Frankfurt am Main Administrative Court has imposed stricter requirements on the economic activity allowed to be pursued by municipalities, curtailing their ability to invest in data centres.
In Hesse, the business activity of municpalities is subject to strict legal requirements defined in detail by the subsidiarity principle set out in section 121(1), no. 3 Hessian Municipal Code (Hessische Gemeindeordnung, “HGO”). Under that principle, municipalities may pursue business activities only where the objective is not being or cannot be achieved just as effectively and cost-efficiently by a private third party. This type of qualified subsidiarity clause places high demands on municipalities, which must prove that their provision of services is superior to that of private providers; the burden of proof lies with the municipality. In contrast, simple subsidiarity clauses require that the objective cannot be achieved more effectively or cost-efficiently by a private party; private enterprise is only given priority when both perform on par.
- Municipalities’ margin of discretion and grandfathered rights
However, municipalities have a margin of discretion when assessing the requirements of the subsidiarity clause. Based on their knowledge of local conditions, they can accurately assess the necessity and appropriateness of a business activity in the specific case. Case law does not impose excessive demands on the quality of this assessment. The Rhineland-Palatinate Constitutional Court clarified in 2000 that in the context of the qualified subsidiarity clause set out in section 85(1), no. 3 Rhineland-Palatinate Municipal Code (Gemeindeordnung Rheinland-Pfalz (old version), “GO RhPf”), it was decisive what significance the service at issue had for citizens (see judgment of the Rhineland-Palatinate Constitutional Court of 28 March 2000 – VGH N 12/98 = NVwZ 2000, 801 et seq.). Private competitors who believe their freedom to engage in business activity has been violated by the assessment decision can pursue legal action before the administrative courts – in Hessen, for example, under section 121(1b), sentence 1 HGO.
Under certain circumstances, municipalities can invoke grandfathered rights for existing municipal companies. Insignificant expansion of existing municipal activities would then be disregarded. Significant expansions of business operations are a different matter, and cannot be regarded as a mere continuation of existing activities.
In this context, the Frankfurt Administrative Court decision illustrates the practical challenges for municipalities that a stricter subsidiarity clause may pose. In the proceedings in question, a private company that already operated two data centres in Frankfurt sought a ruling that the defendant city, Frankfurt am Main, had violated the subsidiarity clause set out in section 121(1), no. 3 HGO through its indirect shareholding in a competitor, Mainova WebHouse GmbH. Mainova WebHouse GmbH was majority-owned by the Hessian energy provider Mainova AG, of which the defendant is the majority shareholder. Last year, Mainova AG sold 50.1% of its shares in Mainova WebHouse GmbH to an investor.
- Frankfurt Administrative Court: Violation of subsidiarity clause
The court ruled in favour of the plaintiff. It found that the defendant had not sufficiently demonstrated that the operation of the data centre could not be carried out just as effectively and cost-efficiently by a private third party. There had been an error in the city’s assessment; in particular, the city was accused of not carrying out a market survey. The court also emphasised that Mainova GmbH’s recent data centre activities represented a significant expansion over its past activities, which was not covered by the grandfathering of rights to continue existing operations.
Leave was granted to appeal on points of fact and law. Only the press release has been released so far, so the grounds for the decision remain to be seen.
- Impact on other federal states
The decision has significance beyond Hesse, as similar qualified subsidiarity clauses also exist in other federal states – including Baden-Württemberg, Bavaria, Rhineland-Palatinate, Saarland and Thuringia. However, the sectors to which these clauses apply varies. In some states, certain municipal services sectors such as energy supply and public transport are excluded from subsidiarity review. In Hesse, on the other hand, only specific exclusions apply – for example for renewable energy generation and feed-in, section 121(1a) HGO. Municipalities in the aforementioned federal states must therefore thoughly assess whether any new business activity or expansion of existing business activity meets the strict requirements of the subsidiary clause that applies.
This development is of particular relevance to the data centre market, with many municipally owned companies planning to develop one or more data centres. Particularly where private partners are to be involved, municipalities need to be sure that subsidiarity clause requirements can be met.
The Frankfurt case emphasises the need for municipalities to carry out thorough market analyses before pursuing business activities to ensure that they comply with statutory requirements and are legally sound. If the higher instances uphold this judgment, the city of Frankfurt could be obliged to give up its indirect shareholding in Mainova WebHouse GmbH.
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