Actions

Step 8 - Identify the best legal form

From Municipal Cooperation

Establishing IMC
PHASE 1: Initiating cooperation
PHASE 2: Establishing cooperation
PHASE 3: Implementing IMC
PHASE 4: Evaluating IMC

There are many possible legal forms for IMC that the task force should review in order to select the one that best suits the objectives of the partner municipalities. As already indicated, the most suitable legal form depends to some extent on the area of IMC. It is also shaped by the provisions of national legislation as well as the potential to mobilize subsidies and grants from the central government. One can distinguish six broad IMC legal forms in Western Europe; Box 17 provides a brief description of each of them.

Informal cooperation through a handshake agreement is always an option, of course, and is very common in practice. But it is appropriate only when the cooperation does not result in binding decisions and does not involve the joint management of resources. This restricts the cooperation mostly to ad hoc events such music festivals, arts exhibition or sport competitions. Informal cooperation has the advantage of being easy to initiate and to stop if things do not work out as expected. It is often a preliminary step for more formal IMC.

The legal forms of IMC


Box 17: The legal forms of IMC (based on the Western European experience)

IMC based on a contract (private or public law)

IMC based on a contract is very common practice. Contracts between municipalities for IMC must usually be approved by the respective municipal councils. This is a very flexible form of IMC since it is up to the municipalities to negotiate its provisions, including the duration of the contract. It is probably best adapted for a smaller number of partners. This modality is suitable for the buying and selling of services between municipalities.

IMC through private law municipal associations

Associations and other forms of NGOs ruled by private law are very common. The founders and members of the association are the municipalities themselves. Unless there are legal provisions that state differently, the general legislation on associations should apply. This provides real advantages in terms of management flexibility and the ability to hire qualified professionals by paying attractive salaries. Associations are funded with the contributions of the members as well as any fees they charge. The associations often benefit from various grants provided by the municipalities themselves, sectoral ministries or donors. Associations can be single- or multi-purpose. In the latter case, the budget may have several separate divisions according to the resources dedicated to each function: services paid by user fees and activities paid by contributions of each member municipality.

IMC through private law commercial companies

IMC through private law commercial companies involves several municipalities creating an enterprise and becoming its shareholders. This must be allowed – or not prohibited – both by private law and public law. The operations of such companies are subject to the provisions of private law. If the law does not prohibit it, several municipalities can establish a “mixed company” with a private firm for the delivery of one or several public services. Such public-private partnerships are not uncommon in Western Europe. The advantages of these private management forms are those associated with commercial activity: flexibility, efficient management, qualified staff, introduction of advanced technologies, etc.

IMC through specialized legal entity

This possibility of establishing IMC through a specialized legal entity depends on national legislation. Where such legislation exists, it outlines the statutes of the legal entity whose exact shape and content are specific to each country. The municipalities transfer one or some of their functions to this entity for which they no longer have authority because they are managed under the full responsibility of the new legal person. Municipal control is still possible because the respective municipal councils elect representatives to the council of the IMC body. The president and vice president of the legal entity are elected by the IMC council. Depending on the legal provisions of the country, these roles may be filled by mayors. The resources of IMC through specialized legal entities depend on the services they run. They include fees, grants, contributions from members as well as state transfers and loans. Such entities can be a single- or multi-purpose. They often have technical competences mainly for public utilities services, but this greatly varies between countries

IMC through territorial public law institution

This IMC modality corresponds to the French communautés (Box 4). It differs from public law associations since it encompasses not only technical competences, but also strategic ones. It is the most institutionalized form of IMC and involves strong permanent links among municipalities in all their main areas of competence. The objective is to enhance the competitiveness of the geographical area covered by the IMC entity at the national and international levels. This form of IMC allows more solidarity between the municipalities and coherent economic development planning.. National legislation often gives a minimum list of mandatory competences and allows the municipalities to transfer additional ones. The IMC council’s members are elected by the respective municipal councils. Each municipality has a number of representatives that corresponds to the share of its population. The president and vice presidents are elected by the IMC council. The budget and finances of territorial public law institutions have the same regime as municipal ones. The resources available must guarantee autonomy to the institution. They include general local taxes, user fees, business taxes, grants and other transfers from the state, including the right to borrow.


It must be noted that the countries of CEE are characterized by communal and public utility enterprises for the delivery of public services inherited from the previous system. The trend in the development of IMC in these countries is for the enterprises of the neighbouring municipalities to merge into one.

Table 6 summarizes the key features of each of the six legal forms in Western Europe as regards statutes and organs, human resources, financing and control. It also indicates the most relevant service areas for each legal form.


Table 6: Summary of the key features of each legal form for IMC

Legal form
Most relevant competences
Statutes & organs
Human resources
Financing
Control
Contract (private or public law) Selling and buying of services among local governments: Road maintenance, rescue services, etc.

Joint administration: Human resources management, procurement and internal audit. Comments: Particularly suitable for joint administration (sharing staff and delegation of functions).

