1 Analysing NPM-inspired Public Sector Reforms - the Case of Helsinki Metropolitan Area Bus Services Pekka Valkama & Ari-Veikko Anttiroiko University of Tampere, Finland Abstract This paper discusses NPM-inspired public sector reforms in Finland and analyses bus services as an example. It seems that most of the reforms in OECD countries are framed by loosely defined NPM doctrine, thus emphasising such institutional arrangements and measures as downsizing, privatisation, corporatisation, outsourcing and competitive tendering. Nordic countries are not exceptions to this trend, even if they seem to adopt a kind of mixed strategy of traditional and NPM-inspired reforms. In this paper Finland is used as an example. Since the 1980s the Finnish Government has followed fairly straightforward-minded competitiveness policy, which conditions also public sector reforms. Local governments, which provide most of the public services in the Finnish system of government, show occasionally some resistance to this trend, but they follow suit for the most part, thus seeking continuously more efficient ways of providing local public services. One aspect of this trend is competitive tendering, which has become institutionalised part of the functioning of the service and procurement systems of Finnish local government. This paper describes the introduction of competitive bidding of Helsinki metropolitan area bus services and assesses its economic and other consequences. The idea is to discuss whether competitive tendering can be expected to bring significant economic benefits to local authorities, local community and society as a whole. 1. Introduction The concept of New Public Management New Public Management (NPM) is generally known to be quite a loose, yet widely used term in discussions about public management and public sector reforms. Some authors attach it to neo-liberal ideas of minimal state and of need to streamline governance by introducing market-driven solutions for public service delivery (see Table 1). When understood this way, we may define NPM as a management doctrine that emphasises business-style management of public organisations and the use of market mechanism and consumer choice as the basic principles of public service delivery. In essence, its message is that the approach to the management of public organisations and services must be based on managerialism and market-based coordination rather than on allocation of 2 resources made within the representative system of government (Walsh 1995). On this basis the concept of New Public Management can be defined in the following way: New Public Management (NPM) is a neo-liberally oriented public management doctrine based on a market-oriented view stating that, instead of direct political control and hierarchies, public organisations should rely on indirect control - that is, market-based coordination - in the interaction between public organisations and their environments. It emphasises the efficiency and effectiveness of public organisations, customer focus in provision of public services, and market-based conditioning frameworks, such as privatisation, competition, and contracting out. Table 1. Aspects of New Public Management (Greve 2002, 84). ASPECTS OF NPM CONTENT Idea or tendency A new doctrine of administration based on NPM-inspired management literature Reform manoeuvre A global trend to replace hierarchies and bureaus by markets and networks Tool box A tool kit for problems of public organisations Policy agenda Theory of contractual management Real life policy framework and reform agenda NPM-inspired contractual relations causing an erosion of public authority Discourse An idea that the emphasis in public governance must be placed on private service providers From an academic point of view we may say that the theoretical foundations of NPM lie on institutional economics and public choice theory (“free to choose” approaches) and on new management doctrines that favour business-oriented management style in public sector (“free to manage” approaches). Their theoretical foundations can be summarised for institutional economics (including principal-agent theory, public choice theory and ransactions costs theory) and business-type managerialism (including learning from business sector, professional business-like public management and leadership theory). Rationale behind NPM The triumph of NPM has found a good soil in advanced countries since the 1980s, when they started a general turn towards more neo-liberal policies. Most of the Western countries experienced legitimation crisis in regard to the functioning of the existing systems of public governance. They also faced increased individualism, which increased people’s tax-consciousness (reluctance to pay high taxes and high expectations of the returns on taxes paid) and also demand for responsiveness in providing public services. Another practical reason for the popularity of NPM among politicians, public managers 3 and developers was simply to increase the efficiency of the public administrative machinery, which was a must in the situation in which territorial communities needed to adjust themselves to globalisation and hinder the growth of public expenditure. New governance discourse in various forms also started to blur the boundaries of different institutional sectors, which paved way for inter-sectoral co-operation between public sector and private sector actors. To sum up, NPM seems to be linked with the following trends (cf. Hood 1991, 3): 1. Attempts to slow down growth of public expenditure 2. The shift from nationalisation or centralisation to privatisation 3. The development of automation and IT (e.g. e-procurement, e-vouchers etc.) 4. Globalisation and internationalisation of societal relations 5. The needs for inter-sectoral co-operation (e.g. PPP) and pooling of resources. NPM has been particularly popular in Anglo-American and Anglo-Saxon countries. The USA had a fruitful soil of NPM not only due to its strong entrepreneurial and self-help traditions but also to strong hold of conservative values in politics, which has meant a widely spread anti-state sentiment in the country. In the USA, a private sector has traditionally had a stronger role in public governance and economy. That is why the US governments have used private sector in providing public services in various ways for decades. In Britain, favourable conditions for NPM-inspired reforms were formed by its economic difficulties, rise of Thatcherism since the late 1970s and general managerialist orientation in public governance. (Savas 1987 and 2002 and Burnes & Anastasiadis 2003, 356.) Public services have traditionally been regulated very detailed way and central, regional and local governments have had only little discretion over how to produce them. Thatcherism marked a turn that affected whole Europe. Since then competitive tendering and various quasi-market arrangements were applied increasingly to public service provision. As much as establishments and public managers in Europe favoured NPM, there has been and still is rather strong opposition to the foundations of NPM. It has been claimed that NPM suffers from a fundamental misunderstanding in its approach to government and citizens – the former is not about “business” and the latter is not just a “client”. It is also said that NPM simplistically denies the benefits of hierarchy. It is also claimed to be too instrumental to serve communities of people in an optimal way, consequently providing only short-term and /or particularistic advantages and making public administration even more complex. (See cf. Dunleavy, Margetts, Bastow & Tinkler 2006, 476.) 