Oecd Reviews of Regulatory Reform (OECD Reviews of Regulatory Reform)

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OECD Reviews of Regulatory Reform

OECD Reviews of Regulatory Reform

FINLAND A NEW CONSENSUS FOR CHANGE

FINLAND

In the past, vigorous reforms promoting competition and liberalising the economy have helped Finland to stimulate strong growth and an above average performance among OECD countries. The rise of a world class ICT sector is a defining characteristic of today’s economy, but so is a large public sector and a continuing high level of state ownership. This report suggests that more impetus needs to be given to the reform process across the Finnish society. A stronger, strategic and centrally-driven regulatory governance policy will help to unlock further positive changes.

A NEW CONSENSUS FOR CHANGE

The success of the ICT sector needs to be mirrored by a stronger performance of other parts of the economy. The efficiency of public services, which are mainly delivered at the local level, requires attention. Clear policies are needed to determine the scope of state ownership and the governance of state-owned entities. These will help to delineate the respective roles of the state and the private sector. Some service and other sectors would benefit from more competition. And regulatory reform of the labour market is an increasingly pressing need. Finland is one of many OECD countries to request a broad review by the OECD of its regulatory practices and reforms. This review presents an overall picture, set within a macroeconomic context, of regulatory achievements and challenges including regulatory quality, competition policy, and market openness. It also assesses progress in the commercialisation of government services. The background material used to prepare this report is available at: www.oecd.org/regreform/backgroundreports In the same series: in in in in in in in in in

Canada the Czech Republic Denmark Greece Hungary Ireland Italy Japan Korea

Regulatory Regulatory Regulatory Regulatory Regulatory Regulatory Regulatory Regulatory

Reform Reform Reform Reform Reform Reform Reform Reform

in in in in in in in in

Mexico the Netherlands Norway Poland Spain Turkey the United Kingdom the United States

For a comparative analysis of regulatory policy performance in OECD countries, see Regulatory Policies in OECD Countries: From Interventionism to Regulatory Governance, published in 2002, and Integrating Market Openness into the Regulatory Process: Emerging Patterns in OECD Countries, available at www.oecd.org/regreform. The analytical basis of the OECD Regulatory Review Programme was laid in the OECD Report on Regulatory Reform: Synthesis, and the supporting two-volume OECD Report on Regulatory Reform: Sectoral and Thematic Studies, published in 1997.

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ISBN 92-64-10267-1 42 2003 09 1 P

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A NEW CONSENSUS FOR CHANGE

Reform Reform Reform Reform Reform Reform Reform Reform Reform

Finland

Regulatory Regulatory Regulatory Regulatory Regulatory Regulatory Regulatory Regulatory Regulatory

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OECD Reviews of Regulatory Reform

Finland A New Consensus for Change

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT Pursuant to Article 1 of the Convention signed in Paris on 14th December 1960, and which came into force on 30th September 1961, the Organisation for Economic Co-operation and Development (OECD) shall promote policies designed: – to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial stability, and thus to contribute to the development of the world economy; – to contribute to sound economic expansion in Member as well as non-member countries in the process of economic development; and – to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance with international obligations. The original Member countries of the OECD are Austria, Belgium, Canada, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The following countries became Members subsequently through accession at the dates indicated hereafter: Japan (28th April 1964), Finland (28th January 1969), Australia (7th June 1971), New Zealand (29th May 1973), Mexico (18th May 1994), the Czech Republic (21st December 1995), Hungary (7th May 1996), Poland (22nd November 1996), Korea (12th December 1996) and the Slovak Republic (14th December 2000). The Commission of the European Communities takes part in the work of the OECD (Article 13 of the OECD Convention).

Publié en français sous le titre : Examens de l’OCDE de la réforme de la réglementation Finlande

Un nouveau consensus en faveur du changement

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FOREWORD

Foreword

T

he OECD Review of Regulatory Reform in Finland is one of a series of country reports carried out under the OECD’s Regulatory Reform Programme, in response to the 1997 mandate by OECD Ministers. Since then, the OECD has assessed regulatory policies in 16 member countries. The reviews aim at assisting governments to improve regulatory quality – that is, to reform regulations to foster competition, innovation, economic growth and important social objectives. It draws on two important instruments: the 1995 Recommendation of the Council of the OECD on Improving the Quality of Government Regulation and the 1997 OECD Report on Regulatory Reform. The country reviews follow a multi-disciplinary approach and focus on the government’s capacity to manage regulatory reform, on competition policy and enforcement, on market openness, and on the regulatory framework of specific sectors against the backdrop of the medium-term macroeconomic situation.

Taken as a whole, the reviews demonstrate that a well-structured and implemented programme of regulatory reform can make a significant contribution to better economic performance and enhanced social welfare. Economic growth, job creation, innovation, investment and new industries are boosted by effective regulatory reform, which also helps to bring lower prices and more choices for consumers. Comprehensive regulatory reforms produce results more quickly than piece-meal approaches; and they help countries to adjust more quickly and easily to changing circumstances and external shocks. At the same time, a balanced reform programme must take into account the social concerns. Adjustments in some sectors have been painful, but experience shows that the costs can be reduced if reform is accompanied by support measures, including active labour market policies. While reducing and reforming regulations are key elements of a broad programme of regulatory reform, experience also shows that in a more competitive and efficient market, new regulations and institutions may be necessary to ensure compatibility of public and private objectives, especially in the areas of health, environment and consumer protection. Sustained and consistent political leadership is another essential element of successful reform, and a transparent and informed public dialogue on the benefits and costs of reform is necessary for building and maintaining broad public support. The policy options presented in the reviews may pose challenges for each country. However, the in-depth nature of the reviews and the efforts made to consult with a wide range of stakeholders reflect the emphasis placed by the OECD on ensuring that the policy options presented are relevant and attainable within the specific context and policy priorities of the country. Each review consists of two parts. Part I presents an overall assessment, set within the macroeconomic context, of regulatory achievements and challenges across a broad range of policy areas: the quality of the public sector, competition policy, market openness and key sectors such as telecommunications. Part II summarises the detailed and comprehensive background reviews

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FOREWORD

prepared for each of these policy areas, and concludes with policy options for consideration which seek to identify areas for further work and policy development in the countries under review. The background reviews for Finland have been posted on the OECD Web site: www.oecd.org/regreform/ backgroundreports

Acknowledgements. The Horizontal Programme on Regulatory Reform is headed by the Deputy Secretary-General Richard Hecklinger. The country reviews are co-ordinated by the Public Governance and Territorial Development Directorate. The Review of Finland reflects contributions from the Government of Finland, the Working Party on Regulatory Management and Reform of the Public Management Committee, the Competition Law and Policy Committee and its Working Party, the Working Party of the Trade Committee, the Working Party on Telecommunication and Information Services Policies of the Information, Computer and Communication Policy Committee; representatives of member governments, and members of the Business and Industry Advisory Committee (BIAC) and the Trade Union Advisory Committee (TUAC), as well as other groups. In the OECD Secretariat, Odile Sallard, Rolf Alter, Cesar Córdova-Novion, Caroline Varley, Wim Driehuis, David Parker, David Turner, Anthony Kleitz, Michael Wise, Patricia Heriard-Dubreuil, Bernard J. Phillips, Myung-Soo Jang, Rex Deighton-Smith, Sue Holmes and Seppo Reimavuo contributed substantially to the review of Finland. The document was prepared by Jennifer Stein.

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TABLE OF CONTENTS

Table of Contents Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Part I

Regulatory Reform in Finland Chapter 1.

Performance and Appraisal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20

Setting the scene: the macro-economic context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory reform: its contribution so far . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory reform: the challenges which lie ahead . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

22 31 37 50

Part II

Regulatory Policies and Outcomes Chapter 2.

Regulatory Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

55

Context and history . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The local Government and EU dimensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory transparency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Alternatives to regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory Impact Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory bodies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Keeping regulations up to date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Improving the business environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

56 59 59 61 62 64 64 67 67 67

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Policy options for consideration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

70 71

Chapter 3.

Competition Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

75

Context and history . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The substance of the competition law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Competition policy institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Competition law enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Competition policy in the international context. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The limits of competition policy: exemptions, monopolies and special regulation. . . . Competition advocacy for regulatory reform. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Policy options for consideration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

76 77 80 81 82 84 86 89 90

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Chapter 4.

Market Openness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

95

Context and history . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 The policy framework for market openness: the six efficient regulation principles . . . 97 Sectoral trade and investment liberalisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 Policy options for consideration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 Chapter 5.

Regulatory and Competition Issues in Key Sectors . . . . . . . . . . . . . . . . . . . . 109

A. THE COMMERCIALISATION OF GOVERNMENT SERVICES . . . . . . . . . . . . . . . . . . . . 110 Context and history . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 Reform achievements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 Reform challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State ownership policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Policy options for consideration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

114 122 123 123

B. THE POSTAL SECTOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Context and history . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market entry and market conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Universal Service Obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Policy options for consideration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

125 125 125 128 128 129

Appendix 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 Appendix 2. Appendix Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 List of Boxes 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17.

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The Nordic governance model and value system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . What is regulation and regulatory reform? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Public service delivery: improving efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sectoral market opening and performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The cross-over effects of regulation in product, labour and financial markets . . . . Recommendations for further structural labour market reform Labour Market and Social Security System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Milestones in improving capacities to assure high quality regulation . . . . . . . . . . . Central oversight units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Targeting RIA: the US and Korean examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Are sanctions too low for effective deterrence? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Examples of the FCA’s “Government and Markets” Project work . . . . . . . . . . . . . . . . Information on technical regulations and standards: Notification obligations in the European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Measuring and improving productivity in the public sector . . . . . . . . . . . . . . . . . . . . The case of the Civil Aviation Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Competitive neutrality frameworks in other OECD countries. . . . . . . . . . . . . . . . . . . Reform of State Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Experiences of postal market liberalisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21 31 38 44 47 49 57 60 66 83 88 99 112 113 118 121 126

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List of Tables 1. 2. 3. 3. 4. 5. 6. 7. 8. 9.

Major regulatory reform promoting market openness . . . . . . . . . . . . . . . . . . . . . . . . 32 Labour productivity, prices, production and employment per industry, 1980-2000 . . . 45 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Different types of impact analysis used in Finland . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Finland’s major regulatory institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Recent merger review experience. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Trends in competition policy actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Major trading partners with Finland in 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Indicative list of recent MRA initiatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 Merger control statistics in 1998-2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

10. Stages in the commercialisation process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 11. Former and present state enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 12. Main state-owned companies operating in a competitive market . . . . . . . . . . . . . . 115 1.1. Sectoral regulatory reform in Finland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 1.2. Potential impacts of regulatory reform in Finland . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 List of Figures 1. 2. 3. 4. 5. 6. 7.

Key economic indicators of Finland and EU/OECD countries 1980-2001 . . . . . . . . . . Share of trade in OECD economies, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Export share of the electronic equipment industry . . . . . . . . . . . . . . . . . . . . . . . . . . . Labour productivity by sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Output and productivity: GDP per hours worked . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Public spending as a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Public sector employment in years 1990, 1993, 1996, 1999 and 2001 . . . . . . . . . . . . .

23 24 25 26 27 29 29

Map of Finland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

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ISBN 92-64-10267-1 OECD Reviews of Regulatory Reform: Finland A New Consensus for Change © OECD 2003

Executive Summary

OECD REVIEWS OF REGULATORY REFORM: FINLAND – ISBN 92-64-10267-1 – © OECD 2003

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EXECUTIVE SUMMARY

Finland has experienced important changes over the last twenty years, leading to economic success Finland’s economy has experienced important changes over the last twenty years. A banking crisis combined with the worldwide recession of the early 1990s and the collapse of trade with Russia accelerated major reforms to liberalise the economy. Though unemployment is high, the economy has grown strongly, productivity has improved and the economic structure has changed. The rise of the ICT sector in a country traditionally dominated by industrial goods and natural resources is perhaps the most defining characteristic of the new economy. Finland has other strengths. The financial sector is healthy and helps to underpin the economy. R&D policy is successful and expenditure is the second highest in the OECD as a percentage of GDP. Finland’s economy grew by 5% per annum between 1995 and 2000, one of the best performances in the OECD. The economy is now an above average performer.

Regulatory reform helped Finland to make this transition Finland has used regulatory reform since the 1980s to support policies aimed at opening up the economy and strengthening competition. Deregulation was the first priority for an economy that used to have significant restrictions on market entry. A wide range of sectors was liberalised. Finland started liberalising telecommunications ahead of many other OECD countries. The electricity sector was rapidly liberalised, and by 1997 all consumers could choose their supplier. The liberalisation of capital markets was another important factor in economic renewal. A heavily regulated economy based on the principle of economic nationalism gave way to one based on the principle of open markets.

Competition policy provided powerful support for the transformation; it is well-conceived and remains an important tool for promoting a good future performance The role which competition policy could play in the liberalisation of the economy was identified at an early stage. A new competition agency was established which attacked the system of cartels, challenged price regulation, and took part in the government’s deregulation project. The competition law was amended to give the competition agency an explicit, active role in regulatory reform. The law is clear and reasonably strong, combining national traditions with the EU competition toolkit, though sanctions are a weakness. “Efficient economic competition” is the standard to which market performance is compared when the law is applied. In efficient conditions, prices are set by independent

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EXECUTIVE SUMMARY

action and there are no barriers to entry into the market. However the major policy thrust of the 1990s to deregulate an over-regulated economy has faded and the competition agency (the FCA) does not appear to be so strongly anchored in the policy-making process as before. Against this background, the agency’s establishment of a separate advocacy unit is a good initiative. The FCA should persist with its work on the marketisation of public services.

Trade policy has encouraged international competition and promoted Finland’s competitiveness, but some issues need attention Deregulation went alongside policies to open the economy to competition, which also helped to strengthen and diversify international trade. A range of measures is in place aimed at creating a friendly climate for international trade and investment. The promotion of simplified customs procedures has been a priority. One measure of Finland’s success is the World Competitiveness Yearbook, which ranked Finland first in 1999 and 2002 in terms of the impact of its customs bureaucracy on competitiveness. There is scope for further reform. Actual trade performance relies heavily on the ICT sector. Finland retains numerous national standards, often aimed at giving consumers a high level of protection, which means that a large part of the Finnish economy remains sheltered from foreign competition. Inward foreign direct investment is, perhaps surprisingly, relatively low. The trade perspective is not strong in the rule-making process.

The Nordic governance model and value system remain a key feature of the Finnish political economy The Nordic values of equity and solidarity continue to play a central role in policy-making, driving the promotion of high standards of public services and infrastructure across the whole country. The state retains a strong and central role in the economy and society, through the direct delivery of tax-funded public services, mainly at local level, and continued substantial ownership of economic assets. Decision-making is based on a search for consensus and the avoidance of conflict, often working through informal structures and procedures. Government is very decentralised. Finland has most of the systems in place to promote quality regulation. But it has not yet taken up the idea of a formalised and centrally driven regulatory governance policy.

The future fitness of the economy depends on further reforms Despite a generally strong recent performance Finland cannot afford to stand still and the reforms of the 1990s need to be updated and taken further. The large public sector, some non-ICT sectors, and the labour market operate with relative inefficiency and need attention. The framework of regulatory governance also needs attention. These points are taken up below.

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The public sector remains large and relatively inefficient, which drags down overall performance The public sector (central and local government), measured in terms of the ratio of public spending to GDP, is large relative to the OECD average. Government employment accounts for nearly a quarter of total employment, with little change since 1990. Most public services are delivered at the municipal level, and spending at this level has risen. Taxation, driven by public spending, is above the already high European average. This is negative for key aspects of performance such as employment, entrepreneurship, international competitiveness and inward investment, and represents an opportunity cost that Finland cannot afford to pay. Significant reforms of the public sector have already taken place, notably the creation of state enterprises to replace the former state budget-funded government agencies, many of which have been converted to company form, and some of which have been privatised. But further reforms are needed to promote greater efficiency, especially at municipal level.

The rapidly ageing population will make matters worse by generating pressure to raise public spending Finland’s population will age rapidly and earlier than in most other OECD countries. The number of over 65s is projected to increase by over 50% by 2020, and the labour force could start to decline within a decade. The old age dependency ratio is projected to rise from the current 25% to 39% by 2020, the fastest rise in the OECD. The challenge is therefore to deal with the inefficiencies of an over-large public sector, and to contain public spending as the population ages.

Public sector efficiency therefore needs to be addressed urgently There is a need to put more effort into raising efficiency and competition for those services that remain both publicly owned and under direct public control, especially at the local level where they are concentrated. Modern public management techniques have still to permeate to this level. Outsourcing remains low and procurement practices need attention. Social, health and education services could be more efficient without compromising quality. As noted by the 2003 OECD Economic Survey of Finland, modern public management techniques need to be implemented for all public services. Competition policy should play an even stronger role in securing a level playing field between state-owned entities and private companies, and consideration should be given to setting up an explicit competitive neutrality framework, as some other OECD countries have done.

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The effective management of state ownership is important State ownership and the governance of state-owned entities need clear policies. A basic question concerns the boundaries between the state and the private sector. Are the current boundaries the right ones? An appropriate end point for activities that are clearly competitive and do not include any sensitive public service functions is privatisation. A more coherent framework for privatisation decisions, including cost/benefit analysis, would be helpful. The governance of entities in the market that remain state-owned needs careful management. The recently adopted State Enterprises Act is welcome, as it will help promote effective corporate governance and a level playing field for private enterprises in competition with public enterprises. More is needed. In particular, the government’s regulatory and ownership functions in relation to publicly owned entities needs to be separated, to avoid the perception and risk that regulation will favour them.

The performance of some parts of the private sector is an issue Some other parts of the economy, not just the public sector, remain relatively sheltered, and suffer from inadequate competition and inefficient regulation. The productivity level of product markets is still below that of the best performing OECD countries, and prices of consumer goods and services are higher than elsewhere in the euro area. Overall competitiveness and productivity performance is considerably boosted by the ICT sector. But it would be unwise, given the sector’s volatility, to be over dependent on it. Policy needs to be geared to ensuring the ICT sector’s continued prosperity, but should also promote a stronger performance by other parts of the private sector to minimise vulnerability. Competition needs to be further encouraged. Evidence strongly suggests that competition helps a better economic performance. A comparison of the performance of different sectors in Finland with respect to production, labour productivity, output prices and employment over the period 1990-2000 shows that greater competition does make a positive and appreciable difference. Liberalised or open sectors performed above average by the end of the period. Industries in which competition had hardly changed show a lower labour productivity growth and higher prices. A strategic review to identify and focus on important weak spots could be carried out. Examples include the retail sector, which is very concentrated and has high prices; the construction sector, which has the same problems; the agricultural sector which is heavily regulated and protected even by EU standards; and pharmacies, which are also protected and operate in a relatively uncompetitive market. Stronger reforms could also be made to the postal, natural gas, water supply and sewerage, and rail transport network sectors in order to encourage greater efficiency through competition. Effective reregulation is an important part of policies to promote competition in previously closed sectors. The postal sector, for example, has been fully opened to competition, but the incumbent, Posti, remains very dominant partly because the regulatory framework is not yet well adapted to the new conditions.

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Entrepreneurship is also relatively weak. Though significant efforts have been made to provide support for SMEs and entrepreneurs, fewer new companies are set up in Finland than elsewhere in the OECD. Current efforts to open up more public service production to competition at the local level should help. A range of possible issues may need attention to generate better performance including access to R&D programmes, training, and even stronger efforts at administrative simplification. The regime of permits and licences seems ripe for a further review.

The labour market needs reform: it is a key to the general performance of the economy Though unemployment has halved since 1994, it is still high at both ends of the age spectrum and at 9% is above the EU average. Structural unemployment, especially longterm unemployment, is a major issue. Regional disparities in unemployment are substantial. The structural problems can be linked to the Finnish governance model and value system that promote equity and solidarity, with decisions that are based on consensus between the social partners. Productivity suffers indirectly from the strongly centralised wage formation process, which results in wage compression, and in consequence offers little incentive for improvement in the sheltered sectors of the economy. The regulatory regime for the labour market includes a number of features that militate against getting people back to work. These include a long maximum duration for unemployment benefits, high levels of support for long-term recipients of benefit, and a short waiting period before benefits can be claimed. Reform is needed to reduce the fiscal burden and pressure, to improve productivity and to support well-functioning product markets. As a number of studies have demonstrated, product, labour and financial markets interact in important ways. OECD analysis suggests strongly that employment rates are increased by product market regulatory reform, and there is some evidence that labour market reforms may enhance innovative activity and hence output growth. Labour market reform in Finland needs to tackle a wide range of issues: reform of the pension system and the reduction of incentives for early retirement, reform of unemployment and related benefits, making active labour market programmes more effective, increasing employment and labour cost flexibility, improving labour force skills and competencies, and introducing more flexibility into the central wage bargaining system. The government has already taken some important initiatives. The pension reform that will be implemented as from 2005 includes a number of striking features that should enhance the sustainability of the system.

A clear and centrally driven regulatory governance policy is urgent, with supporting processes and institutions Regulatory governance is not centre stage in Finland and this is becoming a liability for future performance. The traditions of gradualism, decentralisation and consensus are not well suited to an overall strategy and a strong central focus. These traditions will need to be adapted if greater policy responsiveness is to be achieved. Three issues need special attention. First, decentralised government is creating problems. The development of “whole-of-government” processes, encouraged by a much stronger centre, is the only way

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of ensuring that high quality regulation will be systematically delivered, of embedding a dynamic approach, and of securing effective implementation of rules. The second issue is the need to maximise transparency in the rule-making process. Thirdly, regulatory impact analysis (RIA) currently lacks rigour and a clear focus. There is a need to promote an evidence-based approach to regulation, which includes the quantification of regulatory impacts as well as the involvement of all interested parties. This implies a stronger policy on RIA.

In conclusion, a new “consensus for change” needs to be promoted Earlier reforms and current economic success have not removed the need for further change. Policy has successfully promoted market openness and international competitiveness for part, but not all, of the economy. This imbalance needs to be addressed because it undermines the performance and future resilience of an economy which is vulnerable to external shocks, and which needs to find ways of coping with high unemployment and a rapidly ageing population. A large part of the economy remains relatively closed to competition and consequently relatively inefficient. It includes significant elements of the private sector, but also public services, which are mainly delivered at local level. The question is whether Finland is prepared to embark on a new round of change to complete the work started twenty years ago, which will require a review of governance traditions and of the role of the state in the economy.

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PART I

Regulatory Reform in Finland

OECD REVIEWS OF REGULATORY REFORM: FINLAND – ISBN 92-64-10267-1 – © OECD 2003

ISBN 92-64-10267-1 OECD Reviews of Regulatory Reform: Finland A New Consensus for Change © OECD 2003

PART I

Chapter 1

Performance and Appraisal

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Introduction Finland is a relatively small economy on Europe’s northern edge, with a population of just over 5 million concentrated in the south and west of a large country. It became an independent state in 1917, and cultivated before that a long tradition of economic nationalism to ward off domination by Sweden and then Russia. The traditional backbone of the economy used to be the exploitation of natural resources (iron, wood, agricultural products) and associated manufactured products (machinery, ships, paper, clothing and food). The economy was characterised by state monopolies, price regulation and cartels, which had been historically encouraged by a combination of economic, political and geographic factors. Though Finland had long been a member of EFTA and GATT, the dominant trading partner was the Soviet Union. Development over the last two decades has been marked by significant changes, which have altered the nature of Finland’s economy and strengthened its international trading links. Change started in the 1980s, with the abolition of price controls and the establishment of a strong new competition authority. A banking crisis in the early 1990s and the collapse of trade with the Soviet Union combined with the worldwide recession at that time to trigger further major reforms to liberalise the economy. The structure of the economy changed. Knowledge-intensive products, notably electronic and communication services (led by Nokia), now make an important contribution to GDP and exports. Foreign trade now accounts for 35% of GDP. Regulatory reform was used with other policies to promote change. As well as the strengthening of competition policy, it included deregulation of the key electricity and telecommunications sectors and reforms of the financial sector. Accession to the EU in 1995 provided a further boost for reform. The market economy that has emerged is well implanted in most sectors. Together with sound macro-economic management and strong R&D expenditure, reform and greater competition have brought Finland significant economic success and sustained its good quality of life. Per capita income is now around the EU average. The economy has grown strongly, and productivity has improved. Unemployment is high, however, and overall productivity levels remain below the EU average. The impact of reforms has been strongest in the network industries, the development of the ICT sector (and the diffusion of ICT technologies), and those parts of manufacturing that have been exposed to foreign competition. The banking sector is also strong, but performance elsewhere (especially in services) has been unremarkable, if not weak. Sectors that are not exposed to foreign competition (including the large public sector) still account for 60% of GDP. The Nordic governance model remains a key feature of the Finnish political economy (Box 1). In particular, the state remains a key player in the economy, through the provision of public services and the substantial ownership of economic assets. An enduring political consensus promotes the development and maintenance of high standards for the protection of Finnish citizens, including an extensive system of social services, many of

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which are delivered at the municipal level, and high standards of social, environmental and consumer protection These policies are also aimed at ensuring the continued settlement of the northern region (including for security reasons). The core public services of social, health and education services remain tax-funded. That said, evolution toward a more market-oriented approach, a distancing of the state from commercial activities, and reforms of parts of the public sector have taken place since the 1980s.

Box 1. The Nordic governance model and value system The Nordic model of governance is broadly common to the Scandinavian countries and to Finland. Of course, there are differences of emphasis and approach, as well as a constant evolution. Many features of the model are present in other, very diverse societies around the world. The following must be read in that context. The Nordic approach sustains and promotes a particular set of values – the foremost being equity and solidarity – which guide public policy-making. The high value placed on equity in society drives social policies to ensure that different parts of the country (especially important in those countries with dispersed populations) and particular groups in society are not disadvantaged. High standards of universal public services and infrastructure are also expected everywhere. Environmental protection is also generally high on the agenda, as an important contribution to a good quality of life. Institutionally, the model – and the values at its core – emphasise a strong and central role for the state in the economy and society. The state is seen as the main guardian and defender of society. The state (through the taxpayer) is ready to finance an extensive social services system. In Finland and Norway, the government also traditionally owns substantial economic assets. Public ownership has historical roots but also reflects concerns about relying on the private sector to deliver important social objectives (even where substantial regulation is in place). The state is both strong and highly decentralised. Powers are devolved to individual ministries, which are highly autonomous, and the centre of government is relatively weak. The delivery of public services is heavily devolved to local government. Electoral law provides a strong voice for local representatives. Another marked institutional feature is a political and societal culture characterised by consensus building. There is widespread participation in decision-making, a constant search for consensus, and institutionalised power sharing among government, employers and the unions. Consensus-building tends to promote gradual rather than rapid change and reduces conflict. Pragmatic solutions are favoured. There may be no perceived need for formalised structures and procedures, which may be seen as undermining the trust-based culture. It is arguable that the Nordic model of governance only works effectively in small, homogeneous societies. The consensus-based approach to decision-making draws its strength and effectiveness from a close and informal network of contacts within government and society, based on mutual trust. Constitutional and political factors may also promote the development of this model, which tends to work in tandem with a political culture that generates coalition or minority governments.

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At the same time, Finland emphasises the need to connect traditional public policy goals with a strong economy, on the basis that the first cannot be sustained without the second. The 2000 Annual Report of the Ministry of Trade and Industry (MTI) identifies three strategic goals: an ecologically sustainable economy, a high level of employment, and a good quality of life. These high level goals are translated into intermediate goals: the creation of a competitive environment for business enterprises, including efficient market mechanisms, environmental aspects, and internationalisation, the supply of sufficient and inexpensive energy, the establishment of high professional expertise in terms of knowledge and competence, the safeguarding of the rights of citizens on the market, and the provision of good management of the state’s shareholdings. This report is structured as follows. It starts by considering the key issues that are shaping the overall development and performance of the Finnish economy and society, and the particular characteristics of the economy that have a strong link with regulatory reform. It then considers the contribution which regulatory reform has already made to performance, before addressing the question of where further regulatory reform might continue to boost performance and the achievement of policy goals. It ends with the important conclusions that can be drawn from this analysis.

Setting the scene: the macro-economic context Finland’s recent economic growth has been among the best in the OECD In the early 1990s Finland’s economy was hit by the world recession and the collapse of trade with the Soviet Union. A deep recession and huge job losses followed. The economy came back from this deep trough in the second part of the 1990s, growing by 5% pa between 1995 and 2000 (double the rate of the euro area and the OECD). Revival came through strong exports and ICT-based growth, which went hand in hand with rising employment (Figure 1). A number of factors created the conditions for revival. They included sound macro-economic and fiscal management, moderate wage settlements, and not least, reforms to liberalise markets and open up the economy. In other words, the recovery was not just a cyclical “bounce back” but reflected much deeper structural changes. The Finnish economy (like others) has been affected by the recent global economic slowdown, which has particularly hit the ICT sector. A modest export-led recovery is expected in 2003.

International trade and investment play a key role in the economy Finland’s main trading partner used to be the Soviet Union and the economy was inward looking, characterised by state monopolies, widespread cartelisation and price regulation. Foreigners could not trade stocks on the Helsinki stock exchange, or buy land. The liberalisation of domestic markets, accession to the EU in 1995, and commitment in EU and WTO fora to the promotion of international technical standards have promoted and consolidated Finland’s place in the OECD group of open economies (Figure 2). Trade now accounts for some 35% of GDP (the OECD average). Finland has diversified its trading partners, with Germany and Sweden heading the list (Russia now comes third). Finland exports relatively less to the euro area than any other euro country, and Asia is an increasingly important market. International mergers, especially between Nordic competitors, now mark the industrial landscape, especially in banking, paper, energy, food and telecommunications. In 2001, one third of the 500 biggest Finnish companies were owned by foreign investors. However inward investment is relatively low. Though traditional industrial goods still dominate exports, ICT products have risen fast up the ranks.

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Figure 1. Key economic indicators of Finland and EU/OECD countries 1980-2001 1980-1990 GDP per capita (% growth rate)

1990-2001

1995-2001 Unemployment rate (average, % labour force)

4

15

3 10 2 5 1

0

0 Finland Denmark Norway Sweden

EU 15 OECD 24

Inflation (% growth rate)

Finland Denmark Norway Sweden

EU 15 OECD 24

Government budget balance (average, % GDP) 15

10

8 10 6

4 0 2

0

-5 Finland Denmark Norway Sweden

EU 15 OECD 24

Current account (average, % GDP)

Finland Denmark Norway Sweden

EU 15 OECD 24

Employment rate (average, % working population)

8

85

6

80

4 60 2 40 0 20

-2

0

-4 Finland Denmark Norway Sweden

EU 15 OECD 24

Finland Denmark Norway Sweden

EU 15 OECD 24

Source: OECD.

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Figure 2. Share of trade in OECD economies, 2000 Trade ratio, % 80 IRL BEL

70

60 NLD 50 NOR DNK

40

CHE SWE AUT CAN

FIN

GBR

KOR

30 NZL SVK

CZE HUN

20

GER

FRA PRT

ESP

GRC

MEX

ITA

AUS POL

JPN

TUR

USA

10

0 10

100

1 000

10 000 GDP, billion USD

Source: OECD.

As an export-led economy, confronted with the pressures of globalisation and the need to remain competitive, Finland must ensure that the conditions for international trade are carefully nurtured.

The performance of the ICT sector has been outstanding, and makes a large contribution to performance The rise of the ICT sector over recent years is perhaps the most defining characteristic of the “new” Finnish economy. From virtually nowhere, Finland has become the world leader in the production of mobile telephone handsets and systems. Sound macroeconomic management played an important part, combined with an effective R&D policy. The most important factor behind this was early liberalisation of the telecommunications market. An effective R&D policy, liberalisation of capital markets, and an engineering oriented education also played a role, alongside strategic decisions by the management of Nokia (the main ICT company). The impact which the fortunes of the ICT sector (and especially Nokia) have on Finland’s economy today can be illustrated in two ways. The first is the sector’s contribution to overall export performance (Figure 3). This is reflected in the trade developments of 2000 and 2001. Exports surged by 18% in 2000, due mainly to an extraordinary 50% increase in exports of the electronic equipment industry (essentially Nokia). They fell back in 2001, and again the most important factor was the performance of the ICT sector, which fell victim to the sector’s global downturn (though it did better than competitors and gained market share). Within the sector, Nokia has by far the greatest influence on trade. In 2000 Nokia’s exports amounted to EUR 13 billion, 24% of total Finnish goods and services and some 80% of exports of telecommunications equipment.

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Figure 3. Export share1 of the electronic equipment industry Electronic equipment

Wood, pulp and paper

% of total

40

30

20

10

0 1990

1992

1994

1996

1998

2000

1. Goods exports. Estimate for 2001 based on monthly customs data. Source: Statistics Finland; Finnish Customs Authority; OECD, Main Economic Indicators and ITCS database.

The second impact is on overall competitiveness and productivity. This can also be illustrated by recent events. Finnish export performance from the early 1990s to 2000 was supported by a strong and growing cost competitiveness in manufacturing, which was reversed in 2001 due to a fall in productivity which coincided with a reversal in the fortunes of the ICT sector. More broadly, Finland’s strong record of economic growth between 1995 and 2000 was due partly to recovery from the recession, but also included a significant non-cyclical component, with output and productivity performance boosted by the ICT sector. This sector alone added nearly 1.5% pa to output and labour productivity growth over the period (Figure 4). The OECD estimates that ICT productivity will accelerate, with a potential output growth in coming years of 3.25%, which suggests that Finland will remain a centre of excellence for mobile telephony. But the sector is volatile. Innovation is rapid, and the competitive situation of a particular firm can quickly change. The contribution of the ICT sector to the economy is a strength but also a vulnerability – so much depends on it, and especially one firm and product. Policy should ensure that ICT continues to prosper, but it should also promote a stronger performance by other parts of the economy to minimise this vulnerability.

R&D policy is successful and expenditure strong In 2000, total R&D expenditure was 3.3% of GDP, the second highest in the OECD after Sweden, and nearly twice as high as the EU average. Two thirds is financed by the private sector but Finland was also one of the few countries with a rise in government spending on R&D in the 1990s. High and rising R&D expenditure is partly the cause and partly the result of the strong development of the ICT sector. Government policy seems to have been effective too. Lack of interference in specific project choices and systematic evaluation of R&D support

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Figure 4. Labour productivity by sector 20

15

10

Manufacturing Total

Total, excluding electrical and optical equipment

5

0

Administration, social security, education, health and social work

Real estate and business activities

Financial intermediation and insurance

Transport, storage and communication

Trade, repairs, hotels and restaurants

Construction

Electricity, gas and water supply

Electrical and optical equipment

Machinery and equipment, transport equipment and n.e.c.

