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Marcin Baron, Artur Ochojski, Adam Polko, Katarzyna Warzecha, Martin Šimon

Economics and Strategic Management of Local Public Services in Central Europe: Towards multidisciplinary analysis of infrastructure and service costs

Marcin Baron, Artur Ochojski, Adam Polko, Katarzyna Warzecha, Martin Šimon. 2014. Economics and Strategic Management of Local Public Services in Central Europe: Towards multidisciplinary analysis of infrastructure and service costs. Prague: Institute of Sociology, Academy of Sciences of the Czech Republic. 270. ISBN 978-80-7330-253-5.
  1. The study challenges cost analysis of local public service across countries of Central Europe. The relations of economic features and demographic change characteristics have been investigated. Central Europe Programme co-financed the initiative as its strategic project for 2007-2013. The ADAPT2DC project (New innovative solutions to adapt governance and management of public infrastructures to demographic change) reflects a need for: …better transnational strategies to stabilize or reduce infrastructure costs under the conditions of stagnation and shrinkage; better solutions of urban and regional planning in Central Europe to handle infrastructure costs as limiting factor for the room for maneuver regarding and regional development; more refined downsizing and restructuring measures in order to qualify the surrounding area of formerly densely populated urban structures; improved image and reputation of shrinking regions or cities in terms of public awareness; deepened understanding on the impact of shrinking regions on other regions and cities (e.g. growing cities/ regions and their challenges regarding mobility, infrastructure, housing issues); improved and more holistic approaches to counterbalance depopulation trends.
  2. Demographic changes and cost of public service are interrelated within the supply-demand logic of public service delivery. Nevertheless, the linkages are not direct and provoke many research questions. To decompose the variables that play role, the supply-side issues of economics of public service and political & management impacts over the territorial system needs to be known. The same applies to the demand-side. The changes of population, and more importantly the knowledge on population structure and population growth become one of the key issues for the service providers to deal with the economics of public infrastructure provision. Therefore, the hypotheses that orientate the research are: (1) the cost of local public services is significantly correlated to population change and (2) volume of service delivered and number of users are not the exclusive change factors behind the cost shifts of public service in Central European countries.
  3. This type of studies can be handled by analysis of data on NUTS3 / LAU territories, the range of which is neither fully available, nor fully comparable for the whole CE area in Eurostat or ESPON. Consequently, alternative approach was elaborated and implemented. The so called proxy cost ratio (PCR) was calculated using the business intelligence data. The ratio remains at the heart of the study, even though bottlenecks of the approach have been identified. The PCR – calculated for five thematic fields, i.e. social care, healthcare, public housing, public transport as well as water and sewage – was presented for Central Europe at NUTS3 level and further statistically tested against demographic change, spatial and economic parameters. The analysis of data indicate that public service cost comparison across regions in the Central European countries should not be done in any kind of direct way. The PCR indicator proposed here is rather “neutral” in a meaning that it shows certain comparable value of service delivered to citizens. It means that NUTS3 regions have been described by a value of service sold in the investigated fields. It is not the price of the service but it shows sales of specific services per inhabitant of territory.
  4. The analysis for all available PCR observations in Central Europe shows that the ratios are for most cases negatively correlated with long term population changes (not significantly correlated for social care). The PCRs are also positively correlated with population density (not significantly for water and sewage). The PCR for public housing is significantly correlated with all the analyzed variables (long term population change, medium term population change, average rate of natural increase, population density elderly to active ratio, GDP per capita. PCR for healthcare is significantly correlated with all variables but elderly to active ratio. In the used data set concerning Central Europe all PCRs apart from the water and sewage proxy cost ratio, are significantly correlated with population density. Moreover numerous contextual and qualitative premises pinpoint that public service provision relies much upon the spatial characteristics of the territory. The most importantly, a clustering of NUTS3 territories was proposed based upon PCRs and economic, spatial and demographic variables. The core of the idea was to cluster similar regions where similar cost-saving strategies of service and infrastructure delivery can be introduced. The suggested taxonomy creates an opportunity for policy actors and service operators of clustered territories to consequently share relevant knowledge and best practices needed to adapt to demographic change. At least three out of five investigated regional taxonomies (concerning: water and sewage, transportation and healthcare) report on comprehensive data. In case of housing and social care some limitations occurred. An example of clustering in similar territories with regards to healthcare is presented below.
  5. For type A the majority of territories represent intermediate and rural areas where ageing is much higher than average and natural increase as well as long-term population change have low values. Type B is dominated by intermediate territories with highest values of long-term population change. Type C most of all offers a picture of urban territories where PCRs, population density and GDP per capita present the highest values. Type D is characterized by lowest PCRs, GDP per capita and natural increase. These are mainly rural territories. Finally type E represents the lowest values of ageing and population density as well as highest natural increase. In case of health care sector, we can observe clear division of Central European countries on group in which clusters type E and D dominate, and group with clusters type A and B. The first group consists of Poland, Slovakia, the Czech Republic and Hungary. The second group consists of Germany, Italy. However in these countries there are some territories of different types. Austria and Slovenia are most diverse countries taking into account clusters types.
  6. The efficiency issue is also conditioned by e.g.: organizational settings, legal schemes, spatial characteristics, technical standards and novelty. Taking them into consideration in qualitative studies allow much better picture and proper insight into the issues of public service economics. Therefore, 14 field studies have been set-up in order to enable better understanding of particular determinants of changes in infrastructure and service costs. It is understood as a complementary method to investigate public service adaptation to changing demographic situation in terms of public sector economics and policy making. The activity consisted of a comparative microeconomic analysis of sample cases in infrastructure and service provision in shrinking regions. The characteristics of the offered products and their value chains have been investigated in terms of standards, technology, management and financing. Moreover, they were designed as a source of overview of specific national and local contexts.