4 2. Objective and methodology of the article In this paper, we discuss the adoption of NPM and quasi-marketisation from the point of view of local government. We focus on the case of Helsinki metropolitan area bus services. Helsinki is the capital of Finland. The general framework for the city management in organising and financing bus service is Nordic welfare state model, which emphasises the universal services, transparency and efficiency. During the last decades municipalities in the Nordic countries have gained more power to implement the provision of local welfare services. With the exception of some minor statutory task, there are only very few requirements concerning the mode of service provision. Basically, local councillors have thus an option to choose how to organise local public services for local citizens. This development has opened a door to quasi-marketisation. Contrary to minimalist approach to local government, which favours the reduction of the scale and scope of municipal services, trends in Nordic countries include cases in which even expansion of publicly funded services are justified (Brown, Ryan and Parker 2000, 209). For example, privatisation, as much as it has been discussed in all Nordic countries, has been rather rare at local level. Instead, the major trend can be associated with outsourcing, contracting out and competitive tendering, which form key aspects of quasimarketisation. In this paper we analyse the quasi-marketisation with a special view to contracting out of bus services in Helsinki metropolitan area. Our aim is to map out an overall picture of quasi-market development, assess the economic and other consequences of the introduction of competitive tendering in bus services and to discuss whether competitive tendering can be expected to bring significant economic benefits to local authorities, local community and society as a whole. The case of contracting out Helsinki metropolitan area bus services is important, because the model of competitive tendering has been applied over then years and it involves both public and private actors operating in the same market. The first part of the article is a conceptual analysis, which produces as results new definitions, standpoints and argumentation. A source material is mainly composed by previous political economy and administrative studies. The second part of the paper is an empirical case study about competitive tendering of bus services in Helsinki metropolitan area. A part of empirical data was collected by interviews in 2002 and 2003. Key stakeholders of bus services of metropolitan area, including representatives of local governments, bus companies and lobbying organisations, were interviewed. The lobbying organisations and especially Helsinki Metropolitan Area Council (Pääkaupunkiseudun yhteistyövaltuuskunta, YTV in Finnish) gave some important public documents, which were analysed. (See more detailed Valkama & Flinkkilä 2003.) At the same time, also a comprehensive survey among staff members of the bus companies were carried out, but only few selected results from the survey will be presented in this article. (See more detailed Haatainen 2003.) 5 3. Creation of the quasi-market Emergence of a new terminological field A new public management ideology does not reduce the demand for locally provided and financed services, but it will change patterns of service delivery, and it may also change division of labour between private and public sectors. The message to local government is to reduce its own production of public services and assume a kind of enabling role in local governance and service provision. Thus, local government is becoming primarily a purchaser of welfare services, which creates a local quasi-market which is based on purchaser/provider split (See Bailey 1999, 303-324 and Valkama 1994). The enabling role and outsourcing mean that private companies and non-profit organisations can be enabled to participate in service provision through competitive tendering and contracting out. Competition policy of the EU has introduced even compulsory competitive tendering practises in certain specific large-scale service acquisitions. In addition, the enabling role means that the individual consumers and users are enabled to choose services that meet best their own needs. (Bailey 1993, 137 and 142.) Terminologically competitive tendering opens the door to various actors to bid for the provision of certain public services. It may be compulsory (CCT) or voluntary. Competitive tendering is usually formally regulated and organised procedure that opens public services to quasi-markets. Yet, only some parts of the services involved in tendering process are contracted out, for it is possible that also an in-house provider bids for and wins the contract (contracting in). Thus, competitive tendering emphasises the tendering process, whereas contracting out emphasises the contact between purchaser and provider irrespective of whether the contact is based on competitive tendering or not. This is the major distinction between these two quasi-market-related concepts. Contracting out is one form to externalise public services out of a public bureau. In this paper, externalisation can be defined as a manoeuver, which will outscource local public duties from a local government to private or non-profit organisations or other public authorities. An alternative way to speak about externalisation is outsourcing. (Cf. Sparke 1994.) Commercialisation can be defined as a process in which quasi-markets are established for selected local public sector goods and services in order to increase competition and open access to these markets for different players. (Brown, Ryan & Parker 2000, 2007.) It may also be given a broader meaning, to include sponsorships and other forms of involvement of business partners in the provision of government services, as well as the applications of market testing and other business-style marketing techniques. Privatisation is a different from commercialisation and quasi-marketisation, as it refers to the sale of government owned assets or enterprises - such as airline companies, railway companies, etc. - to private sector investors (Shirley 1999, 115). Thus, in the name of terminological clarity, privatisation, which is in a sense an extreme end in the continuum 6 of reorganisation of public service provision as it takes the activity out of public domain, has to be distinguished from quasi-marketisation and related phenomena. Enabling role of government Sponorships and donorships Privatisation Marketing techniques and market research applied by public organisations Outsourcing Non-competitive PPP