Basic metals, fabricated metal products

Fuel, chemicals, rubber, mineral products

Pulp, paper, publishing and printing

Food, drink, tabacco, textiles and leather Wood and wood products

Agriculture, forestry, fishing, mining and quarrying

-5

Source: OECD.

programmes may have helped make R&D spending more effective. Performance could be further enhanced by competitive tendering for research projects, and improved evaluation of the expenditure of ministries that does not go through research councils or the Ministry of Trade and Industry (MTI) National Technology Agency (TEKES). It is noteworthy that Finland does not provide any R&D tax breaks.

The financial sector is healthy and helps to underpin the economy The financial sector’s profits reached a record level in 2000, though this could change quickly. Finnish financial companies have strong balance sheets, the consequence of high economic growth and substantial cost reductions due to restructuring and the introduction of new technologies. Concentration in banking is high: the three largest banks have around 90% of the market. But competition is fierce, partly helped by new legislation, which allows customers to change their lending bank at no extra cost. Consolidation continues. Important recent developments include the merger of insurance company Sampo with the state-owned Leonia bank in 2001, and the growth of Nordea bank through mergers with Unidanmark (Denmark) and the CristiniaBank og Kreditkassen (Norway). Finland is also leading in e-banking. Generally, the banking sector is experiencing rapid restructuring and productivity growth.

But some parts of the economy fall well short of the ICT sector’s performance, and productivity in the other sectors is an issue Liberalisation has benefited all product markets, but the extent of the change varies enormously. Important markets now operate in conditions of full and effective international competition, whilst others (especially service markets) are still quite closed. Despite the

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deregulation drive and the major changes in the structure and orientation of the economy over the last fifteen years, some parts of the private sector remain heavily – and unhelpfully – regulated, and are not subject to strong competition either within or from outside the country. The outstanding performance of the ICT sector tends to mask this. Entrepreneurship is also relatively weak, which is a problem for the future. Entrepreneurs drive change and innovation: they are prepared to take risks and seize opportunities, especially those arising from technological change. One important indicator of the work ahead to raise growth is productivity. The productivity level of product markets is still below that of the best performing OECD countries, and prices of consumer goods and services are higher than elsewhere in the euro area. Overall productivity levels measured by GDP per hours worked are still below the EU average (Figure 5). The lower productivity of the sizeable public (central and local government) sector has a negative impact of course, but the overall data also include the higher performing ICT sector.

Figure 5. Output and productivity: GDP per hours worked Luxembourg Belgium Norway Netherlands Italy United States France Ireland Austria Germany Denmark Switzerland United Kingdom Canada Australia Finland Sweden Japan Spain Iceland New Zealand Greece Portugal Hungary Korea Czech Republic Mexico

EU OECD 0

50

100

150

Source: P. Schreyer and D. Pilat (2001), “Measuring Productivity”, OECD Economic Studies, No. 33, Paris.

The labour market is in difficulties despite a strong recent growth in employment Unemployment has halved since 1994. But structural unemployment is a major issue, with unemployment highest (relative to other EU countries) at both ends of the age spectrum. Despite an improvement in the overall unemployment rate since recovery from the recession of the early 1990s it is, at 9%, still uncomfortably high and above the euro area average. Regional disparities in unemployment are substantial, with unemployment in northern and eastern regions around 30%, three times the rate in the south and west where some 80% of new jobs were created in recent years. Almost half the Finnish population lives in areas entitled to the EU’s regional aid, the largest share after Greece, Portugal and Spain. The job market is characterised by a low share of part-time employment, and a high share of temporary employment, together with an increasing polarisation between those with a low and a high chance of finding work. Long-term unemployment is a major issue (Figure 1).

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The structural problems can be linked to the Finnish governance model and value system, which promote equity and solidarity, with decisions based on consensus between the social partners. But the social cost of a high rate of unemployment contrasts with the aspiration to an equitable society. There are also productivity repercussions. Wage formation is strongly centralised, and productivity differentials between industries carry little weight in the process. The wage structure is, as a result, compressed. The tone is set by those industries that are most exposed to international competition, and have a high productivity growth. There is little incentive for the sheltered sectors to be more innovative and productive in this context. The figures bear this out. Despite a significant growth of labour productivity in the 1990s (the result of a small reduction in working hours, a moderate increase in human capital, and a substantial increase in GDP per hours worked) labour productivity in absolute terms is still not strong, especially if the ICT sector is stripped out (Figure 3). Overall labour productivity growth has not yet accelerated. The higher multifactor productivity (MFP) growth of recent years has been due to a strong rise in capital efficiency. The regulatory regime for the labour market includes a number of features that militate against getting people back to work. These include a long maximum duration for unemployment benefits, high levels of support for long-term recipients of benefit, and a short waiting period before benefits can be claimed. Though the current wage system has often delivered aggregate outcomes, which have kept inflationary pressure under control, this feature could be preserved in a reform. Changes are urgently needed, including more flexibility in the central wage bargaining system.

The public sector remains very large, especially at the municipal level The public sector (central and local government) is large relative to the OECD average (Figure 6), especially the municipal level of government. Public sector employment accounts for nearly a quarter of total employment, one of the highest shares in the OECD, with little change since 1990. This reflects a continuing attachment to the Nordic model of governance, which emphasises a central role for the state in the provision of public services (in the Finnish context and in this report public services means social services, health, and education). The municipal level of government accounts for a very large share of the total (Figure 7). As in other Nordic countries, public spending is highly decentralised. Municipalities account for almost all health care and a large share of education spending, as well as social services. But the noteworthy feature in Finland is the upward trend in local spending. Mandates to municipalities for public service provision have increased over time. While the share of central government spending has diminished, the municipality share now exceeds the peak it reached before the recession of the early 1990s. Municipalities account for a very large share of public employment. The ageing of local government personnel (40% of its employees will retire this decade) means that without reform to increase efficiency, private sector labour needs could be crowded out. The efficiency of municipal government is now an urgent issue.

Many central government services have, however, been commercialised The Finnish state was also historically a direct producer of a diverse range of products and services including forestry products, mining and chemicals, finance, grain trade and storage, cars and machinery (among others). Central government has, slowly, moved back from this high level of direct engagement in the production of potentially competitive

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Figure 6. Public spending as a percentage of GDP % of GDP

60

50

OECD1

40

30

20

10

USA

KOR

IRL

JPN

AUS

CHE

CAN

NZL

GBR

ESP

ISL

LUX

PRT

NLD

GRC

FIN

NOR

CZE

ITA

POL

BEL

DEU

FRA

HUN

AUT

DNK

NOR

SWE

0

1. Weighted average. Source: OECD, OECD Economic Outlook, No. 71, June 2002.

Figure 7. Public sector employment in years 1990, 1993, 1996, 1999 and 2001 State, persons

Municipalities, persons

All public sector, persons

Share of total employment, %

Number of persons 800 000

% 33

600 000

31

400 000

29

200 000

27

0 1990

1993

1996

1999

20021

25

1. Estimate for 2002. Source: Labour Force Survey, Statistics Finland.

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services. A major step was taken with the creation of state enterprises to replace the former state budget-funded government agencies, which started from 1989. State enterprises are a hybrid form of government entity, strategically steered by government, but independently managed, and often operating in a competitive market. Most have now been converted into company form, and some have been privatised. Privatisation, which started in 1992, has been slow and case-by-case. 13 companies have been fully privatised, and the government has reduced its stake to less than a third in another 8 companies. But it has kept full control of 27 companies, and a simple majority of shares in another 4 major companies. Fully or partly state-owned companies still make up 12% of private sector employment. A major reform in the governance of state enterprises took place recently with the adoption of the State Enterprises Act in December 2002. However change has so far mainly affected central government, not local government. So far there has been no corresponding legislation covering municipal enterprises and other municipal business activities, though this is also much needed in order to address issues of competitive neutrality, accountability and transparency at the local level.

Taxation, driven by public spending, is very high which has a negative effect on employment and competitiveness The high level of taxation, above the already high European average, is a major issue. This is driven by high levels of public spending, which in turn reflects the size of Finland’s public sector, its commitment to high standards of welfare, and strong attachment to an equitable society. Important reforms of the tax structure have taken place. Substantial and effective reforms of consumption, corporate and capital income taxation in the early 1990s have reduced distortions in domestic mark ets and promoted international competitiveness. But high labour income taxes still hamper growth potential, distort economic behaviour, and undermine international competitiveness. Among the measures that could be taken, personal income tax could be reformed to improve the functioning of the labour market, and social security contributions could be made more employment friendly. Initiatives such as the two Working Groups set up recently to review the tax system are an encouraging sign that the government is taking the problem seriously.

And the population is ageing rapidly, which will put pressure on public spending and hence on future economic performance Finland’s population will age rapidly and earlier than in most other OECD countries. The number of over 65s is projected to increase by over 50% by 2020. The labour force could start to decline within a decade. The old age dependency ratio (over 65s as a percentage of the working age population) is therefore projected to rise from the current 25% to 39% by 2020 (the fastest rise in the OECD). Public finances will come under strong pressure. Fiscal policy was successful in correcting the serious budgetary imbalances caused by the recession. The central government balance moved from a deficit of 11% of GDP in 1994 to a surplus of 3.5% in 2000. But it now faces the potentially more difficult challenge of containing spending as the population ages. The rise in total old age related spending is projected to be the fourth steepest in the OECD. A substantial budget surplus will be essential in future. The government has already set a medium term surplus target that reflects this (though the current slowdown means that the surplus is below its 2000 target of 1.5-2%, and may even be in deficit). This implies the need for a strong future economic performance.

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As well as measures to improve efficiency of the public sector, the problem also requires further and deeper reform of the regulatory framework for pensions and retirement to minimise spending growth. In particular the current effective retirement age is low (59 years). The government recognises the problem. The pension reform that will be implemented as from 2005 includes a number of striking features that should enhance the sustainability of the system.

Regulatory reform: its contribution so far Regulatory reform (Box 2) has already made a significant impact on the Finnish economy and society. Its main impact, alongside other policies, has been to help Finland make a successful transition to an open market economy (though the work is not complete). Without this change, the recent economic revival and associated structural changes would have been impossible.

Box 2. What is regulation and regulatory reform? There is no generally accepted definition of regulation applicable to the very different regulatory systems in OECD countries. In the OECD work, regulation refers to the diverse set of instruments by which governments set requirements on enterprises and citizens. Regulations include laws, formal and informal orders and subordinate rules issued by all levels of government, and rules issued by non-governmental or self-regulatory bodies to whom governments have delegated regulatory powers. Regulations fall into three categories: ●

Economic regulations intervene directly in market decisions such as pricing, competition, market entry, or exit. Reform aims to increase economic efficiency by reducing barriers to competition and innovation, often through deregulation and use of efficiency-promoting regulation, and by improving regulatory frameworks for market functioning and prudential oversight.

●

Social regulations protect public interests such as health, safety, the environment, and social cohesion. The economic effects of social regulations may be secondary concerns or even unexpected, but can be substantial. Reform aims to verify that regulation is needed, and to design regulatory and other instruments, such as market incentives and goal-based approaches, that are more flexible, simpler, and more effective at lower cost.

●

Administrative regulations are paperwork and administrative formalities through which governments collect information and intervene in individual economic decisions. They can have substantial impacts on private sector performance. Reform aims at eliminating those no longer needed, streamlining and simplifying those that are needed, and improving the transparency of application.

Regulatory reform is used in the OECD work to refer to changes that improve regulatory quality, that is, enhance the performance, cost-effectiveness, or legal quality of regulations and related government formalities. Reform can mean revision of a single regulation, the scrapping and rebuilding of an entire regulatory regime and its institutions, or improvement of processes for making regulations and managing reform. Deregulation is a subset of regulatory reform and refers to complete or partial elimination of regulation in a sector to improve economic performance. Source: OECD (1977), OECD Report on Regulatory Reform, Paris.

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Deregulation cleared the way for the development of a market economy Finland has used regulatory reform since the 1980s to support policies aimed at opening up the economy and strengthening competition. Deregulation was the first priority for an economy which suffered a wide range of restrictions on market entry. A deregulation project was launched which aimed to dismantle unnecessary barriers to market entry across a wide range of sectors. It was applied to particularly good effect in the liberalisation of key sectors including telecommunications and electricity. Licence requirements for market entry were streamlined or removed, as were controls on the number of market players. The licence reform project, for example, ran from 1989 to 1993. Price regulation was abolished in 1988. The breadth of the deregulatory measures taken is illustrated in Table 1 (which also gives an idea of the difficulties of market access before liberalisation). A heavily regulated economy based on the principle of economic nationalism gave way to one based on the principle of open markets.

Table 1. Major regulatory reform promoting market openness Unrestricted competition in data transfer (1988) Abolishing common price regulation (1988) Liberalising imports of crude oil products (1991) Abolishing needs-testing in road transport of goods (1991)1 Liberalising the news agency business (1991) Liberalising entry into hotel and restaurant services (1991) Abolishing capital market restrictions (1986, fully 1991) Abolishing import monopoly in the sugar industry (1992) Abolishing restrictions related to foreign ownership (1993) Abolishing needs-testing in domestic passenger airline services (1993) Liberalising the postal sector (1994) Implementing EU internal market rules within the context of EEA Agreement (1994) Opening up competition in telecommunications (1987, fully in 1994) Abolishing needs-testing in driving schools (1994) Liberalising entry into motor vehicle inspection (1995) New Electricity Market Act (1995) Abolishing monopoly of calendars (1995)2 Incorporation of the State Grain Storage Centre (1995) Liberalisation of alcohol imports and wholesale trade of alcohol products (1995) Ending the state-owned banks’ exclusive right to conduct the state’s payment traffic (2000) Adoption of a Water Regulation Act, to increase transparency and control monopoly (2001) Opening up competition in selection of government services (1987, renewed 2002) 1. Needs-testing means an arrangement whereby the authority has power to assess whether there is a need for additional operators in the market and grants licences accordingly. 2. Since 1923, the University of Helsinki has had a legal monopoly of publishing and selling almanacs in the Finnish and Swedish languages in Finland. Source: OECD.

Policies to promote international trade have encouraged international competition Deregulation went alongside policies to open the Finnish economy to international competition. A country with relatively narrow links to the rest of the world has changed in less than two decades to become one of the more open economies in the OECD. Accession to the EU in 1995 was an important stimulus, but the change predated this, and has been supported by a range of measures aimed at creating a friendly climate for international trade and investment. The principle of non-discrimination is observed, with some exceptions (often relating to EU and WTO commitments). A Market Access Unit in MTI

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helps both domestic and foreign firms with import and export problems. The promotion of simplified and efficient customs procedures has been a priority, carried through with success. Customs services are faster, more consistent and predictable, and more consumer-oriented. In 2002 a new electronic data interchange (EDI) import clearance system was launched, and work has started on an EDI export clearance system. The success of these changes is reflected in the World Competitiveness Yearbook, which ranked Finland first in 1999 and 2002 in terms of the impact of its customs bureaucracy on competitiveness. The country is active and organised in international work to promote the harmonisation of technical standards, which are often a more important barrier to trade today than tariff barriers. As will be seen later, Finland needs to consider whether the benefits of retaining a significant number of national standards for the protection of consumers and society outweigh the costs.

Competition policy provided powerful support for the transformation, is well-conceived and continues to be an active agent of change The role which competition policy could play in the liberalisation of the economy was identified at an early stage. A landmark government report in 1987 drew attention to the deregulatory potential of competition policy, suggesting that the country’s economic problems might be due to obstructions in the way of a competitive market, such as the tolerance of cartels. A new competition agency was established which aggressively attacked the system of cartels, and challenged price regulation. It took part in the government’s deregulation project. The competition law was amended to give the competition authority an explicit, active role in regulatory reform, and was deployed very successfully in the market opening and network industry reforms of the 1990s. The competition authority not only called attention to the need for change, but also offered expert assessments of the competition implications of proposed changes to the regulatory framework, especially for the electricity and financial markets, and also (together with the Ministry of Transport and Communications) for telecommunications. Between 1988 and 1996 it issued 385 statements on regulatory issues, and promoted 120 initiatives calling for specific regulatory changes. The competition law is clear and reasonably strong (sanctions are a weakness), combining national traditions with the EU competition toolkit. Exemptions are limited, which explains the broad role it has been able to play in reform. Merger control helps to prevent market-dominant positions. “Efficient economic competition” is the standard to which market performance is compared when the law is applied. In efficient conditions, prices are set by independent action and there are no barriers to entry into the market. The institutional framework is strong, now that a newly reconstituted independent court is in place, alongside the Finnish Competition Authority (FCA). The framework, in brief, is there to ensure that competition policy continues the tradition of active engagement to promote open markets. The FCA has shown its willingness to sustain this role through the efforts which it has put into issues raised by the commercialisation of public services: its “Government and Markets” project, and its more recent complementary focus on the marketisation of local public services. But, as will be discussed later, advocacy today is proving much harder than in the past.

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The telecommunications sector was successfully liberalised, which stimulated growth of the ICT sector Finland started liberalising its telecommunications sector ahead of many other OECD countries and ahead of the EU. Business telecommunications had already been partially liberalised in the late 1980s, followed by GSM (mobile telephony) networks and data transmission in 1990. The market was opened to competition in 1994, and market opening was further promoted with the 1997 Telecommunications Market Act. These developments marked a break with the more straightforward deregulation of the economy which had been the hallmark of reforms so far, because a new regulatory regime (in particular, third part access to the network, unbundling of potentially competitive services from the network, and the establishment of a new regulator) had to be developed to promote competition in a sector where the fixed line network remains monopolistic. The liberalisation was a success in two respects. Charges for calling services came down by some 20%, and service quality improved. Mobile telephony has done particularly well. Among EU countries Finland has the lowest or near-lowest tariffs for mobile calls. It also, crucially, provided a condition for growth in the home telecommunications equipment market, and a platform for the rapid international expansion of this market. Between 1990 and 2000 production volumes of communications equipment grew at double the previous rate, and exports rose by a factor of 15. An important development is a new law, which will take effect in July 2003 – the Communications Act – which takes account of the convergence of all forms of communications (telecommunications, broadcasting and the Internet) and will apply to suppliers of all types of communications network. The aim is to promote technological neutrality in regulation. Nevertheless, the telecommunications sector could do even better. Dominance in the local loop of the fixed network (the last kilometre to the customer) remains an important issue that has kept prices for local call services unnecessarily high. Former local monopolies still have 80-90% of the fixed line market. The largest local operators are Sonera (27% market share, and Elisa Communications, 26%). Sonera, which merged in late 2002 with the incumbent Swedish operator Telia, also has a market share of 62% for mobile calls, 50% for international calls and 37% for long-distance calls. It remains 53% state-owned and issues of corporate governance have been raised by the recent mismanagement of its bid for a UMTS third generation mobile phone licence. Recent measures by the FCA allowing customers to obtain competitive bids from different operators might change the competitive situation in due course.

The electricity sector was also successfully liberalised early on The electricity sector was the subject of an early and relatively fast-track liberalisation in the 1990s. The process started with the 1995 Electricity Market Act, which introduced third party access to the monopolistic grid and allowed large users to choose between different suppliers. From 1997 all consumers could choose their supplier, and from 1998 they could do this without paying for a new meter. The vertical supply chain has been disaggregated (through accounting unbundling) to separate the grid from potentially competitive distribution and supply. A regulator (now called the Energy Market Authority) was set up which today also covers the gas market. Another positive feature is the full integration of the Nordic electricity market. As with telecommunications, the liberalisation

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has been a success, with electricity prices among the lowest in the EU (this is consistent with a recent EU study that shows prices to be substantially lower in fully liberalised markets than elsewhere). However in early 2003 an extreme market situation brought on by a very cold winter and dry summer raised electricity prices by 10-19%. Improvements can be made. Another recent EU study shows that Finnish consumers have been slow to switch supplier compared with their counterparts in other liberalised markets. State ownership remains pervasive: the state owns 12% of the transmission grid and has a 70% share in Fortum which owns 25% of the grid. Unbundling of competitive activities from the grid is still weak with 87 vertically integrated companies. The MTI is preparing an amendment to the Electricity Market Act that would require the separation of grid operations into distinct companies.

Important and necessary reforms of parts of the public sector have taken place The commercialisation of central government services has been generally well managed, and has promoted greater efficiency As already noted, the Finnish state has traditionally held a large place in the economy, well beyond the usual provision of public goods and welfare services. Change was necessary to unlock the potential for a better performance by a significant part of the economy. The government understood this, and the need to distance its policy/political role from commercial activities. The commercialisation of potentially competitive services has been carefully managed and systematically pursued, within a clear conceptual framework. Where (as in many cases) an activity has not been fully privatised, a framework for arm’s length management of ownership responsibilities has been put in place, leaving state-owned entities to operate in an increasingly competitive environment. A study of the commercialisation process concluded that overall efficiency, effectiveness and quality of service has improved, profitability has also improved, and prices have come down. Competition has also generally increased. It has emerged strongly in some cases (such as telecommunications), less so elsewhere (such as rail and postal services). The slow emergence of competition can often be linked to weak initial structural reforms and a gradual liberalisation path. For example rail competition was held back by the fact that access to the track was monopolised by one group until 1999. Competition in road construction and maintenance is slow in coming because the same government agency still covers this as well as road planning and procurement (though change is underway). This is not to say that the commercialisation approach works perfectly. A number of issues need attention (these are considered later). The decision to privatise, or not, is of course political. But it is very difficult to retain state ownership and manage commercial activities in such a way that these can really mimic private companies, and not disadvantage the latter. Corporate governance frameworks still have some way to go in addressing these needs. Reforms have promoted an important and necessary separation between the state and state-owned entities, which needs be taken even further. Commercialisation reveals the tension between the production of services (at arm’s length of government and in a commercial environment), and public objectives (such as regional and social objectives). These need a separate regulatory framework, not least to ensure that a commercial entity does not use regulatory powers to disadvantage competitors. Public objectives become more explicit because they can no longer be pursued implicitly under cover of direct state control. Absent the will to privatise on a large scale, Finland has – through its state

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enterprise model – found a reasonably effective way to separate functions that need to be separated. A further strength of the Finnish approach to commercialisation has been its handling of personnel issues. The employees of state enterprises are not civil servants, but come under the general labour legislation. This was an important (but not surprisingly, sensitive) change to ensure that state enterprises could adjust labour to market conditions. Reforms have so far mainly addressed central government. Much remains to be done at the local government level, which is responsible for the delivery of most public services.

Significant reforms have modernised the central public administration Significant reforms have been carried out to fit the central administration for its new role as facilitator, rather than direct provider, of public services. This included an antibureaucracy drive and reforms to increase customer orientation. The decentralisation of government (both within the centre and from the centre to the local level) was another important development. Delegation required new means of control by the centre. Performance management systems were established based on objective setting, monitoring the provision of services, and accountability for results. The budgetary process has also been reformed. Medium term budgeting has been introduced to control public spending. A system of lump-sum allocations to ministries and local governments has been introduced alongside correspondingly greater budget management responsibilities, and the replacement of ex ante budget controls by ex post evaluation. The increase in ministerial and municipal autonomy has raised some controversy. Concerns have been expressed that it undermines central policy coherence. The government is considering how to strengthen this.

The liberalisation of capital markets played a key part in the changes to the Finnish economy, and reforms continue The liberalisation of capital markets was an important factor in the renewal of the Finnish economy. This started at the end of the 1980s with the abolition of price controls. The abolition of rent controls, exchange rate controls over short-term capital movements, controls over borrowing from abroad and the ban on ownership of shares by foreigners in Finnish investment trusts followed. Further liberalisation came from the deregulation of banks’ lending rates in 1986. The speed of liberalisation generated some short-term pain as the deregulation of lending rates induced a credit-led consumption and investment boom. This was followed by high real interest rates and debt levels, which reinforced the slump in domestic demand, against the background of the world-wide recession in the early 1990s. But the benefits of reform have been substantial for long-term economic health. Further important reforms to the financial sector and to the stock market are planned or underway that should ensure the adaptation of the regulatory and supervisory framework to increasing internationalisation and conglomeration (not least the mergers of banks and insurance companies). There is stronger co-operation with other Nordic supervisors (Finland is unique in that its largest bank, Nordea, has a Swedish head office). There are proposals to amend the Securities Market Act, the Act on Trading in Standardised Options and Futures, and related Acts, so as enhance the versatility and flexibility of the securities market.

Regulatory governance has not been neglected Regulatory governance policy – that is, policy for enhancing the capacity to make “fit for purpose” and cost-effective regulations and regulatory regimes – is a driver of

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regulatory reform in general and an essential adjunct to more specific reforms. Finland now has most of the systems in place that enable it to promote quality regulation but there is some way to go for these systems to take root in the regulatory culture. Finland’s first formal policy was issued in 1996, and has been regularly revised. Policy is broadly consistent with the OECD’s 1995 Recommendation on Improving the Quality of Government Regulation. Its main focus is to improve the quality of new primary legislation (which is more prevalent in Finland than secondary legislation). However, Regulatory Impact Analysis (RIA) goes back much further: Finland took its first steps on RIA in the 1970s. RIA started with a requirement to assess the economic impact of regulation, and has since added further – non-mandatory – assessments (for example social and health impacts). There is a good tradition of transparency in the making of regulations, based on longstanding informal traditions of consultation. A wide variety of methods are used, including hearings and written statements. Access to information is good. Backed by the 1999 Act on the Openness of Government Activities, which sets high legal standards for transparency, the government uses a variety of tools for this, including the Web. Finland is a relative newcomer to the idea of a formalised and central regulatory governance policy. Like many other small countries, it does not have a central body to drive regulatory governance policy: informality and decentralisation are the keynotes. But two ministries – the Ministry of Justice and the Ministry of Finance – make important quality checks. Some essential elements of strong regulatory governance are in place, including a systematic approach and a recognition of the need for continuous improvement. But as will be seen later, a great deal more needs to be done. The EU dimension of regulation is of growing importance, as for all EU countries. In Finland’s case, it has been a major driver to open up the economy. Finland has a wellorganised decision-making process for EU policies. A cabinet committee chaired by the Prime Minister meets once a week to discuss key issues and to set priorities. A network of more specialised committees ensures effective policy development and representation in Brussels. A co-ordination process links the competent ministries. Implementation of EU legislation is handled, on the whole, fast and effectively.

Regulatory reform: the challenges which lie ahead For EU countries, the transfer of monetary policy to the EU central bank and the relative constraints imposed on fiscal policy mean that public finance and demand side measures cannot be deployed in the same way as in the past to tackle policy issues. Supply side measures, and not least, regulatory reform, can however make a particularly significant contribution to meeting policy goals. In Finland, further reform could make an important difference in three areas that are vital to ensure the future structural fitness of the economy: performance of the public sector and of state-owned entities, of some non-ICT sectors, and of the labour market. The overall framework of regulatory governance also needs attention to ensure that all regulation is both cost-effective and fit for its intended purpose. The role of the state is perhaps the most crucial issue, and especially public sector performance. In particular, there is a need to put more effort into effective management of those services that remain both publicly owned and under direct public control, especially at the local level where they are concentrated. Efficiency of service delivery, through more effective procurement and competitive delivery by private providers, needs to be promoted if the pressures for public spending are to be contained (Box 3). The role of the state also

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raises the issues of state ownership and the governance of state-owned entities. There is a need, first, to clarify the boundary between public and private sectors. Commercial activities belong in principle with the private sector. Careful regulation can be used to ensure that public policy goals, such as regional solidarity, continue to be supported even when the instrument of delivery is privately owned. The governance of entities that remain state-owned is important too. More work is needed to promote effective corporate governance and a level playing field for private enterprises in competition with public enterprises. It is encouraging that there are clear signs that Finland (unlike many other OECD countries) has embarked on some important “second generation” reforms, which centre on efforts to define a new “regulatory state” in which state ownership and regulation are clearly separated, and corporate governance issues are tackled. But this is still work in progress.

Box 3. Public service delivery: improving efficiency A key aim of governments in the reform of the public sector is to improve efficiency. This can help general economic performance (for example through lower taxes because the state’s financial needs are reduced) and can also further specific public policy objectives such as quality public services (more can be achieved with the same or even with less funding). Where, as in many OECD countries, pressures on public spending are expected to grow because of a rapidly ageing population, the need for reform becomes more pressing. The problem with public services, which are traditionally provided directly by the state without any competition (as in Finland), is that their value cannot be measured in the market. Introducing competition enables services to be valued. It is then possible to relate inputs (the cost of services) to outputs and outcomes, using modern management techniques, including new budgeting and performance measurement systems. Benchmarking services (for example between municipalities, and between the latter and private service providers) also becomes possible. Efficiency gains will follow. There are, of course, challenges in developing this approach. Outputs or outcomes must be found that can be measured, and new regulatory, governance and management systems must be put in place. But the challenges are surmountable, and a growing number of OECD countries have already gone some way to develop effective new systems for the management of their public services. Public services can be opened up to competition whilst retaining direct state control. Under this approach, the service continues to be provided directly to consumers by the state. Competition is introduced by competitive tendering for services from private service providers by the state. The state agency which used to provide the services may also compete for their provision under the new arrangements. In this case competitive neutrality – making sure that the state agency does not enjoy an unfair competitive advantage over private sector competitors, for example ensuring that prices reflect costs – is essential. Alternatively, the state can withdraw entirely from the direct provision of services to the consumer. Consumers, not the state, decide on their service provider. Regulation is put in place to ensure that service standards and other public policy objectives continue to be met.

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1. The public sector remains both large and relatively inefficient, a drag on overall performance Despite substantial reforms, the public sector remains large and relatively inefficient. This does have to be set in perspective. Virtually all health, education and social services in Finland are publicly-funded (i.e. through taxation). Productivity problems in the public sector are far from being unique to Finland. Still, the public sector is an important drag on overall economic performance and there is scope for efficiency improvements. The opportunity cost to the economy of a large and inefficient public sector is significant. Taxation is higher than it needs to be, which is likely to be discouraging entrepreneurship and FDI. Public spending is higher than it needs to be, a major issue for the future fiscal prudence which is needed to cope with the country’s ageing population. Efficiency gains could also reduce the size of the public sector without lowering the reliability, safety and quality of services.

Where can regulatory reform help? More effort needs to go into raising efficiency and competition at local level, with a special focus on public procurement The management of public services delivered at local level is a big issue. Reforms do not seem to have permeated down to this level, which has extensive responsibilities for service provision. There is a problem of unfunded mandates – requiring municipalities to do more without extra funding. In fact this pressure should help to drive a solution through greater efficiency. The current attention paid by the FCA to local public services is important. There are some positive developments. A recent survey shows that many municipalities are starting to exercise their right to purchase services on the market, driven by the need to improve productivity as the population ages and the cost of health and elderly care grows. But outsourcing remains at a low level. There is a lack of transparency in the pricing of municipal services. The costs of services need to be better understood and accounted for. It would then be possible to compare cost differences between private production and production by municipalities. As the OECD’s 2003 Economic Survey of Finland has already highlighted, municipalities need to be put into a stronger position as purchasers of services. In this context, public procurement is a key issue. The framework seems strong enough. Finland has implemented the EU directives on public procurement and the WTO Agreement on Government Procurement. Its procurement legislation, which applies to central, regional and municipal levels of government, lays down basic principles of transparency, nondiscrimination and equal treatment, and requires a tender competition for all procurement regardless of value. But inefficiencies exist and public procurement appears vulnerable to the maintenance of long-term insider contracts fostered – consciously or not – by the consensus tradition that tends to favour Finnish entities. There is evidence that procurement rules are not being followed and that competitive tendering is not always being used. Competitive neutrality between private service providers and the municipalities’ own service provider arm which may be in competition with the former also need to be reinforced, to encourage outsourcing.

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negative impact on overall productivity. Health care spending has already been contained for fiscal reasons, without adverse effects on quality. The government itself considers that more could be done. Measures are under discussion (for example the introduction of financial incentives for health care workers). These need to be taken forward. Education and training are good, but could be more efficient and better adapted to support the needs of the labour market. Important features of the current system are extensive compulsory education, and reliance on school-based vocational training. The performance of the system is good for academic education, and excellent for secondary education. But the costs of the education system are among the highest in the EU. Long study duration is a factor. Human capital is a key input to growth for all countries, but especially for knowledge intensive economies, and Finland’s relative weaknesses need to be addressed. For example, incentives are needed to encourage students to choose study programmes that are better fitted to labour market conditions, and student contributions to their education have a place under certain conditions (for certain types of study and for long studies). Despite a strong emphasis on labour market training, outcomes are weak and this also needs attention. The OECD’s 2003 Economic Survey notes that modern public management techniques need to be implemented for all public services – health, education and social services. Explicit statements about functions and policy goals are needed so as to provide focus and clarity for spending objectives. Benchmarking should be more systematic and regular.

2. The scope of state ownership and the management of state-owned entities need further attention State-owned entities (this term covers both state enterprises and state-owned companies) also need further attention. The government is aware of the problem. The FCA’s “Government and Markets” project addresses the competition issues that have arisen with the progressive commercialisation of public services.

Where can regulatory reform help? A clearer framework for defining public-private sector boundaries would be very useful The first issue concerns the scope of state ownership. Are the current public-private sector boundaries the right ones? Finland has generally preferred a gradual commercialisation of state-owned activities to privatisation. But an obvious end point for activities that are clearly competitive and do not include any sensitive regulatory or public service functions is privatisation. This would ensure that a larger part of the economy could improve its efficiency through full competition in the open market. Finland does not have a clear framework to guide decisions on privatisation. There has been little substantive public debate on the desirable ownership boundaries of the state, and a framework policy stance is lacking (Finland is not the only OECD country in this position). Governments have been neither implacably opposed nor ideologically in favour of privatisation. It is done case-by-case. Its potential scope is also limited by parliamentary control, which is strongly influenced by the union view that supports state ownership as an insurance against job losses, which is rather costly for the taxpayer. A broader and more coherent framework for decision-making would be a great help. This could usefully include a cost-benefit analysis to guide decisions on whether to privatise, or not. The state of the stock market is of course a major practical factor.

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More work is needed on the governance of state entities A crucial challenge raised by the commercialisation reforms that have created state enterprises and state-owned companies is that the government today has a major stake in companies which are in competition with private companies (see Chapter 5). At the end of 2001 the total value of all state shareholdings was estimated to be above EUR 20 billion. Further commercialisation is planned. Government ownership on this scale needs very careful handling, to avoid discrimination against private companies, and to maximise the pressures for efficiency on state entities. Issues of potential market dominance and anticompetitive behavior arise from the presence of state-owned entities in the market, and could grow. The reason is that state-owned entities may enjoy an unfair competitive advantage over private companies. This can happen in many ways: subsidies if a state enterprise does not have a tight budget constraint; balance sheets which undervalue the assets of state entities; favourable taxation; and state guarantees that lower the risk of borrowing. For private companies, competitive neutrality (a level playing field) is essential. The governance of entities that remain under state ownership therefore needs careful attention. Political steering and slow decision-making can break their efficiency. The government needs to be clear about the degree of political control that it wants to exercise, and develop the governance structures to achieve this. Also, mixing ownership and regulatory functions in government raises the risk that regulation will favour state entities. Finland (unlike, for example, Norway) still generally puts regulation and ownership functions with the same ministries. There is a proposal to change this, but no decision yet.

