Pricing joint use of municipal services: Theoretical perspectives and regulatory issues

• Author: Stephen J. Bailey,Pekka Valkama
• Date: 01 February 2019
• DOI: http://doi.org/10.1111/faam.12180
• Published date: 01 February 2019

Received: 28 January 2017 Revised: 22 March 2018 Accepted: 6 June 2018

DOI: 10.1111/faam.12180

ORIGINAL ARTICLE

Pricing joint use of municipal services: Theoretical

perspectives and regulatory issues

Pekka Valkama1,2 Stephen J. Bailey3

1Universityof Vaasa, Wolffintie 34, 65200 Vaasa,

Finland

2Cityof Helsinki, Siltasaarenkatu 18-20 A, 00099

Cityof Helsinki, Finland

3CaledonianSchool for Business and Society,

GlasgowCaledonian University, Cowcaddens

Road,Glasgow, G4 0BA, Scotland, UK

Correspondence

PekkaValkama, University of Vaasa,Wolffintie

34,65200 Vaasa, Finland.

Emailaddress: pekka.valkama@uta.fi and

pekka.valkama1@gmail.com

Correctionadded on 2 October 2018, after

firstonline publication: The affiliation of the

correspondingauthor has been updated in this

currentversion.

Abstract

This paper analyses price regulation of inter-municipal contracts in

Finland to demonstrate interpretative problems of regulatory rules

specifying full-cost or market prices and, by so doing, deepen under-

standing of the theoretical underpinnings for pricing collaborative

municipal services. It considers how to price inter-municipal ser-

vices taking into account the specific socio-economic nature of inter-

municipal cooperation, including both financial and non-financial

objectives, through a new joint-use pricing model of municipal ser-

vices that challenges the supremacy of full-cost pricing requirements

in cases of inter-municipal collaborative contracting.Acknowledging

limitations and benefits, it concludes European Single Market rules

militate against municipal discretion and localism.

KEYWORDS

full-cost pricing, inter-municipal contracting, joint use, market pric-

ing, public procurement

1INTRODUCTION

This study analyses pricing issues for inter-municipal contracting. It considers how to price local governments’collabo-

rative services and the implications of different pricing options for financial governance.Utilizing Finnish case materi-

als, it focuses on municipal joint use systems, where a municipal service is at the disposal of at least two local authorities

simultaneously or consecutively.It shows that the economic principles of the European Single Market (ESM) are incon-

sistent with both Nordic countries’ strong municipal autonomy and the European Charter of Local Self-Government's

principles for local democracy (ECLSG, 1985).

The European Union (EU) has sought to create and promote the realization of the ESM by abolishing trade barriers

on goods and services in member states and instituting a transparentcompetitive system of public procurement (Bovis,

2013). However,non-tariff obstacles to trade have proved difficult to remove, various bureaucratic or discriminatory

governancepractices against outsourcing provision of public services to the private and third sectors being justified on

special grounds (Hansson & Holmgren, 2011).

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits

use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or

adaptations are made.

c

2018 The Authors. Financial Accountability & Management Published by John Wiley& Sons Ltd.

20 wileyonlinelibrary.com/journal/faam FinancialAcc & Man. 2019;35:20–36.

VALKAMAAND BAILEY 21

In Finland, attempts to justify such non-conforming practices generally refer to the decentralist principles promul-

gated by the Council of Europe to propagate local democracy (ECLSG, 1985; Stivachtis & Habegger,2011). Fostering

the regulation and management of a substantial share of public affairs by municipalities themselves through localism

seems to conflict with EU-wide regulation.

Nordic countries have an administrative tradition of relatively strong local autonomy allowing municipalities to

choose whether they want to produce their services via their own (i.e. in-house) organization or municipal collabo-

ration. Elsewhere in the EU, inter-municipal collaboration is alsowidespread and has many operative models (Hulst &

van Montfort, 2011). This can be regarded as closed outsourcing because it blocks supply of public services by private

law organizations and so militates against a consistent ESM regulatory framework.

Previous studies of the regulation of public procurements and inter-municipal contracting demonstrated legal

uncertainties regarding the grounds on which municipalities may sign inter-municipal contracts without following EU

public procurement rules (Burgi & Koch, 2012). Baciu and Dragos (2015) reported inconsistent practices in member

states related to under what conditions municipalities engage in horizontal inter-municipal transactions and there was

evidence of an increasingly flexible interpretation for the scope for inter-municipal contracting (Clarke,2015). There

is no obligation to apply public procurement regulation if inter-municipal contracting delivers local public services in a

cooperative manner and the contractdoes not involve remuneration.

The aim of this paper is to contribute to these discussions about how well grounded or functional are the public

procurement regulations providing rules for horizontal inter-municipal transactions and how to improve regulatory

reasoning from the perspective of financial management. Accordingly, we consider the issues of joint use contracts

relatingto the specific socio-economic nature of inter-municipal cooperation, including both financial and non-financial

objectives.

Our study analyses how the pricing settings of collaborative inter-municipal contracting are regulated in Finland

in order to highlight the interpretative problems of top-down price control of municipal joint use services and deepen

understanding about the theoretical underpinnings of pricing inter-municipal services. Our purpose is to demonstrate

how the issues of capacity utilization and the relationship between contracting municipalities are overlooked by the

current price regulation and so we argue the case for a new pricing model for joint use of municipal services.

Pricing intra-organizational contracts can use cost-based, market-based,negotiated or dual prices. Cost-based and

market-based prices are the most popular transferpricing methods for the internal pricing of goods and services mov-

ing between corporate divisions in private sector companies (Cravens,1997; Tang, 1992). Our study also analyses full

cost and market-based pricing methods but within the public sector to highlight the influence of regulatory policies

on alternative pricing methods and their financial governancefrom the perspectives of public administration, law, eco-

nomics and accounting.

The pure pricing problem of inter-municipal contracting is universal but how to regulate prices or pricing methods

is an economic region or country specific issue. EU directives and European Court of Justice (ECJ) cases constitute

a comprehensive legislative framework limiting regulatory leeway for member states. Nevertheless, the wording of

European statutes create remarkable legal uncertainties for public-public collaboration and so are subject to various

interpretations by member states (Hausmann & Queisner,2013).

Our study of the Finnish case demonstrates how the loose legal statutes of inter-municipal cooperationleave unre-

solved the demarcation between joint use of services as part of municipal public administration based on democratic

self-government and public procurements as part of the ESM. It also demonstrateshow this lack of resolution creates

governance problems in municipal financial management and so contributes to the tightening of state regulation of

the pricing decisions of local governments. Furthermore, the conceptual analysis reveals the weaknesses of the key

cost and price terms used by courts and lawmakers in their efforts to regulate pricingof inter-municipal services. This

analysis is relevant not only for Finland but also for the rest of the EU and elsewhere.

2METHODOLOGY AND STRUCTURE

The paper proceeds by explaining our research data and methodology, thereafter considering the wider theoretical

foundations of contractual public service delivery via agency theory within a quasi-market framework. Regulatory