relations and commissions Contracting Contracting out Contracting in Consumer choice (vouchers) Figure 1. Central terms related to the quasi-market. Quasi-market revolution A practical consequence of NPM-oriented reform wave is that local government is becoming an enabler and a purchaser of welfare services. In practice an important social innovation behind quasi-market is the separation between a purchaser and provider of services. Local council and other public bodies are purchasers, but local public services are to be supplied by a variety of semi-independent and independent public and private agencies or companies. Quasi-market is “quasi” simply because it differs from conventional markets. In quasimarket there are various kinds of service providers, including private companies, public companies, public bureaus, and third sector organisations. A quasi-market is a planned market, where commercial and financial transactions are planned and designed in political-administrative processes. All service providers are not necessarily out to maximise their profits, because also non-profit organisations may participate in quasimarket competition. (Le Grand & Bartlett 1994, 2-10; Bailey 1993, 148.) Quasi-market is also more heavily regulated and controlled that free or conventional markets. Quasimarketisation as applied to modern welfare and community service industry involves the implementation of strategies such as the commercialisation of services, introduction of quality improvement processes and value for money programmes, and the entry for both 7 for-profit and non-profit providers to create partnerships with local authorities. (Spall & Zetlin 2004, 284.) Quasi-market of local public services consists of two basic ways to organise competition of local public services. First, different service providers are invited to submit competitive bid (tenders) for service contracts by local governments. This kind of activity will create a fundamental part of quasi-market and will stimulate competition in the supply of services needed by local public sector. Whilst private sector provision of local public services is being encouraged, private enterprises must demonstrate that they can offer better value for money than any in-house provider, corporatised unit or non-profit organisation. If in-house provider wins service contracts in competition, the result is contracting in. In the other cases the result is contracting out. (Bailey 2002, 150.) Second, service providers can compete for a favour of those individual customers, who have vouchers. A voucher is a new instrument, which will move competition power from local governments directly to citizens. Vouchers support a current trend, which seeks alternatives to increase the power of both the individual local citizen and the private market through functional decentralisation within a quasi-market system. A voucher is an instrument issued by a principal that can be redeemed by the holder for a service, commodity or other such benefit provided by an agent. A local public service voucher is thus publicly directed consumption with individualised choice of production and payment. (Valkama & Bailey 2001, 54.) Emergence of the quasi-market of local public services is creating not only opportunities but also responsibilities for public authorities to develop new modes of good governance of commercialised public service. Because all activities of quasi-market are financed primarily by local tax payers, services providers should operate also under a strict control of publicity. Competitive tendering Adoption of NPM ideas has boosted the development of enabling government, with ‘steering rather than rowing’, and constitute a development of the role of the local government as enabler and purchaser. These developments are intended to allow governments to pay more attention to strategic policy-making by avoiding becoming embroiled in the details of service production. Competitive tendering and contracting out are practical applications of purchase-provider split. In particular, they can help to promote better quality, cost-effectiveness and savings in public spending. Purchaser-provider split and competitive tendering reforms are common in developed countries at every level of public governance. Those reforms typically seek to introduce constrained rather than free-market mechanism. (Valkama & Bailey 2001, 55.) 8 4. Theoretical perspectives of bus services According to the economic theory of goods the original idea of the provision of public services has been to meet the requirements of undivided collective needs by providing public goods. Public goods are in this sense all such goods or services of which all the members of a polity benefit irrespective of whether they pay for such a good or not. Basically, every citizen benefits from such a public good, and it is usually public sector that has the responsibility to organise the provision of such goods. Due to welfare society development the scope of the service palette of public authorities – and of local authorities in particular – expanded to new areas. However, most of such welfare services were not public goods in the strict sense of the word. Rather, this expansion led to the increase of toll good, i.e. such such public services of which citizens needed to pay some fees or fares. (Bailey 1995, 27-31.) Exclusion Possible Impossible Individual consumption Private goods Common resources Collective consumption Toll goods Collective goods Consumption Figure 2. Theory of goods. (See e.g. Savas 1987, 38-41.) From the point of view of the theory of goods bus services cannot be categorised as “collective goods”. As regards to their nature as collective consumption, bus services would fulfill the minimum criteria of collective good, but, on the other hand, they are the kind of services in which in the most of the cases the exclusion of the individuals is possible. Technically any customer who refuses to pay for the service, can be excluded from the consumption of it. This holds even in the case in which these services would be provided to citizens for free. 1 1 For example, in Basel, Switzerland, every tourist that spends a night in the city is given a transportation card that allows them use busses and trams for free. (http://switzerland.isyours.com/e/guide/basel/transport.html 3.7.2003.) 