Competition policy should play an even stronger role A level playing field between state-owned entities and private companies needs action that goes beyond drawing up a list of specific problems. Competitive neutrality must also be tackled from a much broader perspective, to capture issues that may not easily be identified or which may emerge later. The abuse of dominance provisions in the competition law are important here. A special provision in the Finnish competition law may also be helpful. This states that “a restriction that is deemed to have harmful effects through decreasing efficiency or preventing or hindering the conduct of business in a manner inappropriate for sound and effective competition” may be enjoined even if it is not otherwise specifically prohibited in the statute. Although this provision has not been used much in enforcement since Finland added substantive prohibitions similar to those of the EU in 1992, the FCA has invoked it to advocate change. The FCA has worked to achieve competitive neutrality in its “Government and Markets” project and it has been active in the investigation of a number of state-owned activities from grain trading to meteorological services. This work needs to continue. It would be even better if an explicit competitive neutrality framework were put in place (as some other OECD countries have done – see Chapter 5).

3. The performance of some product markets could be better but is held back by inefficient regulation and inadequate competition Some product markets have not yet been much affected by liberalisation, and performance could be improved. The problems appear across a range of important sectors. If unhelpful regulation and the relative lack of competition in these sectors are not tackled, the implications for economic performance and the resilience of the economy to external shocks are potentially OECD REVIEWS OF REGULATORY REFORM: FINLAND – ISBN 92-64-10267-1 – © OECD 2003

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serious. No economy can afford to be a “one horse town”. Finland is a long way from this, yet the dependence on the ICT sector (and on one company) is high and should encourage more debate on its implications for future economic stability and growth. It is uncertain that the ICT sector contribution to total output and productivity growth will be as large in future as in the second half of the 1990s, though it will remain important. There is a need to raise overall performance so as to reduce the exposure of the Finnish economy to the ICT sector. For this, a more vigorous and strategic approach to identifying and tackling slowmoving and relatively closed sectors is needed. Finland should take heart from the fact that previously sheltered activities which have been opened up have significantly improved their performance and hence that of the economy. The retail sector is very concentrated. Two retail groups – the K-Group and the S-Group – account together for nearly 70% of Finland’s daily consumer goods sector. There are relatively few outlets, and shops are large, but efficiency appears low (prices are high). Regulatory constraints – in particular controls on land use and shop opening hours – are likely to be dampening competitive development. Exemptions from opening hour limits for some shops are explicitly aimed at protecting particular retail sectors from competition. The experience of other countries that have relaxed opening hours (such as Sweden and the Netherlands) provides evidence that this can lower prices, raise employment and improve labour productivity. However for the first time a low price foreign chain entered this market in 2002. One part of the retail sector that is especially protected is the sale of alcohol. Alko Ltd (a state-owned company with 301 retail outlets and an additional 140 postal order outlets) has a statutory regulated monopoly on the retail sale of alcoholic beverages. Though its production and wholesale activities have been separated from the retail operation, possible abuse of its dominant position in the wholesale and import markets is a concern. The construction sector is also very concentrated, prices are high and competition difficult. Poor municipal planning regulations and lengthy processes to acquire a building permit do not help. Administrative and legal barriers to market entry stand in the way of starting new building companies. The sector is inefficient. Labour productivity hardly rose in the 1990s. New house prices and rents are high relative to quality against a background of house shortages. The situation strongly suggests the presence of cartels. Pharmacies are protected by regulation and also operate in a relatively uncompetitive market. They need a licence, and a tariff schedule of maximum prices sets market prices in practice. FCA attempts to inject a more competitive approach have not been very successful, partly because of the view that competition is not the only important policy issue, and that distributional and equity considerations are also important. The agricultural sector remains the most regulated and protected industry, with the application of tariffs and subsidies under the umbrella of the EU’s Common Agricultural Policy (CAP), as well as EU environmental aid and EU Least Favoured Area (LFA) support, and not least, national support (which is intended to be a transitional help to farmers). Adoption of the CAP, which replaced Finland’s own even higher producer subsidies, did generate dramatic change: output, prices, agricultural income and employment have fallen substantially. The sector produces a declining part of GDP (3.5% in 2000) but total subsidies remain very high. They account for a larger share of farmers’ income than elsewhere in the EU. Aid to the sector is partly driven by regional and environmental goals, but as the OECD has already pointed out there are less costly and distortive ways of meeting these goals.

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Although Finland took early steps in telecommunications and electricity, its liberalisation of some other important network sectors has been much less impressive. There are developments, but there does not seem to be any sense of urgency, and effective competition in many sectors is still some way off. Meanwhile there is evidence of efficiency problems in some sectors, with costs and prices higher than they need to be. The postal sector is an unusual mixture of complete de jure market opening (which goes well beyond the EU’s minimum requirements) and a continuing de facto dominance by Posti, the incumbent and Finland’s second largest employer, which retains a monopoly of the letter post. Market entry is very difficult and the regulatory framework is not yet well adapted to promoting competition. In particular, service obligations for market entrants are onerous. However the threat of competition seems to be keeping Posti on its toes: it is a dynamic and profitable company which has maintained a high quality of service delivery. The first steps have been taken to promote competition and consumer choice in the natural gas sector, but there is still some way to go. Finland imports gas exclusively from Russia. Gasum (24% state-owned) is the sole importer. Consumers (most gas is used by industry and in combined heat and power (CHP) plants) cannot import directly, though a secondary market has been established recently which allows them to trade unused gas. The 2001 Natural Gas Act promotes further change. It requires the unbundling of supply from the grid, and sets up a new pricing system. But a recent study – perhaps not surprisingly – highlights consumer dissatisfaction with the lack of competitive suppliers, and the fact that there is only one source. The reform of the water supply and sewerage sector progresses at a slow pace. The sector currently consists of hundreds of municipally-owned companies and co-operatives, though the trend is towards turning these into separate companies under corporate law. Municipalities must keep their water accounts separate from the accounts for their other activities, and water services must be priced according to the EU water directive, which requires full cost pricing. But competitive pressures are low, and there is room for greater efficiency. Significant differences exist between water companies in relation to productivity, water quality and prices. The new Water Services Act seeks to remedy shortcomings and should help to improve efficiency. The transport sector (goods and people) is important and substantial due to Finland’s geography and demography. The passenger transport sector has some way to go. Rail transport is state-run and rail services are still essentially a monopoly. Efficiency is low and prices high relative to the quality of service. A partial market opening is planned for 2003, which would also unbundle the network from rail services. Air transport has limited competition (92% state-owned Finnair, and two small companies). A recent study highlights numerous barriers to entry in the Nordic air flight market, and a strong state influence (it also found collusion between the four Nordic companies over prices and other issues). Taxi transport is not in good shape, because of limited entry, heavy regulation, and price-fixing by the state. The market for bus transport is in better shape. Entry is free (apart from the need for a professional qualification licence) and there are many small suppliers. There is some price regulation, but prices are coming down. The road freight transport sector which was liberalised in 1991 does reasonably well. Apart from regulation of driving behaviour which is stronger than the EU average, the sector has fewer restrictions than in other EU countries. There are many small players.

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Where can regulatory reform help? Competition policy must regain the strong influence it had in the past over regulatory policy and market developments Evidence strongly suggests that competition helps a better economic performance (Box 4). The major policy thrust of the 1990s to deregulate an over-regulated economy and to replace economic nationalism with market principles has faded. The formal process of consulting the FCA seems to have fallen into disuse, and its role in the reform process has become less prominent over time. The FCA does not appear to be so strongly anchored in the policy-making process. For example, an instruction that ministries should consult the FCA before issuing any regulations that restrict competition is no longer systematically carefully followed. The most obvious kinds of general restraints, like price controls, have been eliminated, and ministries may find it hard to see how their proposals could affect markets. The FCA itself has responded by opening up new channels of communication, and sits on a wide range of task forces and committees so as to be there at an early stage of discussion. But this needs to be reflected in an equivalent willingness by ministries to

Box 4. Sectoral market opening and performance The performance of different sectors in Finland with respect to production, labour productivity, output prices and employment shows that greater competition does make a positive and appreciable difference. 1990 was compared with 2000 across a range of sectors, showing deviations from the national average performance. It shows that liberalised or open sectors (including those which have undergone quite limited liberalisation so far, such as gas) performed above average by the end of the period. Conversely industries in which competition had hardly changed show a lower labour productivity growth and higher prices. Even allowing for the fact that reform was not the only variable at work, the analysis does strongly suggest that liberalisation is a successful policy approach to boost performance. It provides an argument for taking a closer look at those sectors which show lower labour productivity growth as well as higher prices (such as retail trade, transport, construction and some professional and public services). A lack of competition may be at the root of the problems. The analysis also indicates that industries with a relatively high productivity growth and relatively low (or negative) price increases also show a relatively fast growth in output and employment. Other things being equal, this implies that higher labour productivity in a sector reduces prices, which stimulates output and employment. The output and employment effects are positive (in due course) because the initial (employment reducing) rise in labour productivity is eventually outweighed by real income and price substitution effects. That said, the initial capital or labour intensity of a sector is important. Reforms of more labour intensive industries are likely to experience a significant labour shake-out in the short term as productivity rises, and will have to wait longer before the positive real income and price substitution effects kick in. But in the long run, the real income effect may be substantial because of the large share of labour intensive services in consumer expenditure. Tables 2 and 3 substantiate this analysis.

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Table 2. Labour productivity, prices, production and employment per industry, 1980-2000 Average growth rate Average growth rate Share in employment (%) labour productivity output price 1980/90 1990/00 1980/90 1990/00

1980

1990

2000

Share in GDP (%) 1980

1990

2000

All industries Agriculture, hunting, forestry and fishing Mining and quarrying

3.6

5.2

6.3

–2.6

13.6

8.9

6.2

9.3

6.4

3.5

10.4

1.8

–0.3

–2.5

0.4

0.3

0.2

0.6

0.4

0.2

Manufacturing

4.6

6.4

4.7

0.1

24.7

20.3

20.1

27.4

22.4

25.7

Electricity, gas, water

3.7

5.8

3.2

0.2

1.1

1.0

0.8

2.8

2.1

1.7

Construction

1.0

0.4

9.0

3.2

7.5

8.3

6.9

6.6

7.7

5.7

Trade, restaurants and hotels

2.6

1.8

6.0

2.1

15.2

16.2

15.5

13.1

12.9

11.2

Post and telecommunications

5.9

10

3.6

–1.0

1.9

2.1

2.2

1.9

2.1

3.1

Transport and storage

2.3

3.1

6.7

2.1

5.2

5.3

5.4

6.8

6.7

7.1

Financial, real estate, business services

0.4

1.8

7.6

3.5

6.2

8.9

10.5

13.7

17.4

21.3

Community, social and personal services

0.5

0.2

9.5

2.8

24.2

28.6

32.2

17.7

21.9

20.4

Total

2.7

3.2

6.7

1.7

100

100

100

100

100

100

Specific industries Communication equipment

9.5

21

6.4

–6.4

0.4

0.5

1.7

0.3

0.8

5.1

Electrical and optical equipment

7.6

15

5.0

–3.8

1.7

1.7

3.0

1.5

2.1

6.4

Financial intermediation

4.7

5.1

6.6

3.1

17.1

29.9

28.2

3.3

4.6

4.2

Source: OECD.

Table 3. Summary Productivity up + price down

Electricity, gas, water, telecommunications, communication equipment, electrical and optical equipment

Productivity up+ price up

Financial intermediation

Productivity down + price up

Construction, trade, restaurants, hotels, transport, financial, real estate, business services, community, social and personal services

Production up + employment up

Transport, telecommunications, communication equipment, electrical and optical equipment, financial, real estate, business services, community, social and personal services

Production up + employment down

Electricity, gas, water, trade, restaurants, hotels

Production down + employment down

Financial intermediation

Productivity = difference between average growth rates of labour productivity per industry and total economy in 1990s. Price = difference between average growth rates of output price per industry and total economy in 1990s. Production = difference between share of an industry in total GDP in 1990 and 2000. Employment = difference between share of an industry in total employment in 1990 and 2000. Source: OECD.

listen and ask for advice. The role of competition advocacy, complex as it may be today, needs playing up again. The FCA’s recently established separate advocacy unit and the commitment of significant resources to this work is a good initiative. Beyond this influence on the general policy-making process, competition policy needs to pay special attention to regulatory constraints and market restrictions in several important sectors, such as construction. The FCA has an important role to play here, policing the award of contracts and considering the evidence of collusion. It must also continue to use merger control to prevent market dominance.

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Regulatory barriers to trade and investment require further work Finland emphasises its market openness and free trade within the EU and with the rest of the world. But its actual trade performance owes too much to the ICT sector. Other potential is neglected, partly because over-regulation stands in the way. Finland’s participation in EU and global standards making is undermined by the retention of numerous national standards (often aimed at giving consumers a high level of protection) which are a serious technical barrier to trade. It means that a high proportion of Finnish economy remains sheltered from foreign competition. The Finnish Standards Association still applies more than 15 000 national standards. Public sector contracts raise questions. They are open to foreign competition and there have been no infringements. But there are indications that the Finnish authorities prefer domestic over foreign suppliers, although geographic and institutional circumstances might also play a part in this process. For example, larger projects are divided into smaller ones to make them less attractive to foreign suppliers. Inward Foreign Direct Investment (FDI) is, perhaps surprisingly, relatively low for a country with a policy of market openness. The trade perspective is not strong in the rulemaking process: in fact it barely exists. Trade policy bodies are not systematically involved in rule-making, which means that trade and investment issues are not systematically considered. The rule-making process is weak in assessing clearly the full range of costs and benefits of a proposed regulation, which may have especially negative consequences for trade. RIA rarely singles out trade as an issue. And foreigners may be prejudiced by the fact that consultation on the development of regulations is not mandatory but informal, and largely centred on domestic stakeholders (through the EU committees within government, trade associations, unions, etc.).

The climate for entrepreneurs and SMEs needs more attention, and efforts need to be made to pinpoint the difficulties which still appear to lie in their way Significant efforts have been made and are underway to provide support for SMEs and entrepreneurs. The Entrepreneurship Project was set up in 2000 and includes work on administrative burdens. E-government is a priority, with a major project launched in 1997 to promote electronic data interchange between companies and government (for example, VAT notifications and tax returns), and a Cabinet decision in 1998 to promote electronic transactions and service delivery. A new Web portal was launched in 2002 aimed at startups, new exporters and those looking for R&D support. One-stop-shops (Business Service Points) have been set up in the regions to help with licences and permits, as well as information and training. A new act on business information was introduced to simplify the provision of information to businesses. Legal provisions to facilitate administration and bookkeeping have also been introduced. And the new Companies Act promotes small business and investment support. A report in 2002 by the MTI provides some evidence that initiatives have reduced the administrative burden for SMEs. But despite these initiatives, fewer new companies are set up in Finland than elsewhere in the OECD. The size of the public services sector and the fact that large parts of it remain relatively closed could be a significant factor. Current efforts to open up more public service production to competition at the local level should help. A range of possible issues may need attention to generate better performance: including access to R&D

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programmes, training, and even stronger efforts at administrative simplification. A close review of all the potential difficulties for SMEs is warranted.

The unhelpful regulatory framework and relative absence of competition in particular sectors need to be addressed Many of the difficulties that block a stronger performance by key sectors could be unwound or at least minimised without necessarily compromising other goals such as regional or social equity. For example in the retail sector, the regulatory framework could encourage the establishment of smaller, specialised shops in non-rural areas. The regime of permits and licences seems ripe for a further review. Despite the reforms of the 1990s, administrative procedures and licences to enter certain markets (for example financial services, restaurant services, travel and tourist services) do not encourage new entry. In the network industries regulatory frameworks need to be made more market-friendly. For example, in the postal sector – which has large natural barriers to entry – market entry must be facilitated. In the natural gas sector, competition is needed in supply and sourcing. In the water sector, benchmarking would almost certainly reveal the scope for substantial cost – and hence price – reductions.

4. The labour market needs to be reformed: it is a key element in the general performance of the economy The labour market needs attention for a number of reasons. Reform is needed for social reasons and to even out large regional employment differences. It is important for reducing the fiscal burden. Labour productivity is also a key component of overall performance. And, not least, it is a factor in well-functioning product markets (Box 5). For example Finland needs to remain a centre of excellence in mobile telephony, which needs a strong future supply of skilled labour.

Box 5. The cross-over effects of regulation in product, labour and financial markets Product, labour and financial markets interact with each other in a number of ways. Regulation in one of these markets may stimulate or restrict performance in the other markets. A number of studies have been carried out on these cross-over effects. For example, imperfectly functioning financial markets that restrict the availability of venture capital may limit innovation, which adversely affects competitiveness and slows job creation. Product market regulations affect wages, employment and employment security (for example wage premiums are found to be weaker in more competitive industries, so employment growth is stronger). OECD analysis using product market regulation data suggests strongly that employment rates are increased by product market regulatory reform aimed at increasing competition. It may explain just over 1% of the difference in employment rates between countries (in some cases much more). Conversely labour market regulation affects product markets. A regulatory environment that promotes competition positively affects productivity, and innovation/R&D are stronger in more open markets. There is some evidence that labour market reforms may enhance innovative activity and hence output growth. Source: OECD (2001), OECD Economic Outlook, “The cross-market effects of product and labour market policy”.

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Where can regulatory reform help? A wide range of issues need to be tackled. They fall into five main categories: reform of the pension system and the reduction of incentives for early retirement, reform of unemployment and related benefits, making active labour market programmes more effective, increasing employment and labour cost flexibility, and improving labour force skills and competencies (Box 6).

A clear and centrally driven regulatory governance policy is urgent, with processes and institutions to match Regulatory governance is not centre stage in Finland and this is becoming a liability for future performance. Finland appears to lack a strongly rooted policy in support of regulatory governance (and a strategy to match) that would drive a more committed approach to effective regulatory governance across the board. The traditions of gradualism, decentralisation and consensus which are built around informal networks and practices militate against an overall strategy and a strong central focus. The emphasis on consensus which seeks to accommodate everyone’s views promotes a degree of regulatory inflation. But these traditions will come under pressure if greater adaptability and policy responsiveness are to be achieved, and if all stakeholders are to be included in the policymaking process. Some of them will need to be reconsidered if the regulatory process is to be well equipped for meeting the challenge of raising performance.

A central driver and strategy for regulatory governance does not yet exist Decentralised government and the Finnish ministerial “stovepipe” syndrome are creating problems. No centrally placed body is currently equipped to provide an effective challenge and monitoring function for regulatory quality, with the result that compliance with regulatory policies is limited and regulatory quality guidelines are not systematically followed. Finnish tradition emphasises autonomous action within government and plays down the role of the centre. But the development of whole-of-government processes, encouraged by a much stronger centre, is the only way of ensuring that high quality regulation will be systematically delivered, of embedding a dynamic approach, and of securing effective implementation. Policy making increasingly requires solutions that cross ministerial boundaries (the links between biotechnology, food, health, trade and agriculture are an example). The implications for effective regulatory governance of the devolution of power to local government also need to be addressed. The government recognises the need for action. A ministerial task force has made a number of proposals, including government adoption of horizontal policy programmes with a co-ordinating minister in charge, an enhanced role for the Prime Minister’s Office, and a new strategic unit to complement the role of the Ministry of Finance (these proposals are expected to be implemented by the new government in place after after the March 2003 general elections).

Promoting adequate openness can be a challenge in the current consensus driven framework This issue is well expressed by the report of a competition policy working group in March 2002. It pointed out that “it is absolutely essential to receive outsiders’ opinions on the openness of the Finnish economy, the practical functioning of competition, special features of legislation, public service production and administration”. The need to secure transparency in regulation making processes is a growing challenge for many OECD

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Box 6. Recommendations for further structural labour market reform Labour Market and Social Security System A. Reduce incentives for early retirement and reform the pension system a) Increase further the minimum age for the unemployment pension; shorten “unemployment pipeline to pensions”; reduce incentives to retire early. Early retirement schemes will be phased out gradually. However, there is a risk that the take-up of the disability scheme will rise. b) Reduce impediments for hiring older workers. Reduce, for instance, the contribution of the last employer to disability and unemployment pensions. c) Smooth the future impact of ageing by increasing funding of the pension system now. Recent reform will raise funding. d) Introduce a properly funded pension scheme for central government employees. The pension reform which will be implemented as from 2005 includes a number of striking features that should enhance the sustainability of the system. B. Reform unemployment and related benefits a) Shorten maximum unemployment benefit duration to increase job search intensity. Phase down unemployment benefits during the first 500 days of unemployment. Unemployment benefits increased in March 2002. b) Make eligibility criteria for social security benefits stricter. Enforce eligibility criteria for unemployment benefits. Implementation of the November 2001 reform proposal would be a step in the wrong direction. c) Increase regional mobility of the unemployed. Lift the condition that placement involving relocation is suitable only if the vacancy cannot be filled locally. d) Introduce medical re-examination of disability pension beneficiaries. Individual early retirement, which was one form of the disability pension, will be abolished. The medical requirements for the remaining disability pension are higher than for the individual early retirement scheme. C. Make active labour market programmes more effective a) Pursue better job counselling; for instance, reach the target of one contact per month with every unemployed person. Consider going further with the introduction of a general contestable placement market. b) Reduce the number of subsidised jobs offered by local government. The number of subsidised government jobs has been reduced and those in the private sector raised. c) Step up ALMPs for older workers. Apply sanctions in case older unemployed refuse training or a suitable job. National Programme for Ageing Workers has helped in raising participation. d) Evaluate the effectiveness of all active labour market programmes and end those with poor results. Given limited effects, an overhaul of some ALMPs is needed. Evaluations have been carried out, but there was little change to the ALMP schemes. e) Expose the Public Employment Service to competition as successfully done in other OECD countries. A pilot reform started at the beginning of 2002. D. Increase employment and labour cost flexibility a) Reform employment protection and working time legislation to encourage job creation, especially by SMEs. b) Support greater wage differentiation in wage agreements, to promote the employability of low-skilled workers, while maintaining moderate average wage rises.

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Box 6. Recommendations for further structural labour market reform Labour Market and Social Security System (cont.) E. Improve labour force skills and competencies Ensure that education and training meet evolving needs of labour market. Finnish students have received very high marks for their educational achievements in international comparison, but studies still take to many years compared to other countries. Source: OECD (2003), OECD Economic Surveys, Volume 2003/1.4.

countries faced with increasingly complex societies and globalisation. It can be difficult to accommodate those who may lack easy access to regulatory processes and who are not part of the “establishment”, but whose views are nevertheless important in securing effective regulatory outcomes. Less organised or broad groups such as taxpayers, consumers, SMEs and foreigners may be left out or play a more marginal role than they should. Finland does appear to have a problem here (for example, the Federation of Finnish Enterprises, the main representative of the SMEs, does not take part in the collective wage bargaining system). Outsider exclusion (the financial sector is an example) seems to be a particular issue with the country’s self-regulated groups where regulation has been delegated by the government to the main, and usually domestic, market players. Another issue is that consultation in Finland (a feature which it shares with Nordic neighbours) is used to promote consensus and political support, but much less a better understanding of the potential impact of proposed regulation. To make a significant impact on regulatory quality, consultation needs to make a much stronger contribution to information collection, which would raise the quality of analysis and evaluation in making rules and assessing their impact.

Regulatory Impact Analysis lacks rigour and a clear focus There is a need to promote an evidence-based approach to regulation, which includes the quantification of regulatory impacts as well as the involvement of all interested parties. This implies a stronger and more targeted RIA policy. RIA is one of the most important regulatory tools available to governments. Its aim is to ensure that the most efficient and effective regulatory options are systematically chosen. Yet most Finnish officials agree that RIA has so far had little impact on the shape of regulation, and political commitment is poor. The absence of a clear central promotion of RIA means that requirements have grown ad hoc (the inflation of objectives now covers a wide range of issues including economic, business, environment, regional, gender, etc.) to the point where the process lacks focus and may be generating unnecessary burdens.

Conclusion Finland has experienced remarkable changes over the last twenty years. A generally open and more innovation-driven economy has replaced the old traditions of economic nationalism and heavy, pervasive state control. The exploitation of natural resources has been overtaken by the development of an ICT sector that has come from nowhere to impose itself as a global and highly competitive presence. The country’s reaction to the difficult circumstances which it faced from the late 1980s – a banking crisis, recession and the break-up of the Soviet Union – was swift, well-focused on the important trouble areas

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(which included over-regulation and lack of competition), and highly effective in regenerating the economy. Today, in some respects, Finland continues to show a healthy appetite for reform. This is reflected in its handling of recent work to separate the state’s ownership and regulatory functions. An awkward duality remains, which needs quite urgent attention because it undermines the future resilience and performance of an economy which is vulnerable to external shocks, and which needs to find ways of coping with high unemployment and a rapidly ageing population. Much policy effort and support goes into promoting market openness and international competitiveness. Yet alongside the highly performing exportoriented sector (and the significant contribution made by the ICT sector and one company in that sector), a large part of the economy remains relatively closed to competition and consequently relatively inefficient. This part of the economy includes significant elements of the private sector (especially services industries) but also public services, which are mainly delivered at the local level. In short, development has been unbalanced. More competition is needed to stimulate efficiency and growth so that Finland’s legitimate policy goals of strong social services, equity and care for the environment can continue to be supported. Those goals clearly remain important, but the current cost of meeting them is high. The question is whether Finland is prepared to embark on a “new consensus for change” to remove the duality and raise overall performance. It showed itself capable of highly effective reform in the past. It should be deeply encouraged by the fact that where reform has taken place to move activities out of the sheltered economy, performance has markedly improved. Therefore why not do it for the remaining sheltered activities? Further important reforms – to regulatory governance, to the public sector and especially, to local public services, to those parts of the private sector that are still quite closed, and to the labour market – are needed. They are complementary and mutually reinforcing. The problem is that a more comprehensive approach of this kind will require a deep cultural change away from the tradition of widespread and strong state involvement in the economy. This part of the Nordic governance model is increasingly difficult to reconcile with a well-performing and open economy and society. Such change implies the need for a strategic, centrally driven and focused reform policy to complete the work started two decades ago.

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PART II

Regulatory Policies and Outcomes

OECD REVIEWS OF REGULATORY REFORM: FINLAND – ISBN 92-64-10267-1 – © OECD 2003

ISBN 92-64-10267-1 OECD Reviews of Regulatory Reform: Finland A New Consensus for Change © OECD 2003

PART II

Chapter 2

Regulatory Governance*

* The background report used to prepare this chapter is available at: www.oecd.org/regreform/ backgroundreports

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Context and history Finnish governance and regulatory culture is shaped by strong and distinctive features Finland has developed a distinctive approach to governance and regulation, much of which is shared with its Nordic neighbours. Four key features have traditionally stood out: a strong and central role for the state, a political culture characterised by consensusbuilding, a reliance on the rule of law, and a decentralised executive power with strong ministries and a relatively weak centre. The important role of the state is reflected in substantial government ownership of economic assets, and high standards of social, environmental and consumer protection, including an extensive social services system. The public’s expectations of the state are high. That said, the economic crisis at the end of the 1980s and accession to the EU in 1995 have driven significant market liberalisation as well as some privatisation, though government ownership and regulation remain prominent. The political culture is characterised by consensus building, informality, collegiality, gradualism and a degree of corporatism. This is reflected in many ways, including a search for consensus among coalition parties, widespread participation in decision-making, the use of committees and informal procedures (for example the consultation process for new laws is not formally specified), institutionalised power sharing among government, employees and enterprises and a preference for slow change. The importance of the rule of law is reflected in the widespread use of detailed (command and control) laws, the respect by citizens and the public authorities of legal form, and the influence of legal thinking in public management. The decentralisation of executive power is reflected in the devolution of regulatory authority to ministries (which are highly autonomous), official bodies, and municipalities, leaving a relatively weak cabinet at the centre.

Significant, and successful, regulatory reforms have already been carried out over a number of years to promote a more open and competitive economy From the early 1980s Finland has used regulatory reform to support policies aimed at opening up the economy and strengthening competition (Box 7). Deregulation was a tool used to good effect in the liberalisation of key sectors including telecommunications, transport, electricity and broadcasting, through the removal of licensing requirements and controls on the number of market players. More general initiatives included the Norms Project (1984-1993) and the Licence Reform Project (1989-1993). Competition policy played an important role, with the Finnish Competition Authority (FCA) a key driver of reform. Trade liberalisation was also vigorously pursued, with Finland sometimes going beyond EU requirements. These initiatives have borne fruit. Finland’s current relatively high level of income and quality of life is linked to much greater competition as well as a marked improvement in competitiveness over the past ten years. Competition has developed in many sectors previously characterised by government monopoly providers, which have been restructured as state enterprises and often partly privatised. Still, government ownership remains widespread.

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Box 7. Milestones in improving capacities to assure high quality regulation 1975

Instructions on the Drafting of Government Proposals (i.e. HELO Instructions)

1980

Reform to the HELO Instructions

1981-87

Study of the Finnish law drafting (which produced about 900 pages)

1984-93

Norms Project

1988

Act on the State Enterprises Cabinet Committee on Public Management Reform

1989-93

Licence Reform Project

1992

Reform to the HELO Instructions

1993

Government Resolution (decision-in-principle) on measures to reform central and regional government

1994

Comprehensive reform of the municipalities Act New decision on rationalisation of permit procedures Reorganisation of key elements of the SOE sector (e.g. Forestry, Post and Telecommunications)

1995

New Local Government Act Further reorganisations within SOE sector

1996

SME policy programme Government Resolution to establish the Programme of the Government to Improve Law Drafting Law Drafter’s Guide

1997

The Regional Administrative Reforms: Law Drafter’s EU Guide Participation Project

1998

New reporting system of performance measures Instructions for Assessing the Economic Impacts of Legislation Instructions for Assessing the Environmental Impacts of Legislation Government Decision on Electronic Transactions Finish Checklist: On Quality Requirements of Proper Law Drafting. The Implementation of the OECD Recommendation in Finland Government Resolution: “High-Quality Services, Good Governance and a Responsible Civic Society”

1999

Cabinet Committee on Regional Development and Public Management Reform Revised Act on the Openness of Government Activities A Memorandum of the High-Level Working Group on Legislative Policy on the formulation of the Government Legislative Policy “Hear the Citizen” project Instructions on the Assessment of Business Impacts

2000

Act on electronic service in the administration New Constitution Second Government Resolution, the II Programme of the Government to Improve Law Drafting Law Drafter’s Constitution Guide Reform of Central Government 2000-2001

2001

Standpoint of the Ministerial Steering Group to the Reform of Central Government

2002

A national portal on public sector information and its services Recommendation on the Reform of the Central Government

Source: OECD and Government of Finland.

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Market liberalisation reforms were complemented by important reforms to the public administration From the end of the 1980s, linked to the crises that shook the economy, significant reforms were also carried out to the public administration in order to fit it for its new role as facilitator, rather than direct provider, of public services. An anti-bureaucracy drive was carried out, followed by reforms to increase the service orientation of the bureaucracy and to decentralise government. Delegation required new means of control by the centre. Performance management systems were established based on objective-setting, monitoring the provision of services, and accountability for results. The budgetary process was also reformed, with the introduction of lump-sum allocations linked to correspondingly greater budget management freedom, and the replacement of ex ante budget controls by ex post evaluation. The autonomy of ministries and municipalities increased, at the expense of the Ministry of Finance. Some concern has been expressed about the negative impact of the autonomy conferred by these reforms, in particular whether central policy is being followed and policy coherence undermined. A report published in 2000 concluded that horizontal governance needed to be strengthened and that this would require significant effort, including cultural change in the administration, whole-of-government strategic thinking and prioritisation, as well as new processes to overcome ministerial “stovepipes”, and an enhanced role for the Prime Minister’s Office (PMO). These conclusions led to the establishment of a ministerial task force which has made proposals, including government adoption of horizontal policy programmes with a co-ordinating minister in charge, an enhanced role for the PMO, and to strengthen it as a strategic unit to complement the role of the Ministry of Finance. These proposals are expected to be implemented after the March 2003 general elections. Proposals have also been made to address problems by setting up extensive horizontal entities (Policy Programmes). The core of the proposals is to increase transparency, making the Government Programme a guideline document outlining Policy Programmes and calling on ministries to co-operate closely on topical items agreed upon by ministers in connection with the Government Programme preparation. In order to steer the implementation of the Government Programme, the government will, at the very beginning of its term, through a political process, confirm a strategy document making the Government Programme more concrete and containing the Policy Programmes for the election period. The Government also intends to strengthen the links between the Government Programme and the preparation of legislation. Traditionally, information on legislation issued by ministries has systematically been given to the PMO. Based on this information, the PMO draws up a list of legislative projects and passes it on every six months to Parliament so that the latter can better plan and co-ordinate its work. To promote strategic (legislative) planning and co-ordinate the work of government, the proposals also consider to the development of a list of strategically important legislative projects from the Government Programme. These projects would be subject to careful planning, and adequate resources would be secured for their implementation. The publication of a strategy document will provide for a clearer follow-up of the Government Programme, and a better focus on the implementation of specific projects, including legislative projects and Policy Programmes. The related Project Portfolio (which explains how the Programme is to be carried out through specific projects) would also be made clearer, and the performance responsibilities of agencies would be clarified.

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But meeting current policy challenges will require completion of these reforms, as well as further adaptation of governance and regulatory traditions Important policy challenges such as high unemployment have emerged that will require a strong, well-adapted and responsive regulatory environment. This is not least because fiscal policy freedom is now constrained by the European Growth and Stability Pact, raising the importance of supply-side (including regulatory) measures. The lack of policy co-ordination across government already identified in the wake of the public administration reforms needs attention. Policy making increasingly requires solutions that cross ministerial boundaries (the links between biotechnology, food, health, trade, and agriculture are an example). The implications for regulatory governance of the devolution of power to local government also need to be addressed, including important issues of accountability and financing. The Finnish traditions of gradualism, consensus (which is built around informal networks and practices) and corporatism will come under pressure if greater policy responsiveness is to be achieved, and if all stakeholders are to be included in the policymaking process. Regulatory tools and processes such as ex ante regulatory impact analysis (RIA), which currently play only a small part in the governance process, need to be sharpened so as to enhance the quality and effectiveness of regulations.

Regulatory policies Regulatory policies and principles cover most of the basics but there are weaknesses Finnish regulatory policy is broadly consistent with the 1995 OECD Recommendation of the Council on Improving the Quality of Government Regulation. The first formal regulatory policy was issued in 1996. Current policy is set out in the 2000 Government Ordinance “The Second Programme of the Government to Improve Law Drafting”. Its main focus is to improve the quality of new primary legislation (which is more prevalent than secondary legislation in Finland). Guidance on implementing the policy is also available. The most important basic guidance is the “Instruction on the Drafting of Government Proposals” (HELO). There is also the 1998 “Finnish Checklist” based on the 1995 OECD Recommendation. But as noted, regulatory governance in Finland is not centre-stage. And despite successive initiatives over the past few years, gaps and weaknesses in regulatory policy still exist which need further work. First, there are few concrete criteria to support the tests of good legislation. Second, the main focus is primary legislation. Third, only new legislative proposals are covered. Fourth, the relationship between the tests set by the policy and those set by the checklist is unclear. Fifth, implementation of the policy is relatively poor. And sixth, regulatory policies, institutions and tools (such as RIA) are seldom evaluated ex post.

