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The relationship between governance and performance in water services provision in Estonian municipalities



The Faculty of Economics and Business Administration, University of Tartu,
Estonia
2012
Peeter Peda
Supervisors: Professor Toomas Haldma (Ph.D), University of Tartu, Estonia
Associate Professor Giuseppe Grossi (Ph.D), Kristianstad
University, Sweden
Opponents: Professor Salme Näsi (Ph.D), University of Tampere, Finland
Professor Loreta Valančienė (Ph.D), Kaunas University of
Technology, Lithuania

The Faculty of Economics and Business Administration, University of Tartu,
Estonia

This dissertation is accepted for the defense of the degree of Doctor
Philosophiae (in Economics) on 27 June 2012 by the Council of the Faculty of
Economics and Business Administration, University of Tartu.

Supervisors: Professor Toomas Haldma (Ph.D), University of Tartu, Estonia
Associate Professor Giuseppe Grossi (Ph.D), Kristianstad
University, Sweden

Opponents: Professor Salme Näsi (Ph.D), University of Tampere, Finland
Professor Loreta Valančienė (Ph.D), Kaunas University of
Technology, Lithuania

The public defence of the dissertation is on 18 October 2012 at 14:15 in room
B306, Narva Rd. 4, Oeconomicum, University of Tartu.

The publication of this dissertation is granted by the Faculty of Economics and
Business Administration, University of Tartu and the Doctoral School of
Economics and Innovation created under the auspices of European Social Fund.

TABLE OF CONTENTS

THE LIST OF AUTHOR’S PUBLICATIONS AND CONFERENCE
PRESENTATIONS ................................................................................... 8
INTRODUCTION .......................................................................................... 10
1. THEORETICAL FOUNDATIONS FOR THE ANALYSIS
OF THE RELATIONSHIP BETWEEN GOVERNANCE AND
PERFORMANCE ..................................................................................... 20
1.1. Main concepts and theories applied in the study ............................... 20
1.1.1. The concepts of corporate governance, accountability and
performance ............................................................................. 20
1.1.2. Performance expectations from the theoretical perspectives
of corporate governance .......................................................... 33
1.1.3. Corporate governance mechanisms influencing company
performance ............................................................................. 42
1.1.4. Generation, incorporation and the use of performance
information to influence performance through governance
mechanisms ............................................................................. 50
1.2. Shifts in public services provision and performance expectations .... 54
1.2.1. Externalization of public services in pursuit of performance
improvement ........................................................................... 55
1.2.2. Changed institutional roles of local governments in public
services provision .................................................................... 63
1.2.3. Relationships between governance and performance
in public services: evidence from previous studies ................. 68
1.3. Governance and performance of water services provision ................ 73
1.3.1. Specific characteristics of water services and
their performance .................................................................... 73
1.3.2. Corporate and regulatory governance mechanisms
influencing performance in water services .............................. 82
1.3.3. Externalization and the changed institutional roles
of local governments in water services provision ................... 89
1.3.4. Relationships between governance and performance
in water services: evidence from previous studies .................. 94
2. RESEARCH DESIGN AND METHODS ................................................. 100
2.1. Research framework and research questions ..................................... 100
2.2. Research methods .............................................................................. 105
2.3. Sample selection and data collection ................................................. 109
2.3.1. Sample and data for the quantitative analysis ......................... 109
2.3.2. Selection of case studies .......................................................... 112
2.3.3. Data sources and collection for case study analysis ................ 113
2.4. Validity and reliability ....................................................................... 116
2.4.1. Validity and reliability issues of the quantitative analysis ...... 116
2.4.2. Validity and reliability issues of the qualitative analysis ........ 117
3. EMPIRICAL STUDIES ON THE INFLUENCE OF GOVERNANCE
ON THE PERFORMANCE OF WATER SERVICES PROVISION
IN ESTONIA ............................................................................................. 120
3.1. Overview of the Estonian water services sector ................................ 120
3.1.1. Operational framework ............................................................ 120
3.1.2. Regulatory framework ............................................................. 122
3.2. Quantitative study of the influence of ownership and
size on efficiency of Estonian water companies ................................ 125
3.3. Case study research of the influence of governance on
performance in water services provision ........................................... 133
3.3.1. Case A ..................................................................................... 133
3.3.2. Case B ..................................................................................... 162
3.3.3. Case C ..................................................................................... 186
3.4. Discussion on the influence of governance on the performance
of water services provision ................................................................ 208
3.4.1. Governance patterns and the performance
of water companies.................................................................. 208
3.4.2. Corporate governance features and their consequences
on the performance .................................................................. 215
3.4.3. Regulatory governance features and their consequences
on the performance .................................................................. 220
3.4.4. Accountability features and their consequences
on the performance .................................................................. 226
3.4.5. Trade-offs between financial and non-financial
performance ............................................................................. 233
3.4.6. Theoretical implications .......................................................... 234
CONCLUSION .............................................................................................. 242
REFERENCES ............................................................................................... 256
APPENDICES ................................................................................................ 287
Appendix 1. The production model of performance .............................. 287
Appendix 2. Groups of primary and secondary stakeholders ................. 288
Appendix 3. List of collected documents for the case study .................. 289
Appendix 4. Interview guide for the case study ..................................... 292
Appendix 5. Sample questionnaire for the case study:
the importance of set performance objectives ................... 295
Appendix 6. Full list of efficiency scores of the DEA analysis ............. 297
Appendix 7. Descriptive characteristics of the mean net profit
margin in water companies ................................................ 298
Appendix 8. Water services affordability for households
in the case study ................................................................. 300
Appendix 9. Differences in commercial and residential water
prices of case companies ................................................... 300
Appendix 10. Earnings and dividends per share in company A ............... 301
Appendix 11. Cash-flows related to company A and its
shareholders 2001–2010 (million euros) ........................... 301
Appendix 12. Inclusion of depreciation costs into the water prices
in company C (euros) ........................................................ 302
SUMMARY IN ESTONIAN ......................................................................... 303
CURRICULUM VITAE ................................................................................ 322

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