Public Sector

Valuation

Sector-specific valuation issues can arise for municipal utilities and other public sector companies (valuation of companies, parts of companies or energy networks). Examples include the expiry of concession agreements, contributions in kind, the issue of state aid for financing and equity measures in favor of public companies (private investor test) and the value-oriented assessment of company performance.
Together with you, we identify the best method for the specific valuation, taking into account the industry-specific features (e.g., regulated network charges).
We specialize in the valuation of energy supply companies and in particular in the valuation of energy supply networks. Based on our many years of experience in supporting concession procedures combined with our regulatory know-how, we are constantly engaged both as party representatives (purchase price determination; fairness opinion) and as court-appointed experts. From our many years of experience as court-appointed experts, we are familiar with the applicable case law and professional standards.
We work closely with the Baker Tilly Valuation Competence Center experts on all matters relating to valuations.

Business plans

An increasing number of shareholders, lenders and investors require an objective assessment of a company’s business performance and financial situation in order to make well-founded decisions. With the involvement of auditors, functional and industry experts, Baker Tilly assesses the strategic, operational and financial situation of a company, taking into account the relevant regulatory, legal and tax framework. In addition, Baker Tilly examines and evaluates the key elements of the business plan. To this end, we ensure the technical quality of the integrated planning calculation (consisting of planned income statements, planned balance sheets and planned cash flow statements) and assess the underlying planning assumptions on the basis of sound market and industry data. Thus, Baker Tilly creates a transparent basis for financing and investment decisions.

New approach

The history of public budgeting and accounting has shown that the traditional cash-based accounting system is not sufficiently suitable for mapping the consumption of resources and for providing comprehensive information on the financial situation of public budgets, which allows comparisons of performance and financial indicators across countries. The introduction of harmonized double-entry European Public Sector Accounting Standards (EPSAS) is intended as an approach to solving this problem. The International Public Sector Accounting Standards (IPSAS) could form the basis for this. In order to prevent future sovereign and financial crises, the EU had already requested the European Commission to assess the suitability of International Public Sector Accounting Standards (IPSAS) for EU member states in 2011 with the “Council Directive on requirements for the budgetary frameworks of the Member States”. However, the European Commission’s report of March 6, 2013 states that although IPSAS are considered a suitable basis for the development of EPSAS, they cannot be implemented in the member states without further ado.

Resolution of the German Bundestag

On March 5, 2015, the German Bundestag passed a unanimous resolution on the EU’s EPSAS project and called on the German government, among other things, to ensure that proven German accounting principles are given sufficient consideration by actively helping to shape EPSAS. Furthermore, the principles of proportionality and subsidiarity should be upheld. The German Bundestag also added that the freedom of choice between different double-entry and cash-based systems of budget management and accounting in the member states must be maintained against the backdrop of scarce financial and human resources and relies on a choice-based use in this context.

We support the transition process

Baker Tilly supports the public sector in particular with the qualified changeover processes. In this context, the focus is not on the technical changeover, but on individual training and support in the process flows in current accounting and in the annual financial statement processes. Together with the administration staff, we practice the individually appropriate conversion process and the future accounting procedures. This also includes linking payroll accounting with financial accounting.

As a service provider, we also take care of all payroll accounting.

Modernization process changes management model

The new municipal budgeting and accounting system and the switch to double-entry accounting are part of a comprehensive modernization process in German municipalities. The results-oriented management of the core administration requires a strong business management focus. In principle, centralized individual controlling is being replaced by results-based controlling, usually through the agreement or specification of financial and performance targets. Where this is possible and expedient, the focus is also on market-based coordination and competition. It is essential for this business management control philosophy to see the administration as a system of business units in which a large number of products (keyword: product budget) are created or offered. This creation of business units with comprehensive management responsibility and the results-oriented controlling of these units as cost centers are at the heart of the new management model.

Public budgets under pressure

All of this does not exempt these reforms from being accompanied by budget consolidation, budget protection concepts and debt reduction in individual cases. The pressure to consolidate public budgets varies in intensity depending on the federal state. The explosive nature of high social spending and investment backlogs in infrastructure characterize public budgets in many regions, forcing them into a cycle that oscillates between responsibility for tasks and the burden of tasks. The level of tasks must determine the financial resources and not vice versa.
Knowledge of the new management model and the new budget and accounting system is essential for understanding the new budget and accounting system and for structuring and applying it locally. The advantages can only be exploited by local authorities in which both are applied. In the opinion of the courts of auditors, municipal audit institutions and legal supervisors, budget consolidation measures must include municipal participations. From a management perspective, core administration and participations are seen together as a group.