Regulatory institutions Mechanisms and institutions work informally to promote quality regulation, but there is no tradition of a strong central driver As well as principles of regulatory quality, countries need a supporting regulatory infrastructure. As noted, and as in many other small countries, Finnish policy-making and regulatory practice is relatively informal, consensual and decentralised. There is no central body to drive overall policy on regulatory quality and monitor the use of regulatory instruments as a key government intervention in the economy and society.

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Several central government bodies play an important but specific role. The Ministry of Justice, and in particular its Bureau of Legislative Inspection, is responsible for the development of proposed laws, as well as the Government Resolutions used to implement regulatory policy. It examines proposals for new legislation, including their technical legal quality and consistency with the existing legal framework, and checks compliance with the HELO instructions. Around 75% of draft government bills are checked. Since 2000, the ministry has been responsible for monitoring ministries’ compliance with RIA requirements, though the focus so far is on whether there is compliance rather than the quality of the RIA. Resources are limited, and consist mainly of legal experts. The Ministry of Finance reviews the expected budgetary impact of draft laws and any potentially significant impact on the national economy. The Finnish Competition Authority (FCA) has been one of the main drivers of regulatory reform, devoting substantial resources to this. It has significant powers over proposed economic legislation. But an instruction that ministries should consult the FCA before issuing any regulations that restrict competition is no longer carefully followed. Advocacy today is a difficult challenge (see Chapter 3). In terms of more general input, the Prime Minister’s Office (PMO) has played a minor role so far, though this is expected to change with the new Constitution. The PMO is the focal point for implementing the Government Programme and related Project Portfolio. Two cross cutting bodies with wide ministry and other participation have also been important in regulatory advocacy: the ad hoc High Level Working Group on Legislative Policy and the Council of State Network on Promoting Regulatory Reform. A number of government research bodies and public and private think tanks also further the debate. The lack of any strong central body to push quality principles forward and to consider policy as well as legal issues has raised some significant problems. The tradition of ministerial independence lies in the way and no centrally placed body is currently equipped to provide an effective challenge and monitoring function (Box 8). The result is that compliance with successive regulatory policies has been limited and the guidelines – which have so far been fairly general without detailed directions and criteria – are not

Box 8. Central oversight units Reform mechanisms with explicit responsibilities and authorities for managing and tracking reform inside the administration are needed to keep reform on schedule, and to avoid a re-emergence of poor quality regulatory practice. It is often difficult for departments to reform themselves, given countervailing pressures, and maintaining consistency and systematic approaches across the entire administration is necessary if reform is to be broadbased. Considerable experience across the OECD has shown that central oversight units are most effective if they are independent from regulators (that is, not closely tied to specific regulatory missions), if they work under a clear regulatory policy endorsed at the political level, if they are horizontal (cut across government), staffed with experts (have information and capacity for independent judgement), and are linked to existing centres of administrative and budgetary authority (i.e. centres of government and/or finance ministries). For many countries, this is achieved by locating the challenge function at the centre of the government. Mechanisms to promote regulatory reform within the public administration, however, are not only about imposing explicit responsibilities on reform agencies and authorities, but also about designing and evaluating the overall architecture of the regulatory system.

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systematically followed. Also, the strong legal expertise applied to the review of legislation is not adequately complemented by policy, economic and other perspectives. Finland needs an effective central oversight unit for regulatory quality. Strong political backing for co-ordinated regulatory reform does not currently seem to exist. Yet the capacity to co-ordinate reform across government in other contexts – in adversity during the 1991 economic crisis and in the EU context – has been well demonstrated.

The local Government and EU dimensions Regulatory co-ordination with the local level, responsible for service provision, appears to be well handled though financing needs attention Regulatory quality is important at all levels of government: failure to carry out effective regulation at one level can undermine efforts elsewhere. Finland has devolved responsibility for implementing regulations and for service provision to the local level, whilst strengthening the centre’s legislative power. Municipalities can only make regulations (ordinances) that are consistent with laws passed by parliament. But they have extensive responsibilities for service provision, including for primary education, social services, primary health care, housing, town planning and transport. Regional and local governments are increasingly responsible for the allocation of licences and permits. Financing these services is a major issue. The responsibilities have often not been matched by the necessary budget allocations, and many municipalities have found it hard to finance their new mandates. Though they have the power to increase local taxes this is not liked by the public, and municipalities have preferred to meet their obligations more indirectly, for example by privatising service providers. Central government currently exerts only weak oversight over these arrangements, and their implications for service quality and value for money. It is left to the courts to provide ex post control. That said, measures are now being taken to develop assessment systems for municipal services by central government. Given the pressures on public spending, which will increase with the rapidly ageing population, competitive pressures of this kind to promote greater efficiency of public service provision are essential. The avoidance of duplication, overlap or contradictions across levels of government is also important. Finland has several arrangements in place for this. The Ministry of the Interior’s Advisory Board on Municipal Economy and Administration examines government legislative proposals and their budgetary implications for local government, monitors what happens and recommends improvements. The Association of Finnish Local and Regional Authorities plays a major role promoting regulatory co-ordination between municipalities. Other initiatives such as the Sub-Regional Co-operation Experiment Act also foster co-operation. The 2003 OECD Economic Survey of Finland has also drawn attention to the fact that municipally provided public services would be made more efficient if the government were to strengthen measures to encourage mergers between the many small municipalities, as well as encourage greater use of co-operative arrangements to reap economies of scale.

The relationship with the EU is handled with considerable competence, using an effective network of co-ordinating bodies The EU dimension of regulation is also important. As with other EU countries, Finnish legislation increasingly originates in EU legislation. The EU (and EMU) have also been major drivers to open the Finnish economy. Finland has risen well to the challenge, as a small country, of making its voice heard by setting up an extensive and effective structure to

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manage the relationship. This includes the competent ministries, a Cabinet Committee on European Affairs (chaired by the Prime Minister, which sets priorities), a Committee for EU Affairs (to advise on and facilitate EU issues in the government) and its sub-committees, the Government Secretariat for EU Affairs (recently transferred to the PMO, it serves the Cabinet Committee, prepares important EU meetings, and provides information and training), the Permanent Representation of Finland to the European Union, and Parliament.

Regulatory transparency Transparency is generally well embedded in Finnish regulatory practice, but aims at consensus building rather than understanding likely regulatory impacts Transparency is one of the central pillars of effective regulation – that is to say, regulation that will be suited to its purpose. It is a challenging task and involves a wide range of practices, including standardised processes for making and changing regulations, consultations with interested parties, effective communication of the law and plain language drafting, publication and codification to make it accessible, controls on administrative discretion, and effective implementation and appeals processes. Transparency of rule-making procedures is promoted by various means. Ministries inform the public through the Internet or press releases. The government’s main regulatory activities are announced in the Government Programme and the Project Portfolio (see above). Access to information is good: through electronic availability of documents, information on ministerial home pages, and the Project Register (HARE). The 1999 Act on the Openness of Government Activities sets high legal standards for transparency: it requires ministries to make information available on draft legislation and important projects. Backed by consultation procedures (see below) this helps interested parties and the wider public to take part in the legislative process. Law-making arrangements are also strong: many publicly available procedures and guides, which are widely known, compensate the absence of legislation on this. Identifying when regulation is the right way forward is an important aspect of good regulatory practice, which requires a careful assessment of costs and benefits and an emphasis on proportionality. Transparency in terms of decision-making and proportionality is addressed in the Finnish regulatory system through the tests in the regulatory policy implementation checklists, which incorporate cost-benefit checks. But there is no overriding criterion to decide whether a proposal should be accepted or rejected, in absence of quantification rules, and too many checklists. Transparency in terms of public consultation gives stakeholders the opportunity to help shape regulation, gives regulators valuable feedback on potential costs as well as benefits and the prospects for successful compliance and enforcement, and provides a safety net against capture by particular interest groups. Consultation must be fully embedded in the regulatory process. Finland’s consultation procedures are adequately integrated into the regulatory process and have recently been strengthened. It has long-standing informal traditions of consultation, backed by guiding principles set out in a number of documents going back to the early 1980s. Procedures have recently been strengthened. First, the 1999 Act on the Openness of Government Activities. Ministries must ensure that they obtain opinions “on a large scale”, and parties likely to be affected by a proposed law must be able to express their views. Second, a recent initiative by the Ministry of Finance is “Instructions on the Hearing of Citizens”. These aim at further improving citizens’ ability to participate in and

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influence rule-making as well as other decision-making procedures, and are intended to be followed by all ministries. An important element in the transparency of the hearing process under these Instructions is the fact that individual comments as well as a summary of comments will have to be available through the Project Register (HARE). Traditionally the most influential groups were the centralised employer and employee organisations, but this has broadened. Nevertheless, there is still no formal check on what is done. Finland uses a wide variety of methods to consult. The traditional mechanism is through committees and councils, a distinctive feature of the Finnish regulatory landscape. Set up by the government at an early stage in the legislative process, they bring together a wide range of groups with a significant interest in a proposal, and the result of their work is disseminated for public comment. On the negative side, there has been a move away from interministerial representation, which is believed to have exacerbated the “stovepipe” approach to government. And membership chosen at the government’s discretion may favour incumbent interests. Hearings and written statements are also used. Use of the former is increasing and displacing the written comment procedure in the later stages of legislative development, but some hearings are called at uncomfortably short notice. Draft legislation is often posted on the Internet when ready for comment. Citizen-initiative consultative referendums are another important mechanism, used at municipal level. 24 referenda were held between 1991 and 1998 (mostly to approve municipality mergers). Finland does less well on other aspects of effective consultation. The social partners (employer and employee groups) traditionally exert a special influence in consultation. Tripartite agreements with the government have covered not only wages, but also employment policy and issues of working life extending to social services, pension schemes and taxation. This tradition does carry the danger of blurring the line between obtaining advice on policy issues and undermining the government’s democratic responsibility to take a final view. It also risks excluding important social interests: the main employer group representing SMEs is not included. Another feature of consultation in Finland, which it also shares with Nordic neighbours, is its use to promote consensus and political support, but much less a better understanding of the potential impact of proposed regulation. Consultation is not generally used to gather information that might shed light on this, and RIA (see below) is, partly as a result, relatively undeveloped. The bias is reflected in the frequent amendments to laws soon after their adoption to remedy unforeseen consequences. In order to make a significant impact on regulatory quality, consultation will need to make a much stronger contribution to information collection. Consultation’s role to promote consensus clearly remains important, and the two roles could happily coexist. Transparency of communication is a fourth pillar of effective regulatory practice. The existence and content of laws needs to be known, and citizens provided with information to help them comply with and make use of the law. Finland has a very long tradition of upholding the principle of free access to information. The basic right of access to information in official documents is protected by the Constitution. A number of provisions back this up, including the 1952 Act on the Publicity of Official Documents, the Act on the Openness of Government Activities (see above), and the requirement on the Ministry of Justice to publish laws and other regulations, including on its Web site. Clear drafting of laws is also highly emphasised, with regularly updated guidance. An informal codification of the legislation is published annually in the form of a statute book. The codified

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legislation is also published on a free-of-charge Internet database “Finlex”. But although laws are clear and precise, they are often amended, which undermines other efforts at greater transparency, as it is hard to keep up with the latest state of the law.

Alternatives to regulation Some progress, mainly in the environment area, has been made in promoting alternatives to regulation, but a systematic approach does not yet exist The use of a wide range of mechanisms, not just traditional regulatory controls, for meeting policy goals helps to ensure that the most efficient and effective approaches are used. Governments must lead strongly on this to overcome inbuilt inertia and risk-aversion. Finland does not systematically assess the use of alternative policy instruments, despite a requirement to do so since 1975 in the HELO instructions and reiterated since then. The tradition of drafting detailed regulation may militate against the use of alternatives, there is a lack of guidance and practical support, and regulators generally do not have the necessary economic training to evaluate options. Also, the new Constitution requires that laws must be used for a large area of social policy. Nevertheless significant progress has been made, especially in relation to the environment (as in many other OECD countries). Alternative instruments used include green taxes, grants, voluntary agreements and information programmes. They have so far tended to be applied piecemeal though integrated approaches are now emerging. Finland was the first country to introduce a tax on CO2 emissions, and environmentally related taxes as a whole represented 11% of total central government budget revenues in 2001. Subsidies are extensively used to support energy conservation and renewable energy. Voluntary agreements cover a wide range of environmental concerns. Voluntary participation by industry in environmental management systems under the EU’s EMAS (Eco-Management and Audit Scheme) programme was established in 1995 for manufacturing companies. 52 chemical companies take part in the internationally adopted Responsible Care programme to promote safety, health and environmental protection. Help is offered SMEs so that they too can participate in such schemes. Information based strategies through a broad range of media are also widely used. They include monitoring and statistical programmes, eco-labelling (over 800 products carry the Nordic Swan eco-label) and life cycle analyses. They cover not just the environment but also other issues such as health and safety. Performance-based regulation (employers must comply with a standard but can broadly choose how to meet it) is also developing. It forms the centrepiece of health and safety legislation, and is starting to emerge in the environmental sector. For example a unified permit and notification system sets a limit on effluents or emissions without dictating how this will be achieved.

Regulatory Impact Analysis Regulatory Impact Analysis is a powerful tool for quality regulation: it is not yet used effectively RIA is perhaps the most important regulatory tool available to governments, as its aim is to ensure that the most efficient and effective regulatory options are systematically chosen. It is, however, a challenging process, which needs to be built up over time. It combines good habits of consultation with a rigorous assessment of the impact of prospective rules through a clear and balanced assessment of costs and benefits.

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Finland took its first steps on RIA in the 1970s when early editions of the HELO instructions required assessments of economic and certain other impacts. Requirements have evolved since then, mainly to add further specific impact assessments (for example impacts on different groups of society, social and health impacts). A wide range of partial impact assessments is now proposed (Table 3). Ministers are “advised” to perform any one of these assessments if the likely impact of a proposal in that area is deemed “significant”.

Table 3. Different types of impact analysis used in Finland Type of impact analysis

Government decision

Budget

The overall application provisions concerning the State budget (1989) revised 1995.

Economic

Instructions on the preparation of Government bills (1992). Instructions on the assessment of the economic effects (1998).

Organisational and manpower

Instructions on the preparation of government bills (1992).

Environmental

Instructions on the preparation of government bills (1992). Instructions on the assessment of the environmental effects (1998).

Different sectors of the public

Instructions on the preparation of government bills (1992).

Human (Social and Health impacts)

The use of human impact assessment are being developed by the National Research and Development Centre for Welfare and Health (STAKES).

SMEs

Developed in line with the SME Policy Programme of 1996 and reflected in the Instructions on the assessment of the business impacts (1999).

Regional policy

Programme of Prime minister Paavo Lipponen’s Second Government (1999).

Gender equity

Instructions being developed.

Source: OECD.

Despite the early start, RIA is a long way from playing an effective role in the preparation of Finnish regulation. The Ministry of Finance in two 2001 reports has identified a number of problems, including a lack of resources within ministries, deficient assessments, and a systematic lack of quantification. Major weaknesses certainly exist (see below). Most officials agree that RIA has so far had little impact on the shape of regulation, but there is also concern that a stronger approach could generate red tape and slow down policy making. The following list, based on best practices identified by the OECD, sets out the most important areas for government attention in the development of RIA: ●

Maximise political commitment to RIA. Use of RIA should be endorsed at the highest level. All rule-making bodies should actively participate. This is a crucial weakness in Finland, as there is no political pressure and no sanctions to enforce RIA requirements.

●

Allocate responsibilities for RIA carefully. Ownership by regulators needs to be carefully balanced with quality control and consistency: responsibility for RIA should be shared between ministries and a central quality control unit. In Finland, ministries carry the lion’s share of responsibility, and are subject to minimal challenge on their performance. The Bureau of Legislative Inspection and the Ministry of Finance exert limited and specific controls, and the Cabinet Finance Committee and individual ministries can block unsatisfactory proposals, but these mechanisms are inadequate in practice.

●

Train the regulators. Regulators need the skills to carry out high quality RIAs. There is room for improvement. Individual ministries issue their own guidelines in Finland but there is no general guidance, although the Ministry of Finance issued advice in 2001. Also, demand for guidance and training is low, reflecting the tradition of ministerial independence and lack of central control.

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Use a consistent but flexible analytical method. An effective RIA needs a soundly based costbenefit analysis, which includes quantification. Again, Finland falls short. Quantification of impacts is required but no particular methodology is laid down, and there are no minimum standards, so results are poor.

●

Develop and implement data collection strategies. RIA quantitative evaluations are only as good as the data they rest on, and lack of information is known to raise problems. Finland does better here, with a range of strategies to ensure information flows to ministries, including from research institutes. The committee system for public consultation (see above) also helps and could be further developed for data collection purposes.

●

Target RIA efforts. RIA resources should be targeted at regulations with the largest potential impacts, and with the best prospects for changing outcomes. This issue needs to be addressed too. RIA is mainly focused on primary legislation and there is no objective test to target efforts. The fragmentation arising from an approach based on partial RIAs does not help. Finland might like to consider the targeting policies employed in Korea and the US, for example.

●

Integrate RIA with the policy-making process. RIA can only be effective if it is integrated with policy-making, and not just an “add-on” after policy decisions have been made. RIA is not strongly integrated: as noted above it appears to have little impact on policy-making. Political commitment is poor and urgently needs strengthening, which would also help policy coherence. It would also help to develop a more coherent RIA policy by rationalising the current proliferation of partial RIAs (this is under consideration).

●

Communicate the results and involve the public. Consultation provides essential quality control, by providing feedback on a draft regulation’s feasibility and likely future impact. Finnish guidance requires that RIAs are made available during the consultation process, but this seldom happens in interministerial consultation, or in public consultations. In any event, RIAs currently lack the rigour needed to be an effective consultation tool.

●

Apply RIA to existing as well as new regulation. Finland lacks a consistent approach and reviews of existing regulations, left to individual ministries, are not overseen or checked by the centre.

Box 9. Targeting RIA: the US and Korean examples The Korean RIA system requires a rough estimate of costs for all regulations, and defines as “significant” regulation those that have an annual impact exceeding KRW 10 billion (USD 0.9 million), an impact on more than 1 million people, a clear restriction on market competition, or a clear departure from international standards. Significant regulations, as defined, are subject to the full RIA requirements. This is a well-chosen set of criteria in terms of its ability to highlight regulation likely to require a full and detailed analysis. In the US, a full benefit-cost analysis is required where annual costs are estimated to exceed USD 100 million, where rules are likely to impose major increases in costs for a specific sector or region, or have significant adverse effects on competition, employment, investment, productivity or innovation. This means that roughly 600 regulations a year are reviewed (around 15-17% of the rules published), of which fewer than 100 (around 1-2% of the rules published) are “economically significant”, and thus require a full benefit-cost analysis.

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Regulatory bodies Regulatory bodies subordinate to ministries have been established for the state-owned enterprises Reform of Finland’s state enterprises, which have played a dominant role in the economy, started in 1987 with corporatisation (self-financing replaced financing by the government budget) followed by the introduction of private sector competition and some partial privatisation. New regulatory agencies (Table 4) were also set up, to separate the government’s roles as owner and regulator. Many cover sectors rather than specific industries, reflecting the OECD trend. Most of the new agencies are not fully independent but report to the relevant ministry. For example the Energy Market Authority and the FCA report to the Ministry of Trade and Industry. Ministries have generally retained the power to determine policy and to make new regulations, though regulators may provide advice. The system does need further attention. Restrictive rules on civil servants (relating, for example, to salaries) put some of these bodies at a disadvantage. Issues include the fact that regulators often have no powers to enforce sanctions for non-compliance with regulations, and some lack of clarity over responsibilities for competition issues, which often overlap. Maximising the effectiveness of regulatory authorities requires the clear handling of a number of issues, but this is also an area where best practice is still evolving across the OECD.

Keeping regulations up to date Efforts are made but these are piecemeal and there is no systematic or strategic review of regulations Finland’s regulatory policy does not cover the review and reform of existing regulation. With some exceptions, reviews have been ad hoc and driven by individual ministries. That said, the later 1990s have seen a helpful trend towards the review of laws considered as complete entities such as the Constitution, the Act on the Openness of Government Activities, and the Penal Code. Also, strategic reviews have emerged informally such as the review beginning in the late 1980s of the entire structure of environmental regulation. And limited use is made of mandatory periodic reviews and sunsetting clauses. Still, many changes remain reactive rather than strategic. Laws are often amended to keep them up-to-date, reflecting their detailed, “command and control” character which is not well adapted to embrace economic, social, technological or other changes. The current weaknesses of RIA and consequent lack of emphasis on ex ante impacts does not help, nor the tradition of ministerial independence which stands in the way of a more strategic vision.

Improving the business environment Some good initiatives have been taken to reduce administrative burdens, and e-government gets special attention A number of major initiatives have been carried out or are underway to address administrative burdens. Past initiatives include the Licence Reform Project of 1989-93 and changes to the Accounting Act and Ordinance, which simplified accounting requirements for SMEs. The Entrepreneurship Project (to encourage new and existing entrepreneurs) set up in 2000 includes a focus on administrative burdens and the use of information technology. E-government is a high priority, with a Cabinet decision in 1998 to promote electronic transactions and service delivery, and a major project launched in 1997 – the TYVI data

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68 Name of organisation

Sectors under the regulators authority

Selection and appointment of heads

Financial sources

Accountability mechanism

Communications Market Act Ministerial agency under the 1987/2002 (formerly Ministry of Transport and Telecommunications Act). Act on Communications. the Protection of Privacy and Data Security in Telecommunications 1999. Act on Electronic Signatures 1999. Radio Act 2001. Act on Television and Radio Operations 1998. Postal Services Act 2001. Act on the State Television and Radio Fund 1998. Postal Services 2001. Act on Communications Administration 2001.

Electronic communications, information society services and postal services.

The Cabinet appoints the General Director.

Fees paid by supervised entities.

FICORA submits to the Ministry of Transport and Communications an annual report each calendar year. Decisions of FICORA may be appealed to the Administration Court.

The Electricity Market Act Ministerial agency (an expert (1995); the Natural Gas Market body) subordinate to the Act (2000); The Act on the Ministry of Trade and Industry. Energy Market Authority (2000).

Electricity and natural gas.

Appointed by the government for an indefinite mandate.

90% is from supervision and permit fees charged on the network business; the rest comes from the state budget.

Its decisions can be appealed to the Supreme Administrative Court of Justice.

The Act on Competition Restrictions (480/1992), the Act on the Finnish Competition Authority (711/1988), the Decree on the Finnish Competition Authority (66/1993).

All sectors except the labour market and a certain primary production of agricultural products.

The Cabinet appoints the Director General for an indefinite period.

FCA is funded by the government budget.

FCA submits to the Ministry of Trade and Industry an annual report each calendar year. The Director General can be prosecuted before the Helsinki Court of Appeals in cases of professional misconduct. Also, decisions issued by the FCA may be appealed to the Market Court.

Laws

Institutional and legal status

Telecommunication Finnish Communications Regulatory Authority (Sept. 1st 2001) (FICORA) (formerly Telecommunications Administration Centre 1988).

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Energy The Energy Market Authority (2000) (formerly Electricity Market Authority 1995).

Competition authority The Finnish Competition Authority (FCA) (1988).

Ministerial agency subordinate to the Ministry of Trade and Industry. The Ministry has no jurisdiction over individual cases.

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Table 4. Finland’s major regulatory institutions

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Table 4. Finland’s major regulatory institutions (cont.) Name of organisation

Laws

Institutional and legal status

Sectors under the regulators authority

Selection and appointment of heads

Banks, brokerage firms, stock and derivatives exchanges, and management companies for mutual funds.

The president appoints the Director General of the FSA on recommendations of the Parliamentary Supervisory Council (PSC). The PSC appoints the members of the board for three years at a time on the basis of proposals by the Ministry of Finance, Bank of Finland, and the Ministry of Health and Social Affairs.

Financial sources

Accountability mechanism

Operating costs are covered by supervision fees and specific fees paid by supervised entities and issuers of securities.

The FSA is accountable to the PSC and the Bank of Finland with respect to administrative matters. Also, a decision made by the FSA can be appealed to the Supreme Administrative Court.

Financial sector The Financial Supervision Authority (FSA) (1993) (formerly the Bank Inspectorate 1922).

Act on the Financial Supervision Independent regulatory body. Authority (503/1993). Credit Institutions Act (1607/1993). Securities Markets Act (495/ 1998). Investment Firms Act (579/1996) Act on Foreign Credit and Financial institutions in Finland (1608/1993). Act on the supervision of financial conglomerates (44/2002). Act on the Temporary Interruption of the operations of a Deposit Bank (1509/2002).

Insurance Insurance Supervision Authority (ISA) (April 1999).

Ministerial agency subordinate Insurance and pension to the Ministry of Social Affairs institutions and other actors of and Health. Independent in the insurance sector. decision-making.

The Ministry appoints three Operating costs are covered members of the board for three by fees collected from those years at a time; two of them on subject to supervision. the basis of proposals by the Ministry of Finance and Bank of Finland. Furthermore, the director generals of the ISA, FSA and the Insurance Department of the Ministry of Social Affairs and Health are members of the board. The staff of the ISA chooses among themselves a member to the board (only personnel affairs).

The ISA is accountable to the Ministry of Social Affairs and Health: Performance Contract and Annual Report to the Ministry of Social Affairs and Health. A decision made by the ISA can be appealed to the Supreme Administrative Court.

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Source: OECD.

Act on the Insurance Supervision Authority (78/1999).

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transfer model – to promote electronic data interchange between companies and government such as VAT notifications, tax returns and customs information. The system has also helpfully centralised the data collection needs of different agencies. TYVI is now used regularly by over 50 000 companies. Further developments are expected via a proposed Action Plan on electronic communication, with a view to redesigning government/business interactions rather than just converting traditional approaches to electronic mode. Special attention is given to SMEs. The Ministry of Finance has led the development of a Web portal – Yritys-Suomi (Business Finland) – launched in 2002 and aimed at start-ups, new exporters and those looking for R&D support. The Tax Administration is developing an Internet-based social insurance payment system for employers. One-stop-shops called Business Service Points have been set up regionally to help with licences and permits, as well as other assistance such as information on business financing and training. The Ministry of Trade and Industry is a national co-ordinator of the EU Commission’s project, the European Business Test Panel (EPBT). The EPBT allows the Commission to contact, and obtain through the Internet, the views of up to 3 000 enterprises whenever major European legislative proposals or policy initiatives are proposed. The EPBT is part of the Commission’s overall policy to improve the consultation with businesses as it implements its 2002 Better Regulation Action Plan. A 2002 report by the Ministry of Trade and Industry provides some evidence that these initiatives have reduced the administrative burden for SMEs. Finland has certainly embraced the opportunities offered by new technology, and despite a generally decentralised approach to government, has successfully streamlined government administrative requirements.

Conclusion Finland is well placed in many ways to take forward the further reforms which are needed to meet important policy challenges such as high unemployment, an ageing population and continuing rapid changes to the external environment in which it has to compete. It has shown itself capable of highly effective reform in the past. It not only overcame the challenges of the economic crisis at the end of the 1980s, but also emerged with an open and competitive economy. It also successfully mastered the challenge of integration with the EU. It made an early start with the liberalisation of some key sectors, such as telecommunications, which are now highly competitive. More recently it has laid solid groundwork for the development and strengthening of entrepreneurship and SMEs. Some of its current regulatory policies and processes are helpful: a good level of transparency, including a wide range of consultation methods, an emphasis on clarity of primary legislation, and a strong development of e-government to minimise administrative burdens. However the current regulatory system, despite these good features, is not strong enough to make a fully effective contribution to meeting today’s policy challenges. Yet its contribution is essential: to ensure that ever-higher standards for public services and social and environmental regulation can be met, and to boost performance in those sectors of the economy where the state remains a major provider (which remains very significant). And this involves a major challenge. Improving the regulatory system so that it can provide the necessary support for economic and social policy will require important changes of approach, rather than simply tinkering with what is already there. The

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government needs to start by confirming the importance, which it attaches to regulatory policy. Some of Finland’s traditions will need to be reconsidered, in particular the tradition which emphasises autonomous action within government (the “stovepipe” syndrome) and plays down the role of the centre. The development of whole-of-government processes, encouraged by a much stronger centre, is a key way of ensuring that high quality regulation will be systematically delivered, of embedding a dynamic approach, and of securing effective implementation. Work is also needed to promote an evidence-based approach to regulation which includes quantification of regulatory impacts and the involvement of all interested parties. This implies new policies for RIA and consultation.

Policy options for consideration 1. Establish regulatory policy as a key priority of the government. Competition from other policies (like environmental, social, regional policies) can blur the role and importance of regulatory policy in a modern society. Without replacing other policies, regulatory policy deserves a more central role in Finland’s governance arrangements. The decentralised nature of government and the resulting lack of responsibility for regulatory policy at the centre means that government does not have a clear view of the priority which should be attached to managing regulations. The new Constitution confers additional authority on the Prime Minister – and hence the centre of government – and thus provides an ideal opportunity to redress the balance. The message would be reinforced by the adoption of policies to strengthen regulatory institutions and processes.

2. Increase accountability for reform results within ministries through systematic oversight by a high level ministerial committee, and by setting broad targets for reform in high priority areas against which ministries will be held accountable. There is currently no political level process for reviewing the concrete results achieved by ministries in relation to government priorities. While many OECD countries provide political oversight by appointing a minister responsible for regulatory reform, an alternative that is arguably more suited to the Nordic model is to set up a committee of ministers (the Netherlands Competition, Deregulation and Quality of Law (MDW) Committee is an example). The authority attached to such a committee could, in particular, help promote the adoption of the new regulatory policies and processes proposed in recommendation number 1.

3. Establish a technical unit with the mandate, capacities and resources to promote, implement, enforce and evaluate an enhanced regulatory policy. Building on the experience of the Bureau of Legislative Inspection, the establishment at the centre of government of an oversight unit with broad responsibility for regulatory policy would strengthen the signal that regulatory policy is a government priority. Its principal function would be to oversee the RIA system and provide technical opinions on the substantive quality of proposed measures. The unit could also provide advice and facilitate training on regulatory instruments. In co-operation with the Bureau, the unit could also participate in the management of the legal and regulatory system. Its central position would also do much to address the problem of lack of policy co-ordination or “regulatory stovepipes”. Finally, it would provide a secretariat function for the ministerial committee proposed above.

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Periodic oversight and assessment of progress would strengthen incentives for ministries to innovate, to learn from each other, and to seek concrete results. It is recommended that this unit be within the centre of government. It must be given the means to fulfil its mandate, in particular the implementation of RIA requirements (see next recommendation).

4. Integrate RIA requirements and place the responsibility for quality assurance in relation to all aspects of RIA with the central unit recommended above. Finland should address the current fragmentation of RIA requirements by arranging for all RIA to be carried out on an integrated basis and published in a single document. A requirement to address all substantial impacts within a benefit/cost framework would lead to more coherent analyses and better understanding of policy trade-offs. Careful consideration should be given as to whether particular kinds of impact analysis should be made a mandatory requirement.

5. Adopt explicit and measurable government-wide criteria for making decisions as to whether and how to regulate, through stronger implementation of the benefit-cost principle. Finland has adopted all major elements of the 1995 OECD Recommendation including the benefit/cost principle. But there are significant weaknesses in practice, not least the lack of effective assessments of benefits and costs. These weaknesses need to be addressed by adopting specific criteria and detailed methodologies for benefit/cost analysis, together with a mechanism to target efforts at regulations with the largest potential impacts and with the best prospects for changing outcomes. Gradually increasing analytical rigour and expanding the scope of RIA to substantive lower level rules, as expertise increases and resources permit, would progressively increase the benefits of the new approach. Policy making will be more objectively based, alternatives will be better assessed, and regulatory accountability and transparency improved. The efficiency of public consultation would also improve, if it were integrated with RIA, as in recommendation number 8.

6. Adopt systematic processes for review and reform of existing regulation, incorporating major regulatory quality processes, including the use of standardised methodologies consistent with the RIA requirements applied to proposed new legislation. The adoption of mechanisms to ensure existing legislation is regularly and systematically reviewed and reformed will embed a dynamic dimension to regulatory quality which is currently lacking. These should include regulatory quality assurance principles equivalent to those applied to proposed new legislation, including impact analysis requirements, identification and assessment of alternative policy options, broad consultation and appropriate oversight by the central regulatory reform authority. Given the volume of existing regulation, it is also essential to identify priority areas for reform, particularly in the early stages of the programme.

7. Provide detailed written advice and support and train the regulators. Support those principles with consolidated written guidance to ministries. Making RIA requirements operational, particularly in the context of a stricter enforcement of the benefit/cost principle, will require substantial action to equip officials in regulatory agencies with the necessary skills. In addition, more general training in regulatory

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policy is important in developing a constituency for reform within government. The central regulatory reform authority should be responsible for providing a broadly based training programme covering both RIA disciplines and other regulatory quality topics. In parallel, the current efforts to consolidate all the partial impact requirements into a reformed HELO Instruction need to be pursued. This essential“regulation for regulators” needs to be periodically reviewed, updated and improved. Canada’s current initiative to integrate guidance and requirements into a single Internet based tool could serve as an example.

8. Strengthen the policy on consultation, and ensure that consultation and RIA programmes are effectively integrated. Reinforcement of public consultation mechanisms is essential to ensure that consultation can adequately support an enhanced RIA programme by acting as a source of relevant data. One key reform is to standardise minimum quality criteria for public consultation by imposing a certain number of more formal requirements on all ministries and regulatory agencies, so as to ensure that outsiders have the same opportunities as traditional insiders. A further good practice could be the establishment of a mandatory “notice and comment” system for all draft laws and secondary legislation. Integrating consultation with RIA would enhance the effectiveness of both policy tools: consultation is better informed and focussed and more likely to yield useful information if it is conducted on the basis of substantial factual information, as provided by RIA. In turn, well-directed consultation can be the most cost-effective means of gathering the data needed for more reliable and sophisticated RIA.

