A Processual Theory of Local Public Services Commercialization

Over the past ten years, the large municipalities have increasingly regarded the water utilities as a source of financial resources. This commercialization has happened through a changing attitude in the municipalities towards managing their own affairs in a more entrepreneurial manner that allows them to actively substitute decreasing state funding with alternative sources of income. The water utilities represent one of these alternative sources of income that are used to help balancing the municipal budget. The most important driver for this process has been the state government’s coercive pressure on the municipalities. The state decreased its funding of municipal affairs and encouraged municipalities to become more effective, and as a result, municipalities were coerced into becoming more entrepreneurial.

As depicted in Figure 8-1 (opposite page), the state has been pressuring municipalities towards higher self-sufficiency from state grants, and imitation of private sector managerialism. The state is withdrawing from the scene as a financier and is implementing stricter standards on services provision, such as for water supply and sanitation, while the economic side of regulating municipal services and enterprises does not receive sufficient attention. In other words, municipalities face pressures from decreasing income and higher service standards, and as they are being told to become more entrepreneurial, the relaxed economic regulation allows them to conduct their business in a rather unregulated, flexible manner. The space (or subject position), which becomes available through the lack of state finance and regulation is filled by financial actors. Therefore, I find that contrary to the notion of the municipalities handing over their activities to the private sector, they substantially turn to financial actors. The reason is that increasing municipal entrepreneurialism has given municipalities the confidence and motivation to own and operate profitable businesses themselves. I see this trend as contrary to the initial response to crisis and reform, which the public sector showed in the early 1990s when it seemed to divest its operations by selling to the private sector rather

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swiftly, such as during the liberalization and privatization in the electricity sector.

Further, because of the experience with the energy sector liberalization, learning occurred in the meantime in municipalities since these decisions and the benefits that were hoped for have been questioned by a variety of municipal stakeholders and the municipalities themselves.

Figure 8-1 A Processual Theory of Commercialization

As shown in Figure 8-1, the role of the state becomes less important (especially in terms of financing the municipalities) and as a result, the municipalities are becoming more proactive and entrepreneurial and turn to financial actors to help them find new resources that can substitute (at least partially) for the decrease in state funding. Therefore, when the state actor withdraws from the scene, a subject position opens up, where other actors can enter. These actors, need a suitable value offering for municipalities (as financial actors do by providing valuable advice on financial restructuring) but also the right timing is important, and knowing who to talk to and how to get access to municipalities.

Therefore, this space is filled by financial actors instead of other private companies because the municipality, emerging as self-confident owner, requires advice on restructuring its assets rather than selling them to the private sector.

Financial actors are filling these open spaces (referring to Figure 8-1) over time by adapting their proposals for municipal restructuring to fit the municipalities’ own logics and needs. Financial actors require but also possess the conceptual flexibility to adapt their solutions to the municipalities’ needs because their business is one of changing and

State pressures municipalities towards higher self-sufficiency, imitation of private sector managerialism, and allows freedom in market-oriented reforms. As Municipalities increasingly rely on

financial actors to help with balancing municipal budgets.

2000s

TIME

1990s

Changing Importance of Actors in the Municipalities’ Finances Higher Degree of Commercialization

Lower Degree of Commercialization Municipalities

State Financial

Actors

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transferring assets, but whether they earn their commissions from transactions within the municipality or by privatizing municipal assets is only of secondary concern.

Change is the main issue financial actors really profit from. When municipalities increasingly cooperate with financial actors in restructuring municipal assets, any attempt to understand the process and its outcomes needs to consider the logic behind the financial actors’ advice and how it combines with the municipalities’ own thinking. The financial actors’ institutional logic is best described by summarizing it as ‘flexible financialism’. Although these actors have a rather strong set of normative assumptions that assumes, for example, private firms are more effective in managing and that the public sector is too large and lacks professionalism, they are highly flexible in their conceptual thinking. They can change their perspective and concepts according to their clients in order to stay in the game. Financial actors also argue that markets need regulation because on one hand, they believe that private firms would take advantage of their monopoly and go too far in trying to maximize their profits. On the other hand, regulation would serve their interests of bringing private companies into the market, which could only happen when a regulatory agency exists. Therefore, they regard regulation as a prerequisite to privatization.

The financial actors’ attempt to promote privatization by interacting with the media and decreasing the municipalities’ legitimacy to own or operate the water works (by criticizing their effectiveness and investment policies) did not produce any significant success. Instead, they adapted by analyzing the institutional logics and pressures residing in the water sector, identifying the most important actors (the municipalities), and using them in order to leverage their own goals. Three characteristics of financial actors enable them to stay in the game regarding the nature of change. First, they sell intangibles (knowledge about finance) and hence, are able to adapt their solutions to the clients’

problems – irrespective of what solution (privatization or some other form of restructuring) is required. Second, their service is highly flexible as financial expertise can be adapted to different sectors – making them a part of almost any organizational field today that deals with restructuring of some kind. Third, financial actors apply tactics in a comprising fashion: identifying the key actors in the game; adapting to their logics;

and using coercive forces such as promoting regulation and undermining certain actor’s legitimacy to leverage own goals.

However, despite the important role financial actors play in municipal asset restructuring I do not see them as the drivers of the commercialization of water services or other local public services but instead, they are (often willfully) merely facilitators of the commercialization process. This commercialization process is caused by the entrepreneurialization of local government that is coerced into it by the market-oriented reform at the national governance level. A crucial feature of municipal entrepreneurialization is the increasing self-confidence municipalities have in their management abilities combined with their need to hold on to profitable service

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operations, such as water services and commercialize them to such extent that operational and strategic decisions concerning these operations are made under significant commercial pressure in order to create substantial income for the municipal budget. This creates the situation where I see it less likely that municipalities are selling out their profitable operations and assets to the private sector but instead, aim to hold on to these operations and use them for subsidizing other, non-profitable local public services.

Therefore, I am proposing the following processual theory of local public water services commercialization:

- Local public services commercialization is the result of the entrepreneurialization of local government.

- As the state adapts a laissez-faire stance and withdraws from the local government level as financier, its subject position is open for another actor that can assist the municipalities in their finances.

- As municipalities become more entrepreneurial (due to isomorphic forces), they recognize their ability to be entrepreneurs and want to hold on to those operations which can be profitable and commercialize them.

- Because for municipalities it is primarily a question of their own commercialization rather than privatization, they turn to financial actors before turning to private companies to sell their operations and assets to them.

- Therefore, municipalities turn to financial actors who can help them commercialize their operations and the subject position that opened when the state withdrew is taken by financial actors.

- As a result, the more municipalities entrepreneurialize, the higher their level of commercialization, meaning that enterprises owned by the local government turn into publicly-owned, commercially-oriented enterprises.

- Further, the higher the municipalities’ entrepreneurialization, the less likely that they will privatize service entities that are profitable.

I see this theory as applicable to enterprises that are owned and managed as public service (especially public-owned water and wastewater works), and where it is possible in theory and practice to operate them as profitable business.

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