Domain and Purpose of Municipalities

The analysis of the domain and purpose of municipalities is divided into briefly describing the ‘tasks’ of municipalities; and municipal managers seeing themselves as

‘service providers’ as well as ‘business owners’.

6.1.1 Tasks of Municipalities

Municipalities provide roughly two-thirds of public services; the state, one-third. The municipalities are required by law to be responsible for organizing different tasks or so-called basic services, as depicted in Table 6-1 (next page). Of these, the most important basic services are education, health care, and child day care, which is in Finland a constitutional right of the citizens. In addition, planning and housing are part of the municipal domain, as well as technical services that include energy and water services.

The amount of regional cooperation in health care and municipal planning has been constantly increasing, partly due to the compulsory regional authority committees for these sectors. The local, rather independent municipalities are obliged by state law to provide for certain services, such as child day care, health care, education, or water services, but they are free to choose the method of service production in many cases.

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Therefore, the municipality has the duty to make sure that within its defined territory—

for example, of a city—every citizen has access to drinking water and sanitation. While the municipalities are required to organize these services, they have a certain degree of freedom in how to do so. That means that in practice, it is up to the municipality to organize the local health care through contracting the private sector or by doing it itself.

Water and sanitation services fall in that category as well. Private sector participation in service delivery has also been increasing—for example, in delivering health care and technical services such as energy, water, waste, maintenance, and construction services.

Table 6-1 Patterns of Service Production in Finnish Municipalities Mostly in-house, some

utilization of private producers

In-house or joint-municipal authority/other co-operative solution

Mostly joint municipal authority

Primary Schools Day Care for Children Care of the Elderly Libraries, Culture Technical Services Local Zoning

Secondary Schools Primary Health Care Environmental Protection Industrial Policy

Specialized Health Care

Vocational Education Regional Planning Fire Protection

Source: adapted from Sandberg, 2005

The municipality is predominantly regarded by the municipal technical managers as a service provider, and it is clearly distinguished between the so-called core services and non-core services. Within the core service domain, the usual view is that child day care, educational, health, and social affairs are parts of it, as well as the management of major infrastructure. Major infrastructure includes roads, bridges, certain buildings but also recreational infrastructure of strategic importance, such as a city’s amusement parks.

Wastewater networks are usually rather the affair of the municipality than of the water utility because sewer canals are underneath the municipal streets. They are also often counted as major infrastructure and therefore as the municipalities’ core activities.

Especially because the municipality has invested significant sums in network infrastructure of all kinds, including district heating, roads, electricity, water, or sewerage, they are often considered as part of the strategic core because of their high asset value.

121 6.1.2 Being a Service Provider

Especially in areas where the operation of services or infrastructure faces missing or imperfect markets (monopolies or quasi-monopolies), the law states that municipalities are responsible for organizing them. For educational services, municipal technical managers clearly emphasize that the municipality and therefore the public sector should remain as the owner and operator. But there are other areas where they make a clear distinction between owner and operator, in overseeing and controlling key decisions—for example, regarding service levels and service quality.

“We have four areas of core services, and they are health, social, schooling and major infrastructure, such as roads, bridges, and the sewerage system.”

(Municipal Manager)

“Our task is to produce educational services, health care, street maintenance, child day care. But I think for example managing real estate is not so important and we could outsource it or sell them.” (Municipal Manager)

Municipal managers feel many of the activities the municipality performs as burdensome due to the difficult budget situation. But they also emphasize that it is not enough to be a mere provider of services, which the municipality is obliged to provide by law. Voluntary or value-added services are regarded as significant contributors to municipalities’

inhabitants’ quality of life and, therefore, as important factors for image.

“We must think about our image and that it is not enough to have services based on law but we also need cultural services, sports, environmental services, recreational services, and all kinds of services, and not only based on what we are required to do by law.” (Municipal Manager)

Therefore, not only are core services valuable to the municipality; a wider range of activities needs to be provided for, whether by the municipality or by a chosen contractor.

Slimming down the municipalities’ operations is of great concern and therefore is linked to business divestment as well.

The question of whether to divest from certain business activities requires municipal managers to determine a service unit’s ownership value, meaning that owning a certain service entity brings value to the municipality. That value can take on several forms.

