Individualism

Regional cooperation among municipalities for service provision and production represents the main task for securing the viability of many of Finland’s municipalities for the next years. For water and sewerage services, this cooperation is regarded as a solution to current and future challenges for the water sector. However, either creating larger water utilities through merging assets of water utilities, or just cooperating based on service production has been a rather troublesome and slow process.

Regarding the analysis of the interview data from financial actors, when it comes to initiating restructuring and making the creation of larger entities happen, the interesting things in the data are a combination of what has been said and what has not been said.

The need to financially and rationally calculate and restructure the water sector is emphasized rather strongly by financial actors. However, problems in this process are dealt with by complaining about the political process in municipalities rather than by aiming to achieve a deeper insight into what it takes to create successful change and cooperation among municipalities.

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A successful regionalization project of Finnish water services, the water utility of Hämeenlinna region, which merged with eight of its surrounding municipalities’ water utilities, is criticized by the financial actors for giving up some of its power and financial benefits it would be entitled to according to its relative size compared to the other company members. Further they point out that the previous water utility of Hämeenlinna had better economies of scale that allow a lower water tariff in its larger urban territory as in the surrounding, less densely populated neighboring municipalities with whom it merged together. Here, compromising is interpreted as a weakness and as an action against the principles of financial rationality.

Financial actors think structural change is less complex where a water utility is sold to an energy utility, both belonging to the same municipality, because one has to deal only with one municipality in which all decisions are taking place, opposed to the case of merging entities that belong to a number of municipalities with each other. But financial actors also recognize that out of the necessity to merge water services there may be no other option than giving in to the demands of others.

“In this case [where the water utility was sold to the energy utility, both belonging to the same municipality] there was only one decision-maker and they can do what they want…but in the case of Hämeenlinna region, it is different because the decision-making is dispersed…you have to do it differently there. Establishing the company in Hämeenlinna was…a regional necessity…to pool the resources.” (Investment Banker)

“But I think that if you forget the financial side, the parties make some mistakes. For example in Hämeenlinna I am sure that some municipalities have made some mistakes, and that Hämeenlinna is the city that has made the worst decision because they have the same transmission tariff in Hämeenlinna than in the neighboring municipalities, even though they have larger scale effects [in Hämeenlinna]. From a financial side, the tariff should be much lower in Hämeenlinna than in the outside area. This is only one example for their mistakes because they forgot the financial aspects. The water customers of Hämeenlinna are subsidizing now the rural areas.”

(Investment Banker)

“I think gifts to individual municipalities should not be made because it would affect the balance of the company, and its future.” (Financial Consultant)

Financial actors have been trying to facilitate these restructuring processes, for example by talking to the municipal leadership, to politicians, to managing directors of water and energy utilities, and to the media. However, they have been facing opposition, and financial actors are mainly blaming the municipal decision-making system for the slow progress in these projects and the fact that power is dispersed among so many different actors, especially when more than one municipality is required to agree to a restructuring plan. Here, the municipalities’ lack of willingness to think about the bigger picture and to

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make compromises is criticized by financial actors, even though according to the financial logic earlier, making compromises would be against their own logic. For example, financial actors do not like the idea of agreeing to the same water price in all participating municipalities if that means that the largest municipalities would end up subsidizing the water rates of others.

“Now we are establishing these regional companies and maybe they will be established within one or two years but I cannot say exactly because these projects are very slow. So, maybe the horizon will be about five years...”

(Financial Consultant)

“The problem with regional cooperation or merging of business activities is that you have so many different decision-makers. In each municipality there are authorities, politicians, the board, the council, and then a second municipality and a third. Everybody has his own agenda and is trying to remain independent and still get the most profit out of it.” (Investment Banker)

One way for financial actors to try and make progress despite complications in the municipal decision-making process especially in situations where several municipalities need to agree is to propose financial and organizational solutions that favor the municipalities’ individualistic interests. For example in the question of not having any municipality subsidize the others’ water tariff because of the different economies of scale advantages and disadvantages, one of the investment banks also proposed a model according to which every municipality would be allowed to have its own tariff and investment policy.

In this case, however, the structure of the proposed organizational model would create a separate entity for the assets of all utilities; merge the service operations, and have, for each municipality, its own entity that manages its individual tariffs and investments, under the guidance of its direct municipal owner. Such a model creates not one single water utility as a result of the merger of several existing ones, but instead a service organization is created, an asset organization, and for each municipality a management organization. The result is a rather complex organizational arrangement, which represents in itself a challenge to municipal decision-makers because of its complexity.

“[In our concept] every municipality is able to have their own tariffs and own investment policy. If you have a tightly build city and rural area around, you can differentiate the investments and have different types of connection fees.

But still, you can merge the operational parts of the water sector and that makes it a useful tool for local and regional cooperation of municipalities.

The municipalities are most happy about that…this is a big advantage of this concept.” (Investment Banker)

“I have discussed with several towns about owner policies and how they should treat these [utilities] as owners and […] I have been meeting the

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politicians of the city, different political parties, explaining them very practically what are the real issues, political issues, and how the decision-maker should treat these issues… they should not for example try to understand the complicated financial issues…but they should focus on different issues, and leave these more complicated issues to experts.”

(Investment Banker)

In a situation like that, where the municipalities as owners of the utilities are struggling to agree on merging their water works in order to create larger, more resource effective units, financial actors are hoping for and welcoming pressures or incentives from the state level that would facilitate the necessary progress.

“There are 444 municipalities and it is very difficult to merge them, which is why the state administration has given out some rules now to push the regionalization of the services, which is also difficult but it is still easier than merging municipalities as a whole.” (Financial Consultant)

“The state or somebody should decide, who are outside; or offer large enough incentives, because the decision-makers of these municipalities are not the right persons to make the decision because they would be cutting their own jobs.” (Investment Banker)

Financial actors are predominantly concerned with the financial aspect of organizations, and their ideas shape their approaches to strategic change in the Finnish water sector, through continuously proposing financially innovative solutions to their municipal clients. However, these solutions are serving both the financial actor as well as the client although implicitly, the financial actors are working towards more private ownership in the water and sewerage sector.

From a financial actor’s perspective, and especially from an investment banker’s point of view, the current restructuring that would be possible through changing the municipally-owned water utilities from municipal business departments into limited companies is a beneficial business where large fees are to be expected. Because municipalities are able to release their capital through such an arrangement, they are rather passive about accepting private capital, for example through partly or fully selling their water utilities.

Therefore, privatization as such is not expected to happen, neither by the municipalities nor by the financial actors, who had to learn about the limited possibilities of privatization and adapt their concepts to alternate solutions. These solutions either deal with the question of how to create larger units of water utilities or whether to merge them with energy companies. But despite the benefits the financial actor’s concepts offer the municipal owner, problems especially with the integration and regionalization process still exist. The answer to these problems lies in municipalities’ and financial actors’ focus on rationally calculating the risks and benefits. Financial actors are trying to optimize the risks and benefits according to the needs and demands of individual project participants although making compromises would promise more success.

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