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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.
OECD's books, periodicals and statistical databases are now available via www.SourceOECD.org, our online library.
This book is available to subscribers to the following SourceOECD theme:
Governance
Ask your librarian for more details on how to access OECD books on line, or write to us at
SourceOECD@oecd.org
www.oecd.org
ISBN 92-64-10267-1
42 2003 09 1 P
-:HSTCQE=VUW[\Z:
A NEW CONSENSUS FOR CHANGE
Reform
Reform
Reform
Reform
Reform
Reform
Reform
Reform
Reform
Finland
Regulatory
Regulatory
Regulatory
Regulatory
Regulatory
Regulatory
Regulatory
Regulatory
Regulatory
© OECD, 2003.
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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
© OECD 2003
Permission to reproduce a portion of this work for non-commercial purposes or classroom use should be obtained through the Centre français
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part of this book should be made to OECD Publications, 2, rue André-Pascal, 75775 Paris Cedex 16, France.
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
OECD REVIEWS OF REGULATORY REFORM: FINLAND – ISBN 92-64-10267-1 – © OECD 2003
3
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.
4
OECD REVIEWS OF REGULATORY REFORM: FINLAND – ISBN 92-64-10267-1 – © OECD 2003
TABLE OF CONTENTS
Table of Contents
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9
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
OECD REVIEWS OF REGULATORY REFORM: FINLAND – ISBN 92-64-10267-1 – © OECD 2003
5
TABLE OF CONTENTS
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.
6
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
OECD REVIEWS OF REGULATORY REFORM: FINLAND – ISBN 92-64-10267-1 – © OECD 2003
TABLE OF CONTENTS
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
OECD REVIEWS OF REGULATORY REFORM: FINLAND – ISBN 92-64-10267-1 – © OECD 2003
7
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
9
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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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.
The efficiency of public services could be boosted without compromising quality
The health care system could probably raise its efficiency without compromising the
quality of care. The wide variation of health cost per capita across regions has a significant
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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
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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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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.
REGULATORY GOVERNANCE
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.
II.2.
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Source: OECD.
Act on the Insurance
Supervision Authority
(78/1999).
II.2.
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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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OECD Reviews of Regulatory Reform: Finland
A New Consensus for Change
© OECD 2003
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.
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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
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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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OECD Reviews of Regulatory Reform: Finland
A New Consensus for Change
© OECD 2003
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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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.
●
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.
●
Taxation. All tax exemptions were removed or tax equivalent regimes were developed
for entities not legally separate from government.
●
Finance. Advantages from implicit guarantees could be addressed by a neutrality charge.
●
Rate of return requirements. Businesses were required to fully recover costs and earn
appropriate rates of return on capital.
●
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).
●
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).
●
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).
●
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).
●
Consolidated accounts of a state enterprise and any subsidiaries is required.
●
Services acquired by the state are under a budget appropriation and subject to the
government procurement arrangements.
●
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.
●
A service fee is levied on state enterprises for services provided to them by the State.
●
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.
OECD REVIEWS OF REGULATORY REFORM: FINLAND – ISBN 92-64-10267-1 – © OECD 2003
127
II.5.
REGULATORY AND COMPETITION ISSUES IN KEY SECTORS
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.
128
OECD REVIEWS OF REGULATORY REFORM: FINLAND – ISBN 92-64-10267-1 – © OECD 2003
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.
OECD REVIEWS OF REGULATORY REFORM: FINLAND – ISBN 92-64-10267-1 – © OECD 2003
129
ISBN 92-64-10267-1
OECD Reviews of Regulatory Reform: Finland
A New Consensus for Change
© OECD 2003
APPENDIX 1
Map of Finland
NORWAY
Irarijärvi
en
Ou
liv
äa
sm
nk
Kö
ki
sjo
na
ki
Kem
rio
Lu
ijok
i
Muonionjo
Ozero
Imendre
ve
leä
Lu
n
Rovaniemi
ia
Torn
SWEDEN
Pyaozero
ki
ijo
njok
em
K
i
Topozero
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.
OECD REVIEWS OF REGULATORY REFORM: FINLAND – ISBN 92-64-10267-1 – © OECD 2003
131
APPENDIX 2
APPENDIX 2
Appendix Tables
OECD REVIEWS OF REGULATORY REFORM: FINLAND – ISBN 92-64-10267-1 – © OECD 2003
133
Industry
Key legislation/regulatory framework
OECD REVIEWS OF REGULATORY REFORM: FINLAND – ISBN 92-64-10267-1 – © OECD 2003
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.
APPENDIX 2
134
Table 1.1. Sectoral regulatory reform in Finland
OECD REVIEWS OF REGULATORY REFORM: FINLAND – ISBN 92-64-10267-1 – © OECD 2003
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.
135
APPENDIX 2
Source: OECD.
Limitation for non EU/EEA carriers.
APPENDIX 2
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
OECD REVIEWS OF REGULATORY REFORM: FINLAND – ISBN 92-64-10267-1 – © OECD 2003
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.
OECD REVIEWS OF REGULATORY REFORM: FINLAND – ISBN 92-64-10267-1 – © OECD 2003
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.
APPENDIX 2
137
ISBN 92-64-10267-1
OECD Reviews of Regulatory Reform: Finland
A New Consensus for Change
© OECD 2003
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