Many municipal services and infrastructure is operated by the municipality because they are facing missing or imperfect markets. Opera houses, conference centres, or amusement parks are important organizations for urban life and achieving profitability is difficult.

Nevertheless, these units create some form of value for the municipality, remaining the owner and controlling entity. In the example of a local amusement park, the value might not be in the form of financial profits to the owner, but it has strategic importance as attraction for the municipality as a whole, creating spillover effects for other local businesses and enhancing the quality of life for inhabitants—and therefore contributing to the overall competitiveness of the municipality.

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“We have companies that have very big strategic meaning for the city, such as the amusement part, or the conference hall. It is not so important how profitable they are. The strategic meaning is ownership value. That is the most important thing.” (Municipal Manager)

Concerning the municipal organizations related to technical services, a distinction can be made between operations which are unlikely to be profitable, such as operating a conference centre and operations that can be profitable, such as the water utilities or energy utilities, which could be even more profitable if management and cost structure, would change, although the current situation often does not allow it. In the first case, it seems evident to the managers that it is only the public sector or the municipality for that matter who takes care of such services. However, in the second case, profitability is a possibility, and therefore it indicates that a market exists and private sector organizations would be interested to perform the task instead of the municipality.

6.1.3 Being a Business Owner

Where profitability of a service is realistic and privatization would be a theoretical option, municipal managers legitimate municipal ownership and management control through the strategic importance of the particular unit or through unique market characteristics, such as the natural monopoly character of water services. These units are organized as municipal technical services and infrastructure, managed either as departments of the municipality, as more independent municipal enterprises, or even established as limited liability companies.

In cases where there exists a functioning market in the sense that private sector companies are readily available to perform the same tasks as the organizations controlled by the municipality (for example in the case of operating bus lines) municipal managers can imagine that either the municipality divests from these activities or that it remains in the market. The fact that the municipality should maintain ownership and the operation of certain service units (despite the possibility of allowing a third party organizes these activities) is justified through the municipality’s need to protect itself from private sector cartels. But having one of its own organizations participating in the market also enables it to execute municipal policies.

“When we are talking about the housing system, the reason why we own the companies is how to handle the housing policy of the city. You can’t handle it if you are not in it. Of course, the most of them are working in the open market, but we need to be in there to use our housing policy, because the housing policy comes from the law. So, that is only the tool to make the policy.” (Municipal Manager)

“Our logistics transport centre takes care of all the transport, so when units order transport services, we have that kind of services because there is not enough competition. The price level is so high that it is good to have your own organization to affect the price level.” (Municipal Manager)

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Regarding water services, another reason for it to be a municipality-owned service business is that its domain is a natural monopoly. Competition in natural monopolies can only be created through competitive tendering for long-term service contracts of service infrastructure, but not in a sense that the end customer can choose between several service producers—to, say, switch water service producers, as it is possible for electricity services.

Municipal managers believe that it is better to have the public sector operating a local natural monopoly rather than the private sector because, after all, citizens are able to execute some sort of monopoly supervision through the local democratic municipal government system. If the water utility were owned by a private company, it could not be effectively supervised and regulated because the utilities’ economic decisions would be made by an owner who is independent and mainly guided by profit motives.

Here, a lack of trust towards the private sector is visible because in case of a monopoly market, the lack of competition would create a lack of incentives for the private company to put the customer’s interests before economic interests. The municipality is seen as the more suitable owner and provider because the democratic system assures that the inhabitants’ interests come before economic interests, or are at least considered as important. And even if the municipality is as profit-seeking as a private enterprise—as municipal managers argue—its profits benefit the citizens because the income is used to finance services the municipality could otherwise not afford to provide, such as leisure and cultural activities.

“We are in very big financial difficulties and know that we need to do something but many of us have not concluded yet, if it is more reasonable to privatize because it mostly does not get cheaper but the citizens have to pay more.” (Municipal Manager)

“It is in the interest of this city and us, the people, not to destroy the nature which affects the water quality and availability. But if there would be a private firm, I believe they would not think so much about that.” (Municipal Manager)

“What are the benefits to change from public monopoly to private monopoly? It makes no sense.” (Municipal Manager)

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