  7. Two types of infrastructure were given investigation within the studied fields. Namely, social services infrastructure (including: social care, healthcare and housing) and network services infrastructure (in particular: water and sewage, roads and public transportation). Social care services show similar pattern in the studied cases. In general, the average cost per beneficiary rises. Social care services seem to be the most vulnerable to demographic changes. Sudden changes of social structures directly raise expectations towards service delivery (more crèche, shelters, subsidies paid, etc.) In other words, the increase in demand directly calls for an increase in supply. In many other types of services demographic change generates a need for efficiency and cuts in spending. For social care services, the situation is to the opposite, more spending may be needed based on the needs of an aging population or increased demand for social care for children. At the same time, it may be worth to notice that social care infrastructure usually does not generate high fixed costs in the system. The demographic elasticity of supply in healthcare services and infrastructure is higher as compared to any network infrastructure-based services. It is relatively easy to cumulate the service in one place and therefore the fixed cost can be shared between many users. Also, adapting the supply of certain healthcare services to the number of customers can be easily done in most of the cases. The other general issue observed is the common pressure to control the excessive state expenditure on healthcare. That is, basically, related to economic situation and not linked to demography. In that case, service quality and service supply are mainly impacted by the state policy. That should not be seen as pro-effective activities but cuts in spending. When it comes to public housing, territories with a significant (dominating) share of public stock of the housing infrastructure are much more vulnerable to the economic consequences of depopulation processes. For privately owned property, market rules apply and decisions as well as consequences impact the owner (individual) and are much more dispersed among the community. The more the housing relies upon the public sector and its ownership, the more the demographic changes affect economic stability of local authorities. On the other hand, “cumulated” ownership allows easier facility management including relocation of tenants, deactivation of blocks of flats and other adaptation processes. The public housing sector may use mechanisms of selective privatization (single flat, single house) that is not possible in case of network infrastructure (e.g. with a part of road or water pipeline). Finally, the loss of revenue due to increased vacancy rate may be partly compensated on revenues based on selling dwellings to the market as an alternative to transferring the growing costs onto the remaining tenants.
  8. The costs of public transport in the analyzed cases are either balanced according to inflation or slightly going up. The return on public transportation ratios is not favorable either. Anyway, this may be regarded as common in territories characterized by weakening demand for the service where there is high fixed costs. The share of subsidies goes up over the years and compensates the losses to the public service. As in analyzed cases the population change is believed to influence future situation of the service and its infrastructure, there is a question whether it may impact only the demand for the service or it will severely change the economy of operations and lead to new innovative solutions in management. When it comes to roads, there is a natural disproportion of demand and supply in the infrastructure due to the fact that historically established roads can hardly be deactivated. Moreover, any settlement needs road infrastructure regardless depopulation and growth dynamics. While any significant increase in population may impact new road investments, the depopulation trend will rather not lead to road abandonment. For this reason, the main concern of any authority will probably be turned to the costs of maintenance. Investments and spending on new infrastructure would only be linked to development processes focused on boosting territorial attractiveness of precisely defined areas. For example it may include industrial zones or places challenged with potential depopulation. In general, as water provision is the basic public good, its demographic elasticity of supply is rather small. In other words, the demand must be met anyway, the only issue is whether the final beneficiary is able to cover the costs. So, the question is whether the (usually) increasing costs of water delivery / sewage treatment are transferred onto the final user (citizen, company) or they are subsidized by public authority of any level. The fixed costs of the system mainly determine the economics of water provision / sewage treatment services and infrastructure. Maintenance costs and investments cannot be stopped over the depopulation processes as technical operation of the system needs to be kept. It is hardly possible that a complete district / significant part of the city is closed down.
  9. The presented study offers picture of local public service delivery systems and their complex environments in a territorial perspective of Central Europe. It shows that the costs of public services are related to demographic change but also they are influenced by other factors. For policy recommendations, the prospective approach is highly needed. Therefore, scenarios over future trends and key drivers of changes should be formulated. Otherwise, the identified relations as well as case-based evidence may mislead if directly used for public strategies or governance models over Central Europe. It is not the aim of the publication to offer such scenarios, policies or strategies as they have been further provided under ADAPT2DC works. Nevertheless, the initial theses on what may affect social and network services and their infrastructures have been identified within the study.
  10. The ADAPT2DC approach of delivering proxy cost ratios (PCRs) has been a partial answer to the data shortage in public statistics. A similar attempt has already been introduced by the OECD for microanalyses across countries. Anyway, within the study, the PCR could only be calculated as a static picture covering average values of the last five years. This was due to limitations in business intelligence data available for Central Europe. Therefore, this method should be further developed to achieve a dynamic model. This is a challenge for research groups or partnerships between researchers and Eurostat set up within the framework of Horizon 2020 or ESPON. The lessons of the study and the proposed research method are believed as a meaningful attempt that can be further developed and utilized by Eurostat. Also, the studies over services of general interest (ESPON SeGI2) could be therefore extended by cost-based analyses. Finally, in further years, the joint effort could enter the yearly statistical agenda supporting EU policies.


age and ageing
public administration