9 Exclusion Individual Possible Market goods (clothes, food, housing) Voluntary surgeon Impossible Mineral and fishes in seas, air A fish in a lake Waste collection in countryside Open pasture A river, a lake Consumption Higher education A taxi drive Mecial service Restaurant, hotel A parking lot Primary school Waste collection in cities Post delivery A street parking Practising religion Watching marathon Insurance Fire prodection A city park Bus services Patroling by a polic Collective Theatre, stadium, library Electricity Telephones Cabel TV Weather forecasts A National park Inspections of buildings and elevators Immunisation A lighthouse Imprisonment of criminals National defence, TV programs Figure 3. Bus services in the theory of goods. (Savas 1987, 38-41.) Theoretically speaking bus service is, thus, a toll good, for the consumption of the service is collective and those who do not pay for it may be excluded from using it. Other similar kinds of services are theatre plays, water supply and library services. The primary beneficiary of such a service is the consumer him-/herself. Yet, in contemporary Western democracies the provision of such services are not left solely to private sector or to markets. Public sector regulates usually in some ways the provision of public services, be they public goods or not. Another nature of goods that is relevant here is ‘merit goods’. Merit goods as the kind of goods which are considered important for social reasons, irrespective of the preferences of individual consumers. Thus, the consumption of merit good is beneficial not only for the consumer him-/herself, but for the whole community and society. In economics this is called positive externality. This is why public sector organisations may involve in providing toll goods and in regulating their markets. In the case of bus services we may see them as merit goods as all the users of streets benefit from the wider use of bus services, as it may decrease congestion problems and may contribute to the sustainable development. 10 Needs of capacity 7-9 11-13 15-17 Time of the day Figure 4. Needs of bus services during the day time. Seeking of the economic efficiency in bus services leads normally to the optimisation of working hours of bus drivers. The need for workers has two peaks, first one in the morning when people go to work, to school or other destinations, and the next in the early evening when they return to their homes (see Figure 4). Outsourcing leads easily to the situation in which the purchaser considers carefully the capacity they need in different lines during the day, and refuses to buy over-capacity. The service provider will thus face a challenge of optimising the use of workforce, which is not an easy task, especially due to the pressure from labor unions and labor market regulations. One way of approaching the bus services from the point of view of societal decisionmaking mechanisms, is Hirchman’s (1970) theory on exit and voice. Exit refers to consumers’ chances to change the services or service provider if the quality of service does not match with their expectations, whereas voice option refers to a people’s chances to influence collective decision-making by giving their opinion through some legitimate decision-making mechanism, such as referendum or other institutional arrangement. When applied to bus services, we get the following kind of framework (see Figure 5). 11 Difficult Weak Ample Possibilities of exit Possibilities of voice Health care services and schools in countryside: -high regional barriers and local monopolies restrict use of exit; -juridical and information barriers limit use of voice Urban schools and municipal housing: -local availability of alternative services increases possibilities for exit -differentiated services and high socioeconomic barriers restrict use of voice Strong Public energy utilities and water works: -natural monopolies restrict use of exit; -weak possibilities to differentiate services increase power of voice Public busses in cities: -lack of economies of scale gives opportunities for several companies, which increase possibilities for exit, -undifferentiated services and low socio-economic barriers make it possible to use voice Figure 5. Bus services and possibilities to use voice and exit options (Bailey 1999, 52.) Bus services are goods in which we may use conveniently both voice and exit options. They are services that lack to a large extent the economies of scale, which leads usually to the pluralism in service provision, especially in urban communities. Also chances to product differentiation are rather limited. Moreover, bus services are not characterised by significant asymmetry of information. Consumers do have, in principle, good chances to change service providers if they are not satisfied with the services. One important restriction to this is the fact that some lines at some time of the day may be provided only by one bus company and without alternative modes of public transportation, which leaves hardly any choices for service users, provided they want to use public transportation. An important exception to the rule of easy use of exit option in the supply side is that even if there are sometimes chances to change the service provider, local authority as a purchaser of bus services cannot use the exit option as it pleases due to the restrictions set by regulations, such as procurement act. This means that if a city government contracts out bus services, it does not necessarily increase service users’ chances to use exit options. The only party that may use exit in a meaningful way is the city government as a purchaser, as it may at a later stage consider service quality as a factor that needs to be taken into account when assessing the bids of various bus service providers. 5. Previous studies on reforms based NMP-ideas and bus services Discussion about reorganisation of public service provision by extending the role of private sector actors revolved originally especially around privatisation, but the trend seems to be towards less extreme forms of reorganisation, which can be referred to as NPM doctrine and more specifically quasi-marketisation. Quasi-marketisation as a novel source of inspiration of reformers of public sector has aroused a new trend also in administrative sciences and policy studies, which is having many different sub-trends. 12 There are studies concerning like example deregulation of different industries (see Kahn 2004 and Stanton, Cummings, Molesworth and Sewell 2001), adoption of a policy of compulsory competitive tendering (see Choi 1999 and Gómez-Lobo & Szymanski 2001) commercialisation of natural monopolies like postal services and harbours (see Lucio, Noon & Jenkins 1997 and Toime 1997). As regards the research on the quasi-market of public services, researchers have been particularly interested in savings of local public spending via competitive tendering and outscourcing (see Hilke 1992, Bryntse 1992, Kähkönen 2001 and Milne & Wright 2004). Results of some international studies on direct economic benefits or cost-savings of competitive tendering are presented in Table 2. According the most results, competitive tendering has generated savings on public spending at least in a short term. Table 2. A summary of results of international studies on direct economic effects of competitive tendering. (Bailey 1995, 370). 