Competitive neutrality, accounting separation and market-based pricing
Competitive neutrality means that actors in the public and private sectors have a level playing field on the market. Public sector bodies can engage in business activities and compete on the same markets as private enterprises. The Competition Act’s provisions safeguarding competitive neutrality aim to ensure that public actors do not have any competitive advantages that are not available to private businesses and that can distort competition.
The public sector saw a significant reform on 1 January 2020 when the Competition Act laid down the accounting separation obligation. The accounting separation obligation means that municipalities, the state and enterprises owned by them that engage in economic activity in a competitive market must keep separate accounts, including profit and loss accounts, on such activity where its value exceeds EUR 40,000.
The assessment of an accounting separation obligation begins with assessing the competitive market activities of the public actor. It is very common that actors in the public sector engage in business activities in a competitive market, and it is not always easy to distinguish these activities or the costs related to them from the entity’s other core activities if separate accounts have not been kept.
If, based on the analysis, the competitive market activities have been identified and separated from other activities, separate accounts must be kept on these operations. Otherwise the sales figures in the profit and loss account may not provide a true reflection of the situation. The separation of revenues and costs referred to in the Competition Act between market activities and other activities plays a central role.
Accounting separation serves as a basis for market-based pricing. Market-based pricing refers to the price level that a comparable private actor would set for the same services in a comparable market situation. However, pricing is not based on the average market price - the market pricing of business activities must be profitable according to business principles.
There are many factors that go into competitive neutrality, and the regulatory playing field is broad. Our experts can help you with accounting separation or any other issues related to competitive neutrality from both legal and financial perspectives.