9. Effectively enforce existing requirements to assess alternatives during policy making, ensuring that a wide range of options, including market instruments, are identified and analysed. While Finland’s existing regulatory policy notionally requires the consideration of alternatives as part of the policy development process, compliance remains poor in some policy areas, apart from the environment. Giving substance to the requirement to consider alternatives – and therefore to the general principle that policy analysis should be conducted in a comparative context – requires that regulators have a sound understanding of the range of policy instruments available and of the nature of each. The central regulatory policy authority should ensure that these issues are addressed in the context of the training courses proposed above. The adoption of rigorous RIA requirements in parallel with an effective “challenge” function from a central unit (see 3 above) would then provide a discipline to ensure that alternatives have been properly considered. However, these steps are not, in themselves sufficient. Adopting untried alternatives necessarily involves an element of policy risk. Thus, government must take on the responsibility of promoting the use of alternatives by policy-makers. A possible first step would be to better document and promote the progress already made in this area, particularly in the environmental field. A further step might be the preparation of a public and periodic report on progress in implementing alternatives.

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PART II

Chapter 3

Competition Policy*

* The background report used to prepare this chapter is available at: www.oecd.org/regreform/ backgroundreports

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Context and history Competition policy has a long history, closely linked until recently with Finland’s tradition of collective corporatism Finland’s competition policy goes back a long way with the earliest reported decision, against a restrictive agreement among mill owners, in 1837. Policy development has largely reflected the country’s distinctive pattern of industrial development, which in turn reflects its political history. Thus a large number of companies grew up in infrastructure industries such as electricity and telecoms, which helped to deter Russian take-over when this was an important threat. But later this also facilitated early and successful liberalisation as part of the 1980s economic reforms in which competition policy played a major role. On the other hand Finland’s small size and isolation from other markets, combined with a desire to succeed in export markets, encouraged concentration in some sectors, such as forest products. The problem of industrial combinations was first discussed in 1928, but price controls were for a long time the main way of dealing with market abuses: as late as 1984, 40% of prices were still liable to regulation. Domestic producers were shielded from foreign competition by import licences. The policy of economic nationalism also supported the emergence of state enterprises and government ownership to this day remains an important feature of Finland’s industrial landscape. This evolutionary process, in which competition policy nonetheless remained largely tailored to the prevailing culture of collective corporatism, carried on through most of the twentieth century.

Developments in the 1980s changed its direction and made it a centrepiece of the new market economy Developments before the 1980s left Finland some way short of a strong, modern competition policy. Dissatisfaction and a change of government led to a fundamental change of direction in the 1980s, which not only altered the nature of Finnish competition policy, but also made it the centrepiece of the wide-ranging economic reforms that took place in the late 1980s. A landmark report in 1987 by a government-appointed committee had drawn attention to the deregulatory function of competition policy, implying that the country’s economic problems at the time might be due to obstructions in the way of a competitive market, such as the tolerance of cartels. The tide was about to turn against collective corporatism in favour of a more individualist market economy. The most visible change was the establishment of a new competition agency, which aggressively attacked the system of cartels, and set about eliminating the effects of price regulation by challenging the horizontal price agreements that flowed from such regulation. It also took part in the government’s deregulation project which aimed to dismantle unnecessary barriers to market entry across a wide range of sectors. Yet the competition law was at that stage still based on reporting and control of abuse, rather than outright prohibition – which shows that legal form can be less important than policy purpose. Legal form caught up in the 1990s when the 1992 Act on Competition

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Restrictions was removed. The Act reflected EU competition policy by broadly prohibiting restraints on competition. The Act was amended in 1998 by introducing merger control which had been lacking in the competition law toolkit.

Competition law now aims to promote efficient economic competition, in the interests of both companies and consumers The policy standards in Finland’s competition law are efficient markets and consumer interest. Its statement of purpose calls for protecting “sound and effective economic competition from harmful restrictive practices”. In applying the law, special attention is to be paid to interests of consumers and to the freedom of business to operate without “unjustified barriers and restrictions”. “Efficient economic competition” is the standard to which market performance is compared when the law is applied. In efficient conditions, prices are set by independent action and there are no barriers to entry into the market. Thus the objectives are to ensure free access and to eliminate restrictions that can distort or harm competitive conditions. The statement also distinguishes between legal sanctions, which will apply to the conduct that the law prohibits, and regulatory action, which will control conduct that is not prohibited but that may nonetheless impair efficient competition. The law applies to publicly-owned firms. Competition policy has also been closely tied in with regulatory reform. Policy makers have appreciated that regulations can limit competition unnecessarily, and also that competition policy can have a role in removing those limits. Reflecting this, the competition law was amended to give the competition agency an explicit, active role in regulatory reform. Its role was deployed to great effect in the market opening and network industry reforms of the 1990s. Today the emphasis has shifted toward the competition and regulatory issues raised where government entities are market participants. The substantive rules combine national traditions with the EU competition toolkit. The most interesting difference with the EU model is a provision reflecting Finland’s competition policy goals. A restriction that is deemed to have harmful effects through decreasing efficiency or preventing or hindering the conduct of business in a manner “inappropriate for sound and effective competition” may be enjoined even if it is not otherwise specifically prohibited in the statute (Articles 9 and 16). This could provide a basis for the flexible application of competition policy to complex or novel issues, such as unfair competition supported by state aids.

The substance of the competition law Provisions to control restrictive agreements are well adapted to the objective of efficient markets, but sanctions may not be strong enough The approach is much the same as that of the EU. The most serious types of cartel are prohibited. Three types of horizontal agreement are prohibited explicitly: collusion in tendering, price fixing, and agreements to limit output or divide markets. Other types of horizontal agreement are not prohibited, but might be enjoined if they actually impair competition. On the other hand, even an otherwise prohibited agreement might be permitted if it is found to be efficient. Anti-competitive self-regulation (such as trade or professional association efforts to control or prevent competition) is clearly covered. Eliminating price agreements adopted by business associations was an early priority, and most of these have now disappeared (although the issue occasionally reappears despite a clear prohibition against their price lists). Oligopoly facilitating practices such as tacit collusion are less clearly covered. OECD REVIEWS OF REGULATORY REFORM: FINLAND – ISBN 92-64-10267-1 – © OECD 2003

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The main issue is that sanctions may not be strong enough to deter horizontal collusion. Despite the ban on price and market division agreements, there have been few enforcement actions. The courts appear to have been lenient. For example fines imposed on buyers of forestry products for collusion to keep prices down were substantially reduced on appeal, and may have lost any deterrent effect because they are not proportionate to the benefits of the collusion. Most vertical agreements are permitted, unless they are imposed by a dominant firm. Only one practice is clearly forbidden: requesting that customers observe maximum or minimum resale price levels. This toleration is consistent with an efficiency-based competition policy. The approach is more flexible than the traditional EU combination of blanket prohibition with detailed exemptions, and could help in novel situations.

A flexible approach is applied to abuse of dominance, and the law has been used to help restructure traditional monopoly markets Rules about dominance are nuanced. A firm (or association of firms) that has the power to “significantly control the price level or terms of delivery” or in some “corresponding manner” influence the competitive conditions in a defined market is considered to have a dominant position. Unfair trading terms, exploitative or predatory pricing, and using dominance in one market to restrict competition in another are prohibited. However some behaviour, such as exclusive sales or purchasing arrangements, is allowed if the firm can show a “justified cause” for it. The flexible approach applies the prohibition to small-scale markets and to legal monopolies. It is harder to apply to oligopoly situations. Finding dominance depends on the definition of a market, which can be a challenge, and may involve a context-sensitive approach. A common setting is cases involving utilities. Of interest, too, in Finland is the interdependence between a buyer who is “captive” to a seller for a long period with the effect that the seller may define a relevant market. Market share is not the key determinant in finding dominance. Barriers to entry are an important factor. Sanctions for abuse of dominance include fines and orders against the misconduct but not structural relief to break up the dominant position. The law has been successfully used to help promote competition in traditional monopoly markets. Discrimination, such as loyalty discounts, to discourage competition is challenged. For example the “bonus customer” system offering discounts for completing long-term contracts used by some local energy firms has been examined. It would be considered anti-competitive when offered by an incumbent monopolist, but not when offered by a small new entrant. Denying network access or charging too much for it can be abuse even if the dominant position is authorised by law. The early stages of power market liberalisation saw an important decision which found abuse by local distribution companies in the charges to suppliers for network connection. However a more recent decision has created some uncertainty over whether pricing can be challenged as abusive. The law tends to rely more on an indirect approach to price abuse, by promoting conditions under which prices are set by market forces.

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Merger control rests with the competition authority and aims to prevent market dominance Merger control, the newest part of the law, prevents market-dominant positions. It applies to true mergers, the acquisition of control or assets, or setting up joint ventures that operate as autonomous economic units, and to transactions by all kinds of entity regardless of their ownership – which means that privatisations are subject to competition review. The competition authority treats the statutory legal standard as a dominance test, not a substantial lessening of competition test. It believes that the test could be met if high concentration increased the risk of oligopolistic collusion. It applies a standard analysis which starts with the definition of the relevant market. Market share is used as an indicator with other factors. These include the potential advantages of the post-merger firm relative to competitors, the bargaining power of the firm’s customers, and the prospects of a quick competitive response. Prospective efficiency gains and imminent firm failure are treated sceptically. Notification requirements are based on size and on operation in Finland. The two-part notification threshold is a combined worldwide turnover of more than EUR 336 million and turnover of each of two or more of the parties of more than EUR 25 million. If a transaction also falls within the EU merger regulation, it need not be notified in Finland. Merger review and control is the responsibility of the competition policy bodies. The Finnish Competition Authority (FCA) investigates, negotiates and may impose conditions, and the Market Court decides whether a merger should be blocked. There is no provision for intervention by the government, and policies and effects other than competition are not considered. A problem is usually resolved by imposing conditions, which are subject to deadlines and enforced by penalty payments or conditional fines. Structural conditions are preferred, such as divestiture of a business operation. Conduct commitments, harder to oversee, are sometimes accepted. Table 5 summarises recent experience.

Table 5. Recent merger review experience

Decisions

2000

2001

114

104

Proposed to ban

1

0

Approved with conditions

5

5

104

99

Approved, no conditions Notifications cancelled

27

21

Other closed issues

35

27

Source: FCA 2002.

Subsidies and unfair practices are uncertainly covered by the competition law Subsidies (including state aids) are not clearly addressed in the law and have no separate provision. Anti-competitive effects of subsidies might, in principle, be controlled under the competition law’s general principles. This would be difficult though, and it has not been done so far. Unfair competition is also not yet well integrated into competition policy. Unfair marketing practices are treated as matters for private dispute and left to the courts. Finland’s efficiency-based competition policy might sometimes permit practices which private parties might challenge as allegedly unfair because of the positive overall effect on efficiency. The OECD REVIEWS OF REGULATORY REFORM: FINLAND – ISBN 92-64-10267-1 – © OECD 2003

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new Market Court may promote a different balance in deciding about which practices are “unfair” if it also takes into account market competition and consumer perspectives.

Consumer protection is somewhat detached from competition policy Consumer protection is currently handled under separate legislation and institutions. Protection is traditionally strong, as in other Nordic countries, and though the role of competition policy is recognised, issues of equity and distribution are uppermost. Consumer interests are looked after by the Consumer Complaints Board, the Finnish Consumer Agency and the Consumer Ombudsman. This means that the competition and consumer authorities can take different views, for example on the risk that high product standards may harm consumers by limiting competition. However efforts are made to co-operate.

Competition policy institutions The 1980s reforms created a strong competition authority, now effectively complemented by a newly reconstituted independent court Three bodies apply the competition law. The Finnish Competition Authority (FCA) is responsible for investigating, negotiating and recommending enforcement action. The Market Court (newly reconstituted in March 2002, it replaced the Competition Council) is the independent decision-maker with the power to impose orders and fines. Decisions of the Market Court can be appealed to the Supreme Administrative Court. The FCA, which functions as an independent agency, is attached to Ministry of Trade and Industry (MTI). Its Director-General is appointed (and can be dismissed) by the government. But despite the FCA’s administrative position under the budgetary aegis of MTI, the government and the ministry do not have legal authority to interfere in the FCA’s actions or decisions. MTI is involved in competition legislation and policy but not enforcement. Its position as shareholder of several state-owned companies does raise at least the appearance of a potential conflict of interest with competition policy objectives. The Market Court will decide cases about competition, public procurement and marketing practices. In competition matters it takes over the powers of the old Competition Council to issue orders, impose fines and hear appeals from FCA actions. It also has the consumer protection and unfair competition jurisdiction of the old Market Court. The decision to combine previously separate bodies and powers under one roof was partly driven by a general desire to reduce the number of tribunals. It also reflected a need to address the uncertainty of having a body (the Competition Council) in charge of competition decisions which was not formally a court and dependent on MTI. The new Court is a true court and is expected to be more open in its proceedings.

The FCA workload and priorities reveal conflicting demands on its resources Resource commitment to the FCA has been stable but turnover is high. Personnel resources for the FCA run at around 61.5 person-years, with another 9 devoted to enforcement at the regional level. However the staff turnover runs at about 20% pa, and some 40% of staff have less than two years experience. Higher salaries in the private sector lure away younger staff. Many other government bodies share the problem. The FCA’s nonadministrative sections, which had been organised in terms of industry expertise, were reorganised in October 2002 in terms of substantive issues, into three sections covering mergers and abuse of dominance, cartels, and advocacy.

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Mergers and ex officio matters are taking more resources. To make room for this the FCA has tried to dismiss complaints that have little effect on competition such as supplier or competitor relationship disputes. Abuse of dominance is the largest single category of work. By sector, the largest number of cases in 2000-2001 was in telecoms.

Table 6. Trends in competition policy actions Horizontal agreements

Vertical agreements

Abuse of dominance

2001: matters opened

150 52

Sanctions or orders sought Orders or sanctions imposed

1

Total sanctions imposed

EUR 1.6 million

2000: matters opened

22

Sanctions or orders sought1 Orders or sanctions imposed

EUR 4.7 million 23

1 3

Total sanctions imposed 1999: matters opened Sanctions or orders sought2 Orders or sanctions imposed

Mergers

3

Total sanctions imposed 1998: matters opened

74

184

6

62

0

0

3

1

0

0

0

0

41

30

78

143

0

1

3

52

1

0

1

0

0

0

0

0 23

38

24

78

Sanctions or orders sought2

2

0

2

0

Orders or sanctions imposed3

0

1

0

0

Total sanctions imposed

0

0

0

0 n.a.

1997: matters opened

46

35

56

Sanctions or orders sought2

3

2

2

0

Orders or sanctions imposed3

3

1

2

0

Total sanctions imposed

0

0

0

0 n.a.

1996: matters opened

42

32

77

Sanctions or orders sought2

0

0

2

0

Orders or sanctions imposed3

0

0

1

0

Total sanctions imposed

0

0

0

0

1. Action sought or taken by FCA. 2. In 2001, 5 approved conditionally, one of which was banned, on appeal, by the Competition Council; in 2000, 5 approved conditionally, 1 proposal to ban; in 1999, 5 approved conditionally. 3. Order issued by Competition Council. Source: FCA, 2002; FCA, 2002a.

Competition law enforcement Powers are satisfactory but sanctions may be too weak In enforcement of the competition law the FCA initiates matters, and the Market Court has the main power of decision. For example if the FCA determines that an order or sanctions should be imposed in the case of a merger, or the parties to a merger cannot reach agreement with the FCA about conditions, the FCA must make a proposal for action to the Market Court. Powers of investigation focus on obtaining documents. The FCA together with the regional authorities may be involved, and no court order is needed for the basic powers to require the provision of documents and answers to questions, and to carry out inspections (with which the police may help).

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The record in meeting statutory deadlines for decisions is reasonable. The deadline for merger review and decision is nine months (if it must go all the way to the Market Court), but the time taken in practice has usually been shorter (and for mergers that the FCA does not investigate further there is a one-month “silence is consent” deadline). However the average time for FCA decisions (non-merger cases) has increased from one year to 16 months, which the FCA put down to the greater complexity and importance of cases. Where the need for urgent decision is identified, the rules allow for the process to be speeded up. Enforcement action can lead to orders or fines. The Market Court may for example issue an order to prohibit an agreement. It can also impose fines for engaging in prohibited conduct. Fines can range from EUR 800 to EUR 670 000, with a provision to go beyond to a ceiling of 10% of the previous year’s turnover. They apply only to the undertaking involved in a prohibited act: individuals do not risk personal liability. The basic level of fine is low compared to recent EU actions, and the courts have often set fines well below the level proposed by the FCA. Appeals can determine the shape of policy. The Competition Council (now subsumed in the Market Court) has not hesitated to substitute its judgement for the FCA’s in rulings about conditions imposed on mergers and other matters where an appeal has been made to it. FCA action – or inaction – can also be appealed. Appeals from decisions of the Council can be taken to the Supreme Administrative Court. The FCA as well as the parties may appeal Market Court rulings. An example is the FCA’s appeal of a Council decision rejecting, for the first time, a merger that the FCA had approved subject to conditions (in July 2002, the Supreme Administrative Court overturned the Council decision and agreed with the FCA action). There are two further enforcement possibilities. First, private suits are possible, but have not been seriously tested. Civil courts may hear private disputes about infringements of the Competition Act and claims for compensation based on them. Damages that might be claimed could include additional expenses, price differences, or lost profits. The second possibility is to invoke EU law directly. The FCA does not yet have authority to apply the EU Articles 81 and 82 Treaty provisions on competition (which as already noted, are followed by Finnish law with some variations). In the meantime it is unclear whether private parties could claim damages for violation of the EU Treaty under Finnish procedures. But the situation is expected to change with an anticipated amendment to EU law, which would devolve responsibility for applying the EU rules to national authorities.

Competition policy in the international context Competition policy retains a vestige of economic nationalism but promotes co-operation with neighbours The first competition law in 1958 reflected an era of economic nationalism and tolerated competitive restraints on trade. This is no longer the case but the current law does retain a focus in Finland. It applies to a restriction of competition outside Finland if that conduct is directed against Finnish customers (the nationality of the firm is not by itself relevant). It thus implies the need for a direct connection between the act and harm in Finland, which is something less than a full “effects” test. For example, the FCA declined to pursue a complaint about low prices of wood imported from Russia despite the collusion of Finnish firms, because the direct effect was in Russia, and Finland benefited from the competition. For mergers, the object of an acquisition must conduct business in Finland.

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Box 10. Are sanctions too low for effective deterrence? FCA charged three major forest products firms, Stora Enso, UPM-Kymmene and Metsaliitto Osuuskunta, with colluding to reduce the prices they paid for wood. The FCA asked for a fine of EUR 3.4 million against each company. This was about 5 times greater than the basic statutory fine level, but far below the maximum of 10% of these firms’ turnover, which could have been EUR 1 billion or more. The Competition Council imposed fines one-half of what FCA had recommended, EUR 1.7 million per firm. On appeal, the Supreme Administrative Court cut that again, down to EUR 500 K per firm. This is below the top of the basic statutory range, and far below the FCA’s estimate of the parties’ likely gain from the challenged practice. The statute provides little guidance about the reasons that can justify imposing a fine greater than the statutory maximum of EUR 670 000, referring only to the nature of the restriction and the circumstances of the case. The Government’s explanatory memorandum offers little more guidance, mentioning some potentially relevant factors such as repetition, particular harm to other businesses, scope of the violation, and need for the sanction to exceed the gain from the restriction. The Supreme Administrative Court gave several reasons for reducing the fines in this case, some of them obviously related to these factors: ●

The information exchange (from which the agreement on price was inferred) happened at meetings called by the sellers, with the sellers present. Evidently, the court believed that this showed the parties thought this was a continuation of a normal business practice, and not a violation of law. The court thus implied that strong sanctions are only justified against deliberate, wilful violations.

●

The activity was limited in geographic scope. This point may have been mentioned because the scope of activity is one of the factors mentioned in the government’s explanatory memorandum.

●

The meetings had positive effects for the wood trade. Thus, there was no showing of the factor of “particular harm to other businesses”. This observation also implies that the court might recognise an “efficiency” justification for price fixing.

●

There was no evidence showing how the parties to the restraint on competition benefited from it. Here too, the reasoning calls into question the concept of a per se prohibition against horizontal collusion about price.

●

The agreement on price was not proved by direct evidence, but was only inferred from circumstances. It is not clear whether the court believed it unlikely that there was an agreement in fact, or whether the court was sceptical about trying to prohibit tacit collusion.

The outcome may represent a failure of proof by the FCA, which may have believed the agreement should be prohibited per se and thus did not produce detailed demonstration of benefits to the parties or of harm to particular sellers or the economy. Some features of the case that tended to show a likely adverse effect on market competition are not among these listed in the statute or explanatory memorandum, notably that the buyers were important factors in a concentrated market for a homogeneous product. The FCA tried to emphasise one of the factors from the guidance, the repetition of the practice for 4 years. Indeed, the FCA had decided that the statute prohibited this conduct when it imposed strict conditions on an exemption for more limited co-operation that it granted in 1994. The FCA believed that the companies were deliberately flouting that earlier decision. The court, though, may have believed that the parties’ failure to follow the FCA’s decision was not as serious a disregard of the law as failure to obey a court order would have been.

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Co-operation has concentrated on Nordic countries (with which much business is conducted) and other neighbours. The FCA and other Nordic country competition agencies have a formal agreement on procedures for co-operation and there are agreements with Estonia and Russia.

The limits of competition policy: exemptions, monopolies and special regulation Competition policy has been able to help broad-based market-opening reforms because exemptions are limited The general provisions for exemptions are narrow, but applied with sensitivity. The FCA and the Council have taken the position that exemptions should be explicit and limited to what is necessary to achieve a policy goal. Laws which allow anti-competitive actions can overrule the competition law but explicit provisions are needed for derogations. The FCA has a general authority to file initiatives aimed at changing these. The competition law has a broad reach into the public sector and public services. It applies fully to state enterprises, and to private enterprises operating under special authority. The Council has ruled that an entity operating under special authority is subject to the law if this does not compromise the purpose of the special legislation and if the competition problem is due, not to the special law itself, but to the way it has been implemented. And there should be no difference in treatment where a public entity could entrust its activity to a private one, or where private entities engage in the same activities as the state entity. The FCA has also found that “the concept of a business undertaking includes all the activities of the state, municipalities and other public undertakings that have been organised in accordance with commercial principles”. Although statutory activities in health care, social services or education may not fall within this definition, the development of market methods to provide public services may bring them within reach over time. The law does not exempt small firms, though small-scale restraints may escape enforcement. The FCA does not have to take action if a restraint only has a minor effect on competition (a principle which can also be relevant for large firms). Small firms have been fined for agreements clearly aimed at suppressing competition (for example, bid rigging among taxi drivers).

Specific exemptions do remain for labour market agreements, and in agriculture Agreements that concern the labour market are excluded, on the grounds that collective bargaining involves a form of economic competition that is qualitatively different from competition among business enterprises. But the exemption is limited. Court rulings have limited the exclusion so that terms of labour agreements cannot be used to limit competition in markets outside the scope of the agreement (for example the exclusion was found not to cover an agreement preventing a paper mill from outsourcing security and cleaning services). And the exclusion does not apply to parts of an agreement which are not related to terms and conditions of employment. The exclusion for agriculture is limited to primary products, and is not absolute. The law does not apply to agreements, decisions and practices among producers of primary products as long as those agreements promote increased productivity, improve markets, promote availability and achieve reasonable prices and lower costs (this deliberately covers agreements to support producer incomes). However the law does apply if an agreement

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prevents competition to a significant extent. Outside primary products the law applies and is enforced. For example, action has been taken against market division in the meat processing industry. Agricultural subsidies remain high relative to the OECD average.

Progress in opening up the network industries to competition is strong in some key sectors, slow in others Some key network industries such as telecoms and power have been liberalised and are broadly subject to the competition law as well as coming under sector specific legislation that treats their particularities. Competition issues are picked up by the competition law and institutions, as well as the sector-specific regulators. Other network sectors such as natural gas and water remain regulated monopolies. Telecoms services, liberalised in the 1990s, are fully subject to the competition law. The Telecommunications Market Act (TMA) also applies, and imposes some competitionrelated obligations on vertically integrated companies. The FCA has put considerable resources into this sector, picking up issues such as interconnection and pricing of services to Internet service providers. It has also resisted efforts by major network operators to acquire dominant positions in cable infrastructure (the main alternative fixed-line service). The power sector was also liberalised in the 1990s. This included disaggregation of the vertical supply chain to separate the grid (transmission and distribution) from generation and supply (so far through accounting separation) so as to promote competition in the latter, the abolition of permits, and rules to ensure fair grid access. The grid operators were given an exemption from the competition law to allow them to set up a common nodal pricing system (the grid requires a special approach to pricing, and this reflects what some other OECD countries have done). The Energy Market Authority (EMA) has the main responsibility for grid access and pricing, though the FCA is also involved. Wholesale and retail prices are not regulated, but subject to the general competition law principles about predation, discrimination and so on. The competition law contains a special rule about power sector acquisitions aimed at preventing the recreation of vertically integrated monopolies. More extensive vertical separation of the network from other operations is also planned. Generation and wholesale markets remain concentrated, and vertical ties still exist (there are still 87 vertically integrated companies). Natural gas remains a regulated national monopoly. Finland has an exemption from the EU natural gas directive, postponing open competition until the grid has been connected to the European network and Finland has more than one source of supply (there is only Russia so far). The monopoly importer is regulated by the EMA. Water and sewer services are local regulated monopolies, and an integral part of municipal governments or enterprises. The trend is towards corporatisation. National regulation covers health care and environmental protection. The Consumer Ombudsman has a role in ensuring compliance with consumer protection rules. The FCA can apply the competition law to prevent abuse of dominance, including excessive prices. Competition in transport varies according to the type of transport. The liberalisation of road transport started in 1991. Licences are still required for bus services. Private buses have demonstrated their efficiency: prices in Helsinki are significantly lower than before, though there are some complaints about service quality. Taxis may still be subject to entry and rate controls. A recent report recommended against opening the sector to competition. The rail

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sector is still a monopoly, but the ground is being prepared for some competition with corporatisation and functional separation of activities.

Competition policy works alongside the special legislation for financial services Financial services are now fully subject to the competition law and FCA jurisdiction, including notification for bank mergers. The Financial Supervision Authority (FSA) for banks, and the Insurance Supervision Authority (ISA) for insurance, work in tandem with the FCA on competition issues. Bank mergers are subject to special legal provisions. As noted the financial sector is a priority for the FCA. Concentration is high, especially in banking (the combined market share in Finland of the three biggest companies is around 90%). But competition is strong and helped increasingly by foreign competition as markets become international.

Professional services are now fully covered by the competition law In many countries professional services are to some extent exempted from the competition law. In Finland the FCA made it a priority to eliminate the professional associations’ recommended fees, and these have now gone. In general, entry is open and providers may compete over price. The competition law is applied when issues arise.

Competition policy so far plays a relatively minor role in some other sectors, sometimes reflecting the Finnish context and history Alko Ltd, a state-owned company, has a statutory monopoly on the retail sale of alcoholic beverages. Alko’s production and wholesale activities have been separated from the retail operation. Nevertheless there is some concern over possible abuse of its dominant position in the wholesale and import markets. In small, relatively open economies such as Finland, non-traded services such as retail are often a key competition issue. Regulatory constraints (such as controls on opening hours and land use controls) as well as high concentration and industry co-operation may be dampening competition. Exemptions from opening hour limits for some shops are explicitly aimed at protecting particular retail sectors from competition. Pharmacies need a licence, and a tariff schedule of maximum prices sets market prices in practice. Furthermore, retail prices for some pharmaceuticals have been set by government decree from the beginning of 2003. FCA attempts to inject a more competitive approach into this sector have not been very successful, partly because of the view that competition is not the only policy issue, and that distributional and equity considerations are also important.

Competition advocacy for regulatory reform Competition policy has developed a close link with regulatory reform, but advocacy is becoming a more complex process As already noted, competition policy was a key driver of the market-opening reforms which started in the late1980s. The competition authorities (institutionally strengthened and better resourced) not only called attention to the need for change, but also offered expert assessments of the competition policy implications of proposed changes, especially in the traditionally more regulated industries such as telecoms and financial markets. Between 1988 and 1996 the competition authority issued 385 statements on regulatory issues, as well as 120 initiatives calling for specific regulatory changes. The list of regulatory

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reforms promoted by this advocacy is long and impressive, from abolition of price control, to liberalised entry into diverse sectors such as trucking, hotels and restaurants, and sugar imports, and other measures such as adoption of the legislation to open up electricity markets and have them fully covered by the competition law (the direct result of a MTI working group set up on an initiative of the then head of the competition authority). The pace has continued, with over 50 FCA statements and several initiatives each year. A separate advocacy unit within the FCA has just been established (advocacy was previously attached to the relevant sectoral unit), and a substantial commitment of some 10% of staff resources is devoted to this work, which is underpinned by explicit statutory authority so that the FCA need not wait to address an issue. However, an instruction that ministries should consult the FCA before issuing any regulations that restrict competition is no longer carefully followed. With the most obvious kinds of restraints already eliminated, ministries may find it hard to see how their proposals could affect markets. The view may also be taken that the instruction has been overtaken with a new government. The FCA has responded by opening up new channels of communication. It also continues to ensure that it sits on a wide range of task forces and committees so as to be there at an early stage of discussion. The complexity of some policy issues that seek to balance different objectives (of which competition is only one), and the difficulty of anticipating market effects, certainly make advocacy today a greater challenge.

The FCA’s recent focus has been to address the competition issues of government as a market player An important priority has been the “Government and Markets” project. This project considers the competition issues that arise as market methods are used to provide public services. Finland has traditionally maintained a very wide-ranging publicly-owned production sector sheltered from competition (such as road maintenance and construction, grain trading and storage, weather data production, and forestry). This started to be opened up to competition from the private sector in the 1990s. It gave rise to numerous complaints from private businesses about unfair competition (notably that public entities used revenues from still-protected activities to cross-subsidise competitive activities). The FCA successfully tackled a wide range of issues (Box 11). Introducing competition for local public services is now a rapidly growing policy issue. Local governments, as in other countries, are responsible for the provision of a wide range of services. A recent survey shows that all municipalities are starting to exercise their right to purchase services on the market, driven by the need to improve productivity as the population ages and the cost of health and elderly care grows. A 2001 MTI report confirms that the purchase of services is likely to be more flexible and efficient, but notes that the demand for quality is also increasing. It concludes that municipalities must retain overall responsibility but should be encouraged to look to the market and evaluate alternatives to their own direct provision. Competitive neutrality should be maintained when they enter a market occupied by private entities. Introducing competition faces another challenge: consumers are happy with current arrangements and do not always see the long-term problems of staying with them. Also, some parts of government may have other policy priorities such as equity. And whether the service is publicly or privately provided, maintaining and improving quality is a challenge. A number of approaches to these issues are being tried out. Local government has become an interesting testbed.

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Box 11. Examples of the FCA’s “Government and Markets” Project work Examples of the project’s work include:

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●

Road maintenance: Most road maintenance and construction work had been done by a unit in the Finnish Road Administration (Finnra). Thus the producer and the purchaser of the services were divisions of the same government agency. Bids from private firms were invited in some pilot projects, but the private bidders complained that the inside firm was winning contracts because of unfair cross-subsidisation and predatory prices. Following an FCA initiative, the operating unit, Finnish Road Enterprises, was separated from the authorising body in 2001. After a four-year transition period, all construction and maintenance on the public roads will be subject to open public tender. An FCA representative is on the ministry-appointed group overseeing implementation. In the meantime, FCA is encouraging Finnra to use tendering for smaller projects, to support the prospects of potential new entrants.

●

Grain trading and storage: The FCA investigated complaints that Avena, the stateowned grain trader, was using anti-competitive means to steer cargo handling and storage services to a related firm and was charging too much for storage services. Avena changed its policies and lowered its storage prices during the investigation, so no formal enforcement action resulted. In response to a June 2000 FCA proposal, the National Emergency Supply Agency issued a tender for grain traders to manage and store reserve supplies.

●

Weather data: The Finnish Meteorological Institute (FMI), with a legal monopoly on producing and distributing basic weather radar data, also runs a commercial weather service. When a commercial competitor appeared in 1999, using the radar data that FMI transmitted to its Swedish counterpart, FMI responded by degrading the quality of the data it provided internationally. The FCA sought a fine against FMI for abuse of dominance and called on the Ministry of Transport and Communications to separate and corporatise FMI’s commercial functions. In early 2002, the Competition Council imposed a fine, of EUR 20 000. The working group examining the structural issue concluded in 2001 that that the weather service should be separated, although it did not agree with FCA that weather services for civil aviation should also be spun off into the new entity.

●

Government procurement: A central entity, Trading House Hansel, has handled procurement for all levels of government. Suppliers, particularly small businesses, have complained that this limits or eliminates their opportunities to sell directly, especially to local and municipal governments. So far, FCA investigations have not found prohibited restraints. But the procurement system is being reformed, and one element of the reform will be a change in Hansel’s legal status. The FCA’s comment on the procurement development plan suggested that it over-emphasised the potential economies of scale, while disregarding the risk of monopoly. The FCA argued that the key elements were independent procurement units and profit responsibility to encourage efficiency and transparency.

●

Forestry: The FCA found no abuse of dominance in the production of seeds and seedlings by the Forest and Park Service; however, following an FCA recommendation, the Service’s commercial operations were separated and corporatised.

●

Employment services: The Ministry of Labour proposed to establish a commercial temporary labour service, to complement its employment-agency function. The FCA advised that such a service should be set up in an entity that was independent of any other Ministry operation and put on the same footing as competing private enterprises.

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Box 11. Examples of the FCA’s “Government and Markets” Project work (cont.) ●

Education: Commercial vocational training schools complained about unfairly subsidised competition from publicly funded institutes. The scope of this conflict was broad: hotel and restaurant service, computer training, driving, nature tourism, psychological testing, massage, environmental testing, flue gas measurement, building and construction, and hairdressing. The FCA recommended that the public entities set fees on a commercially viable basis for their programmes that compete with private sector offerings. The Ministry of Education, which supervises the institutes, endorsed this recommendation.

●

Social service subsidies: The slot machine association subsidises social services, such as home health care for the elderly, that are provided by local governments, often through contracts with non-profit organisations. These subsidies total EUR 350 million annually. Private providers of these services have complained that the subsidies give their competitors an unfair advantage (and they have lobbied for expanding the scope of subsidies, to include private providers as well as the “third-sector” non-profit providers). The FCA has worked with the association, which is under the direction of Parliament, on a statement of principles to reduce the distortion of competition. The framework that FCA proposed for analysing subsidy distortions is now being applied to other topics, such as sports (FCA, 2002a). MTI is trying to encourage the use of the slot machine funds on functions that do not compete with private firms, in part to avoid contravening EU rules about state aids.

Competition policy also needs to keep up. For example joint ventures by municipalities to improve efficiency may also be anti-competitive. And as with the “government and markets” project, complaints about unfair competition and abuse of dominance from the public sector are numerous. Unfair competition may arise from direct subsidy, cross-subsidy from protected services, or a failure to account for common and capital costs. The FCA is seeking to establish a systematic approach to these cases, based on its work in response to complaints about slot machine subsidies.

