There are more than 16,000 municipally owned companies in Germany. In order to relieve the burden on municipal budgets, operate more flexibly and buy in management capacities, more than 60 percent of economic, social, sporting and cultural services for citizens are often already provided by companies with a private legal form. This means that legal entity management has long since ceased to be a niche topic in German local authorities.
Published in S@pport, issue 5/2023, by Thorsten Deuter
The right to self-administration guaranteed to municipalities by Article 28 (2) of the Basic Law also includes the right to economic activity. This right is concretized for the federal state of Hesse in the Hessian Municipal Code. Municipalities should provide services of general interest in the best possible form. In order to fulfill this purpose, municipalities may, under certain conditions, also establish or participate in companies that are aimed at operating an economic enterprise. At the end of 2021, the City of Frankfurt am Main had around 600 shareholdings, including 44 direct and 193 indirect shareholdings with a stake of at least 20 percent. In addition, there are 362 shareholdings of less than 20 percent. The major shareholdings of 20 percent or more are distributed as follows
- 133 Transportation, supply and disposal (56 percent),
- 48 Economy and urban development (20 percent),
- 26 Residential construction (11 percent),
- 16 Health and social services (7 percent) and
- 14 Culture, leisure and education (6 percent).
4.5 billion euros in total operating performance, 9.3 billion euros in fixed assets, 3.5 billion euros in equity, 11.5 billion euros in total assets and 16,814 employees - these (non-consolidated) key figures from the 2022 investment report of the City of Frankfurt am Main's main majority-owned companies and municipal enterprises reflect the importance of the investments.
"The city's legal entity management differs from that of a group of companies in that the city has many subsidized companies, i.e. companies that would not exist on the free market."
Sven Müller, Head of Investment Controlling, City of Frankfurt am Main
The core of the municipal investment portfolio consists of the four groups ABG Frankfurt Holding Wohnungsbau- und Beteiligungsgesellschaft, FES Frankfurter Entsorgungs- und Service, Messe Frankfurt and Stadtwerke Frankfurt am Main Holding, which account for around 80 percent of assets and around 90 percent of total output. Of particular interest for legal entity management are the investments in which political decision-makers of the City of Frankfurt am Main sit on the Supervisory Board.
(Image: Objectives that were at the forefront of software procurement).
Municipal legal entity management
The City of Frankfurt am Main's legal entity management department is responsible for managing the municipal companies, municipal enterprises and, in some cases, public foundations and banks. With its current 18 employees, legal entity management acts as a central service unit in the task of managing and monitoring the associated companies.
"The City of Frankfurt am Main is committed to ensuring good, responsible corporate governance and control at its associated companies," states the preamble to the city's Public Corporate Governance Code (PCGK). According to the preamble, it has the task of supporting the companies in fulfilling their corporate purpose and improving economic efficiency.
As part of investment management, the department performs the functions incumbent on the City of Frankfurt am Main as shareholder as well as supporting the members of the city's Supervisory Board. In addition, the department provides support in the drafting of articles of association and rules of procedure as well as personnel decisions and acts as a contact and advisor on business and legal issues. legal entity management is particularly involved in the formation, transformation, dissolution and restructuring of companies. Other tasks of investment management include processing inquiries and applications from political groups and local councils, providing administrative support and preparing the investment report of the City of Frankfurt am Main.
The demand for control and transparency in corporate management at the municipal associated companies has risen continuously over the years.
" legal entity management can only meet these quantitative and qualitative requirements with the help of modern, database-oriented software."
Sven Müller, Head of Investment Controlling, City of Frankfurt am Main
Software support
Due to the complex amount of data, a software solution is necessary for reasons of effectiveness that, in addition to purely recording financial data, also records the master data of the investment companies (personnel, address, capital, investments, mandates) and can also provide up-to-date evaluations of the investment portfolio of the City of Frankfurt am Main at all times; Müller emphasizes: "The software solution should fulfill the core function of investment management - the memory function - through a historical database. This is why the solution chosen by the City of Frankfurt am Main provides all investment-relevant information in a central database." All fields are managed historically and can be evaluated historically. The software offers a PC and web interface, automates many labor-intensive processes in legal entity management and allows financial statements, key figures and other controlling data to be stored and evaluated in a special area. In addition to the core module for managing information on persons, addresses, capital and relationships, ten other modules are currently in use, including "Document Archive" (management, archiving and display of documents such as articles of association and extracts from the commercial register) and "Mandates" (information on managing directors, board members, supervisory board and works committee members).
In addition to master data management, the software solution is primarily used for investment controlling. It enables the companies and own operations to enter quarterly and annual figures as well as medium-term planning figures directly into the investment management database via the web. The affiliated companies can use the software to create their own evaluations for their own purposes.
The participation database in action
Once the city's legal entity management had filled the new database with the most important holdings and their data, the software was rolled out to key holdings and cross-departmental employees of the city in accordance with an internally created authorization concept. Almost 100 users currently have access to the software. (Image: Usage and authorization concept for the investment database).
According to the PCGK, the City of Frankfurt am Main's operational investment controlling is carried out in the form of quarterly reporting. For this purpose, the quarterly financial statements of the direct and indirect municipal majority shareholdings as well as of the municipal enterprises are summarized by legal entity management in an overall quarterly report. Over 40 holdings must enter their quarterly figures (balance sheet, income statement, number of employees) into the database by a deadline specified by legal entity management . Many companies use the software's import function, which simplifies and speeds up data entry. "This has considerably shortened the delivery time for the data and increased acceptance of the use of the software due to its simple and flexible handling," emphasizes Müller. The investment controlling department carries out completeness and plausibility checks immediately after the input deadline, which improves data quality. To support the analysis, legal entity management has developed dashboards for the companies and in-house operations. These are a compilation of key financial, personnel and performance figures over several years. It provides the respective addressee with a quick overview of business development. The dashboard files are primarily fed from the company data collected in the database. Time series of ten years and beyond can be displayed graphically. With the help of this analysis tool, legal entity management always has an overview of the business development of the companies over a long period of time.
In addition to providing key figures and the option of prepared reporting via Business Objects, the software solution also offers additional information and reporting options. To date, legal entity management management has generated well over 100 business object reports on various issues. In addition to the recurring standard reports, legal entity management can also respond to short-term requests with ad hoc reports. Database users can also use the document archive module to quickly access company documents such as articles of association, rules of procedure and extracts from the commercial register.
Better processes through digitalization
The central feature of the database used is the "memory function" for legal entity management. With the possibility of historical data retrieval over a self-selected observation period and a history of more than 15 years, this aspect is of significant importance. At the same time, the database has been making an effective contribution to digitization in the city administration for many years, especially in the finance department. The software solution used by the City of Frankfurt am Main in legal entity management has made a significant contribution to more efficient processes in the monitoring and management of the investment portfolio. For example, the use of the software has halved the reporting deadlines for the quarterly report for quarters one to three from the previous 20 to ten working days. The balance sheet pages also no longer have to be checked manually. The software can generate a report that compares the totals of assets and liabilities and calculates the difference.
Where it is not zero, the program displays an alert. The correct transfer of the P&L result to the balance sheet can also be checked automatically. The "Mailing" module provides an additional quality aspect by triggering an automatic message to legal entity management in the event of data changes after the reporting date. This ensures that no incorrect data sets are reported.