2 Country Activity Reported Savings Australia Canada Denmark Water supply Refuse collection Fire services Germany (West) Japan Sweden Office cleaning Refuse collection Road and park maintenance, water supply, sewerage Waste collection Leisure activities Child care Refuse collection Domestic services in local government and the NHS Refuse collection Central government (e.g. IT and printing). Refuse collection Street cleaning Office cleaning Federal government Estimated potential cost savings of 15 %. Public collection up to 50 % more costly. Public provision almost three times more expensive than private contactors. Public sector provision 42-66 % more expensive. Municipal collection 124 % more costly. Cost reductions of 10-19 % in several municipalities. Switzerland UK USA Mass transit Average cost reductions of 25 %. Cost reductions of 13-15 %. Cost reduction of 9-15 % in nurseries. Cost of private contractors 20 % cheaper. Savings of 20-26 %, costs being reduced by more than a third in some cases. Cost reductions of about 20 %. Average savings of 25 %. Savings of 29-37 %. Savings of up to 43 %. Savings of up to 73 %. Cost savings of up to 35 % with an average saving of around 20 %. Potential savings of 20-50 %. Our emphasis here is on bus services. Many EU-member countries introduced competitive tendering in the provision of regional and local bus services in 1990’s. A central aim of these reforms has been to increase efficiency of the industry. Results of previous studies concerning the cost-savings gained through contracting out bus services are collected in table 3. 2 See also OECD 1993 and Parker 1990. 13 Table 3. Research findings of bus services (Hilke 1992, 71–72). Source Morlok & Moseley (1986) Morlok & Viton (1985) Oelert (1976) Walters (1987) Perry & Babitsky (1986) Pommerehne & Schneider (1985) Talley ja Anderson (1986) Teal, Guiliano & Morlok (1986) Rice Center (1985) Comparison Municipal in-house agency versus competitive contracts. Municipal in-house agency versus contracts awarded in competitive bidding versus non-competitive contracts Municipal in-house versus private bus services in W. Germany. Municipal in-house versus private bus services in various cities. Private versus cost-plus contracts versus municipal inhouse versus regional inhouse authority bus operators. In-house versus private firms in West Germany. In-house motor bus versus contracted dial-a-ride services. In-house versus competitive contract operators. In-house versus contract express commuter services. Findings Contract winners supplied services at 28 % lower costs. Contract providers had cost 50 % to 60 % lower than municipal agencies they replaced. Non-competitive contracts were similar to municipal agency costs. Public bus services have 160 % higher cost per kilometre than private equivalents. Private bus services typically charge similar prices, but have 50 % to 65 lower costs. Private operators are significantly more efficient. Cost-plus contractors and municipal bus lines are less efficient. Inefficient private operators are sold to government. Private costs were 60 % lower than public cost for commercial bus operations. Substituting dial-a-ride for scheduled service decreased costs by reducing overtime and idle time and utilizing less costly vehicles. It also reduced costs indirectly by encouraging competition with traditional services of the agency. Competitive contract operations provided cost savings from 10 % to 50 % (lager fleets). Contract operators have 30 % to 60 % lower costs. In all, empirical findings of previous studies show considerable cost-savings of outsourcing or contracting out bus services. Cambini and Filippini (2003, 178) have published a case study of competitive tendering and optimal size in the regional bus services in Italy. According their study, the main effect of competitive tendering has been a reduction in subsidies paid to bus companies by local governments. We will shed light on this issue by discussing the consequence of contracting out of bus services in the Helsinki metropolitan area. 6. The case of competitive tendering of bus services in Helsinki metropolitan area Helsinki metropolitan area Helsinki metropolitan area (Helsinki capital region) has the highest concentration of dwellings and workplaces in Finland. Nevertheless, with one million inhabitants and workplaces for almost 600 000 people, it is a relatively small capital region in Europe. Helsinki metropolitan area includes cities of Helsinki, Espoo, Vantaa and Kauniainen. 14 Figure 6. Maps of Helsinki Metropolitan area (YTV area) and Finland. (http://www.ytv.fi/eng/facts/regional_information/frontpage.htm and http://us.i1.yimg.com/us.yimg.com/i/travel/dg/maps/55/750x750_finland_m.gif) According a special law, the cities of Helsinki metropolitan area are members of a special regional formation, Helsinki Metropolitan Area Council, which is a special regional formation and, designed especially for the Helsinki capital region. YTV is a compulsory joint municipal authority with its own council or the Regional Assembly and civil servants. Helsinki elects 11 representatives, Espoo and Vantaa each 5, and Kauniainen 1 to each meeting held by the Regional Assembly. The political structure of the Regional Assembly is consistent with the results of the latest municipal elections. YTV’s main duties are waste management, regional and environmental services and public transport. YTV Area contains about one fifth of the country’s total population and it generates around one third of the gross domestic product (GDP). YTV is responsible in arranging and financing public transport services that cross municipal boundaries within the Helsinki metropolitan area. An actual commuting area is much larger and it reaches two hundred kilometers radius from the centre of the region. In Helsinki metropolitan area, there are also public bus lines, which operate within jurisdictions of individual municipalities. Responsibilities of such bus services are vested in municipalities. The Act on the Helsinki Metropolitan Area Council is based on an idea of enabling council. The act does not directly or clearly prohibit YTV to buy busses and to run its bus services, but it includes explicit discussion about “arranging services” and “using contractors”. According the main principle of Finnish municipal law, local governments may use fairly freely alternative service delivery systems or rely on in-house service 15 production. In that sense, the Act on the Helsinki Metropolitan Area Council is an exception with an explicit idea of compulsory competitive tendering. Development of Competitive Tendering of Bus Services of Helsinki Metropolitan Area Council YTV got a responsibility of regional bus services in 1986. At that time, when YTV started its new function as an organiser of capital area bus services, business of bus transportation was a relatively highly regulated industry in Finland. Bus companies had special permits given by the state regional authorities for driving in defined areas and lines. Also most of tariffs for customers were regulated. From the very beginning, it was a quite practical solution for YTV to relay on existing bus companies, which had been long time in the markets, knew well the area, and had both suitable vehicles in use and experienced personnel. Thus, YTV started a contract-based co-operation with those bus companies that had been in the business for many years. YTV decided bus lines and then ordered buss services from public and private bus companies. Compensations for the bus companies were defined in mutual negotiations between the operators and YTV. A new law on public transportation came into force in the early 1990s. It was more liberal than former one and created legal conditions for competitive markets for