Conclusion Finland has an impressive record of market liberalisation, in which competition policy and advocacy has played a key role. Some important but difficult network and other sectors have been fundamentally restructured and opened to competition, and the tradition of corporatist control updated to reflect the needs of a market economy. Sectoral regulation generally works with the grain of competition policy, which is well established as the basis for economic regulation. As in other countries, competition principles have been difficult to apply in some areas (trains and retail for example). There is still work to be done, but the debate is open and conducted in a straightforward manner. Alongside this continuing agenda the key issue in recent years has been grappling with the implications of government in markets. How can market principles improve the efficiency of public service delivery? In Finland this is especially important as the state (central government and municipalities) has a large presence as owner and provider of services. The difficult questions raised by the provision of public services through markets – not just the economic and competition issues, but also how to strike a balance between these and other policy goals such as quality and equity – are rightly getting considerable and systematic

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attention. This has been a major area of work for the FCA which has often succeeded in generating pro-competitive changes. However the complexity inherent in the issues means that the role of competition policy is less clear than in the early days of removing barriers to market entry in the economy, and the FCA’s role not so firmly anchored in the policy process as before. Finland has entered new and more challenging territory. The legal and institutional framework is nonetheless in good shape for supporting the work ahead, provided certain important weak spots are addressed. The competition law is soundly based on the EU approach. There is a useful further provision that allows the possibility of action beyond the specific prohibitions of the law, and could help in addressing the new issues. The institutional framework is stronger with the recent changes. The Market Court – if it chooses to – may be a helpful tool for meeting the new challenges. Its broad responsibilities give it the scope to strike a better balance between an efficiency-based tradition that has sometimes allowed unfair practices, and competition. It could also help to integrate consumer issues with competition policy. The FCA is respected, generally works well, and is seen as responsive and fair. Much of its attention goes to abuse of dominance which flows naturally from the current reform agenda, rather than cartels, which also need attention.

Policy options for consideration 1. Incorporate consideration of competition impacts in the regulatory quality process. The 1989 directive requiring prior consultation with the FCA about proposals that could impair competition was well conceived. Requiring the proponent not only to obtain the FCA’s views about it, but also to respond to those views in its submission, will contribute to informed debate and decision. Regulations that constrain competition may sometimes be necessary, but their effects and tradeoffs should be understood clearly, and an effort should be made to achieve other goals in ways that do not impair competition. The present status of the 1989 directive seems to be unclear. If it is still technically in force, then it should be observed. If it may have technically lapsed, a similar instruction should be reissued. Indeed, such a review of potential impacts on market competition should be an element of the general programme for ensuring regulatory quality, applied both to new proposals and to matters that are already on the books. A systematic, general power of review is preferable to a purely ad hoc approach, even though many if not most items reviewed turn out to be competitively neutral. Experience in Finland and elsewhere shows that, as the market impact of regulatory proposals becomes less obvious, agencies may not know when they should ask for views about competitive effects of their proposals. Statutory authority to involve the competition agency in policy matters is already in place, and the FCA’s advocacy and policy work has continued. Reaffirmation of the principle from the 1989 directive, integrated into a comprehensive regulatory quality programme, would ratify the importance of that work.

2. Discourage subsidies and preferences that distort competition. In the FCA’s government and markets project, a common theme has been how, or whether, private providers can successfully compete with government-related entities or subsidised non-profit entities. This will continue to be an important issue in the commercialisation of public services. The FCA’s development of a framework for analysis of subsidy issues, prepared in order to deal with complaints about the slot machine subsidies, shows the importance of a clear assessment of these effects. Conceivably, the Competition Act’s general, prospective Article 9 could be applied to control abuses. But this

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should be addressed in policy and programme design, more than in competition law enforcement. It should not be left to the FCA to devise cost-effective ways to provide services that may not pay for themselves in individual cases.

3. Remove state holdings from positions that raise apparent conflicts of interest. MTI’s dual position as a major shareholder in large industrial enterprises and as the overseer of agencies such as the FCA that enforce the laws against these enterprises is unsatisfactory. Remedies to this situation are under discussion. The fact that the state has a direct ownership interest in the financial health of these enterprises by itself raises some concern about the even-handedness of regulation. There has been no implication of actual impropriety in any particular case. It is a matter of appearances. But appearances do matter. There is an appearance of conflict in MTI’s position, despite credible assurances that the ministry does not intervene in FCA’s enforcement discretion. It would be better to eliminate the appearance of conflict by moving the shareholder responsibility to another body, if not by eliminating state shareholding entirely.

4. Re-examine remaining constraints on competitive operation and entry in retail and services. In small, open economies, competition problems may be concentrated in non-traded services. Providers’ incentive to obtain legal authority for non-competitive methods of operation is only reinforced by a tradition of social solidarity. In its law enforcement capacity, the FCA has paid careful attention to formal horizontal and vertical structures in wholesale and retail trade. The regulatory barriers to competition are equally significant. Local competitors are likely to have used the land use control process to delay or prevent competitive entry. Regulation of opening hours channels competition and dilutes the effect of alternative retailing strategies. In Finland, the legislature has been more candid than most about the purpose of controlling retail hours. The law’s purpose is self-evidently to limit competition and to protect the profits and positions of particular classes of retailers. When the effects of the controls are reviewed, the legislature intends to examine the impact on jobs and on the distribution of trade, which is at best a euphemism for the effects on particular current competitors. It will be instructive to compare Finland’s experience to others. Flexibility often increases retail employment, albeit with a different mix of skills and work situations. If the purpose and effect of the controls are simply to protect incumbents from competition, then they should be repealed so consumers can decide for themselves when and where they want to shop. If the controls had a purpose other than controlling competition, then the rules should be tailored to that purpose. Needs-based controls on pharmacies should also be reconsidered. To be sure, there is some relationship between pharmacy operations and policies about paying for pharmaceuticals. But it has been official policy to permit price competition, at least below the official price ceilings. (That policy is evidently about to change, as retail prices for some pharmaceuticals will be set by government decree beginning in 2003.) To make that policy a reality (to the extent price competition is still permitted for some products), pharmacies and entrants should have an opportunity to compete to serve the market with different pricing and operating strategies. Incumbents shielded by a needs-testing rule will treat the ceilings as a focal point for common prices, and their costs will adjust so that they appear to be making only a normal profit at that price level. In the absence of challenge by firms with different services, strategies, and cost structures, that will not change.

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In local transport too, needs-based entry requirements should be reconsidered. Taxis are a problem everywhere, but needs-based entry control is not the solution. Regulation of safety and consumer services, price transparency, and properly enforced common carrier obligations should be sufficient to protect against abuses. For local bus services, competition for the market seems to be working reasonably well, despite complaints about the results of some tenders.

5. Integrate competition and consumer policy perspectives. Consumer policy seems distant from competition policy, concerned with other issues, perhaps even still somewhat suspicious of markets. Although consumer policy statements acknowledge the importance of competition, the focus is elsewhere. Combining jurisdictions over these subjects in the new Market Court may help reconnect them, but only if the members of that body take advantage of the opportunity. If not, then creating the new institution will amount to little more than simplifying the organisation chart. Creating the new body has incurred some transition costs, but at the end of the process it looks unlikely that it will save on operating costs, as the total human and other resources available to this body appear about the same as were available to the two separate bodies before.

6. Apply enforcement resources, and effective sanctions, to horizontal issues. The FCA recognises the need to address horizontal problems. The recent wood products litigation dealt with a characteristic and important kind of problem for a national enforcement agency in Europe, namely claims that major firms are colluding at the expense of local raw material providers. Experience elsewhere strongly suggests that problems of horizontal collusion are likely to be found in non-traded services. The FCA has already dealt with overt constraints in the professions and other services. Covert constraints are likely to be found in construction and related markets such as construction materials and contract services. Such constraints could include bid rigging or rotation for large projects and price collusion and anti-competitive work rules for subcontractors. Increased attention to horizontal matters will be a foundation for stronger enforcement co-operation in dealing with international cartels. The apparent lack of judicial support for enforcement against horizontal restraints is discouraging. The FCA believed that the wood products collusion was a serious restraint, but the penalty eventually imposed was insignificant, compared to sanctions that have been applied against cartels elsewhere. This case alone may not be proof that the courts would not impose a significant fine against clandestine price-fixing. The theory and proof may have been more complex than the FCA realised at first. But the limitation on the range of sanctions provided in the Competition Act may have limited the courts’ vision, too. An extraordinary showing is required to impose a fine greater than the cap of EUR 670 000. It is not yet clear what would constitute such a showing. The limit that would apply in the event of such an extraordinary showing, 10% of turnover, is consistent with European practice, but it is an illusion if it is unlikely ever to happen. (Some European jurisdictions authorise potentially much higher fines. Based on deterrence models, even the 10% of turnover level may not be high enough, if collusion enables the conspirators to increase prices by a substantially greater amount. The recent review of experience among OECD competition enforcers suggests that 10% is a conservative estimate of the typical cartel overcharge. The basic range of sanctions under the Finnish law should be expanded greatly, by at least a factor of 10. Even more importantly, it should be possible to impose a

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sanction that has a deterrent effect, by computing the sanction based on turnover or gain from violation. And Finland might consider imposing some liability or sanction on the individuals who are responsible for the violations by corporate entities. The risk of personal liability can discourage an executive from authorising or engaging in illegal conduct, and the prospect of avoiding that liability can lead to confessions that strengthen enforcement against corporate misconduct.

7. Channel competitor complaints into private lawsuits. If the FCA concentrates more on horizontal issues, it will have fewer resources for handling competitor complaints about abuse of dominance. Those issues, which are often contract disputes at heart, are often suitable for resolution in private litigation. Finland’s law permits an aggrieved party to bring suit now, without waiting for the FCA to act, at least with respect to clear violations. Private firms already can file private suits seeking orders against prohibited conduct. For conduct that is not prohibited but that might be covered by an order under Article 9, a party must now go first to the FCA and seek an order. The Market Court hears these disputes only after the FCA has already ruled on them. These are often essentially private disputes among customers and suppliers, and often have little effect on competition at a larger scale. The Market Court’s jurisdiction over complaints about unfair competition is a natural complement to these controversies. Finland should consider amending its procedures if necessary so that the FCA could send complaints directly to the Market Court for litigation and decision there, where it appears that they are essentially private disputes that should not occupy public resources for investigation and resolution.

8. Complete the changes needed to allow the FCA to apply Articles 81 and 82. Giving FCA the complete range of tools will increase flexibility and facilitate co-ordination with other enforcers in Europe. Adaptation should be straightforward. Finland’s approach to exemptions is already what the EC is proposing as a reform: direct application of the criteria, rather than mandatory notification and exemption.

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PART II

Chapter 4

Market Openness*

* The background report used to prepare this chapter is available at: www.oecd.org/regreform/ backgroundreports

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Context and history The relatively closed economy of the past has developed into an open and competitive economy Finland’s economy has changed dramatically since the late 1980s. Before the change it was characterised by state monopolies, widespread cartelisation, and price regulation. The main trading partner was the Soviet Union. Foreigners could not buy land or trade stocks in Finnish companies on the Helsinki stock exchange. The principles of a market economy have now broadly replaced the old traditions of collective corporatism and economic nationalism. A key objective of the reforms was to strengthen competition. This required the liberalisation and deregulation of markets, to encourage both domestic and international competition. Structural and regulatory reforms to achieve this went hand-in-hand with policies to promote international trade. Today, the economy is largely open to the world, and especially to the EU since accession in 1995. In the space of less than two decades, Finland has successfully caught up with the more open OECD countries. In some important markets such as electricity and telecommunications it has moved further and faster to open markets than most other countries. Some other markets do remain relatively closed and protected (notably agriculture). The special relationship with Russia continues in a different form (Finland’s 1 300 km land border with Russia and its longstanding links with the country have made it a bridgehead for market penetration by other EU countries). But the largest trading partners are now in the EU and with the US, with Germany first (Table 7). The EU accounts for 55.6% of imports (Asia and North America accounting for 12.7% and 7.4% respectively). Foreign trade now accounts for about 35% of GDP, which is about the OECD average.

Table 7. Major trading partners with Finland in 2001 Destination

Share % of imports

% share of exports

Germany

14.5

12.4

Sweden

10.2

8.4

Russia

9.6

5.9

United States

6.9

9.7

United Kingdom

6.4

9.6

France

4.5

4.6

Japan

4.3

1.9

Netherlands

3.7

3.9

Denmark

3.6

2.9

Italy

3.5

3.6

Estonia

3.3

2.2

China

3.1

Norway Total EU Total

2.6 2.5

55.6

53.8

100.0

100.0

Source: The Finnish Customs Authority.

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Industrial goods dominate the picture (machinery, transport equipment, mining products and chemicals). That said, there has been a profound shift in exports from basic commodities (wood, paper and metal) to ICT products led by Nokia. There is a favourable attitude toward foreign direct investment (FDI) though it is, surprisingly, relatively low. The ratio of international direct investment (the stock of inward investment) to GDP was about 20% in 2000, similar to Norway. Within the country, though state ownership is still prominent, the state-owned sector now mostly operates in a competitive market, and the private sector has grown. International mergers, especially between Nordic competitors, have marked the industrial landscape, especially in banking, paper, energy, food and telecommunications. In 2001, one third of the 500 biggest Finnish companies were owned by foreign investors.

The policy framework for market openness: the six efficient regulation principles In a global economy, regulations need to be market-oriented and friendly toward trade and investment. The 1997 OECD report on regulatory reform identified six “efficient regulation principles” for building these qualities into regulations, which are reviewed below.

1. Transparency: equality of treatment is the general norm but foreigners tend to be outsiders in consultation on the rules Market openness requires that all market participants be fully aware of regulatory requirements so that they can base decisions to trade on an accurate assessment of costs and benefits. This is especially important for foreign firms, which have to cope with differences in the business environment, such as language and business practices. Transparency requires access to information on regulations and openness of the rulemaking process through public consultation. Different aspects are reviewed below: ●

Dissemination of information. Chapter 2 noted that Finland does relatively well. The Finnish constitution requires that legislation be published before it can be enforced. Laws are published in the Official Gazette, often also on the Web, and the government provides explanatory leaflets for important rules. There are many sources of information. Electronic databases of regulations are available. The Invest in Finland Bureau (which promotes FDI) provides an effective link between foreign and domestic players, and offers advice and information to the former. The Ministry of Foreign Affairs also provides information through its embassies. Trade associations (EU as well as Finnish) can be also be contacted. There is no firm rule about translations into English: it is done when the relevant ministry considers it justified. Language may be a trade barrier as regards public procurement, and importers must pay for a translation of their technical product specifications into Finnish.

●

Transparency in the elaboration of regulations. There are no formal consultation requirements, but the traditional value put on consensus and participation ensures that significant consultation does take place before a regulation is approved. Individual ministries take their own approach. The social partners (employers and employees) play a central role, which makes for a smooth process but risks excluding outsiders. Foreigners have the same right of comment, but do not belong to the organised groups and may face language barriers. However there have been no complaints. Focus groups in the lines of the Danish test panels might be considered as a means of actively engaging non-residents (as well as others who find access to consultation processes difficult).

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●

Information on technical standards and regulations. This is provided via Finland’s notification obligations to the EU (Box 12) and World Trade Organisation (WTO), for which the Ministry of Trade and Industry (MTI) is responsible. EU rules have been especially helpful to transparency in Finland, although the information exchange is mainly between governments. There is no obligation to make drafts available to the public, nor is there an automatic opportunity to comment, but Finland does send them to entities it considers relevant. The Commission publishes a list of notifications received in the EU’s Official Journal, which gives an idea of what is going on.

●

Transparency in government procurement. Finland has implemented the EU directives on public procurement and the WTO Agreement on Government Procurement. Its procurement legislation, which applies to central, regional and municipal levels of government, lays down basic principles of transparency, non-discrimination and equal treatment, and requires a tender competition for all procurement regardless of value. Notices inviting tenders must be published. Smaller contracts (those below the EU threshold) are publicised on a special Web site (the Electronic Information Channel for Public Procurement) which is especially helpful for SMEs and the smaller municipalities. General information on Finnish procurement legislation can also be found on the Web. The Ministry of Finance completed two reports on public procurement in 2001, which made recommendations – now being implemented – for more efficient management of the process. Public sector contracts appear relatively open to foreign bidders, despite some problems over compliance with the rules at the local level. The tradition of consensus does tend to promote Finnish entities. But there has been at least one important foreign success, with several foreign operators now in the bus transport market of the Helsinki metropolitan area (which now enjoys significantly lower prices). Targeted efforts are being made to open up difficult sectors such as construction.

●

Openness of appeal procedures. Everyone is equal before the law under the Finnish Constitution and can appeal a legal decision to a court of law. Appeal procedures vary according to the type of issue. Ministerial decisions on licences, permits, investments and establishment issues are appealed direct to the Supreme Administrative Court. Public procurement and competition rules go to the competition tribunal (the Market Court) first. The appeals procedure for procurement issues has proved to be very efficient.

2. Non-discrimination: this is taken seriously and the business climate for foreigners is good The application of the non-discrimination principle in regulation, through mostfavoured nation treatment (MFN) under which all foreign firms are treated the same, and national treatment (NT) under which foreign firms are treated the same as domestic firms, aims to provide equal competitive opportunities irrespective of the origin of products or services and so maximise efficient competition. Finland is, like many others, committed to non-discrimination whilst maintaining certain exceptions – some arising from EU and WTO commitments, others specific to the country. Finland has a good record in recognising professional qualifications from other member states under the EU system of mutual recognition of qualifications. EU membership also means that Finland is party to preferential agreements (such as the agreements with EFTA). EU members are also entitled to have certain bilateral friendship, trade and navigation treaties and agreements with third countries. Finland has entered a number of bilateral agreements on investment protection which contain a MFN clause. Trading partners has made no serious criticism of this policy and the business climate is positive in this context.

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Box 12. Information on technical regulations and standards: Notification obligations in the European Union In order to avoid erecting new barriers to the free movement of goods which could arise from the adoption of technical regulations at the national level, European Union member States are required by Directive 98/34 (which has codified Directive 83/189) to notify all draft technical regulations on products, to the extent that these are not a transposition of European harmonised directives. This notification obligation covers all regulations at the national or regional level which introduce technical specifications, the observance of which is compulsory in the case of marketing or use; also fiscal and financial measures to encourage compliance with such specifications, as well as voluntary agreements to which a public authority is a party. Directive 98/48/EC recently extended the scope of the notification obligation to rules on information-society services. Notified texts are further communicated by the Commission to the other member States and are in principle not regarded as confidential, unless explicitly designated as such. Following the notification, the concerned member State must, except in case of urgency related to the protection of public health or safety, the protection of animals or the preservation of plants, refrain from adopting the draft regulations for a period of three months. During this period the effects of these regulations on the Single Market are vetted by the Commission and the other member States. If the Commission or a member State emit a detailed opinion arguing that the proposed regulation constitutes a barrier to trade, the standstill period is extended for another three months. Furthermore, if the preparation of new legislation in the same area is undertaken at the European Union level, the Commission can extend the standstill for another twelve months. An infringement procedure may be engaged in case of failure to notify or if the member State concerned ignores a detailed opinion. Although primarily directed at member States, the procedure benefits private parties by enhancing the transparency of national regulatory activities. In order to bring draft national technical regulations to the attention of the European industry and consumers, the Commission regularly publishes a list of notifications received in the Official Journal of the European Communities, and since 1999 on the Internet. Any firm or consumer association interested in a notified draft and wishing to obtain further information on the text may contact the Commission or the relevant contact point in any member state. The value of the system for private operators has been enhanced with the initiative of the Commission in 1999 to publish notifications on the Internet. A searchable database of notifications (Technical Regulations Information System – TRIS) going back to 1997 gives access to the draft text and the notification itself, including the rationale of the regulation and the status of the proposal. The incentive of countries to notify, and thus the efficiency of the system, has been strongly reinforced by the 1996 Securitel decision of the European Court of Justice (Decision of 30 April 1996, CIA Security International SA versus Signalson SA and Securitel SPRL). The decision established the principle that failure to comply with the notification obligation results in the technical regulations concerned being inapplicable, so that they are unenforceable against individuals.

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Box 12. Information on technical regulations and standards: Notification obligations in the European Union (cont.) As far as standards are concerned Directive 98/34 provides for an exchange of information concerning the initiatives of the national standardisation organisations (NSOs) and, upon request, the working programmes, thus enhancing transparency and promoting co-operation among NSOs. The direct beneficiaries of the notification obligation of draft standards are the European Union member States, their NSOs and the European Standardisation Bodies (CEN, CENELEC and ETSI). Private parties can indirectly become part of the standardisation procedures in countries other than their own through their country’s NSOs, which are ensured the possibility of taking an active or passive role in the standardisation work of other NSOs. Notification obligations in the field of technical regulations and standards are complemented by a procedure requiring member States to notify the Commission of national measures derogating from the principle of free movement of goods within the EU. The procedure has come in response to the persistence of obstacles to the free movement of goods within the Single Market. Member States must notify any measure, other than a judicial decision, which prevents the free movement of products lawfully manufactured or marketed in another member State for reasons relating in particular to safety, health or protection of the environment. For example, member States must notify a measure which imposes a general ban or requires modification of the product or withdrawing it from the market. So far, this procedure has produced limited results.

3. Avoiding unnecessary trade restrictiveness: focused policies are in place but the impact of general regulations on trade is not covered, and inward FDI is not especially strong Where possible regulators should favour measures that have the least restrictive effects on trade, a principle that is included in several WTO agreements. Mechanisms need to be put in place to give effect to this principle, including an ex ante assessment of the impact of proposed regulations on trade and investment, and streamlining procedures. Finland has a vigorous policy of promoting a well-functioning market, which is helpful to all companies, domestic and foreign. Measures have been taken to reduce administrative and other regulatory burdens (such as simplification of permit and notification procedures, the development of electronic communication and making the system of social security contributions for employers more flexible). Many licensing and permit procedures have been devolved to the local level. Use of the Internet for information and for processing paperwork is promoted. For example the patent and taxation authorities have joined forces to set up the Business Information System (BIS) in 2001, which enables businesses to report company information to them in a single document. A Market Access Unit has been established in the Ministry of Trade and Industry (MTI) to help firms (national and foreign) with import and export problems. It covers all trade, within and outside the EU. Problems are analysed and action taken to resolve them (for example negotiations, to avoid legal action). This unit is also part of the EU single market network of government contact points to resolve problems arising within the EU market. Finland has a strong and well-organised decision-making process for EU policies, led from the top. A cabinet committee on European Affairs, chaired by the Prime Minister, meets once a week to discuss key issues and set priorities. The EU secretariat (which co-ordinates EU affairs, supports the cabinet committee, prepares EU Council meetings,

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and works on EU policy development) is located in the Prime Minister’s Office. A network of more specialised committees, which may include interest groups outside government, sees to the details and ensures effective representation in Brussels. A co-ordination process links the competent ministries, and special attention is paid to the timely supply of information and involvement of the Finnish Parliament, as well as the Provincial Government of Aland. Finland works in several ways to avoid unnecessary trade restrictiveness. The EU now defines its trade relations both within the EU and with countries outside. Finland is now not only part of the EU single market, but must also comply with EU trade agreements with third countries, and follow EU procedures. Long distances and increasing traffic characterise the Finnish trade environment, so the promotion of simplified and efficient customs procedures under the EU customs legislation has been given top priority. Special attention has been paid to the border with Russia and the Baltic states, and traffic there has increased significantly. Training programmes are in place. Simplified procedures and local clearance have been promoted to speed up the delivery of goods and reduce visits to customs offices. The efforts have been successful: customs services are faster, more consistent and predictable, and more consumer-oriented. And the work continues. Finland has taken part in pilot projects offering a single authorisation to entities in more than one member state. In 2002 it launched a new electronic data interchange (EDI) import clearance system, and has started work on an EDI export clearance system. Finland’s achievements are reflected in the 1999 and 2002 World Competitiveness Yearbooks, which ranked it first in terms of the impact of its customs bureaucracy on competitiveness. Intellectual property protection is also approached conscientiously. The Finnish legal system protects property rights, and Finland has joined a number of international agreements, including the European Patent Convention and the World Intellectual Property Organisation (WIPO). Copyright law is strong, and includes sanctions from fines to imprisonment. The Business Software Alliance (BSA), a worldwide software anti-piracy organisation, started in Finland, and according to a recent survey the rate of software piracy is one of the lowest in Europe. Foreign Direct Investment (FDI) is encouraged. The Invest in Finland Bureau was established in 1992, under MTI, to help foreign firms set up in Finland. Some distinctions (not deliberately designed to hinder foreigners) do arise: entities outside the European Economic Area (EEA) need special permission to set up in a range of regulated activities (banking and insurance, pharmaceuticals, mining, restaurant and catering services among others). Under the social security legislation, only companies established in the country can avail themselves of key provisions such as pension insurance. And some residency requirements must be met for companies’ legislation to have effect. All companies are equal when it comes to government assistance under special development programmes (support for technology, venture capital funds, regional aid, small business support, etc.). This is a positive general backdrop. However the stock of inward FDI is less than half of outward FDI. Finland is slightly below the OECD average for inward FDI. The share of foreign affiliates in manufacturing production is the lowest among OECD countries, after Japan. Cross-border venture capital and investment inflows are relatively limited. There is no simple explanation. One reason may be the small size of the Finnish market and its peripheral location in relation to the EU market. Structural and other factors (such as taxation and a shortage of skilled labour) may be hampering inward FDI. Trade and the

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perspective of foreign companies do not get special attention in the Finnish regulatory process. The key guidance documents for the preparation of quality regulation (the “Finnish Checklist” and the “HELO Instructions” – see Chapter 2) do not specifically cover trade issues. The Regulatory Impact Analysis (RIA) process rarely singles out trade as an issue. Foreigners may be prejudiced by the fact that consultation on the development of regulations is not mandatory but informal, and largely centred on domestic stakeholders (through the EU committees within government, trade associations, unions, etc.).

4. Use of internationally harmonised standards: Finland works to promote these and the record is, with some exceptions, very good Compliance with different national regulations and standards can make the cost of operating in different markets significant, even prohibitive, a major issue raised by the international business community. Internationally harmonised standards offer a solution, and their use has gained prominence with the WTO Technical Barriers to Trade (TBT) agreement. As a small and trade dependent economy Finland pays attention to this issue. It has no discrimination cases relating to standards (within or beyond the EU). It has developed a strong tradition of reliance on EU harmonised standards. With a few exceptions, EU standards are applied and controlled. It has created a special agency, the Finnish Standards Association SFS, to oversee the use of internationally harmonised standards. This is also the enquiry point for Finland in the EU and WTO notification systems for technical standards, and provides information on technical barriers to trade. One important exception to this positive picture is building materials. This market is fairly concentrated, and is covered by a number of national technical rules, which makes market entry by foreigners difficult.

5. Recognition of equivalence of regulatory measures adopted by foreign countries: Finland works within the active EU policy approach Where international standards are not available, trading partners can mutually agree to accept their standards as equivalent. The existence of differing national standards and the need to use differing national procedures for assessing conformity adds to the costs of producers wishing to sell in different markets. Mutual Recognition Agreements (MRAs), which can cover the standards themselves or the procedures used to assess conformity, can help to reduce these costs. Mutual recognition activities are often left to the private sector so that the work is relevant to the needs of evolving markets. Finland follows the EU, which seeks to promote trade with third countries and uses MRAs to achieve this for regulated products. Table 8 shows some recent EU MRA initiatives.

6. Application of competition principles from an international perspective: foreign firms are well treated, but access to some key networks is a problem The benefits of market access can be reduced if anti-competitive conduct is not addressed. From an international perspective, the important issues are commitment to competition principles in law and policy, the existence of open and effective procedures for hearing and deciding complaints over market access, and not least, effective access to networks (for example distribution networks).

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Table 8. Indicative list of recent MRA initiatives Partner

Partner

Sectors

Concluded

Australia

EU

Telecom equipment Low voltage equipment Electromagnetic compatibility Machinery Pressure equipment Medical devices – Transitional period – For some high risk devices Pharmaceutical GMP (veterinary) Motor vehicles

Done 1.1.1999

Pharmaceutical GMP Medical devices Telecom equipment Electrical equipment Electromagnetic compatibility Recreational craft

1.11.1998

Telecom equipment Low voltage equipment Pharmaceutical GMP Industrial chemicals GLP

Done 1.1.2002

Canada

EU

EU

Japan

Effective date

Type of recognition

+18 months +2 years

1.10.2001

+18 months

EU

New Zealand

Telecom equipment Low voltage equipment Electromagnetic compatibility Machinery Pressure equipment Medical devices Pharmaceutical GMP

Done 1.1.1999

EU

Switzerland

Telecom equipment Electromagnetic compatibility Electrical safety Recreational craft Pharmaceutical GMP Medical devices Aircraft Lawn mowers Pressure equipment Machinery Motor vehicles Measuring instruments Toys Phytopharmaceuticals Construction equipment Gas appliances Tractors

Done

EU

US

Telecom equipment Electromagnetic compatibility Electrical safety Recreational craft Pharmaceutical GMP Medical devices Fasteners Agro food biotechnology Certain medical devices

Done 1.12.1998

14.12.2000

1.6.2000

No

EU

EU

All sectors

Done

EU

Israel

Chemicals GLP

Done 1.5.2000

Source: OECD.

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Finland is today a largely open economy, though some public services remain protected (as in other OECD countries) and some sectors (see below) remain relatively closed. Agriculture is also protected and agricultural subsidies accounted for a larger share of farmers’ income in 2001 than in any other EU ountry. It is a small economy and imports are sometimes the only effective way of introducing competition. But it is also large geographically which raises transport (import) costs and its low population density raises the fixed costs of running a network. Competition policy needs to work well in this context, especially for foreign firms. Finland’s competition law and institutions are, in general, soundly based and efficient, and do not discriminate against foreigners. The law combines national traditions with the EU competition toolkit. The nationality of companies does not play any role in the application of the Competition Act. Foreign firms have access to the same procedures as domestic firms in pursuing anti-competitive practices. They may petition the Finnish Competition Authority (FCA), though this is rare. The FCA analyses foreign supply in the context of the relevant geographic market when assessing restrictive practices. Merger rules apply to foreign companies that conduct business in Finland. Foreign parties have been involved in over 60% of all merger cases (Table 9).

Table 9. Merger control statistics in 1998-2001 Cases

Per cent

All parties Finnish

117

39

All parties foreign

104

34

At least one of the parties foreign Total number of decisions

82

27

303

100

Source: OECD.

The shadow on this positive picture is, in some cases, access by foreigners to networks. Effective access to a domestic retail distribution network is essential for entry to retail markets, and this is not easy. Two retail groups (the K-Group and the S-Group, which have nearly 70% of the market) dominate Finland’s daily consumer goods sector, and their buying power threatens competition. But for the first time, a low price foreign chain (the German Lidl) has entered this market, in 2002. Other retail markets (furniture, household electronics and the hardware trade) are also difficult for foreigners. Regulatory constraints such as zoning laws can raise problems. A different type of network to which access is problematic is the self-regulated network where regulation is delegated to the main (domestic) market players. This happens for example in the financial sector, through the Finnish Bankers’ Association, Helsinki Stock Exchange (HEX Oyj), and Finnish Central Securities Depository (APK). Discriminatory behaviour to outsiders (through fees or administrative barriers for example) can be hard to pin down. But the APK has not accepted any foreign rivals with clearing party status despite applications. And it seems that main HEX shareholders (including the government) have colluded to prevent further foreign ownership.

Sectoral trade and investment liberalisation This has been a success for some key sectors of the economy International market openness and the six efficient regulation principles can also be assessed by looking at key domestic sectoral regulatory regimes: how well do these square up?

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Finland was one of the first countries to open up its telecommunications market. The market is now fully liberalised (with foreign participants), innovative and competitive as regards services in particular, though prices of local telephony remain quite high because of lack of competition in the local loop. Despite recent problems with the rollout of digital TV and third generation mobile phone services, the reforms can be considered a success (prices have fallen, service quality has risen). There are no restrictions on foreign ownership in the new Communications Market Act. The telecommunications equipment market is also fully open to competition, and most international manufacturers have established a presence. The market is transparent and non-discriminatory. EU rules are implemented fully and promptly. The regulator (FICORA) works with international organisations (including the European Independent Regulators’ Group – IRG – and the European Telecommunications Standards Institute – ETSI). Finland champions the free circulation of third generation mobile phone equipment (so that it can be used anywhere). The automobiles and components market is fully open, with virtually no market access problems. Finland is not a large car manufacturer, and benefits from measures to facilitate trade. The EU-wide type approval system for cars (under which type approval granted by one member state is valid for all the others) has been especially helpful. Almost all car brands and components manufactured abroad are imported. Any issues are relatively minor. Taxes on cars are high and so are consumer prices: the issue of whether taxes are too high for imported used cars from the EU is under review. The globalisation of the automotive industry makes technical harmonisation increasingly important and Finland puts considerable work into both the UN working groups and its own national Motor Vehicle Working Group to break down barriers. The electricity market is another important sector that has been opened to competition, ahead of most other countries. Tariffs have decreased significantly and are among the lowest in the OECD. No distinction is made between national and foreign firms. Foreign companies have recently been very active in acquiring electricity retailers and local grids. Since 1997 the Finnish wholesale power market has been fully integrated with the Nordic Power Exchange (Nordpool).

But agriculture remains heavily protected Despite severe climatic conditions in which fields are snow-covered for half the year, there has traditionally been agricultural overproduction due to artificially high prices. In 1995, 69% of production was producer supported. The EU’s Common Agricultural Policy (CAP) has entailed significant adjustments to the sector, and producer prices halved with membership. But significant aid continues. Price controls, subsidies and price supports continue under the CAP.

Conclusion The general policy stance of the Finnish government rightly emphasises the importance of free trade for the economy. Finland is a small economy and trade must play an important part in promoting competition. The market is open, but with some important exceptions, and the business environment generally positive for trade. A much less heavily regulated economy has emerged from the reforms of the last twenty years and trading partners consider that market principles are deeply embedded. The few complaints tend to

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be market-specific. The government is favourable towards FDI. It is commendably active and well organised in international fora. Policy co-ordination with the EU is promoted from the centre of government, and EU directives are (usually) swiftly implemented. It makes a significant contribution to international work such as the harmonisation of standards. Some key markets – telecommunications and electricity – are models of openness and successful reform. Finland’s performance in recent international competitiveness surveys is very strong, which can be put down (in large part) to its success in opening markets and encouraging competition from beyond as well as within its borders. There is room for improvement. Some important parts of the economy (building materials and the retail sector, many public services, the railways, banking) have little (or no) competition or are very concentrated. Agriculture remains heavily protected. Public procurement is vulnerable to the maintenance of long term insider contracts fostered (consciously or not) by the consensus tradition, and language can be a barrier. Structural and other factors (such as taxation and a shortage of skilled labour) not specifically related to trade policy may be hampering FDI, which is relatively low given the country’s favourable attitude and generally open door. In fact FDI policy is surprisingly unsuccessful compared with the performance of many other OECD countries and despite the proximity to new or potential markets such as eastern Europe and the Baltic states. A more general issue is the relative lack of a trade policy perspective in the rule-making process. Trade policy bodies are not systematically involved in rule-making, which means that trade and investment issues are often not considered. The rule-making process is weak in assessing clearly the full range of costs and benefits of a proposed regulation, which may have especially negative consequences for trade. And (though foreigners have not raised concerns) the informal, consensus-based approach to consultation on new rules may prejudice the participation of outsiders.

