How to break the ice? The role of state-owned companies with two interests is not an easy one

Of the state-owned companies, the one that has recently been in the public eye is Posti (the leading postal and logistics service company in Finland). However, state holdings share the same problems. In addition to Posti, the other state holdings should also be assessed sufficiently often to avoid these problems. The icebreaking services provider Arctia, for example, operates in a difficult environment as regards the profitability of the business.

Posti has recently received widespread media coverage because of its labour conflict. Posti has undeniably a special position as a state-owned company.

The state has two different targets for its ownership in Posti. First, Posti is one of the holdings where the state has a strategic interest, i.e. the company’s main duty is to provide a service that is particularly important from the citizens’ perspective.

Second, Posti is also a holding where the state has a financial interest. Companies of financial interest are expected to provide a good return on investment.

The state’s share of strategic interest in Posti is 50.1 per cent, while the share of financial interest is 49.9 per cent. In practice, the state could thus divest 49.9 per cent of Posti, should it find an interested buyer.

State-owned companies with two interests

In practice, the strategic interest means that, as the state has a majority holding (50.1 per cent) in Posti, it must ensure that postal services are provided throughout Finland. This universal service obligation of Posti applies to letters paid for by postage stamps and small parcels sent abroad.

In 2018, deliveries falling under the universal service obligation formed 4.6 of Posti’s deliveries and generated 8.4 per cent of the Group’s revenues. However, the main part of Posti’s operations is commercial business in a competitive market.

Posti’s operations are not divided equally between the two interests, although it may seem so based on the recent developments. In practice, the division of Posti has made it possible to assess the company from the perspectives of both strategic interest and financial interest. This is sometimes problematic, as in connection with this autumn’s developments. In the end, it was even unclear who should decide what.

The perspective selected depends on who is assessing and the situation in which the assessment is made. No doubt this made it more difficult to find a solution in the now-solved conflict concerning Posti’s collective agreement.

So far Posti has, nevertheless, remained a company with two interests. In future, this may bring about new problems that cannot be anticipated in detail.

Business principles cannot be applied as such to exceptional solutions

In addition to Posti, there is also another company where the state has a 50.1 per cent strategic interest and a 49.9 per cent financial interest. The company is Arctia, which provides icebreaking services and keeps marine traffic safe in winter.

At the end of 2018, Arctia joined forces with Meritaito, a marine survey service and infrastructure management company. Until the merger, the holding in Meritaito had been fully of strategic interest, but as part of the Arctia Group, the company’s position has changed.

Arctia has not been under similar competitive pressures as Posti. In practice, Arctia has been the only company specialised in icebreaking in Finland. In addition to icebreaking, the company has, however, strived to increase the use of its fleet for instance by seeking other uses for its multipurpose vessels in polar areas. The company succeeded quite well in this until 2014, but since then its market-based operations have decreased considerably.

Arctia’s other operations than icebreaking have decreased, and the company’s primary customer in icebreaking is the Finnish Transport Infrastructure Agency. Arctia thus gets most of its revenues from the state budget. Business principles are not well applicable to this kind of procurement of services.

The size of the fleet of icebreakers is based on standby needs and not on commercial considerations. In this case, public procurement procedures, such as tendering, do not provide benefits, as there is only one actor providing the essential service. The National Audit Office recommended therefore in its audit that the costs of keeping the icebreakers on standby should be separated in service contracts and that the preparedness task should be assigned to Arctia as a cost-based responsibility.

The operations of state-owned companies and unincorporated state enterprises should be assessed regularly

Posti and Arctia are only individual examples of how the actual problem manifests itself. Because of various historical developments, the business form of state organisations and companies is not always in line with the nature of the present operations.

A major change has taken place in the state budget within the past three decades. Almost all commercial and similar operations have been transferred to unincorporated state enterprises and state-owned companies. However, time takes its toll, and not all solutions work any longer in the present operating environment.

Exceptions are often justified by economic benefits, although they always also cause extra costs. In the case of exceptional solutions, competition neutrality, for example, may not be realised properly, or the accountability and the management of business risks may change. These issues have a price in society, even if it were not directly apparent or did not have immediate consequences.

It would therefore be important to review the operations of state-owned companies and unincorporated state enterprises on a regular basis and to assess whether business principles are actually applicable to all of their operations. In view of society and cost-effective operations, it would be important to have shared rules of operations and as few exceptional solutions as possible.