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Appetite grows for ZAAO

  • 2012-11-14
  • By TBT Staff

RIGA - Predatory practices by a municipality-owned company are threatening to reverse two decades of progress in Latvia’s developing free market in the waste management industry, industry participants warn.
ZAAO, a company owned by several counties in northern Latvia, is expanding business outside of its initially designated Northern Administrative Region and taking away market share from private industry in the process. It has already driven out the competition in its home region. But it is doing so using non-competitive tactics while delivering a poorer alternative to the public.

A recent report within the private sector says that a number of tenders have lately been won by the more expensive offers from ZAAO, or have been cancelled outright due to cooperation between ZAAO and the county in question.
As of mid-September, 26 municipalities had joined ZAAO, with more being approached by the company.
Waste collection and management can be a lucrative business. Private companies in Latvia see their lifeblood, which includes separating and selling the raw materials collected (paper, metals, etc.) threatened by the encroaching municipalities’ activities.

Many countries around the world enforce the separation of landfill management from waste collection and management operations to reduce the chances of powerful monopolies exacting pricing policies that are harmful to the consumer.
Though under EU legislation, in Latvia the Public Purchasing Law, which requires fair and open purchasing procedures by public institutions, also allows counties to ‘sidestep’ the general intent of the law without formally breaking it. And counties are taking advantage of this loophole as they make contracts with ZAAO, without proper public procurement procedures. These contracts come with higher than market price contracts, which are ultimately binding for all individuals and businesses in the county.

Side-stepping the tenders and the use of lobby-promoted loopholes in laws have been “an ugly breach of [the idea of] all the public purchasing regulations the EU stands for,” says waste management firm Ragn-Sells.
Though the Public Purchasing Law may not have been broken, other laws may have been broken. As ZAAO grows, it begins to touch on areas covered by monopoly regulations. Public entity monopolies are only allowed if the industry is of strategic importance, or if the private market participants are inept in providing a proper level of service and in an efficient way, neither of which is the case here.

Finnish firm L&T has taken Limbazi county to court. The private firms, however, are in general reluctant to confront the counties in court and prefer a more low-key approach to resolving the crisis, with the goal of making changes for better legislation and regulation, and fair and transparent tenders.
ZAAO though has a strong lobby with the Latvian authorities, meaning that if the industry sees little success, they will move the fight to EU-level institutions. In addition, experts say that it is not only Latvian law, but EU precedents that are on ZAAO’s side.

A colorful debate has begun between a liberal market-oriented Environmental Protection and Regional Development Ministry under Edmunds Sprudzs, and the municipalities and the ZAAO lobby on the other side, including big cities’ associations.

Sprudzs says that the business has been politicized for too long. The situation where garbage ends up in the forest shows that the municipalities don’t effectively carry out their functions – that is, to organize waste collection. The solution has to be one where the free market decides, he says.

Saulkrasti county recently accepted a ZAAO offer, referring to their own 0.8 percent ownership interest in ZAAO as a reason for the decision to cancel an existing contract with private suppliers. ZAAO director Aivars Sirmais explained that the reason Saulkrasti cancelled the contract was its dissatisfaction with the private operators, reported business daily Dienas Bizness.

He added that the industry in Latvia, whose role is essentially allocated to the municipalities, is regulated, meaning that a free market isn’t possible. Defending ZAAO’s high prices, he allows that in the future they will offer three prices, and more advantageous to customers.

Private companies in the waste collection and management business have made significant investments into Latvia. Garbage collection is generally not considered an area of strategic interest for countries, leaving little justification for associations such as ZAAO, with the unfair advantage they have, to continue feeding their appetites, especially as the consumer appears to be at the losing end of the deal. Waste management is one of the many bright spots in Latvia’s recovering economy; Sprudzs needs to maintain his involvement in this issue and push for continued free-market solutions.