Policy options for consideration These proposals should be read alongside the proposals in Chapter 2 (Regulatory Governance) and Chapter 3 (Competition Policy).

1. Enhance transparency and promote consultation in the rule-making process for foreign parties. Ensure better access to the rules of self-regulatory bodies. Consultation is currently not mandatory and may not therefore cover all interests. As well as the general proposal in Chapter 2 to establish a mandatory “notice and comment” procedure, particular steps should be taken to ensure that foreign parties have access to, and can provide comments on, draft regulations as early as possible in the process. In particular, consideration should be given to publishing the texts of draft regulations in the Official Gazette and on the Internet, and information on deadlines should be provided. Rules and agreements issued by self-regulatory bodies should also be more transparent and available to all interested parties.

2. Ensure that the “six efficient regulation principles” for promoting trade and investment are embedded in the key rule-making procedures, and that these procedures include an effective cost/benefit analysis. As Chapter 2 explains, Finland has adopted the major elements of the 1995 OECD Recommendation of the Council on Improving the Quality of Government Regulation, but there are significant weaknesses in practice, not least the lack of an effective assessment of costs

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and benefits of proposed new rules. This should be promoted, and quantified where possible, together with a review of alternatives and an explanation of the regulatory choice that is made. An explicit consideration of anticipated effects on inward trade and investment should be included in the integrated and enhanced RIA proposed in Chapter 2. The Finnish Checklist (which takes up the 1995 OECD Recommendation) and the HELO Instructions (Instructions on the Drafting of Government Proposals) should integrate this. Mechanisms to achieve this more coherent and trade-sensitive approach should be put in place, whilst avoiding an overly burdensome process.

3. Heighten awareness of and encourage respect for the six efficient regulation principles at the local levels of government in their regulatory and procurement activities affecting international trade and investment. There is evidence that the local levels of government lag the centre in the application of quality regulation principles, for example in public procurement. Central and local government institutions should co-operate on this and the centre should promote awareness of the six efficient regulation principles.

4. Continue to encourage the use of international standards as a basis for national standardisation activities, and to promote international harmonisation in the European and international arenas. A strong commitment to efficient and reliable international standards enhances market opportunities for Finnish firms, and benefits consumers too. Finland should continue to work on this not just with others abroad, but within the country. The MTI’s Market Access Unit should have a strong trade advocacy role to promote international standards in Finland itself. The building materials sector, in particular, needs attention as it continues to be based on national standards and approvals.

5. Do more to ensure greater understanding that legitimate policy objectives relating to such areas as health, safety and the environment can be fully achieved without unduly compromising market openness and may in fact be facilitated by trade-friendly regulation. A key reason for limiting alcohol supply and imposing high taxes on alcohol beverages has been health policy. In 2004, Finland will have a complicated issue to solve as the transition period negotiated with the EU will come to an end. It will then be obliged to deregulate all quantitative import restrictions on alcohol. At the same time, Finland has to decide in favour of lower import duties and domestic taxes imposed on alcohol. The health concern is also related to alcohol imports from neighbouring Estonia, which has significantly lower prices, and will probably join the EU in May 2004. Health and safety policy objectives have also traditionally been reasons for limiting and regulating sales of pharmaceuticals. Excess domestic building regulation standards, and also the circulation system for beverage bottles, may be causing market openness problems.

6. Make sure that competition policy and advocacy continue to be strongly promoted, given their importance for market openness. The further commercialisation of state-owned enterprises and the extension of commercialisation to local public services is planned or underway. This means that issues of potential market dominance and anti-competitive behaviour arising from the presence of state-owned entities in the market will remain and could even grow. Competition policy

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enforcement and advocacy are important, not to say essential, tools in dealing with these issues, in order to secure effective market access (not least for foreign firms). The 1989 directive requiring prior consultation with the FCA about proposals that could impair competition should be reissued. Regulations that constrain competition may sometimes be necessary, but their effects and tradeoffs should be understood clearly, and an effort should be made to achieve goals in ways that do not impair competition. Compared to other OECD countries, commitment to competition and regulatory reform research seems to be an area of improvement in Finland. For instance, the competition authority (FCA) has no special state budget allocations for research, nor is there any university-based interdisciplinary competition faculty or institute. However there are preparations for the establishment of a competition institute in Turku.

7. Continue efforts to promote inward foreign direct investment and examine the reasons why it is relatively low. Inward Foreign direct investment (FDI) is relatively low compared to some other OECD countries. Structural and other issues that are not directly related to trade policy, including the small size of the Finnish market and its peripheral location in relation to the EU market, may disadvantage it. Finland is a capital exporting country, and is not attracting FDI with special financial support or state aid. The share of foreign financial investments in Finnish companies traded on the stock exchange is significantly higher than the direct foreign ownership in Finnish companies. However, foreigners generally feel that the tax burden and cost of living are excessively high relative to other EU countries, and that the social overheads of maintaining a workforce are too high. Skilled labour is also in short supply. There are no plans to cut corporate taxes which would make the business environment more attractive. The reasons for the relatively low rate of inward FDI could usefully be examined.

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ISBN 92-64-10267-1 OECD Reviews of Regulatory Reform: Finland A New Consensus for Change © OECD 2003

PART II

Chapter 5

Regulatory and Competition Issues in Key Sectors*

* The background report used to prepare this chapter is available at: www.oecd.org/regreform/ backgroundreports

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A. THE COMMERCIALISATION OF GOVERNMENT SERVICES Context and history State involvement in the Finnish economy has traditionally been very high The public sector has a particularly significant place in the Finnish economy, both at the national and local levels. Although change has taken place, it still accounts for almost a quarter of total employment. Most social and welfare services are provided directly by the state. As elsewhere, there has also been an important presence in the network industries such as the railways. But the Finnish state is – or has been – involved beyond this, in a diverse range of industrial and commercial activities including forestry products, mining and chemicals, finance, grain trade and storage, cars and machinery (among others). This unusually high level of engagement reflects Finnish history which for a long time was marked by a need to secure economic independence against an uncomfortable background of foreign political control, for which state ownership acted as a bulwark. Private capital was also scarce. Until the late 1980s, the state was a direct provider of this vast range of services, through state agencies within ministries, funded by the state budget. This remains largely the case at the local level, though change has started. At the national level, a major change took place with the creation of state enterprises out of many former government agencies. From 1989 to 2001, 14 state enterprises were created. These are a hybrid form of economic entity, created by government statute and strategically steered by government, but independently managed and often operating in a competitive market. Most state enterprises have now been commercialised into company form, and some have been privatised. A good example of this evolution is in the communications sector. Functions were first transferred from a government agency to a state enterprise, and then split into two companies (for posts and telecoms), and the telecoms company was then partially privatised. Of the state enterprises that remain, most have important regulatory or administrative functions such as responsibility for air safety, for which commercialisation and privatisation is considered inappropriate. Nor does the government anticipate the creation of many new state enterprises, as few remaining government services are potentially commercial, and many, such as education and health, are public services that raise complex issues. This chapter covers state enterprises and state-owned companies. It does not cover the local level of government and the provision of public services by municipalities.

Reform achievements A clear policy underpins the commercialisation of the state-owned sector and reforms have promoted efficiency Commercialisation has been taken forward openly within a solid, pragmatic and agreed conceptual framework. Specific reforms are based on the general principles. Though some important issues need attention this approach has generally worked well. Table 10 sets out the stages of commercialisation, relevant to many OECD countries, and which more or less correspond to the Finnish case.

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Table 10. Stages in the commercialisation process Organisational form

State Agency

State Enterprise

State-owned Company

Privatised Company

Functions/ Activities/Services

Public functions and potentially commercial functions.Note: No initial distinction of treatment between the two.

Public and commercial functions still, but treatment is different.

Commercial functions mainly Commercial functions only. and (in some cases) residual public functions.

Government control/ Regulation

Direct control by the government. No need for regulation (yet) because no clear distinction and separation made between public and commercial functions (government regulates itself).

Special arrangements to enable political steering by government (Act on State Enterprises). Board with government representation. Regulation emerges as a distinct role separate from the state enterprise, but still within the ministry that owns the state enterprise.

Limited company, so subject to private sector corporate governance rules. Board with government representation. Regulation confirmed as distinct role outside the company, still with the owning ministry.

Company fully or partially owned by private investors (government retains shares in many companies), shares traded on the stock exchange. Subject to private sector corporate governance rules. Regulation still with the ministry that had original ownership/retains partial ownership.

Market context

No market or very limited. (Stage one) Direct state provision of services for free (Stage two) Restructuring to separate service purchase from service provision, voucher schemes for access to services (Stage three) Sale – and purchase – of services to other parts of government and to the private sector.

Competitive market starts to emerge. Sale – and purchase – of services in a market with private sector competitors.

Competitive market in principle. But previous monopoly incumbents could still dominate.

Competitive market in principle. Previous monopoly incumbents could still dominate.

Funding

(Stage one) Direct funding from the state budget (Stage two) Identifiably separate accounts may emerge for services. Sales receipts may be used to help fund activities (net budgeted agency).

Self-funding. No longer Self funding funded by state budget. However, subsidies to fund public tasks which are economically unviable are permitted (this is the situation under the new Act on State Enterprises, which had a key objective to limit and clarify the scope for subsidies).

Self-funding

Note: Functions (activities, goods, services) that can be potentially commercialised (marketised) and which can therefore be separated from public functions are difficult to define precisely because a number of complex factors affect the definition, some of which are specific to particular countries or cultures (for example Nordic societies). Attitudes over where to draw the line and political feasibility will therefore vary between countries. Three main factors can be identified (some functions contain elements of all three). ●

First, some functions may be “public goods”. Public goods are those which, if they are supplied to one person, are available to others at no extra cost. In other words, if one person consumes the good it is not possible to deny others access to it. Street lighting or defence are classic examples. Quasi-public goods, are ones where there is little additional cost associated with an additional person consuming it, although it is technically possible to exclude consumption by others and thereby have them pay for the use of the good. Public goods involve a specific and incorrectable market failure.

●

Second, some functions may be “merit goods”. These are goods that society has decided are necessary to provide people with the basic capabilities to enjoy a decent standard of living and to be connected to their societies. For example it is unacceptable that people in a modern society should be cut off from water. Money is insufficient compensation. Substitution may be limited or non-existent. By definition the notion of a merit good is elastic and varies across societies. Thus some societies may include in this definition regional equity and quality of life issues i.e. providing the good to the same standard for all wherever they live. Some societies may include as merit goods those which can be technically commercialised, but a desire to assure universal access at equal prices has expressed itself by the public provision of these goods, although increasingly it is recognised even in such cases that private firms can meet the need and there is no need for public provision.

●

Third, some functions involve scale or scope monopolies that complicate the process of developing a competitive market. The classic examples are the network industries such as electricity, gas and telecoms. Again, regulation can (usually) be used to deal with the problems and prevent market failure, though with the more complex cases such as electricity this is also still work in progress.

Source: OECD.

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The state enterprise policy, which began with the 1987 State Enterprises Act, is the starting point. This was established to remove activities from political pressures and to inject commercial pressures aimed at boosting the operational performance (both productivity and quality) of state activities, wherever possible. Pressures and incentives for a better performance would arise from the need to operate in a more commercial context in which services would be sold, not provided, to customers in government and in the private sector (the purchaser and provider functions would, in short, be separated). Further pressures and incentives would come from taking primary responsibility for financial obligations (though without a corporate form, the state still bears ultimate responsibility). The development of competitive markets with private sector competition was a related objective in many cases, reinforcing the pressures for efficiency gains. Privatisation could be an end point. The productivity implications of commercialisation are potentially very important for the whole economy, an observation that does not just apply to Finland (Box 13).

Box 13. Measuring and improving productivity in the public sector A key aim of governments when they reform public enterprises is improved efficiency. They want to boost the productive use of state assets. This can help general economic performance (for example through lower taxes because the state’s financial needs are reduced) and can also further specific public policy objectives such as quality public services (more can be achieved with the same or even with less funding). The problem with (unreformed) state owned services is that they are provided directly rather than sold, so their value cannot be measured from market transactions. One consequence is that the GDP measure for much government output is taken to be equivalent to the measured input, irrespective of the efficiency with which the inputs are used. An example for GDP measurement is that two state employees digging holes will produce twice the GDP output value of one employee, regardless of how much hole is dug. Modern performance measurement and budgeting are therefore based on outputs and outcomes. Outputs such as holes are identified and their costs (inputs) are measured. However the measure only becomes “hard” when the value of the output can be established, and this happens when others also provide the output in a competitive market. Hence the interest in commercialising state services. But there are challenges in developing this approach. Outputs or outcomes must be found that can be measured. And regulatory, governance and management systems must be developed and put in place to promote the search for more efficiency.

A study of the commercialisation of state services in Finland has concluded that overall efficiency, effectiveness and quality of service has improved, competition has increased (but see below), profitability has improved and prices have gone down. Competition has emerged strongly in some cases, such as telecoms, but less strongly than expected in other cases (the postal sector, where competition has failed to develop in the letter post market, is reviewed in Section B). The slow emergence of competition can usually be linked to gradual reform in which liberalisation has been tackled in stages. For example, rail competition was held back by the fact that one group had sole right to track access until 1999 (limited third party access has now been introduced).

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Reforms have also helped to promote better governance of public services Another advantage of commercialisation is that it helps to develop a better governance framework for public services. Transparency is promoted through the separation of commercial from public objectives. The process reveals the distinction between the production of services (at arms’ length of government and in a commercial environment) and public objectives (such as regional or social objectives). The latter become more explicit because they can no longer be pursued implicitly under cover of direct state control. Privatisation takes this a stage further: public objectives must then be pursued through separate and transparent regulation. The state enterprise model has often proved a useful transition vehicle for shedding light on this important distinction and for allowing the necessary structural and regulatory changes to be put in place that reflect it. It is a very practical issue: a company cannot perform a regulatory function and cannot engage in uneconomic activities unless special provision is made (for example a transparent contract with the state). And separation is anyway necessary to ensure that a commercial enterprise does not use regulatory powers to disadvantage competitors. With one exception (Box 14) Finland has made this separation. This exception is interesting because it highlights several issues that need careful consideration in the commercialisation process as well as the inherent complexity of the process in some areas.

Box 14. The case of the Civil Aviation Authority One exception to the separation of regulatory/public from commercial functions concerns the Civil Aviation Authority (CAA). The CAA is a state enterprise (not a company). It owns and runs the airport network. It is also the safety regulator via an autonomous unit, the Flight Safety Authority (FSA). As the CAA is effectively the monopoly provider of airport services, the issue of regulatory bias against competitors does not arise. And as a state enterprise strategically steered by government, the CAA can be service provider and regulator at the same time – it can be relied on to ensure the safe operation of the network. But these issues would need to be addressed afresh if there were competition and if it became a company. The CAA believes that having the two functions captures some cost and competency synergies. However commercial operations may be disadvantaged by the constraints of government steering applied to the CAA as a whole. And part of the cost of the FSA, as well as the cost of running loss-making regional airports (to meet the government’s regional policy objectives), is financed by a transfer from the CAA’s commercial operations. It would be more transparent for these costs to be directly financed by the state budget.

Sensitive but necessary personnel changes have, on the whole, been well handled Finnish state enterprises are part of the state sector, yet nearly all their employees are not “civil servants” with lifetime tenure, but come under the general labour legislation. This was an essential change, to ensure that enterprises operating under commercial constraints and often in competition with the private sector were not disadvantaged by an inability to adjust labour to market conditions. That said, state enterprise employees have retained slightly better pension and other conditions than private sector counterparts.

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The change in status was, not surprisingly, very sensitive. Most state enterprises and companies have shed staff. Unions have accepted the need to improve efficiency, but concern about the risk to staff has led them to resist further commercialisation and privatisation. Unions see the retention of a government stake in privatised companies (even where there are no remaining public objectives) as “insurance” “against” “unreasonable management”. This of course comes at a cost: a distortion of corporate governance of these enterprises which lowers efficiency. The insurance benefit for state employees is paid by the general population (through higher taxes for example).

Reform challenges A crucial challenge raised by the reforms is that the government today has a major stake in commercial companies, and this needs careful management A key effect of the Finnish government’s progressive withdrawal from direct involvement in a number of activities is that, absent widescale and full privatisation, the government today has a major stake in commercial companies operating in a competitive market. These include a diminishing number of state enterprises (Table 11), but mainly consist of state-owned companies (Table 12). Initially there were 14 state enterprises. Four still exist, while the rest have been transformed into state-owned companies, and a few have been completely privatised (an example of this is the Technical Inspectorate which became Inspecta and was then privatised in 2003).

Table 11. Former and present state enterprises Name

Period of operation

Years

Administrative branch

1. State Printing Office

1.1.1989-31.12.1992

4

MoF

2. State Nutrition Centre

1.1.1989-31.12.1992

4

MoF

3. Government Computer Centre

1.1.1989-31.12.1992

4

MoF

4. Post and Telecommunications of Finland

1.1.1990-31.12.1993

4

MinTC

5. State Railways

1.1.1990-30.6.1995

5 yrs 6 mo

MinTC

6. Map Centre

1.1.1990-31.12.1993

4

MAF

01.01.91-onwards

(11)

MinTC MinTC

7. Civil Aviation Administration 8. Central Motor Vehicle Register

1.1.1993-31.12.1995

3

9. State Repair Centre

1.7.1994-31.12.1998

4 yrs 6 mo

MinTC

01.01.94-onwards

(8)

MAF (MoE) MoF

10. Forest and Park Service 11. Finnish Institute of Public Management

1.1.1995-30.8.2002

7 yrs 8 mo

1.11.1995-31.12.1997

2 yrs 2 mo

MTI

13. State Real-Estate Services, present Senate Properties

01.01.99-onwards

(3)

MoF

14. Road Administration

01.01.01-onwards

(1)

MinTC

12. Technical Inspectorate

Source: OECD.

The government’s presence in commercial activities is mainly reflected in stateowned companies (Table 12). At the end of 2001 the total value of all state shareholdings including listed companies was estimated to be above EUR 20 billion. State-owned or associated companies account for some 12% of total private sector employment. The government has fully privatised 13 companies since 1992. Of those remaining, 27 are fully owned, 4 are majority owned and 8 are minority owned. This large, if indirect, presence of the government in Finnish markets raises a number of challenging issues which are also relevant to other OECD countries that have not opted

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Table 12. Main state-owned companies operating in a competitive market

Company

Sector

31st December 2002 Persons Previous minimum (% of share) employed in 2001 Ownership Year (thousands) Ownership Minimum (% of share) of change

Altia

Production and wholesale of alcoholic beverages

0.7

100.0

50.1

66.7

Edita

Printing and publishing

1.6

100.0

100.0

..

..

Finnair

Airline

10.8

58.4

50.1

66.7

1994

Fortum

Energy

14.8

60.8

50.1

66.7

1998

Kemijoki

Energy

0.4

67.0

51.0

66.7

1997

Kemira

Chemicals

10.2

56.2

15.0

33.4

2001

2001

Kone

Lifts and escalators

23.0

4.7

0.0

..

..

Metso

Metal engineering

25.6

11.5

0.0

..

..

19.0

39.7

10.0

33.4

2001

2.3

73.2

50.1

100.0

1999

Outokumpu

Metals and technology

Patria

Defence

Posti

Postal services

23.3

100.0

100.0

..

..

Rautaruukki

Metals

13.7

40.1

20.0

33.4

2001 2001

Sampo

Banking and insurance

10.2

40.3

0.0

20.0

Stora Enso

Forest products

44.3

10.81

0.0

..

..

Suomen Siilot Holding

Grain handling and storage

0.0

100.0

2001

TeliaSonera2

Telecommunications

Vapo

Peat and timber

0.4

100.0

10.5

19.0

0.0

33.4

2000

0.3

66.7

50.1

66.7

2001

1. Government share in votes is 23.4%. 2. In December 2002 Sonera has undergone a merger with Telia, the incumbent Swedish telephone company. Source: Ministry of Trade and Industry, Ministry of Transport and Communication, Ministry of Finance.

for widescale privatisation. Approaches to dealing with these issues are still being developed and tested – there are no clear-cut or single solutions. Two fundamental (linked) issues for the state-owned sector are the handling of competitive neutrality, and the state’s governance framework.

Competitive neutrality is essential for effective commercialisation, but is still work-in-progress Competitive neutrality has proved to be a key objective in the commercialisation process. It means ensuring that state-owned entities do not enjoy an unfair competitive advantage relative to their private sector competitors, and in particular, that the prices they charge fully reflect costs, to avoid distorted decisions on production, consumption and investment. The need to ensure competitive neutrality is one reason why many state enterprises have been transformed into companies (though it does not remove all the issues, if the company remains partly or fully state-owned). The list below is specifically relevant to state enterprises but part is more broadly relevant for all forms of state ownership. The new Act on State Enterprises, which came into force in February 2003, has addressed several of the issues raised here. A key issue which the new Act has sought to address is to get rid of cross-subsidies. ●

Subsidies and cross-subsidies have been major issue, where a state enterprise did not have a tight budget constraint, and/or was able to cross-subsidise non-competitive activities out of revenues from competitive activities (problems with the railways led to structural change that separated the two types of activity). A state enterprise could also in the past grant loans or subsidies on non-commercial terms to a subsidiary. Under the new Act, these actions are proscribed, and only one specific type of subsidy is allowed. The state

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can provide an appropriation in the state budget in order to finance economically unviable tasks (public tasks) imposed on a state enterprise. Only two such cases are foreseen: the Forest and Park Service (for nature conservation tasks) and the Civil Aviation Administration (for an autonomous flight safety unit). The new Act prescribes that public tasks (economically unviable tasks) shall be subject to separate accounting. ●

The initial balance sheet needs careful attention. Although state enterprises are not proper limited liability companies, their creation involves setting up a balance sheet which affects their basic cost structure, and hence their competitive position in the market. If assets taken on to the books are substantially undervalued, and if debt and equity positions do not conform with private sector norms, the state enterprise starts with a built-in competitive advantage over private sector rivals.

●

Taxation is important. State enterprises and corporations are treated the same for valueadded and transaction taxes, but not for income tax. The net business income from the former is not subject to income tax if over half their operations are with other state entities. The exemption means that the average tax rate of state enterprises in 2000 was some 11% compared with 29% for corporations. This means lower costs, which can flow through to lower prices. However the way the performance target is applied can affect the state enterprise’s ability to reduce prices. If it is an after tax rate of return, it could charge lower prices and still meet the target. If it is a before tax rate of return, it might not be able to do this.

●

Performance targets matter more generally. Competitive neutrality requires that state enterprises fully recover their costs, including an appropriate return on capital. During the preparation of the new Act, the Ministry of Finance explored the rate of return of all state enterprises. 56% of their profits were returned to the government budget (which compares with 25-29% corporate tax paid by private companies over the same period).

●

The state guarantee that underpins state enterprises gives them a competitive advantage. The state is liable if they cannot meet their debts, so the risk attached to their borrowing is lower than for a company. The Ministry of Finance estimates that loan interest rates to state enterprises are about 0.5% lower than for competitors.

The use of competition law and advocacy are needed to complement specific actions, and a competitive neutrality framework would also be helpful Competitive neutrality must also be tackled from a much broader perspective, to capture issues that may not easily be identified or which may emerge later. Abuse of dominance provisions in the competition law (Chapter 3 takes a closer look) are important in this respect. But such provisions usually set fairly high thresholds – in terms of market power or conduct such as predatory pricing – and considerable damage can be done before action is taken. This problem has a potential solution in Finland through a special provision of the competition law, which states that “a restriction that is deemed to have harmful effects through decreasing efficiency or preventing or hindering the conduct of business in a manner ‘inappropriate for sound and effective competition’ may be enjoined even if it is not otherwise specifically prohibited in the statute”. The provision has not so far been directly applied. But it has been invoked by the competition authority (FCA) to advocate change, notably through its “Government and Markets” project. The FCA has investigated a number of state-owned activities from grain trading and meteorological services to road management and construction, and has been relatively successful in generating change (though not always enough).

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The experience of some other OECD countries is instructive. More explicit competitive neutrality frameworks exist or are proposed elsewhere (the Netherlands and Australia are good examples – see Box 15). Equity is a key driver. It is unfair for government to use its powers to promote its own business operations. The frameworks usually set lower thresholds for tackling abuse of dominance than competition law, and include provisions for private parties to raise neutrality problems. The FCA could be given stronger powers to pursue these issues. The limits on state aids in the EU are also potentially relevant in tackling competitive neutrality.

A comprehensive governance framework exists for state-owned companies but regulatory and commercial roles need clearer separation The general company law regulates the state as corporate shareholder, supplemented by government “decisions-in-principle” and memoranda. Decisions-in principle are important in defining more closely how state corporate shareholding should work, both in practical terms and in terms of objectives: ●

Two main interests of the state are identified: as owner, and with a special interest flowing from the government’s role to “order society”. The balance will vary between companies.

●

The board (generally made up of a managing director, external directors, and ministry representatives) is the main governance agent for the pursuit of the state’s interests. The larger companies have a two-tier system with an additional supervisory board (mainly representatives of parliament) with a broader remit to oversee the societal interests.

●

State-owned companies must be exemplary employers (compliance with labour agreements for example). The sponsor ministry must be informed of impending layoffs or redundancies. The board includes employee representatives. Incentive-based remuneration (especially equity ownership) is gently encouraged.

The state’s shareholdings are managed by the relevant ministry (nine are currently involved). For example the Ministry of Transport and Communications manages TeliaSonera, Posti, Finnair, Yleisradio, and the VR Group. The ministries appoint the board, and generally have a representative on the board. The Ministry of Trade and Industry has a co-ordinating role: it formulates general policy on ownership, helps with privatisation, and publishes an annual report on state shareholdings. Emphasis has grown in recent years on economic objectives for state-owned entities, as well as improved governance. A government study states that the central aim of the corporate governance of state-owned companies is “the production of economic profit”, taking account of the legitimate interests of the personnel and other stakeholders (this is broadly consistent with OECD guidelines). This is welcome, but it also highlights a tension in the current system under which ministries are both owners of the main firm in a sector and the regulators of that sector. This raises a major potential conflict of interest. A key objective of regulation is to secure competitive neutrality, but a key objective of ownership is to maximise profits. Strict “Chinese walls” within ministries (regulation is hived off into a statutorily separate entity) separate the two functions, and there is no evidence that problems have arisen. However, it could be awkward for the minister in overall charge, for example when a change in regulation is under discussion. The conflict of interest which individual ministers could

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Box 15. Competitive neutrality frameworks in other OECD countries Netherlands A set of “Instructions for the performance of commercial activities by central government organisations” came into effect in 1998. But these were found to be inadequate to address the full range of competition issues since private companies complained of unfair competition from the commercial activities of government organisations. Competitive advantages of government entities can include lower risk, public subsidies or tax advantages or access and privileged relationships with policy makers. Following experience with these Instructions and further policy development, the Government decided in 2001 to legislate a framework of formal rules for government commercial activities involving the supply of goods or services to third parties in actual competition with private providers so as to create more equal competitive conditions. The Bill will impose obligations on government organisations (State, provincial and municipal) and organisations with exclusive and special market rights (OEMs), as follows: ●

Rules for market access by government organisations. Commercial activities undertaken by government entities must have a specific statutory basis and result from a decision that has been underpinned by a thorough and transparent, prior assessment of the desirability of the commercial activities by a government organisation. This access rule also applies to the participation of the government in an incorporated company involved in commercial activities where the company is controlled by the government. The benefits of serving the pubic interest (not merely to generate income) through the activity must outweigh any negative consequences for private providers. Interested private businesses can provide input to this assessment, before the government organisation decides to engage in commercial activities, and have recourse to administrative law remedies if they believe the decision was not properly considered. The decision must be reassessed every 5 years. A Government and Market Commission will be an expert, non-binding advisory body for government organisations undertaking this analysis and making the decision. This Commission can also advise any private entity and its advice can enter into any administrative law complaint proceedings and act as an expert witness.

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Rules for conduct by government organisations and OEMs that aim to prevent unfair competition. Policy functions must be segregated from production functions and policy areas must not grant preferences to production areas. Specific conduct rules include a requirement that all costs attributable to the commercial activity are included in the price for the good or service (intended to prevent cross subsidies) and rules concerning accounting for such costs. OEMs may not use government funds provided to them to perform their function for any other purposes (also intended to prevent cross subsidies to non-exclusive activities). Confidential government data cannot be used in government commercial activities and non-commercial data cannot be used unless it is generally available to all commercial entities. Administrative law remedies are available in the case of misapplication of these rules as they are related to internal administrative functions of the government entity while the Netherlands Competition Authority (NMa) applies the rules of conduct. The NMa may issue a decision of violation in respect of government organisations and may also penalise OEMs.

An administrative law finding against a government entity could form the basis of an action for a civil penalty for damages by a private entity that had been adversely affected by competition from the government.

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Box 15. Competitive neutrality frameworks in other OECD countries (cont.) Preexisting commercial activities and liberalisation programmes are treated under transitional provisions that provide for continuation of existing contractual activities. Existing specific competitive neutrality frameworks – such as in respect of post and energy activities – will continue and after liberalisation be reviewed for compatibility with the Government and Markets Bill. Australia Part of the National Competition Policy Reform implemented in the mid-1990s involved the formulation of competitive neutrality principles and the establishment of special complaints mechanisms to ensure that the principles were applied effectively and the private entities could seek a solution if they had been damaged by unfair competition from a public entity with an inappropriate competitive advantage. The competitive neutrality principles required that significant government business activities should not enjoy net competitive advantages over their private sector competitors simply by virtue of public sector ownership. Consequently, governments committed not to use their legislative or fiscal powers to advantage their own businesses over the private sector. The motivations behind this policy were efficiency and equity concerns. Thus: “In the public sector, increased attention has been given to the core role of government and how government services can be best delivered in an environment of resource constraint. This imperative has driven reforms ranging from privatisation, deregulation of public monopolies, competitive tendering and contracting to various management reforms, including devolution and accountability frameworks. Competitive neutrality requires that where governments choose to provide services through market based mechanisms that allow actual or potential competition from a private sector provider, that competition should be fair. In this sense, competitive neutrality will operate to ensure the integrity of other reforms to improve the operation of government businesses.” Competitive neutrality requirements are applied essentially to commercial activities, i.e. significant government business activities that charge for their services in an actual or potentially competitive environment where the business managers have some discretion in price setting. The requirements do no apply to non-profit, non-business activities. The principles were elaborated in the following areas: ●

Corporatisation. The legal and governance structures of businesses were reviewed.

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Taxation. All tax exemptions were removed or tax equivalent regimes were developed for entities not legally separate from government.

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Finance. Advantages from implicit guarantees could be addressed by a neutrality charge.

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Rate of return requirements. Businesses were required to fully recover costs and earn appropriate rates of return on capital.

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Regulatory neutrality. Special exemptions from regulatory arrangements (e.g. safety or reporting requirements) were removed.

The complaints mechanism is an administrative procedure undertaken by specially established complaints bodies in each jurisdiction that can assess whether the competitive neutrality requirements are being complied with. If the complaint is found to be verified, including by means of a public enquiry, and the matter is not then remedied the complaints body makes a public report with recommendations to the Treasurer who must determine the matter. Investigations have been implemented at the national level in a range of areas including airport services, meteorological services, post, television, security services, railways and job placement services.

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face would be removed if ownership functions were vested in a single ministry without the relevant regulatory powers. This would also help the coherence of ownership policy. The government recognises this issue and made a policy statement in September 2002 to the effect that ownership functions for companies operating in a competitive market would be centralised in one body (companies with public functions would stay with the regulating ministry). A difficult debate continues on where to locate the central body.

State enterprises have their own specific, but somewhat cumbersome, framework A major reform of legislation has taken place with the adoption of the new State Enterprises Act in December 2002, which replaces the 1987 Act on State Enterprises. This sets out the particular framework for state enterprises, covering operations, finances and management. Each state enterprise is the subject of a further more specific Act. Adoption of the original 1987 Act took several years. Sensitivities about the change had to be overcome and a consensus had to be established on the respective roles of parliament, government (the cabinet), ministries, the board, management, and labour. Ambiguities and overlap remain from this process. The formal governance structure cascades, with decisions from parliament to the government, the Ministry of Finance and relevant ministries, to the board and management. Parliament sets the budget and operating targets. The government approves this and supplements the targets set by parliament with financial and performance targets (in an iterative process with ministries). The government also decides on the distribution of profit (which may be delegated to ministries), and appoints auditors. However with the new Act the role of the government has diminished in favour of the relevant ministry. These many layers of governance do not always add much value to the whole. Initial guidance is often just repeated down the hierarchy, and there is overlap as well as a fragmentation of control. Better separation and definition of responsibility would improve efficiency. The enterprise itself decides on issues of “its operations, economy and administration” other than those set already. It must make an annual report. Crucially, state enterprises are (usually) responsible for setting their own prices “based on business principles” to achieve their operational targets (sometimes giving rise, as noted earlier, to competitive neutrality problems). The framework promotes a strong level of political steering, as well as transparency. It is also inevitably slow. The old Act was not well adapted to enterprises operating in a competitive context, which must be flexible in response to market conditions. Hence the general trend to turn such enterprises into companies. The framework was much better suited to the promotion of public objectives. The problems arise when an enterprise covers both public and commercial functions. As already noted, public and commercial functions do not work well together. The necessary government steering applied to public functions is not helpful to commercial activity which must be responsive to other types of pressure. However synergies or economies of scope may exist between the two functions so the decision on how to manage this is not always clear-cut. The new Act is stronger on the application of business principles. It stipulates that a state enterprise has to operate based on business principles and on the main service and other operating targets set by Parliament on each enterprise.

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Government ownership is generally reflected in board representation by the relevant ministry. Approaches vary between ministries, especially as regards the handling of confidential business information. Transparency of and reporting on public functions is also uneven.

A fundamental reform of legislation will address some of the issues relating to state enterprises The State Audit Office, responsible to Parliament, carried out an audit of the management and control of state enterprises in 2001. It focused on three state enterprises (the CAA, Senate Properties and the Finnish Forest and Park Service) but its findings seem relevant across the board. It concluded overall that “although there is room for improvement…. control as a whole cannot be viewed as working poorly in any of the state enterprises included in the audit”. Areas identified for improvement included the problem of overlap and fragmented control; the need for better performance targets and information; the need for more flexible controls on investment and borrowing; the recruitment of board members with business and management skills; a clearer approach to the state as purchaser/provider; and greater emphasis on long term planning. The State Audit Office also recommended improvements to the way in which the governance framework flowing from the ownership authority of the state could be improved (for example, the need to make a clear distinction between the issues of control and of management, and to balance carefully the respective roles of paid management and state representatives). As noted, a major reform of the State Enterprises Act has taken place, which addresses some of these issues (Box 16). Governance will move closer to private sector norms. But some important competitive neutrality issues are not addressed: the need for a mechanism allowing competitors to seek redress when a state enterprise is not neutrally steered (for example a performance target is set too low), and the income tax exemption.