Comprehensive advice on all measures

Baker Tilly advises cities and municipalities, their institutions, commercial enterprises, municipal enterprises and companies on business, legal and tax concepts and optimization strategies. We also assist you with reorganization, restructuring and budget consolidation measures and review the portfolio of facilities and holdings that have been hived off from the budget. To this end, we support you in the introduction and review of investment management as well as in the future design of compliance strategies in administration and investments.

Counteracting the trend of declining infrastructure

In many cases, infrastructure projects are postponed or not realized at all due to the municipalities’ tight budget situation. This leads to a decline in the existing infrastructure’s quality and competitive disadvantages compared to other municipalities/regions.
One way to counteract this trend is to integrate funding programs or private capital into the financing structure. Raising mezzanine capital can also be a way of obtaining the necessary capital in the short term.

Exploit the full potential

We support you in designing such financing concepts, accompany you in discussions with banks and implement the concepts together with you. We also calculate and analyze the prices for existing infrastructure services provided by local authorities, whereby the focus should always be on the political will and the local authority’s mission in addition to the economic aspect.

State funding

The state supports a wide range of areas of public life for a limited period of time and with limited funding. The financial support can be grant-based or in the form of low-interest credits or loans and should comply with the applicable provisions of EU state aid law. The recipients of funding are also generally obliged to apply public procurement law.

Support in the optimal selection of funding programs

Many projects, business start-ups, infrastructure and research projects are only economically viable thanks to public funding programs. It is not always easy to keep track of the interaction, availability and functioning of the various EU, federal and state programs. Baker Tilly supports you in examining whether and how funding programs can be optimally used for your project and assists you with modeling, application and implementation in the project.

Violation of state aid rules leads to nullity

State aid is generally prohibited under European law. This applies in particular to the granting of compensation payments, loans or guarantees by local authorities to their subsidiaries. A breach of state aid regulations can lead to the invalidity of the underlying financing agreements, meaning that any aid received must be repaid together with interest. According to the ECJ’s Residex case law, even financing banks can be considered as addressees of payment claims.

In-house training and state aid check

We offer in-house training courses to familiarize you with EU state aid law. We have developed a state aid check to identify any risks at an early stage. We can draft acts of entrustment and municipal guarantees in compliance with state aid law, conduct a private investor test to prove that you are acting in line with market conditions and represent you in proceedings before the European Commission (e.g., notifications) and the European Court of Justice.
We support you in setting up compliance structures under state aid law and in structuring state financing in compliance with state aid law. In this context, we focus on risk provisioning for banks and savings banks.

State compensation payments under SGEI state aid rules

Another focus of our advice on state aid law is the legal protection of business and tourism promotion organizations as well as leisure facilities. In practice, these institutions are often dependent on state compensation payments. The new SGEI state aid rules determine when state compensation payments to providers of public services are in line with EU law. We support you in implementing these requirements (e.g., by drafting the entrustment act, calculating the compensation payments, preparing a separation accounting).

Comprehensive advice on state aid law

Hardly any other area of law has as many interfaces with public procurement law as European state aid law. Both areas of law aim to ensure fair and undistorted competition. An unlawful award can be challenged after the contract has been awarded if payment of the contractually agreed remuneration constitutes state aid.
State aid law is also highly interdependent with tax law, which is why the involvement of tax advisors is often inevitable. Due to our high level of professional specialization and broad positioning, we can offer you the comprehensive advice you need.
 

We advise our clients on all issues relating to the organization of municipalities, municipal cooperations and companies with municipal participation. This includes, in particular, all issues relating to local self-government, budget and commercial law, as well as financing issues.

Thanks to our high level of professional specialization and broad positioning, our advice is holistic. It includes advice on all matters relating to the municipal council or a municipal council member and the exercise of the municipal council’s function, supervisory board advice and training, public corporate governance, the municipal energy industry, water supply and municipal public transport. In this context, we advise on public procurement, state aid, corporate and tax law issues.

