Ownership and Governance of Finnish Infrastructure Networks • Vtt Publications 777
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VTT CREATES BUSINESS FROM TECHNOLOGY Technology and market foresight • Strategic research • Product and service development • IPR and licensing VTT PUBLICATIONS 777 • Assessments, testing, inspection, certification • Technology and innovation management • Technology partnership • • • VTT PUBLICATIONS 777 • VTT PUBLICATIONS OWNERSHIP AND GOVERNANCE OF FINNISH INFRASTRUCTURE NETWORKS VTT PUBLICATIONS 760 Maria Antikainen. Facilitating customer involvement in collaborative online innovation communities. 2011. 94 p. + app. 97 p. 761 Petteri Alahuhta. Technologies in Mobile Terminals Enabling Ubiquitous Services. 2011. 127 p. + app. 100 p. 762 Raimo Hyötyläinen. Cellular-networked industrial enterprises in innovation paradigm. 2011. 208 p. 763 Greta Faccio. Discovery of oxidative enzymes for food engineering. Tyrosinase and sulfhydryl oxidase. 2011. 101 p. + app. 672 p. 764 FUSION YEARBOOK. ASSOCIATION EURATOM-TEKES. Annual Report 2010. 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ISBN 978-951-38-7764-4 (URL: http://www.vtt.fi/publications/index.jsp) ISSN 1235-0621 (soft back ed.) ISSN 1455-0849 (URL: http://www.vtt.fi/publications/index.jsp) VTT PUBLICATIONS 777 Ownership and governance of Finnish infrastructure networks Pekka Leviäkangas, Marko Nokkala, Jussi Rönty & Kaisa Finnilä VTT Antti Talvitie & Pekka Pakkala Aalto University Harri Haapasalo & Maila Herrala University of Oulu ISBN 978-951-38-7763-7 (soft back ed.) ISSN 1235-0621 (soft back ed.) ISBN 978-951-38-7764-4 (URL: http://www.vtt.fi/publications/index.jsp) ISSN 1455-0849 (URL: http://www.vtt.fi/publications/index.jsp) Copyright © VTT 2011 JULKAISIJA – UTGIVARE – PUBLISHER VTT, Vuorimiehentie 5, PL 1000, 02044 VTT puh. vaihde 020 722 111, faksi 020 722 4374 VTT, Bergsmansvägen 5, PB 1000, 02044 VTT tel. växel 020 722 111, fax 020 722 4374 VTT Technical Research Centre of Finland, Vuorimiehentie 5, P.O. Box 1000, FI-02044 VTT, Finland phone internat. +358 20 722 111, fax + 358 20 722 4374 Technical editing Marika Leppilahti Kopijyvä Oy, Kuopio 2011 2 Pekka Leviäkangas, Antti Talvitie, Harri Haapasalo, Maila Herrala, Pekka Pakkala, Marko Nokkala, Jussi Rönty & Kaisa Finnilä. Ownership and governance of finnish infrastructure networks [Teknisten verkostojen omistus- ja hallinnointimallit]. Espoo 2011. VTT Publications 777. 127 p. + app. 16 p. Keywords financial analysis, governance, infrastructure, ownership, public services, SWOT Executive summary Shortage of capital to finance society’s infrastructure networks (roads and streets, waterworks, ports, railways and airports) has resulted in new proposals for organizing, governing and financing these networks all over the world. Also in Finland, the State and municipal governments are seeking ways to reduce costs, improve efficiency and enhance customer orientation in public service delivery. Infrastructure networks in particular experience strong pressures to reduce their costs. The objective of this research was to investigate and analyze the pros and cons of different ownership and governance models of infrastructure networks. The emphasis was on traditionally publicly owned streets, water and sewage net- works and ports that hold the greatest development potential. National roads, railways, airports and energy networks were included in a smaller role. The main sources of information were interviews of municipal and state department execu- tives arranged during 2009 and 2010, traditional literature reviews and financial statement analyses. The infrastructure sector Technical infrastructure networks are typically owned, administered and man- aged by the public sector as they are considered public goods and critical assets by the state and the municipalities. Although privatization movement has not advanced at the same pace in Finland as in several other countries, the public sector is beginning to adopt the business-like, entrepreneurial practices in the form of Municipality-Owned Enterprises (MOE) and Companies (MOC). The private ownership models that were observed during the course of the research were for the private road and waterworks co-operatives and (two) private ports. Most of the municipal infrastructure networks are administered and managed through public agencies, municipality’s departments or technical centres, which 3 are termed the client organization (excludes co-operatives). The physical works, services (e.g. design), and operations can be performed by municipality’s labor force (the traditional model), the Municipality-Owned Enterprises or State- Owned Enterprises (SOE), the Municipality-Owned Companies or State-Owned Companies (SOC), private companies, or combination of these. The tasks per- formed by the client and supplier units vary between governance models and the level of expertise available in the municipality. If the direct labor force within the municipality has competence, the services are provided with own labor force up to its capacity. In the case where private markets do not exist within the mu- nicipality, services are procured from surrounding municipalities or directly from private market. Most of the interviewees declared that the infrastructure networks should re- main under public ownership (excluding private cooperatives), but the adminis- trators, managers, operators and suppliers can be either public or private depend- ing upon the circumstances and the potentially most cost effective approach. The variety of available models is broad and makes comparisons within a sector and between sectors a challenge. Different sectors are also advancing and introduc- ing different models with different paces and motives. Restructuring the infrastructure sector From the sectors analyzed, waterworks, ports and energy are more active in re- structuring, while streets and roads are slower and have a more cautious ap- proach. The most probable explanation is that the current pricing and revenue collection from the use of streets and roads do not provide cash flow to “owners” or “investors”, but the revenues go directly to the state treasurer. Other sectors like waterworks, ports and energy can price their services according to usage, are generally producing a positive cash flow to owners, and the benefits are uni- form (waterworks, energy) or the beneficiaries can be identified explicitly (ports). Moving from the traditional ownership structure toward other models requires a process where different types of systems, tools and competencies are devel- oped. Restructuring should be a deliberate process, but can occur quickly espe- cially in small to mid-sized municipalities, often in response to a crisis or an urgent need. The research team, however, refrains from asserting the conclusion that only economic or social pressures, although present, can drive the reforms. Rather, the driving forces should be better customer service, benefits and value 4 created to different stakeholders. It should be remembered that, when the tech- nical part of restructuring process is completed, it may take several years before the desired objective and benefits are achieved. Restructuring can be viewed as an “investment”, where the benefits have a slow start and accrue and accumulate later. It goes without saying that many uncertainties are associated with the de- sired outcomes. Several interviewees in the project delivered the message that, economically, tougher times are ahead, and that the reforms are likely to encounter resistance. For instance, political difficulties include resistance against price increases, re- sistance to market-based competition leading to job losses in the short term, and the removal of possible cross-subsidization practices. “Micro-management”