  • Regulated by public or private law
  • Can involve the establishment of an IMC supervisory body
  • Sharing of employees
  • Employees of one municipality perform services for another
  • Public status
Budget of contracting municipalities Ordinary legal control on the contract and subsequent acts of municipalities
Association - NGO

"single purpose"or "multi purpose"

Joint planning and development: Economic development, tourism development, environment protection, etc.

Joint funding: Business centres, tourist offices, kindergartens, homes for the elderly, music festivals, cultural events, etc. Comments: Wide range of possible activities mostly of a non- administrative nature.

  • Statutes of the company as per private law
  • Statutes of the association determine organs and activities
Employees with ordinary labour law contract User charges, fees, contributions from municipalities, grants from other public budgets and donors, accounting as per relevant legislation Ordinary legal control of the members;

Citizens have the possibility to sue

Commercial company

"single purpose" or "multi purpose"

Joint service production: Water and sewage, public transport, ports and airports, waste management, collective heating plants, management of commercial or industrial districts, ski-lifts, etc.

Comments: Possible only for specific commercial activities that charge prices or fees to consumers and need only marginal grant money from the municipalities

  • Statutes of the company as per private law
  • Municipalities are directly associated in capital and management
  • Mixed companies between several municipalities and a private firm
Employees with ordinary labour law contract User charges or fees, commercial accounting Legal control on the decision to create the firm and to take shares, control on the firm as per commercial law.
Specialized legal entity

"single purpose" or "multi purpose"

Transfer of all competences possible.

Comments: Often focused on technical public utility services but not only, depending on the country. Possibility for mandatory transfer of some competences; the law may prohibit the transfer of some competences

  • Statutes of the association as a public legal entity
  • IMC council elected by municipal councils
  • Executive elected by the council of the IMC (but could be elected by citizens)
Employees with public or private status depending on the nature of the service Different sources of funding and accounting depending on the nature of the service: user charges or fees, contributions from municipalities, grants from other public budgets Control by the municipalities who elect representatives in the IMC council;

general control by the state administration on acts and budgets: legal and financial control.

Territorial public law entity Transfer of all competences possible

Comments: Possibility for mandatory transfer of some competences; the law may prohibit the transfer of some competences. Strong territorial dimension. Often minimum number of competencies.

As a public law association of municipalities As a public law association of municipalities As a public law association of municipalities


There are considerable variations between countries as to which legal form is used more often. As indicated earlier, the public law entity model dominates in France and Spain; the private law approach is preferred in Sweden and Norway. For instance, in Switzerland, according to a municipal survey reported in Reto Steiner (2001), the single-purpose public law municipal association is the most frequent legal form of IMC. It is used most often in the areas of sewage, welfare, waste disposal or civil defense (Table 7). The second most common form is the public or private law contractual form for the municipal police, the fire brigade or information technology. The private law institution legal form is less frequently used in Switzerland.


Table 7: Switzerland - Legal forms and service areas

Legal form/service area % of IMC under each legal form

per service area

Public law single purpose association
Sewage 82.0
Welfare 68.1
Waste disposal 67.8
Civil defense 63.3
Schools 57.4
Contract
Municipal police 47.5
Information technology 43.6
Accounting 38.3
Fire brigade 36.7
Human resources management 35.6
Private law institution
Energy supply 39.0
Medical care 29.2
Elder care 22.1


The selection of the most appropriate legal form involves looking at a number of criteria. Each legal form has advantages and disadvantages that the task force must carefully weigh in order to take the optimal decision. Certain advantages are mutually exclusive. For instance, it is usually difficult to combine rapid decision- making and flexibility with strong democratic control. What is considered an advantage in a given context may be considered a drawback in another. Strong democratic control may result in slow decision-making and less flexibility, which can be a serious drawback in a highly dynamic environment. Short-term costs must also be weighed against medium- to long-term benefits. For instance, the process of establishing an IMC public law institution providing a complex public utility can be costly in the short term. However, in the long term, such an IMC may mobilize grant funding from the state, which is far greater than the cost of its establishment.

Contractual vs. institutional form

  • Establishment costs: The establishment of a joint IMC institution can be costly. It requires drawing up statutes that contain provisions concerning its objectives, decision-making authority attributed by the municipalities, governing bodies, funding, amendments of the statutes and dissolution of the organization. However, the central or regional government may subsidize the establishment and operations of public law institutions, which in addition may have easier access to government grant funding in specific areas. For certain service areas, by using contracts and agreements, municipalities can avoid the start-up costs of a joint organization and still create the same economies of scale. However, they may forego the funding opportunities mentioned above.
  • Operational costs: There are also costs related to the governance and management of an IMC institution. The establishment of a new institution always involves costs related to building up knowledge, skills and organizational routines. The joint character of the organization generally implies the presence of assemblies composed of delegated municipal council members and executive boards with three or more members. Hence, decision-making involves potentially costly periodic consultation of and reporting to the local councils. Nevertheless, municipalities in the Netherlands prefer institutional cooperation to simple cooperative agreements because of the stronger democratic control they provide.
  • Flexibility: The institutional IMC legal form is likely to be less flexible than the contractual one since decision-making requires the involvement of all the partners. Moreover, diversification, expansion or reduction of the services cannot be accomplished without substantial interventions in the structure of the organization. Contractual agreements are, on the other hand, relatively flexible. Adjustment is generally a simple matter of agreement between the parties involved. This flexibility makes them appropriate instruments when services have to be rendered in a dynamic environment. However, recent research conducted in the Netherlands did not reveal that the contractual forms of IMC yield better results than the institutional forms involving a single political and professional management. Factors such as the quality of staff, political leadership and contextual factors were estimated to be more likely explanatory factors for any performance differences.