We not only provide strategic support, e.g., in the selection and implementation of the appropriate organizational form, but also enforce our clients’ objectives before authorities and courts. Our non-partisan political practical experience is of decisive benefit here. With this in mind, we perform our engagements with an awareness of local decision-making processes and local political scope for action.
 

Cooperation

In times of empty state coffers, demographic trends and increasingly complex regulations, local authorities and their companies are increasingly facing the challenge of providing their public services in an economically viable manner. Cooperation with other local authorities or public companies can provide a solution. This requires the involvement of citizens and interest groups in the needs-based design of public infrastructures and services according to a best practice model. Baker Tilly examines the potential of your municipality, moderates the process and checks the legal admissibility of the proposed models.

Citizen participation

“What one cannot do - many can” - this was the guiding principle that once drove Wilhelm Raiffeisen when he initiated cooperative self-help. This guiding principle is more relevant than ever, as many areas of public life are facing challenges that require joint solutions from local authorities, companies and citizens. In addition to cooperative models, there are many other ways of involving citizens in the financing of public projects via participation rights, convertible bonds or bond models. Popular public areas in which citizens are already helping to shape and also earn money include the traditional real estate sector and, in particular, energy and heat supply, but innovative topics such as electromobility or hydrogen also offer opportunities for joint projects. Baker Tilly works with you to determine the best models for you, calculates their profitability and creates legal certainty.

Public Corporate Governance

When it comes to the management of municipal-owned companies and shareholdings and of the federal and state governments, it has been recognized that simple investment management measures are no longer sufficient. A Public Corporate Governance Code (PCGC), initially implemented for listed companies in 2002, is now also establishing itself for public sector companies at federal (since 2009), state and city level (since 2006).

The PCGC contains key provisions of applicable law on the management and supervision of companies as well as internationally and nationally recognized standards of good and responsible corporate governance. These principles are intended to improve the management and supervision of the (public) company by its executive bodies and take account of a public-sector organization’s special features.

The PCGC therefore contains recommendations, suggestions and regulations that reflect applicable law, but also provide guidance on the responsibility of executive bodies for cooperation between the management/executive board, supervisory board and shareholder.

The federal and state governments, as well as cities, have already begun to incorporate compliance with a PCGC as a separate audit engagement or to reflect it in the investment reports.
We have practical experience and have supported the establishment and implementation of a PCGC in public bodies on several occasions. We help with design and implementation.

Compliance: Sufficient prevention

Non-compliance and white-collar crime result in considerable damage for the various players in the public sector. Courts are increasingly dealing with the liability of management and supervisory bodies. Against this background, we urgently recommend adequate prevention.
With our high-quality services, we support public local authorities and companies as well as their governing bodies, particularly in the design and introduction of sustainable and efficient compliance management systems that are individually tailored to each specific case.

Our services in the area of compliance focus on

•    Compliance quick check as an initial assessment
•    Checking the effectiveness and efficiency of existing compliance management systems
•    Prevention of white-collar crime through risk analysis and measures
•    Training of employees and compliance officers
•    Ensuring legal certainty when awarding contracts
•    Advice on the introduction of comprehensive compliance management systems

Baker Tilly also has an independent Fraud, Risk & Compliance Competence Center for these tasks.

Current tax advice

Current tax advice sets the course for the tax treatment of the upcoming structure.
As part of current tax advice, we prepare all necessary tax returns as well as any required tax balance sheets and segment accounts. This also includes the preparation of one-off declarations, such as capital gains tax returns, land acquisition notifications, etc.

Tax structuring advice

The constantly changing case law and administrative practice requires that existing structures be constantly reviewed for their effectiveness. New structures are often required in order to adapt to different framework conditions and, for example, to effectively use losses.
In this context, it is always important to pay attention to sub-areas, such as avoiding real estate transfer tax or avoiding additional VAT burdens, so as not to thwart the structure with additional tax burdens.

Special issues

We are available at any time for special tax issues, such as the income statement against the background of the public sector’s special features, including special facts such as capital gains tax in the context of commercial businesses.

This also includes focusing on new legal regulations that will come into force at short notice, such as the planned new regulations on the sales taxation of the public sector (Art. 2b UStG) or the special features of the reverse charge procedure for public sector organizations.

We also pay particular attention to special features that may arise in the case of the public sector’s non-profit activities, such as tax exemption or the use of funds for state museums or theaters.

There are many reasons for transactions in the public sector. They are usually driven by political programs, the budget situation or regulatory/European requirements.

