Municipally owned corporations: few upsides, several downsides?

Andreas Bergh Gissur Ó Erlingsson

The number of municipal companies has increased dramatically since the 1970s. Last year, they numbered 1,724 with a turnover of almost 5 percent of the Swedish GDP. Economist Andreas Bergh and political scientist Gissur Ó Erlingsson argue that there are a number of problems associated with transforming municipal activities into companies. In a new SNS report – “Municipally owned corporations: few upsides, several downsides?” – they highlight a lack of transparency, conflicts of interest, efficiency problems and an increased risk of corruption.

SNS Research Brief 85. Municipally owned corporations few upsides, several downsides 35.3 KB PDF

“There are currently municipalities operating companies in areas ranging from culture and entertainment to vehicle repairs. It is regrettable that this development, where we see an increasing number of municipal companies, is only discussed to a limited extent by politicians and in the public debate. In the report, we describe our own research and that of others having identified several problems,” says Gissur Ó Erlingsson, professor of political science at Linköping University.

The researchers write that in municipalities with a particularly large number of municipal companies, both the municipal taxes and the perceived level of corruption are higher compared to other municipalities. Nor are the residents of such municipalities more satisfied with their municipal services than others. These results, according to the authors, contradict the view that transforming public activities into companies leads to increased efficiency.

They also highlight problems related to the democratic process. There are different opinions among municipal politicians on the boards of municipal companies as to what they should represent. Some believe that they should look to the best interests of the company, whereas others prioritize the interests of the municipality or their own political parties.

“This is troubling as the voters should know what to expect from their elected representatives. In addition, board members not agreeing on their roles will have a negative impact on the efficiency of the board. There is an increased risk of undesirable behavior when there are no clear norms as to how they should behave,” says Gissur Ó Erlingsson.

The researchers also discuss the fact that there is less public insight into municipal activities as these are transformed into companies. They also point out that competition may be distorted as municipalities enter markets where there are also private actors and that there are examples of municipalities transforming their elder care activities into companies to avoid having to pay VAT.

“It is worrying that some municipalities seem to decide on the type of company based simply on tax-related considerations. According to calculations by the Swedish Tax Agency, the state may end up losing up to SEK 1 billion in tax revenues annually as a result of such arrangements,” says Andreas Bergh, associate professor of economics at Lund University.

Bergh and Erlingsson argue that a thorough study is needed on municipal companies, focusing on their purpose and the role of board members. In order to reduce the risk of corruption, they also want to increase public transparency in companies (e.g., by strengthening the role of lay auditors).

about the authors

Andreas Bergh is an associate professor of economics at Lund University and the Research Institute of Industrial Economics (IFN).

Gissur Ó Erlingsson is a professor of political science at the Centre for Local Government Studies, Linköping University.