Private vs. public form

  • Flexibility: Private law institutional IMC provides the most flexible decision-making process. It is particularly appropriate in a highly competitive and dynamic environment. However, as indicated above, the public law bodies are often preferred for their greater legal security and democratic legitimacy due to the IMC councils to which the IMC body is directly accountable.
  • Implications for the financing of IMC: The government may provide financial incentives (subsidies) covering start-up costs and or operational costs for the establishment of certain types of public law entities. Such incentives may at least partly offset the cost of their establishment and the learning costs incurred in the first few years of operation. In addition, as indicated above, the adoption of the public law entity formula may facilitate access to government subsidies or grants for projects. These financial benefits must be weighed against the costs of establishing public law IMC institutions and their potentially slower decision-making processes.
  • Human resources policy: One of the reasons to initiate IMC may be the possibility to hire more qualified and competent staff. The public law institution modality may not give the possibility to hire staff at competitive market salaries since IMC legislation may only allow the hiring of public servants for the IMC entity. The private law legal form, on the other hand, would allow the hiring of qualified staff under ordinary labour law and the payment of attractive salaries.
  • Accountability to the municipalities: The mechanisms of accountability to the municipality are greatest under the public law institutional form. The executives and members of the supervisory boards of a company or foundation, despite being municipal representatives, may tend to act in the interest of the private law institution rather than respond to the priorities of the municipal council. Also, under the private law institutional form, the mechanisms for reporting to the municipal councils are more complicated. The executives of the company must report to the supervisory board, which in turn reports to the shareholders’ assembly whose members are accountable to the municipal councils. Under the public law entity, the IMC council is composed of representatives of the partner municipalities’ councils who have direct control over decision making. Again, this involves a cost in terms of the speed and flexibility of the decision- making process. In the Netherlands, the public authorities discourage private law IMC. The Joint Provisions Act stipulates that IMC under private law is only allowed if there are pressing motives for it.
  • Control: Legal controls on IMC depend on the legal forms of IMC and the provisions of the related legislation. The founders of an IMC may opt for a public law legal form because it involves strong legal controls and provides good legal guarantees to the partner municipalities. Public law IMC often means state control over the legality of decisions as well as financial control by the national audit institution. On the other hand, the founding municipalities may prefer the private law form that minimizes legal controls.

Other considerations

  • Legal security: How large are the risks for a municipality participating in IMC when the partners do not fulfill their obligations?
  • Budget regulations: Does the accounting system of IMC need to be changed or to comply with specific requirements that are different from standard municipal accounting?
  • Tax consequences: What are the tax consequences for the municipalities under an IMC arrangement? For instance, must VAT be paid on contracts between municipalities? Are there ways to optimize taxes and fees for the partner municipalities?
  • Tendering requirements: In 2005, the European Court of Justice ruled that national regulations, which generally exempt contracts between local authorities from procurement legislation, are illegal under EU legislation. This decision prompted strong reactions by the municipalities of the EU member states. The topic is still subject to controversy. The EU member state municipalities that wish to establish a contract-based IMC should carefully review the latest developments on this matter.

IMC and public-private partnerships

The commercial company legal form for IMC generally offers the possibility to establish a partnership between several municipalities and a private company. This is common practice in Western Europe. Box 18 provides a self-explanatory illustration of such a case from Portugal.


Box 18: IMC and PPP in Portugal - The case of the Urban Community of Leziria do Tejo

The Urban Community of Leziria do Tejo, a sub-region of the Alentejo Region includes all the municipalities of the Association of Municipalities of Leziria do Tejo – 11 municipalities and 240,000 inhabitants. The Urban Community of Leziria do Tejo decided to set up a company with a private group selected through an international tender process. The public shareholders of the new company are nine local governments and the Urban Community itself. They hold 51 percent of the capital of the new company, which runs the entire water supply and sewage systems of Leziria do Tejo – i.e. bulk and local systems, including equipment for water intake, water treatment plants and pipes – in an integrated manner.


IMC and the outsourcing of services

Rather than creating their own commercial company or public law institution for the delivery of certain public services (those that can generate commercial revenue) several municipalities can opt for their outsourcing to a private company. This may not have been an option for the municipalities taken individually due to their small size. By joining forces to contract a private firm, the municipalities create a sufficient market size for a private company to envisage profitable activity and even perhaps invest in new technology to improve service quality. Typically, this kind of cooperation in outsourcing takes place in sectors where large-scale production yields efficiencies, such as electricity provision, water provision and public transport. This modality is frequently used in Western Europe and can avoid some of the legal inconveniences of setting up new legal entities.