Municipal infrastructure units, such as energy utilities and ports provide good returns to their owners but risk their investments for the future
Infrastructure seems to be a sure bet for their owners. Water, transport and
energy utilities and networks supply stable cash flows compared to market
returns. For the past decade, Finnish energy and ports have been providing the
best cash-based returns.
The study carried out by VTT Technical Research Centre of Finland, Aalto
University and University of Oulu investigated the ownership and governance
structure of Finnish infrastructure networks and utilities. A part of the
research focused on investors’ and owners’ returns.
municipal and state owned units, limited companies and some private entities
were analysed using the financial statement data for 2002-2009. The study
covered water supply, roads, streets, ports, airports, railways and energy
networks. The report annexes even wider empirical material.
to the research, the cash-based returns has been very stable during the
studied period (2002-2009). The volatility of the cash flows has been almost
risk-free compared to investments in Finnish stock markets.
best sectors were energy with its average annual cash-based return of 13% for
the invested total capital and ports with about 10% average annual return.
study also looked into the returns of state-owned companies. VR, the national
state-owned rail operator yielded to 5% average annual cash-based return on
invested capital. Accordingly Finavia, the state’s airport owner returned
annually 4% on average, and the state-owned road contractor Destia about 7%.
form of ownership has a clear effect on returns. The ownership models covered
traditional municipal entities, municipality and state owned companies as well
as fully private units. Traditional public entities had the best cash-based
returns to their owners. Municipal ports exceeded with about 4%-units the
returns provided by municipal limited liability companies for the period of
analysis. Difference of same magnitude was identified with waterworks.
differences can be explained largely by different accounting practices. With
limited liability companies, the accounting standards are dictated strictly by
different laws and generally accepted accounting principles whereas the
accounting of municipal units and enterprises follow a more liberal practice.
The latter entities are mostly exempted from taxes and have more freedom to
return profits to their owners. In the long run, however, these liberal
practices may lead to “over-milking” of the utilities, hence resulting a risk
of under-investments in infrastructures. Many municipalities and cities are
concerned for example on the technical condition of water supply network.
researchers recommend that accounting practices should be more specific in
terms of reflecting the technical condition of the infrastructure and making
it sure that necessary investments are not neglected while seeking high
returns. On the other hand it is evident that municipalities and cities have
financed some of their basic services – such as education or healthcare - with
the help of revenues raised from infrastructure and utilities.
Finnish Ministry of Finance has initiated last year a proposal to renew the
legislation on municipal enterprises.
Media material: Financial
performance of Finnish technical networks