bus services. In the early 1990s, Finland singed also the agreement of European Economic Area. By the agreement, Finland joined the Single Markets of the European Economic Community. That was also a basic reason why a new law of public procurement was needed. Aims of such a law were to open markets of public procurements for enterprises operating in the Single Market and to prevent possibilities to corruption by making the public procurements more transparent than before. The law introduced also certain kinds of ideas of compulsory competitive tendering in the cases, which some services or goods were bought or provided outside the organisations of public authorities. After the changes of the legal framework of service delivery, YTV was forced to start competitive tendering. The first competitive tendering of the regional bus services was organised in 1994, and after that the first market tested inter-municipal bus line started its operation in 1995. Gradually YTV expanded its competitive tendering activities, and few years later all the capital region bus lines were organised applying competitive tendering procedure. 16 A timeline YTV started regional bus services 1986 A new law of public transportation 1991 First competitive tendering of regional bus services was hold Law of public procurements Bus companies owned by local governments of Espoo and Vantaa were privatized City of Helsinki separated an individual bus enterprise from other transport activities. 1994 1995 The first regional competed regional bus line started its operations 1996 City of Helsinki started competitive tendering of municipal bus services 1997 1998 A strike of transport workers and a special collective agreement was signed City of Espoo started competitive tendering of municipal bus services 1999 Vantaa started competitive tendering of municipal bus services 2000 2004 City of Helsinki corporatised its bus enterprise and merged it with its other bus company An unsuccessful strike of transport workers against corporatisation 2005 Figure 7. The main phases of development of competitive tendering of regional and local bus services in Helsinki Metropolitan Area. The new practice was a fundamental change of public transportation in the Helsinki Metropolitan Area. After YTV had adopted the competitive policy, it started to be more difficult for the City of Helsinki to upkeep its old monopolistic bus service delivery system inside its jurisdiction. City of Helsinki was an owner of two bus companies, the first one was a limited company and the second was a municipal enterprise. Both of those companies competed with private companies at the regional level, but markets of services in Helsinki were monopolised to these two companies. Finally, the city of Helsinki had to give up its old policy and introduce competitive tendering in 1997, like YTV had done three years earlier. There was not any legal obligation for the new policy in Helsinki, but pressures from some key stakeholders became too strong to resist. In a competitive environment, it was difficult to maintain old monopolistic system at a municipal level and at the same time, to exploit new opportunities of opening markets at the regional level. Later on, also cities of Espoo and Vantaa started competitive tendering of local bus services in their own jurisdictions. Helsinki has its own organisation for competitive 17 tendering, whereas Espoo and Vantaa have outsourced management duties of competitive tendering to YTV. The CITY OF HELSINKI Competitive tendering was started in 1997 Competitive tendering Public Public companies enterprise Public company Private bus companies Competitive tendering City of Espoo Competitive tendering started in 1998 management duties of competitive tendering were outscoursed to YTV Helsinki Metropolitan Area Council (YTV) Competitive tendering of regional bus services was started 1994 City of Vantaa Competitive tendering started in 2000 management duties of competitive tendering were outscoursed to YTV Figure 8. Competitive tendering of regional and municipal bus services (Cf. Kähkönen 2001.) Markets of bus services in Helsinki metropolitan area can be seen as the quasi-market. On behalf of the local citizens, local governments and the joint municipal authority of YTV purchase and finance services, public and private services producers compete with each other by bids, and central government regulates market behaviour. (Cf. Kähkönen 2002, 286; Ellwood 1996, 26; and Le Grand & Bartlett 1994, 3.) Potentially there are many alternatives for the present arrangements in the quasi-markets. For example, state government authorities could replace local actors and municipal bureaus could be substitutes for the companies and enterprises. Decentralised and regionalised structure, division of labour among public bodies and the functioning of local government system explains to a large extent why the roles of public and private actors are what they are in the present quasi-market arrangement. It is also worth remembering that bus services are not usually regarded particularly knowledge intensive services, why civil servants and public bureaus could not be a realistic alternative to the delivery of the service. There are many actors on both the purchaser’s and the producer’s side, which makes markets more balanced. Anyway, a new proposal for an amalgamation of purchaser activities of municipalities and YTV was published in 2004. After an implementation of the new proposal, there would be left over only one purchaser, what could make a structure of the quasi-market too one-sided. 18 Bureau Enterprises State government Associations State companies Co-operatives Private companies Local government companies Municipal enterprise Non-municipal Bureau Joint municipal authority Municipal Alternative producers of bus services Quasi-markets of bus services of Helsinki Metropolitan Area Alternative purchasers of bus services Outside of jurisdiction of a local government State government Regional or national associations Joint municipal authority Local government Inside of jurisdiction of a local government Regional government Sub-regions of a local government Political decentralisation (submunicipal committees) Consumers and commuters with vouchers Administrative decentralisation (submunicipal bureau) Figure 9. Alternative purchasers and producers of local bus services in theory and practice (cf Bailey 1999, 70 and Valkama & Flinkkilä 2003, 48). Actual operators and service purchasers in 1994-2004 are circled. In 1994, when competitive tendering was started, four biggest bus companies had 83 % market share of the regional bus service markets. Small bus companies hold together 17 % market share. Ten years later on in 2003, small companies had anymore only 9 % market share. One short-term impact of competitive tendering has been concentration of the markets for the four biggest operators. It has been very difficult for mostly privately owned small bus companies to survive against the big companies. At the same time, it has been impossible for new companies operating in smaller cities and rural areas enter to the market of Helsinki metropolitan area. Amount of suitable garages as critical resource is limited for smaller firms in the urban area. In 1994, municipal bus operators had 37 % market share of Helsinki metropolitan area. Opening markets provided a very good opportunity for them to show their efficiency and 19 capabilities. In 2003, their market share rose up to 49 %. Both of the municipal bus operators had a bigger market share in 2003 than ten years before. 