Mutual effect

For budget consolidation purposes, the public sector’s transaction endeavors can involve the sale of companies (shares) as well as public assets (real estate). However, it must be borne in mind that, in the short term, this will inject liquidity into the public coffers, but in the long term, political influence will be lost. Conversely, the repurchase of former public property can also be regarded as an effective means of generating secure future income that is independent of external influence.

Your advisor for all transactions

Baker Tilly advises you on all transactions in terms of municipal law, antitrust law, tax law and business management and moderates the dialog between the public and private institutions involved.

Re-municipalization

Economically attractive business fields
In the recent past, many municipalities have launched initiatives in order to bring selected privatized areas back under their control. This applies in particular to the water and energy supply sector. It is often antitrust issues and the expiry of concession agreements that lead the public sector to consider re-municipalizing economically attractive business areas.

Careful advice on re-municipalization

Baker Tilly advises you on all issues relating to your municipality’s re-municipalization activities. We pay attention to the issues’ legal admissibility (also under public procurement law), negotiate the contracts, evaluate your networks and find the economically and fiscally optimal model for you.

PPP and privatization

Privatization of public property
The privatization of public property is often necessary in order to restructure public coffers or meet regulatory requirements. Sometimes, however, softer forms of privatization are chosen, such as PPP models in which the public sector retains ownership and, after a certain period of time, has the choice of regaining sole sovereignty over the project in the future.

PPP models

At municipal level, PPP models as a public sector procurement option are particularly common in building construction. Swimming pools, schools, administrative buildings, etc. are realized jointly by public and private actors on a project basis. PPP models are also still common in the transport sector. Depending on the model, additional efficiencies can be achieved through cooperation between private and public players in the modernization, expansion or construction of transport routes such as federal freeways, rural/district roads or bridges as well as the operation of airports and inland ports. The extent to which private investors should be involved must be weighed up and decided depending on the existing local conditions.

Our consulting services for you

We support you in your decision on privatization, PPP model or public procurement and propose what we consider to be the best form of procurement for you. To this end, we will conduct the relevant economic feasibility studies and support you in any subsequent contract drafting.

Audit

Municipalities and municipal companies find themselves in an increasingly difficult economic environment. In particular, municipal energy suppliers and their entire value chain are facing major changes in many regions. Decentralized generation requires high levels of investment, while the legal environment remains difficult to predict. In the area of transportation and distribution, the requirements of regulation are increasing. The economic effects of the revenue cap are becoming noticeable. Due to the high willingness of customers to switch suppliers, the sales sector continues to face growing competition in all areas.

This development could lead to a situation where the losses of local public transport and, if necessary, public swimming pools are no longer covered. The shareholders themselves are struggling with ever-increasing budgetary burdens and are actually dependent on profit distributions from their municipal companies/enterprises.

In this increasingly demanding environment, being able to rely on solid and competent partners is crucial. Therefore, you can expect your auditor to be highly proficient in the legal and economic framework conditions of the public sector and its companies in order to be able to carefully and competently assess the annual financial statements and management reports as well as the regularity of the management.
Baker Tilly is an auditor that you can trust, that adapts flexibly to changing circumstances, that focuses its attention on risky business transactions at an early stage and for whom personal contact between partners and company management and shareholders is a matter of course.

We have many years of broad expertise in auditing the annual financial statements of local authorities and public sector companies and are therefore very familiar with their market environment.

Internal audit

Internal auditing has long since abandoned its one-sided role of “internal police”. In addition to the pure monitoring function, the focus is increasingly shifting to enhancing efficiency and improving processes and organizational procedures. This is becoming increasingly important for overall performance, as even municipal companies are not immune to the ever faster and more complex business environment. The demands on the auditor are constantly increasing and therefore require specific specialist knowledge that can hardly be provided within the company itself.

Outsourcing internal auditing, either for individual or overall audits within a company, to external experts with a high-quality, objective view of the company therefore not only makes sense for reasons of efficiency, but also enables a neutral assessment of the situation within the company and corresponding recommendations for action.

At Baker Tilly, we have many years of experience in the field of internal auditing at large and medium-sized listed companies. In our “Public Sector” Competence Center, we can also draw on a large number of employees with many years of professional and, above all, industry experience in the public sector. For us, complex processes and structures are not new territory, but our staff of life.