What should one think about the corporatisation of public services?

There are two opposing views in the debate on the corporatisation of service production on whether citizens’ wellbeing can be maximised through public sector steering or efficient provision of services. What are the questions that decisions-makers should ask themselves when considering the corporatisation of public services?

The State of Finland uses companies to manage internal service tasks and to carry out business operations. Should the focus in service production be on efficiency or the steering needs inherent in public sector tasks? Why should the provision of services be corporatised? When is corporatisation a reasonable option and are there situations when it is not an option at all?

This year, the National Audit Office has published two audits assessing the limitations on state-owned business operations in the light of international recommendations and national policies. At the same time, the Ministry of Finance has recently issued a recommendation on the corporatisation of central government activities. The following questions help decision-makers to determine when public services should be provided on a commercial basis.

Can the company providing the service operate on a profitable basis?

In commercial service production, the revenue must cover the costs. Profitable operations also generate return on invested capital. Services cannot be corporatised in a sustainable manner if the revenue generated by the operations does not cover the costs. Subsidising the service production with the profits generated by other business operations is government aid, which is prohibited in most cases.

Do the corporatised operations include official duties?

Outsourcing public administration tasks to parties outside central or local government may not endanger fundamental rights, legal protection, the independence required of the service providers or other requirements concerning good governance. Corporatisation of public administration duties is specifically justified and regulated in an act.

Corporatised activities may not, however, involve extensive use of public authority. The right to use force based on independent discretion or to otherwise substantially restrict the fundamental rights of an individual are considered extensive use of public authority.

Does corporatisation produce synergy benefits for services funded from the state budget?

Synergy may reduce the costs arising from the service production process or allow more parties to share them by for example raising the capacity or equipment utilisation rate. Synergies generating such immediate positive effects on service production are an argument in favour of corporatisation.

Do the corporatised services have customers that are not funded from the state budget?

The key difference between a limited liability company and an unincorporated state enterprise concerns market-orientation. An unincorporated state enterprise can only have central government agencies or other actors funded from the state budget as customers. An unincorporated state enterprise is well-suited for government-internal service production. A limited liability company is the only alternative when services are produced on a commercial basis for citizens and companies. From the perspective of public steering and group benefits, an unincorporated state enterprise is often a better option than a limited liability company. If there is a substantial need for steering, the operations should not be corporatised.

Will the company have commercial competitors?

State-owned companies carry out special assignment tasks or there must be other reasons justifying their existence. One such reason may be that because of high start-up costs, no market-based business activities can be generated.

Natural monopolies should be in public ownership. If, however, commercial markets are created in the sector where a state-owned service company operates and there is no longer any justification for state ownership, the state should give up its ownership in a controlled manner.

Is the state able to separate its ownership from its regulatory tasks?

The state has different roles in the market. If the state owns companies operating in the market, the ownership must be separated from regulatory duties in a manner that allows all parties to maintain their trust in the fairness and transparency of the market as well as in the operational capability of the state owner. In other words, the same authority cannot steer a company and draft legislation for the sector in which the company operates.

Is there a danger that state-owned business operations can distort the market?

Unincorporated state enterprises are part of the state, which means that they do not pay any corporate taxes and cannot be declared bankrupt. This gives unincorporated state enterprises a competitive advantage and for this reason, they can only offer their services in the market in a limited scale.

Because of its financial and market position and its role as a regulator, the state must observe strict competition neutrality in all its business operations. Even small-scale sales by unincorporated state enterprises to non-governmental customers may distort the market. When we are examining the European Union and also consider potential business modalities, the competitive impacts of state-owned companies are not always obvious.  Both corporatised services and those provided by unincorporated state enterprises must always be adjusted to the requirements of the EU’s single market.

Could changes in the operating environment lead to a situation where there is no longer any justification for the service company?

The decisions on the organisation of service production are made on a case-by-case basis. Changes in the operating environment may impact state-owned companies in a manner that forces the state to reassess their operations. There must be mechanisms for dissolving a service-production company and transferring the operations to an unincorporated state enterprise or a government agency if there is no longer any justification for operating the company.