3 Among the four biggest bus companies of Helsinki metropolitan area, there are two municipal and two private bus companies. Before 1994, these private bus companies were owned by municipalities. When competitive tendering was introduced first time, cities of Espoo and Vantaa sold their bus companies to multinational private companies. Those deals were real privatisation measures, which have been fairly rare so far. Few years before in the early 1990’s, foreign ownership of shares of Finnish companies was liberated by a change of the Finnish company law. The new owners of the former municipal bus companies were foreign companies, which operate bus services also in many other European countries. Economic effects of competitive tendering Usually the central aim of outscoursing, contracting and competitive tendering of local public services is immediate budget savings of local governments. The main interest in this paper is to discuss what have been the economic consequences of competitive tendering for YTV. The second aim is to provide an analysis about economic consequences of competitive tendering for producers, ie. the bus companies. In theory, outsourcing is based on make or buy decision, but in the case of Helsinki Metropolitan Area Council in-house production of services has not been a real option, because it is rejected by the law. After the competitive bidding, the service purchaser knows, how much service producer will charge for its services. Addition the purchaser have to cover also transaction costs. According the theory of transaction costs, there are three important dimensions of transactions: asset specificity, uncertainty/complexity, and frequency. (Douma & Schreuder 2002, 145 and 150.) 3 In the UK, there was a system of compulsory competitive tendering in certain local public services from 1980 until 1997. Local governments had to open markets of defined services and call in bids from external and internal service producers. In the most of the cases, public service units were very successful and they won around 62-68 % of all competitions. (Bailey 1995, 387 and see also Bryntse 1992.) 20 IN-HOUSE PRODUCTION Variable costs Hourly wages Other personnel costs Fuel, etc. CONTRACTED IN OR OUT Amount of units x Price per unit + Fixed costs Monthly salaries, etc. Capital costs, etc. + Overheads = + Transaction costs = Total costs of contracted production Total costs of in-house production Figure 10. A model of unit cost accounting of in-house and contracted production of service. (See Valtiovarainministeriö 1988, 12-18). Outscouring, contracting and competitive tendering might have also many indirect and implicit economic effects or impacts. In the long run, some companies can face bankruptcy, some people might loose their jobs, local governments might get lower tax incomes, etc. But on the another hand, new companies can enter the market, new service innovations may occur, quality of services may become better, etc. One fundamental methodological problem is that these kinds of consequences are difficult to define, measure and calculate. The main focus of this research is directed only to direct economic consequences based on the framework of calculations presented in figure 10. 21 YTV savings (milj. EUR) 16,7 18,8 20,4 21,0 1999 2000 17,0 4,2 1995 1996 1997 1998 Figure 11. Cumulative savings of public spending of metropolitan bus services 19952000 calculated by YTV. The introduction of competitive tendering started a severe battle of the market shares. In the first round of competing bids, price level fell nearly 40 %. It was a huge change of the price, but after that price level has risen little by little. Anyway, the practice of competitive tendering has generated big savings of public spending of YTV. Cumulative net savings of public spending from1995 to 2000 were around 21 millions euros. These savings have been calculated by YTV. According YTV, transaction costs of competitive tendering don’t play a big role in the quasi-market of the bus services. In the early years, YTV had to study and develop processes of competitive tendering and comparisons of bids. But because of high frequency of transactions, it has been very easy for YTV to learn new administrative modes based on contractual requirements and develop routine procedures of management of competitive tendering. Except of the garages, asset specificity is low in bus services. Transactions are neither very complex nor uncertain. YTV has made calculations also about use of saving of public spending. The biggest part of savings has been used to introduction of new traffic and new bus lines in the Helsinki metropolitan area. In any case, the enlargement of new traffic has been necessary measure, because population of the area has grown all the time. Some savings have been used for stabilisation of bus ticket prices. Because YTV is the joint municipal authority owned by its member municipalities, YTV don’t have a right to levy taxes. Instead, it collects membership fees from the member local governments. Some savings have been used also for stabilizing those membership fees. per cent 22 100 % 90 % 80 % 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0% new traffic ticket prices discounts of membership fee for local governments 1995 1996 1997 1998 1999 2000 years Figure 12. Allocation of competition savings of regional bus services. In the regulated markets, bus operating business was a quite reasonable source of income. The negotiated prices were not market tested at all. Consequently it gave for the bus operators an opportunity to be less effective. The companies could ask reasonable prices from their services, because local governments did not have other options. It was typical that before competition the bus operators had gross margins between 30 and 40 percents. Opening of the market of Helsinki metropolitan area has changed business environment significantly. Gross margins have gone down dramatically. In the 2000 and 2001, the average gross margin of the four biggest bus companies was below 10 %. Gross margin (%) 14,9 % 12,6 % 9,2 % 1998 1999 2000 7,3 % 2001 Figure 13. Average gross margins of the four biggest bus companies in 1998-2001. 