Young professionals: Corporatisation only for the sake of corporatisation?

Over the past few decades, a large number of central government activities have been converted into limited liability companies.  Achieving greater operational flexibility, saving money and providing staff with better incentives so that the operations can be made more efficient have often been given as justification for the reorganisation. However, the accelerating pace of corporatisation may also be worrying from the perspective of central government as on-budget activities previously managed as part of the public sector are placed under the control of separate legal persons and the meeting of shareholders, a body governed by private law.  Less operational transparency and the situation where Parliament has less say in budgetary matters are the biggest risks.

Nevertheless, corporatisation has helped to shape central government and it will also shape it in the future. A recent example of the topical nature of corporatisation is the conversion of the Finnish Transport Agency’s traffic control function into a separate company. The new state-owned traffic control group is expected to start operations on 1 January 2019.

At the moment, many of the state-owned companies are responsible for activities that have traditionally been considered as part of the public sector.  These include icebreaking and the maintenance of the communications networks used by the authorities.

A number of questions arise when public sector activities are transferred into an environment governed by market economic thinking. Do the new companies actually have a genuine customer market or will they continue to rely on central government actors as their only clients? Can it really be said that corporatisation makes economic sense if the invoice for the services produced by the companies is ultimately paid by central government?  And can activities critical to the functioning of the state be allowed to go bankrupt if operating as a company is economically unviable?

We started seeking answers to these questions on the basis of the recommendation issued by the Ministry of Finance, which concerns the selection of organisational models for central government activities. Thus, we decided to take a look back and to examine past corporatisations from the economic perspectives provided by the ministry’s recommendation.

First, we surveyed the companies’ market position, customer structure and the manner in which their turnover is generated. We focused on identifying companies that may have achieved a monopoly and companies operating in a competitive market that sell all their output to customers in the public sector. We decided to only examine companies where the state is a majority shareholder and left companies managing central government assets as well as financing and investment companies outside the scope of the survey. This is because these companies do not generate any turnover and determining their customer base is difficult. About 50 companies were included in the sample and some of them are well-known to Finns.

After all, most of us have travelled on trains owned by VR and paid our own share of the Yle tax. However, the long list of companies also includes firms that few of us know anything about. For example, can you name the sectors in which such companies as Fingrid Oy or Tapio Oy operate?

It soon became clear that the companies included in our sample can be roughly divided into three groups. The first group comprises companies with genuine markets and that also have customers outside central government. In their case, operating as a company can be considered economically profitable. The companies in the second group would face substantial pressure to restructure their operations if they lose their customers in the public sector.   The third group comprises companies that sell most of their output to central government actors, which means that they are also completely dependent on these customers. In their case, there is little justification for operating as a limited liability company and the services should be provided by an agency or an unincorporated state enterprise.

What are the conclusions of our survey? Not all state-owned companies would necessarily survive in the market without the flow of revenue generated by state sector purchases. It should be noted, however, that our survey was relatively narrow-based and we only examined the issue from economic perspectives. Nevertheless, companies operating outside the state budget play an important role in central government finances and they may also provide an interesting topic for research in the future.

There is demand for comprehensive audits of large entities in the public sector and our agency, in its capacity as the supreme auditor of central government finances, is well-placed to respond to this need.  Major issues, such as corporatisation, provide ideal entities for audits combining several audit types. In fact, in the future, the NAOF should boldly tackle extensive phenomenon-based audit processes.  Even though the topics may cover a broad range of different issues, the impacts of corporatisation on Finnish society can be comprehensively assessed with audits spanning several audit types.

Authors: Samu Kälkäjä and Tiina Väänänen