Public service or public investment? An assessment of the consequences of new public management in the water sector

Abstract

Water services systems are essential to public health, economic development and the state of the environment. In order to secure the quality of services as well as ensure reasonable customer charges and sufficient investment, water services have traditionally been taken care of by the public sector in most countries of the world. However, a major problem with the public sector provision of water services, or any other services for that matter, has always been that their demand is invariably greater than the funds available for their production. Thus, countless reforms have been implemented to improve the public sector in terms of service quality, the efficiency and effectiveness of operations, and accountability to citizens.

The latest global wave of public management reforms, coined New Public Management (NPM), has advocated reducing the size of the public sector and the application of private sector management principles and practices. NPM-informed reforms have also been implemented on the local government level in Finland with the broad aim of increasing flexibility and municipal autonomy in service production while still safeguarding the foundations of the welfare society. This approach has brought along with it, amongst other things, the separation of the provision and production of public services; the adoption of accrual or business accounting; and the obligation to practice longer-term financial planning and budgeting. The reform has also involved the separation of water services within municipal accounting, as well as the implementation of full cost recovery through customer charges, including a reasonable rate of return on invested capital.

The principal objective of this research was to examine the consequences of NPM–influenced financial management and accounting reforms in the context of municipal water services. The aim was to ascertain whether or not the reforms have succeeded in achieving their original objectives and whether they have resulted in any outcomes that would require increasing regulation in the public sector. The research focused mainly on Finland, where enough time had passed since the initiation of the first local government reforms to allow an analysis of the consequences. The Finnish perspective was complemented with an exploration of parallel and similar developments in Tallinn, Estonia because, despite differences in politico-administrative history, the two countries shared certain relevant characteristics such as politicians’ inexperience in the commercialization of water services and the need to secure water infrastructure investment funds.

With regard to methodology the research adheres mostly to the disciplines of public sector financial accounting and management. Since much attention is paid to the somewhat radical changes caused by the NPM movement in the water sector, the approach assumed in the research may therefore be called critical. The method of reasoning utilized in the research is induction, which is not based on hypotheses as drivers of the research but which proceeds from specific observations to more general conclusions. The predominant method of arranging the research material is the case study, from which it is possible to make contextual rather than statistical generalizations.

The water services reforms explored in this research sought, through the application of various NPM principles and practices, to increase the transparency of municipal finances, to improve financial planning and management, and to secure sufficient investment into the rehabilitation and replacement of water services infrastructure. The positive consequence of the reforms reported in this dissertation is the accrual-accounting derived practice of infrastructure asset management. The more negative consequences are associated with the inherent difficulty of infrastructure asset accounting and the nationally devised accrual accounting terminology, which offer opportunities for investment deferral, hidden taxation, cross-subsidizing, short-sighted political decision-making, and the violation of intergenerational equity.

It therefore seems that some degree of economic regulation or other type of governance would be appropriate in the case of publicly owned water utilities in which profit-making is allowed. Guidance related to the long-term management of infrastructure assets is considered especially pertinent. The options outlined in this research for the Finnish context are either a combination of formal and informal methods or an expansion of this which involves the establishment of a water sector economic regulator. An ideal arrangement would in either case involve a long-term commitment of municipal decision-makers to water services management. In practice this could mean that the boards of municipal water services enterprises would also include non-politician expert members, and that some of the board members would occupy their positions for a longer time than the municipal election period.