23 Bus companies have faced also financial difficulties due to the new competitive business environment. A key figure of equity ratio is usually being used as an indicator of financing structure of a company. The average equity ratio of the four biggest bus companies has weakened due to competition, and it was only 26 % in 2001. Equity ratio (%) 34,2 % 1998 34,2 % 1999 30,3 % 2000 26,0 % 2001 Figure 14. The average equity ratio of the four biggest bus companies 1998-2001. Central results from stakeholder interviews and staff member surveys Big bus companies have started to dominate markets. First reason is that competition policy of YTV had favoured large pieces of work. Secondly municipal purchasers require quality certificates from bus companies. Certificates are expensive and only big companies can afford those. That gives a competitive advantage for big companies. (Valkama & Flinkkilä 2003, 112115.) Due to competitive tendering, amount of administrative and garage staff of bus operators has decreased slightly. Instead, competitive tendering has had a neutral or slight positive impact of employment of bus drives. According the survey, feelings of uncertainty have increased among bus drives, and they feel their work busier and more uncertain because of competitive tendering (Haatainen 2003, 180-183). A career of a bus driver in the capital region is not very attractive among job seekers. According the interviews, staff problems are not caused only by competitive tendering but also inconvenient working hours, high turnover of bus drivers and difficulties to hire new workers. (Valkama & Flinkkilä 2003, 123.) Fluctuations are a typical feature of labor markets of the bus drivers in the quasi-market. In one time, some bus operators have to carry out redundancies. Soon after that other companies have to hire sometimes even more new bus drives. Many bus drives have to change their employers quite rapidly. In the beginning, it was called into question, is it compulsory for winning bus operators to hire new workers from lost companies and can that kind of workers keep their old employment benefits. These kinds of open questions caused some strikes of bus drivers in the capital region. A trade union of transportation workers organized one successful strike in the late 1990’s and bus drivers of the capital region got a new and special collective agreement. It was a victory for the 24 drivers, because according the new agreement workers can keep their old jobs in the most case of transfers of bus operations. (Haatainen 2003, 128-129.) The starting phase of competitive tendering wasn’t very well planned by public auhtorities. Only one line was competed firstly by YTV and at the same time all the other lines were under regulation. It was very easy for the bus operators to use cross-subsidies from regulated bus lines to competed lines. (Valkama & Flinkkilä 2003, 139.) Cambini and Filippini (2003, 175 and 177) doubted in their study, that cross-subsidies between different bus lines may have been even an aim of Italian local governments. Interviewed representatives of stakeholders criticized city of Helsinki, because city upkeeps quality control of the bus services just by itself. City of Helsinki is having a big dual role in the capital region, because it owns bus companies and purchase bus services for the capital. (Valkama & Flinkkilä 2003, 125.) In 2004, the city of Helsinki made decided to corporatise its municipal bus enterprise. Corporatisation is a process in which a public sector enterprise will be displaced from a public administration and incorporate it to be an independent limited company or an incorporated jointstock company. Workers of the municipal enterprise were against corporatisation by organizing a new strike. The strike wasn’t successful, and a new municipally owned limited bus company started its operations in 2005. Interviewed people seemed to be very convinced about the competitive market system of bus services at Helsinki metropolitan area. Anybody of them did believe that the system before the present one with negotiated prices and lack of competition could be introduced once again. (Valkama & Flinkkilä 2003, 131.) 7. Conclusions The case of Helsinki metropolis has been a certain kind of precursor of NPM-inspired reforms in Finland. Bus services of the limited area have been relatively easy target for commercialisation, because public transport is not public good in the strict sense of the word. Before the era of competitive tendering bus services were produced by public and private bus enterprises and companies. This kind of situation provided a favourable environment for the development of the competitive quasi-market. Quasi-marketisation of bus services of Helsinki metropolitan area have included many fundamental changes like privatisation, outsourcing, contracting out, contracting in and merges. Starting of competitive tendering of the bus services of the capital region was not a result of well defined local policy making. On the one hand, Finland’s memberships in the European Single Markets and European Union and, on the other hand, the strict act of the Helsinki Metropolitan Area Council, can be mentioned as main reasons for an adoption of the new policy of competitive tendering. Quasi-marketisation of bus services of Helsinki metropolitan area has generated economic gains for local public authorities and expanded local public options for exit. If the results of this study are compared with the findings of surveys conducted in other countries, the main results about public savings are fairly similar. At least in the short 25 term, Helsinki Metropolitan Area Council has achieved clear savings on public spending. On the other hand, public savings have caused severe economic problems to the bus companies. The history of competitive tendering is still relatively short, thus, it is difficult to estimate, what will be long term economic consequences. There is a possibility that the market shares will continue to concentrate further, and it could easily jeopardise furthers savings of public spending. In order to prevent the concentration development, the purchasers of the bus services should invite especially small bus operators for biddings by providing also smaller pieces of work and renting space from the garages. Other main difficulties have been associated with fair competition between public and private bus operators, possibilities to use cross-subsidies and an evaluation system of quality of the bus services. In the beginning, the rights of the bus drivers in transfers of an undertaking were not protected by the collective labor agreement, but after the strike by bus drivers a new collective labor agreement were signed and it gave better protection for the drivers. Majority of the personnel of the bus companies is not particularly satisfied with their work. Anyway, it is difficult to point out exactly, how much competitive tendering has weakened working conditions of the bus drivers and the other staff members. It is relatively easy to foresight that improvement of job satisfaction will pose a long term challenge to the industry at the region. Organisational forms and ownerships structures have gone through major changes during the years of competitive tendering. After the corporatisation of municipal bus enterprise of Helsinki, further big changes of organisational forms are rather unlikely. Limited company has proved to be quite successful and effective form of organisation in the bus services. A part of the ownership structures have gone through privatisation and internationalisation, and that kind of changes of ownership may continue also in the future. References Bailey S. J. 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