Box 16. Reform of State Enterprises A new Act on State Enterprises came into force in February 2003, which promoted some major reforms: ●

The Parliament sets service level and other operating targets (compared with the existing Act, this position is broadly unchanged).

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The government determines the assignment of assets to a state enterprise and its opening balance sheet, confirms its annual accounts and appoints and discharges its Board of Directors. The assets assigned to a state enterprise shall be evaluated at current/ market value, and the auditors shall evaluate the assets and obligations before the government takes a decision on the assignment of assets (a reduced and clarified role).

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The relevant ministry handles all other steering matters, including performance steering, although matters of economic importance or other significance could be referred to the Cabinet Finance Committee (an enhanced role, consistent with potential for delegation under previous Act).

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The Board of Directors appoints and discharges the Managing Director. The Board and Managing Director is liable for damage caused to the enterprise with intent or through negligence (aligned with incorporated company governance structures and responsibilities).

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Box 16. Reform of State Enterprises (cont.) ●

Responsibility of auditors is defined. An auditor evaluates the neutrality of commencing balance sheets in terms of asset values and assigned debts (aligned with incorporated company requirements for annual audits but otherwise a new function).

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Consolidated accounts of a state enterprise and any subsidiaries is required.

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Services acquired by the state are under a budget appropriation and subject to the government procurement arrangements.

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An implicit guarantee fee is collected from state enterprises in respect of borrowings from capital markets with the intent of placing them on a neutral footing with private competitors.

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A service fee is levied on state enterprises for services provided to them by the State.

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The state indemnity system is discontinued, with any insurance for property damage and third party liability obtained from private insurance markets. However statutory insurance related to personnel (such as pension benefits) shall be paid out of government funds.

State ownership policy Current policy does not promote significant privatisation This report has so far concentrated on developments in the state-owned sector. But in principle, the end point of the commercialisation process set in motion by the creation of state enterprises could be privatisation. In fact, current government policy makes it quite clear that state ownership will continue to be part of the Finnish political landscape. It is expressed as follows. “The State carries out an active and pragmatic corporate ownership, aiming to achieve good dividend yield and rise in value of the investment. The state as an owner seeks to develop its companies so that they would be interesting objects for private investors. The State does not have a company privatisation programme, but the possible gradual extension of the ownership base is based on company-specific deliberation with the goal of strengthening the company’s operating conditions.” Parliament has tight control over any privatisation. State shareholdings are regulated by the 1991 Act on the Use of State Shareholder Power in Certain Limited Companies Carrying on Economic Activity. If a share sale would lose the state a qualified majority interest, majority control, or a qualified minority interest, Parliament must specifically consent to the sale. The Parliamentary debate is strongly influenced by the unions’ view that government ownership in commercial entities is a form of insurance against job losses.

There is no clear framework to guide privatisation decisions Where it does decide to privatise, Finland’s approach is not guided by any clear framework (the same is true of many other OECD countries). The coherent and open framework that underpins the commercialisation and governance of state-owned entities does not exist for the final step of privatisation. Privatisation has been careful, staged, and done on a case-by-case basis according to the pragmatic circumstances of the moment. There has apparently been relatively little substantive public debate on the desirable ownership boundaries of the state, nor have governments been ideologically in favour of, or implacably against, privatisation. Parliament/union influence is strong. Privatisation has

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proceeded furthest in sectors which are purely commercial and do not have significant public policy elements. This is implicitly consistent with a well principled privatisation policy. Yet the government’s policy position over what it should and should not own, and thus what it should or should not privatise, is fragmented.

Conclusion Reforms to commercialise central government services have been generally successful. Efficiency, effectiveness, and quality of service have improved, competition has increased, profitability has improved and real prices have gone down. Given the unusually large size of the Finnish state sector such reforms were necessary to unlock the potential for a better performance by a significant part of the economy. The reforms have generated a major change in the structure of economic activity. The Finnish state was until fairly recently a direct provider of a wide range of services. Where (as in many cases) an activity has not been fully privatised, a framework for arms’ length management of ownership responsibilities has been put in place, leaving state-owned entities to operate in an increasingly competitive environment. The state enterprise model was the spearhead for this change, and most state enterprises have now been turned into (often state-owned) companies. However two central issues still need attention. The first concerns the continuing scope of the state-owned sector and the boundary between it and the private sector. An obvious end point for many reforms is privatisation. As a general principle commercial activities that have no link with public functions should be privatised. Of course this definition is not always clear-cut and policy reasons may encourage a different conclusion in different countries. Yet in Finland, privatisation is currently done case-by-case. Its potential scope is also limited by parliamentary control, which is strongly influenced by the union view that supports state ownership as an insurance against job losses. This is a pity, as a broader view would help to ensure that the full benefits of privatisation are reaped. Cost/benefit analysis would help decision-making. The second issue concerns the handling of the state-owned sector which remains problematic. Competitive neutrality needs more work. The governance and regulatory framework does not yet provide a fully level playing field for competition between the private and state-owned sector: private companies are losing out, and the pressure on state-owned entities to maximise their efficiency is reduced. Public/regulatory and commercial functions are not as clearly separated as they should be, and there is an unresolved tension over how, and how much, political control should be exerted over public functions that remain embedded in state enterprises. In short the governance system for state enterprises needs important adjustments to ensure it is “fit for purpose”.

Policy options for consideration 1. The implementation of an explicit competitive neutrality framework for state enterprises should be considered. Finland has paid careful attention to setting up the right starting conditions for competition between state enterprises and the private sector. The new State Enterprises Act is welcome as it addresses many remaining issues. But one important issue is only partly addressed: the softer budget constraint on state enterprises that means they can earn a lower rate of return and undercut their private sector competitors. The competition

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authority has some scope to address this issue through advocacy and the application of abuse of dominance provisions in the competition law (however the threshold for applying these provisions is quite high). The general provision in the competition law against conduct that could harm competition could also, in principle be applied, but is untested. A more general approach may be warranted, drawing on the frameworks developed by other OECD countries (the Netherlands and Australia). If this responsibility were given to the competition authority it would need extra resources.

2. The present income tax exemption for a state enterprise that earns most of its income from sales to the state should be repealed. This is a specific distortion that has a major potential impact on competitive neutrality, because of its effect on prices: state enterprises can afford to charge lower prices because their costs are lower. And the eligibility rule is arbitrary.

3. The state’s ownership functions should (as already proposed by the government) be vested in one body so as to remove the potential for a conflict between regulatory and commercial objectives, and to promote a more coherent ownership policy. Reforms have rightly sought to separate the government’s regulatory and ownership functions, which is essential to ensure that regulation is applied (and perceived to be applied) neutrally rather than favouring state-owned entities. However the two functions remain within the same ministries. Despite the strict “Chinese walls” that have been applied within ministries (with success it seems), it would be much better, and avoid potential future problems, if the functions were put under separately accountable ministries, as some other OECD countries have done.

4. Progress needs to be made on the governance of state-owned entities. One important unresolved issue in the reforms is the handling of the government’s political control over the public functions that remain within state-owned entities. The government needs to be clear about the degree of political control that it wants to exercise, and also needs to develop the governance structures to achieve this. Tensions over this issue have delayed further reforms. They need to be resolved.

5. It would be desirable to broaden privatisation plans, guided by a clear and principled policy framework. Privatisation has been carefully carried out, but on an ad hoc basis, rather than according to a developed framework of guiding principles. A framework approach has worked well for earlier stages of the commercialisation process (the development of state enterprises) and could help here too.

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B. THE POSTAL SECTOR Context and history The postal sector in most OECD countries has experienced slower and more timid reforms than other state-owned public utilities. It generally remains dominated by stateowned vertically integrated monopolies that are largely protected from competition. Finland is unusual: a leading liberaliser in principle, but struggling at the same time to generate competition. 1994 saw the complete de jure liberalisation of the postal market, and there are no remaining “reserved areas” of post for the original incumbent, Finland Post Corporation (Posti), which was set up as a state enterprise and is now a company regulated at arms’ length. However Posti remains fully state-owned, and there has been no new entry into the core letter post market. The first steps were taken in 1993 with legislation that set out a new framework for postal operations. The main objective was the provision of postal services throughout the country on equal terms and at reasonable cost. Commercial functions were separated from regulatory functions (the Ministry of Transport and Communications is responsible and the regulator is part of the Finnish Communications Regulatory Authority FICORA). The market was opened to competition, and a regulatory framework based on licensing was set up. Special attention was paid to the universal service obligation (USO), defined as mail up to 2 kg. This is not reserved for the incumbent, but the USO provider must have a presence in each municipality. Price control comes from the threat of entry and the abuse of dominance provisions of the competition law, rather than specific price regulation. Prices must be reasonable, fair and allow all users access to the service, as well as being transparent and non-discriminatory. Access to or interconnection with the networks of different postal operators is not mandated, but left to commercial negotiation. FICORA must approve such agreements, but the absence so far of new postal operators on the market means that the provision has not yet been tested. The competition law applies fully to the postal sector. Posti remains by far the dominant company. It is licensed to provide postal services nationally (and so to carry the main USO obligation) until 2021. It retains a de facto monopoly of the letter post. It is comfortably profitable: in 2001 it achieved a profit of EUR 32 million on a turnover of EUR 1 billion. Some 39% of Posti’s revenue in 2002 was from letter mail services where it has a de facto monopoly. It is Finland’s second largest employer. Its service delivery quality is very high, and it is rated as good or excellent by some 70% of its customers. Over 200 other entities are in the market as couriers for parcels, newspapers and express services.

Market entry and market conditions These are difficult. Other potential operators have found it hard to make headway in a market for which the regulatory framework is not yet well adapted to promoting competition (see also USO below). There have been only two candidates so far. The first (Suomen Suoramainonta Oy) acquired its licence in 2002 (for a period of three years), and the second (Suomen Sinivalkea Oy) withdrew its application. The market is de jure open to all comers but licence applications by new entrants have not had an easy passage and can take years to resolve, including court action. Some potential new entrants give up. The depth of the problem with the government’s attitude to real liberalisation is reflected in the experience of a new entrant in 1995 that led to the enactment of the Postal Fees Act because of concerns about potential damage to universal service from new market entry. A number of specific barriers have been identified, including onerous USO requirements such as daily delivery, the

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fact that Posti owns the address register, and access to Posti’s network. Also short licence periods do not allow time for a business to develop (as noted, and although the law provides for licence periods up to twenty years, the new operator has a licence for only three years). A more general issue with the regulatory framework, shared with other state-owned companies (see Section A), is that the same ministry – the Ministry of Transport and Communication – has both ownership and regulatory oversight of Posti which could lead to a conflict of interest. The regulator (FICORA, which reports to the ministry) does not consider this to be an issue, but this is because there is no competition in the letter post yet. The issue would arise when real competition takes root, as it has for telecoms. Competitors face a serious challenge with Posti, which is dominant and dynamic at the same time. It has been active in expanding its business base in strategic growth areas such as electronic messaging. It is also active in the purchase and sale of subsidiaries, and is moving from traditional service delivery to agency arrangements. It does seem that, absent actual widescale competition, the threat of competition and loss of market share has boosted Posti’s performance. The competition authority (FCA) has been involved in the postal market, with a number of cases and investigations generally centred on whether Posti is abusing its dominance by overcharging. In many cases the conclusion has been negative (prices have been found to reflect costs) but the FCA has sometimes recommended action on pricing. It seems that the Finnish competition law has difficulty pinning down anti-competitive conduct by Posti. Yet the issue is critically important for the development of competition. The market power of postal incumbents is very strong. And state-owned companies like Posti are more likely to be able to engage in anti-competitive cross-subsidisation because they may not face strict profit-maximising objectives or hard budget constraints. Accounting separation of the USO provider’s activities is required (separation of services included in the USO from other services, with itemisation of USO services) and can help to determine whether Posti is in fact engaging in anti-competitive cross-subsidisation. Another problem more specific to the Finnish competition law may be the need (which can be difficult) to show a close connection between conduct and the harm caused by it. The Finnish market and regulatory experience can be contrasted with that of other liberalisation experiences across the OECD (Box 17).

Box 17. Experiences of postal market liberalisation Three countries have fully liberalised their postal sector: Sweden and New Zealand, as well as Finland. Sweden and New Zealand have several operators competing in letter delivery. Australia and the Netherlands have also made significant reductions in the size of the reserved area. Quality of service improvements increases in profitability, in employment and real reductions in prices have been reported in the countries where markets have not only been opened but where strong competition has emerged. Although fears are often expressed that reform will lead to a loss of employment in this sector, both Australia and the Netherlands report that the level of employment in the postal sector has increased during the reform process, due to a diversification of the range of services offered by the incumbent. In Australia and New Zealand the incumbent postal operator is profitable and has reduced real prices consistently over a number of years. New Zealand reports competitors offering

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Box 17. Experiences of postal market liberalisation (cont.) significantly lower prices than the incumbent. Although neither New Zealand nor Sweden directly compensate the incumbent for non-commercial obligations, neither country reports problems in maintaining service quality. New Zealand reports that the postal incumbent is experimenting with an enhanced level of service quality in some parts of the country. The postal market in New Zealand is especially interesting. It was opened to full competition in 1998 (liberalisation started in 1987 and had already generated significant improvements in terms of productivity and profitability). There are no licence requirements imposed on operators, and no service or quality conditions. Operators carrying addressed mail for less than NZD 0.80 must register with the Ministry of Economic Development which maintains a public list of registered operators. In addition, operators must mark postal articles with their postal identifiers (stamps), respect the privacy of postal communications, report to the government if a postal article is posted in contravention of the law, and keep records of postal articles detained or opened. Operators may erect and maintain mail collection boxes on roads and public places. New Zealand Post is under the same regime, but is subject to certain specific obligations. These are imposed through the 1998 Deed of Understanding, an agreement between the government and New Zealand Post (there is no sector specific regulator). This specifies that New Zealand Post will offer access to its network to other operators on terms and conditions at least as favourable as those offered to equivalent customers. The statute does not provide for a regulatory dispute resolution mechanism if New Zealand Post and a competing provider disagree about the terms of access. Such disagreements could be resolved only under the general competition law (although it appears that this has not yet been applied to access disputes since liberalisation). New Zealand Post has agreed to a price cap of NZD 0.45 for standard letters. In addition, it has agreed to maintain certain minimum weekly delivery schedules, a minimum number of delivery points, and a minimum number of full service post offices. The cost of these social obligations is not made explicit and is met by New Zealand Post. It had agreed to these terms provided that it is designated as the sole New Zealand “postal administration” within the Universal Postal Union (UPU) for a transitional five-year period, which will expire in April 2003. This designation confers certain financial benefits on New Zealand Post as a result of UPU’s terminal dues system for international mail (the flow of international mail itself is open to full competition). The government has agreed that it will review the terms of the Deed of Understanding should it appoint a second (or another) operator under the UPU, and is currently reviewing this issue. New Zealand Post is also subject to certain disclosure requirements, including disclosure in separate accounts of revenues and earnings from its activities formerly subject to a statutory monopoly; standard terms and conditions and important discounts granted off these terms and conditions; the number of delivery points and postal outlets and finally, the full details of all access agreements with other postal operators. Since liberalisation, a significant number of independent operators have registered with the Ministry of Economic Development. As of January 2003, approximately 30 operators had active registrations. New Zealand Post has improved it services in a number of ways since the government announced its intention to liberalise the standard letter market, including longer opening hours and special prices for international mail.

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The Universal Service Obligation This is an important policy issue for Finland (as in most other OECD countries). In essence, it is feared that liberalisation could damage the universal postal service, although the experience of countries that have liberalised the furthest does not support this. The fear has driven significant regulation. As well as the obligations on the main USO provider (currently Posti), USO conditions (apart from presence requirements) are applied to other operators – daily deliveries and high service quality standards. The 1997 Postal Fees Act aims to support the provision of postal services in remote areas by applying a turnover tax to new entrants who “cherry-pick” by servicing higher population density areas. This helps to keep profits high for Posti in those areas, allowing it (potentially) to cross-subsidise the loss-making areas, which it must service under its USO obligation. Fears over universal service have some foundation in that there are costs attached to a USO obligation (service to some areas will not be profitable). But equally there are benefits (the competitive advantage to the USO provider from economies of scale and scope, and from controlling an essential facility network to which other market players must connect if they want to offer customers full service delivery). Regulation should therefore be designed to ensure that the net cost of the USO is recovered, no more (the principle which underlies the EU postal regulatory framework). It should also aim at competitive neutrality. The Finnish approach falls short of these aims. The idea behind the Postal Fees Act – that Posti would be pushed out of profitable areas and left with the unprofitable areas – has not been borne out by the experience of other countries. The tax imposed by the Act makes market entry more difficult that it needs to be. And the fees are collected as general tax revenue (instead of being put in a universal service fund that would be used to compensate all operators with USO responsibilities). Nor has the government made a detailed study of the extra cost burden on Posti, which is a profitable company. One estimate puts the burden of the USO at 5% of turnover in the EU, and just 0.7% in Finland. USO regulation could be more efficient and do more to promote competition. Two main approaches are possible (and have been tested in other OECD countries). The first is to tolerate geographic differences in pricing to reflect costs (as in New Zealand). The second is to set up a universal service fund through a charge on all operators, and use a tender or auction process for allocating universal service responsibilities, together with compensatory subsidies drawn from the fund.

Conclusion Finland’s position is probably unique, with full liberalisation (well ahead of the basic EU requirements) but a still hugely dominant incumbent and very immature competition. The threat of competition appears so far to have helped Posti’s performance. But this threat will lose its power if significant real competition does not emerge. The development of competition is also important for tackling the growing challenge of electronic communication, which can be expected to undermine the current importance of letter mail (already regarded as a declining market in Finland). Protected markets are unlikely to cope well with this technological change. The challenge is universal but Finland may have to face it sooner than others because it is one of the most “Internet-connected” OECD countries. To grow more competition will require important adjustments to the regulatory framework, especially as regards market entry. The postal sector has large natural barriers to entry, and particularly needs an effective regulatory framework for competition.

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II.5.

REGULATORY AND COMPETITION ISSUES IN KEY SECTORS

Policy options for consideration 1. Consideration should be given to abolition of the Postal Fees Act, and at a minimum the tax that it imposes should be reduced. The special barrier to limited geographic entry imposed by the Postal Fees Act is much higher than is necessary to achieve its stated purpose (protecting universal service in remote areas). The barriers to entry into the letter post market are very high in any event (given in particular the scope and scale benefits of the incumbent network). Arguably, there is no need at all for a special tax to prevent inefficient entry. At a minimum, the rate of tax should be reduced markedly, and consideration given to whether the basis for its calculation should be changed to make it more competitively neutral. But this would be difficult and it is probably best as a practical matter simply to abolish the tax.

2. Regulatory powers to facilitate interconnection with Posti’s network should be tested and probably improved. If additional competition is to be encouraged, the regulatory powers of FICORA to facilitate interconnection agreements need to be deployed. Access arrangements should meet all the conditions for successful access that have been garnered from experience in other network industries. These include cost reflective and non-discriminatory pricing, as well as the possibility for the regulator to intervene to set prices and ensure that quality variation is not used to frustrate access. Access is necessary not only to physical infrastructure but also intellectual infrastructure, in this case the address register, so that redirection is possible and address uncertainties can be resolved.

3. Licence terms for competing operators should be long enough to ensure reasonable business planning. Short licence periods do not allow sufficient time for a business to develop.

4. The competition authority and FICORA must ensure that they co-operate closely in tackling issues arising from Posti’s dominant position in the market. In the event that additional competition was permitted by implementation of the above recommendations it would be important for the FCA to remain vigilant against possibly abusive conduct by the incumbent and to co-operate closely with FICORA with respect to issues that arose at the margin of FICORA’s additional regulatory powers over access and the prohibition against abuse of dominance in relevant markets.

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APPENDIX 1 Map of Finland

NORWAY

Irarijärvi

en

Ou

liv

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sm

nk

Kö ki

sjo

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ki

Kem

rio

Lu

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Rovaniemi

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SWEDEN

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Iijoki RUSSIA Oulu Ou luj ok i

Oulujärvi

FINLAND

Relinen Vaasa

Jyväskylä

Salmaa

Näsjärvi Päijanne

Ladozhskoye Ozero Hemeenliona Áland Islands

Kouvola

Turku Helsinki

Mariehamn

Baltic Sea

Source: IEA/OECD.

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APPENDIX 2

APPENDIX 2

Appendix Tables

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Industry

Key legislation/regulatory framework

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Regulation on prices

Regulation of entry and exit

Other regulations

Telecommunications Business telecommunications had been partially liberalised in the late 1980s, followed by GSM (mobile telephony) networks and data transmission in 1990. The market was fully opened to competition in 1994. The Telecommunications Market Act (1997) obliges to unbundling of network and operational services. Establishment in 1998 of the Finnish Telecommunications Regulatory Authority FICORA. Shared use of networks (2002). Broadcasting networks under telecom legislation and competition (2002).

FICORA regulates the market on ex post basis with no ex ante approval of pricing.

Notification has to be submitted to the Ministry of Transport and Communication, but otherwise entry and exit are free. Licenses for mobile telephony are granted on the basis of economic viability. In case of shortage of frequencies beauty contest is applied. Licences are required when using frequencies.

Ministry of Transport and Communication supervises frequency allocations. A new law that will take effect in July 2003, the Communications Act, will apply to all types of communication networks and services and its aim is to promote technological neutrality in regulation.

Electric power

In 1995 the Electricity Market Act fully opened up production and trade to competition. The act introduced third party access to the monopolistic grid and allowed large users to choose between different suppliers. From 1997 all customers could choose their supplier, and from 1998 they could do this without paying for new meter. In 1997 national grid was separated from the other electricity companies to form a public limited company also controlling the transmission network to neighbouring countries. The most important regulatory authority is the Energy Market Authority, which advises on issues related to the Electricity Market Act and controls the market on an ex post basis.

The electricity market is not subject The Ministry of Trade and Industry to price regulation since the end delivers licenses. of the 1980s. Tariffs for electricity are based on competition. The Energy Market Authority supervises prices.

Natural gas

Natural gas is a regulated national monopoly, however there The Energy Market Authority has been some initial steps taken to promote competition regulates prices. and consumer choice. Gas is solely imported from Russia by Gasum, a 24% state owned company. Consumers cannot import directly, although a secondary market has been established recently to trade unused gas. EU Natural Gas Directive has implemented in 2000, but open competition is postponed till the grid has not been connected to the European network.

As long as Finland’s natural gas market is not linked to nets of other EU member states, there will be only one provider.

Insurance and banking

The liberalisation measures at the end of the 1980s were No supervision on prices in the followed by a financial crisis and restructuring of the banking insurance sector. sector. Harmonisation with the EU legislation took place in the 1990s. Sector supervised by the Insurance Supervision Authority and Ministry of Finance.

A concession is demanded for Minimum capital requirements insurance companies. Concession and professional qualifications. is granted by the Ministry of Social Affairs and Health.

Licenses are granted on basis of reliability and professional qualifications. Safety regulations applied by Safety Technology Authority. Power plant construction regulation is not subject to permits except for environmental and land use permits.

The 2001 Natural Gas Act promotes change to the system, as it requires the unbundling of supply from the grid and sets up a new pricing system.

Remaining regulations on prices, entry, exit

Recent amendments to Electricity market Act have fostered competition and lowered prices. The MTI is preparing an amendment to the Electricity Market Act that would require the separation of grid operations into distinct companies.

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Table 1.1. Sectoral regulatory reform in Finland

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Table 1.1. Sectoral regulatory reform in Finland (cont.) Remaining regulations on prices, entry, exit

Industry

Key legislation/regulatory framework

Regulation on prices

Regulation of entry and exit

Other regulations

Railways

The rail sector is kept as a monopoly, but the ground is being prepared for some competition with corporisation and functional separation of activities. State monopoly transformed into state enterprise in 1990 and later into a limited liability company in 1995. Unbundling of infrastructure and exploitation in 1995. Finnish Rail Administration was set up in 1995 as a rail transport authority. Rail transport has been partially opened to competition by the Rail Transport Act which entered into force in March 2003.

Rail freight prices have been deregulated since 1990, and rail passenger prices since 1991. The board of VR Group Ltd sets rail transport prices according to the competition from other transport modes (the Ministry of Transport and Communications has a Member in the board).

No free entry, because of state controlled market.

Tight conditions for operating National freight transport will be licences according to the 2003 law. opened to competition in 2008; if EU’s Second Railway Package is accepted (a political agreement was reached by the Transport Ministers Council in March 2003), rail passenger transport will probably continue to be regulated even after 2008.

Air transport

State owns most airports, but Civil Aviation Administration runs the exploitation.

Finnish Competition Authority is investigating loyalty programmes.

No entry limitations for EU and EEA Safety regulation enforced by the carriers. Flight Safety Authority.

Road transport

Road freight liberalised in 1991, but still role of licenses is important. Bus transport is becoming a more competitive market. Taxi market still regulated by government. Provincial State Office is supervising bus transport.

Maximum price fixing for taxis by Entry is limited to the taxi market. Ministry of Transport and Entry is partly limited, when Communication (MTC). unsubsidised, to the bus market. Maximum price fixing for regular trips for buses (44 trips smart card) by the MTC.

The road freight sector has fewer Controlled competition will restrictions that in other EU probably remain the main model for countries, apart from stronger than bus transportation. average regulation on driving behaviour.

Postal services

In 1994, commercial functions were separated from regulatory functions and the complete de jure liberalisation of the postal market took place. There are no remaining “reserved areas” for the original incumbent, Posti. FICORA is the regulator of the sector.

FICORA supervises price setting according to the Act on Postal Services.

Some barriers to entry exist. Entry to postal deliveries less than 2 kg is subject to a licence. Further barriers include specific requirements, such as daily delivery, the fact that Posti owns its own register and problems with access to Posti’s network.

Provider of non-universal services is surcharged in order to finance services in remote areas. The fees are collected as general tax revenue. Access or interconnection with the networks left to commercial negotiation.

Pharmacy

Regulated sector.

It has been an official policy to permit price competition at least below the official price ceilings. Retail prices of pharmaceuticals are based on their wholesale prices. Sale margins are set by government decree. Pharmacies can give discounts only to the regular customers and health care institutes.

Pharmacies need a licence to operate. National Agency for Medicines limits entry by setting high qualifications and needs.

Professional qualifications.

Retail sector

State-owned company, Alko, has statutory monopoly on No regulation on the prices of retail sales of alcoholic beverages. Though its production alcoholic beverages. and wholesale activities have been separated from the retail operations, possible abuse of its dominant position in the wholesale and import market is a concern.

The law on controlling retail hours limits competition and protects the profits and positions of particular classes of retailers.

Several regulatory constraints such as opening hours and controls on land use exist. Some sectors are exempted from opening hours limit.

Plans for privatisation of monopoly for alcoholic beverages. Land control limits entry, especially of foreign companies. Further liberalisation of opening hours.

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Source: OECD.

Limitation for non EU/EEA carriers.

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136 Table 1.2. Potential impacts of regulatory reform in Finland Industry

Industry structure and competition

Impact on output, price, and relative prices

Impact on service quality, reliability Impact on sectoral wages and universal service and employment

Efficiency: productivity and costs

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Telecommunications State monopoly in long distance and international services was replaced by competition, but mainly local monopolies still remained in local connections. Recent measures by FCA allowing customers to obtain competitive bids from different operators might change the competitive situation in due course.

Absolute and relative decline of Improvement of service quality and Positive impact. prices. However, disappointing reliability, more freedom of choice development of local tariffs for customers. because of the dominance in the local loop of the fixed network. The decrease of tariffs for mobile calls was especially substantial.

Acceleration of productivity and declining unit costs. Liberalisation also provided a positive condition for growth in the home and export telecommunications equipment market.

Electric power

Oligopoly has been replaced by monopolistic competition. Since 1997 the Finnish power market has been fully integrated with Nordic electricity market. The State still owns a large part of the transmission grid. Unbundling of competitive activities from the grid is still weak. Recently foreign companies have been active in acquiring electricity retailers and local networks. The number of producers and companies has been falling as a result of restructuring, mergers and acquisitions in the sector.

Prices have decreased and they are among lowest in EU. However, unusual weather conditions resulted in a dramatic 10-19% raise in prices in 2003.

More freedom of choice for customers. However, a relatively low rate of switching in reality compared to other EU liberalised countries.

Higher level of productivity.

Natural gas

Monopoly with share of government.

No price decrease.

Consumer dissatisfaction with the lack of competitive suppliers.

Insurance and banking

Oligopoly in the insurance sector.

Relative price increases.

Improvement of service level due to Negative employment effects. ICT applications.

Railways

State monopoly. Strong competition from other transport modes, especially road transport (e.g. cars represent 80% of the passenger market, buses and coaches more than 10% and rail passenger less than 5%). In freight, rail freight has 25% of the transport market.

Output rising as well as prices.

Air transport

Air transport is an oligopoly with de facto limited Overall price level relatively high competition: a state-controlled national carrier (with 92% due to lack of competition share of the passenger traffic) and three other small carriers. and small size of the market.

Road transport

Many small suppliers exist in the bus and road freight transport sector.

Costs for the authorities (controlled competition) have been coming down in bus transportation.

Positive impact.

Increase in productivity. VR Group Ltd is one of the most profitable companies in the European transport sector.

Service level is good, as well as reliability.

Price stability.

Lack of drivers in the Helsinki Metropolitan Area.

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Table 1.2. Potential impacts of regulatory reform in Finland (cont.) Impact on output, price, and relative prices

Impact on service quality, reliability Impact on sectoral wages and universal service and employment

The state company is a de facto monopoly in the letter post market. Competitors exist in the market of couriers for parcels, newspapers and non-addressed mail as well as express services.

Prices have been rising recently. Yet the competition authority found it difficult to prove that the incumbent abuses its dominance by overcharging.

Limited choice for customer, apart Decreasing employment. from courier services. The threat of competition so far has improved the state company’s performance, but the effect might loose power if real competition continues not to occur.

Pharmacy

Pharmacies operate in a relatively uncompetitive market. There are 800 community pharmacies. FCA attempts to inject a more competitive approach have not been very successful, partly because of the view that competition is not the only important policy issue, and that distributional and equity considerations are also important.

Prices are on EU level. Costs for the Equitable nation wide services customer depend on of good quality. reimbursement, which varies depending on the medicine and sickness.

Retail sector

The retail sector is very concentrated: two retail groups Due to the concentrated market and There are relatively few outlets account together for nearly 70% of Finland’s daily consumer lack of competition prices are high. and shops are large. goods sector. However for the first time a low price foreign chain entered this market in 2002.

Industry

Industry structure and competition

Postal services

Efficiency: productivity and costs Moderate productivity increase. Posti is a dynamic and profitable company that improved its performance due to the threat of competition.

There is an effect of the pharmacy fee that is proportional to turnover and is meant to even out differences in profitability.

Labour productivity and employment are relatively low.

Efficiency appears low.

Source: OECD.

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Bibliography The bibliography used to prepare Chapters 2 to 5 of the Synthesis Report is available at the end of each background reports. Those are free of charge and posted on the Web site at www.oecd.org/regreform/ backgroundreports. For Chapter 1 of the Synthesis Report, here are the main references: Castells, Manuel and Himanen, Pekka (2002), The Finnish model of the information society, Sitra Reports Series 17, Vantaa. Central Pension Security Institute (2002), “Arvioita työmarkkinajärjestöjen sopiman yksityisalojen eläkeuudistuksen vaikutuksista” (Estimations on the Effects of Private Sector Pension Reform Agreed by the Social Partners), Eläketurvakeskuksen monisteita, No. 40, Helsinki. Eschenbach, F. and L. Schuknecht (2002), “Asset Prices and Fiscal Balances”, Working Papers, No. 141, ECB, European Central Bank, Frankfurt, May, www.ecb.int/pub/wp/ecbwp141.pdf European Commission (2001), “Budgetary Challenges Posed by Ageing Populations”, Economic Policy Committee, EPC/ECFIN/655/01-EN final, Brussels, October, europa.eu.int/comm/economy_finance/epc/ documents/ageing_en.pdf Ilmakunnas, S. and J. Rantala (2002), “Evaluating the Unemployment Pension Reform in Finland”, paper presented at the Ninth International Research Seminar of FISS (Foundation for International Studies on Social Security) on “Pension Reform”, held at Sigtuna in Sweden, June. International Energy Agency (1999), Energy Policies Finland, 1999 Edition, June 1999, Vol. 1. No. 6. Jalava, J. (2002), “Accounting for Growth and Productivity: Finnish Multi-factor Productivity, 1975-99”, Finnish Economic Papers, forthcoming, www.taloustieteellinenseura.fi/fep/articles.htm Laine, V. (2002), “Evaluating Tax and Benefit Reforms in 1996-2001”, VATT-Discussion Papers, No. 280, VATT, Government Institute for Economic Research, Helsinki, www.vatt.fi/julkaisut/k/k280.pdf Ministry of Finance (2002), “Stability Programme for Finland: November 2002 Update”, Helsinki, www.vn.fi/vn/vm/english/national_economy/stability/vo2002-11-eng.pdf Ministry of Labour (2002a), “Finland’s National Action Plan for Employment. In accordance with the EU’s Employment Guidelines”, Publication of Labour Administration, No. 308, Helsinki, www.mol.fi/ julkaisut/nap2002english.pdf Ministry of Labour (2002b), “Työllisyys uuden vuosituhannen alussa. Työvoima 2020. Väliraportti” (Employment at the Beginning of the New Millennium. Labour Force 2020. Interim Report), Työpoliittinen tutkimus, No. 234, Helsinki, www.mol.fi/julkaisut/tyopoltutk1.htm OECD (1997), Regulatory Impact Analysis: Best Practices in OECD Countries, Paris. OECD (1997), The OECD Report on Regulatory Reform: Synthesis, Paris. OECD (2002), Regulatory Policies in OECD Countries: From Interventionism to Regulatory Governance, Paris. OECD (2003), OECD Economic Surveys: Finland, Paris. OECD Committee on Competition Law and Policy (1998), Enhancing the Role of Competition in the Regulation of Banks, Note by Finland, September, Paris. Rantala, J. (2002), “Ikääntyvien työttömyys ja työttömyyseläkejärjestelmä” (Ageing Unemployed Persons and the Unemployment Pension Scheme), Reports, 2002:28, The Central Pension Security Institute, Helsinki, www.etk.fi/english/6/r6-3-1.asp

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