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Agency analysis of the Swedish Maritime Administration (2013:1)

On behalf of the Government, Statskontoret (the Swedish Agency for Public Management) has carried out an agency analysis of the Swedish Maritime Administration (SMA). The analysis was based on the model developed and presented by Statskontoret in the report Agency Analysis Model (2008:17). In light of SMA's weak economic performance in recent years, however, the agency analysis has primarily been limited to factors that affect SMA's finances. This delimitation has been made in consultation with representatives of the Ministry of Enterprise, Energy and Communications.

SMA is responsible for Sweden's marine infrastructure, which in part covers activities such as maritime and aeronautical search and rescue, fairway service, icebreaking and pilotage. SMA, which is one of Sweden's few remaining public enterprises, has an annual turnover of around SEK 2 billion. Revenues have been relatively stable over time, while SMA's costs have increased. SMA's revenues consist of central government appropriation funds, charge revenues from merchant shipping (of which fairway dues are the predominant item) and other external revenues (for assignments, rental, etc.). The increase in costs of recent years is mainly due to sharply increased pension costs (as a result of an amended basis for calculating SMA's pension provision and the development of the real interest rate), cost-driving weather conditions (a number of severe winters requiring an unusually high amount of icebreaking on the part of SMA) and the acquisition of an insolvent helicopter company (to secure Swedish maritime and aeronautical search and rescue). SMA has not raised its fairway dues to offset these increased costs.

The following summarises Statskontoret's observations and the suggestions we would like to present with reference to the agency analysis.

The economic trend must be reversed and a buffer should be accumulated

The Agency for Public Management assesses SMA's financial situation to be serious. One of SMA's objectives as a public utility is to make a profit and provide a return to the public treasury. In recent years, however, SMA has shown a negative financial performance, which has moreover deteriorated during the period 2009-2011. The deficit amounted to almost SEK 211 million in 2011, while SMA's equity has gradually declined.

Statskontoret's assessment is that there is a clear risk that this negative trend will continue. This assessment is based on the fact that the current level of appropriations, levels of charges and assignment revenues are insufficient to cover SMA's costs. Measures therefore need to be taken to reverse SMA's negative economic trend, with a focus on both reducing costs and increasing revenues.

Statskontoret also wishes to stress that it will hardly be sufficient to achieve a zero or slightly positive operational performance. SMA conducts extensive and complex operations, the costs of which are difficult in part for SMA to predict with certainty and independently influence to any great extent. However, at present, SMA holds no reserves – other than some funds with the bank – that can, if necessary, be used to handle the kind of fluctuations in the economy to which the uncertain factors may give rise. In the view of Statskontoret, SMA therefore needs to accumulate a buffer in order to be in a better position to handle future uncertainties.

There is some potential for reducing the Swedish Maritime Administration's costs

As stated, SMA's costs have increased in a number of significant respects in recent years. At the same time, it may be noted that a lot is being done, and can be done, in order to reduce costs. One important measure would be to change the management model for SMA's pension provision so that SMA moves, like other agencies, to paying a monthly premium to the National Government Employee Pensions Board. A pension solution of this kind would mean greater predictability and fewer fluctuations in performance than with the current model. Furthermore, SMA has for several years actively pursued internal efficiency improvements, among other things, to reduce its costs. This work has had positive effects. It is in Statskontoret's understanding that SMA is also currently working to review its level of ambition for its various operations in order to achieve further savings, if possible. Statskontoret welcomes actions of this nature and recommends that SMA continue its work of internal efficiency improvements as far as possible.

All in all, it may be noted that there is some potential for reducing SMA's costs. However, Statskontoret estimates that SMA's financial problems are so extensive that cost-reducing measures are not sufficient to eliminate the problems.

Charges should be raised

SMA's charge revenues are intended to cover all the costs that SMA has that are not covered in other ways, for example through appropriations. These revenues are also to contribute to SMA's ability to supply the public treasury with a certain profit. For this reason, activities subject to a charge have a tax-equivalent performance objective of 3.5 per cent of adjusted equity over a business cycle.

Since 2009, however, revenues have been lower than SMA's costs. Meanwhile, SMA has far from utilised the discretion to set charges that has existed. With respect to fairway dues, the Government has stipulated the restriction that these may increase by no more than the net price index (NPI) with effect from the year 2004. But fairway dues have not increased at this rate in recent years; on the contrary SMA has instead reduced them. If the NPI had been followed, SMA would, for example, have been able to raise goods dues by about 10 per cent between 2004 and 2011. Such a price increase of 10 per cent would have given SMA a total of about SEK 780 million more in revenues for the period 2004–2011. That would have meant, all things being equal, that SMA's financial performance would have been positive from 2007 onwards instead of negative.

Unlike SMA, Statskontoret also believes that from a market perspective it would likely not be a problem for SMA to increase its charges so that it achieves the financial objectives decided by the Government. This is because several studies have found that an increase in sea freight charges to the level that would be required to bring SMA's finances into balance would have a negligible impact on the demand for sea freight and therefore not pose any major risk of goods being transferred from ship transport to land transport.

In light of this, Statskontoret believes that SMA should raise its charges, both fairway dues and pilotage dues. However, the agency analysis has not provided a basis for assessing by exactly how much these charges should be raised. This must also be seen in a context where a number of other circumstances are also taken into account, such as the preconditions for improving SMA's finances through reduced costs.

The principles for the Swedish Maritime Administration's allocation of appropriations should be clarified

The agency analysis has shown that there are some differences of opinion between the Government and SMA as to the parts of SMA's activities that should be financed by appropriations or that should be covered by charges from maritime shipping and by how much, a circumstance which partly explains the trend in charges that has been seen. Statskontoret therefore proposes that the Government once and for all establishes clearer principles and/or greater precision in SMA's allocation of appropriations than has hitherto been the case.

Taking into account the different perceptions that the Government and SMA appear to have with regard to the boundary between charge-financed and appropriation-financed activities, there is also reason for the Government to more clearly communicate what the current profit objective entails. As far as Statskontoret is able to assess, the profit requirement inevitably entails that the charges should also cover costs that SMA at present does not consider to fall under the payment liability of merchant shipping. This relates to SMA's pension costs, for example, and to the one-off cost for the purchase of the helicopter operation.

The preconditions for a possible conversion to the operational form of government agency should be further investigated

One question raised in the agency analysis is whether SMA's current operational form (public utility) is optimal for the operations conducted and entirely appropriate for the Government's control of SMA.

In light of previous reviews of SMA, among other things, Statskontoret assesses there to be two conceivable alternatives concerning SMA's operational form: government agency or public enterprise. In our opinion, there are good arguments for both of these models. At the same time, it should be stressed that the issue of operational form is not the most decisive one for SMA's financial situation, the possibilities for managing the problems would largely be equivalent in government agency and public utility form.

Against this background, the choice of operational form rather concerns what is considered to be the best way for the Government to control SMA. With its focus on economic factors, the agency analysis has not provided a basis for determining whether SMA's current operational form is optimal for the operations conducted and entirely appropriate for the Government's control of SMA or whether a conversion to government agency should instead be considered. Statskontoret believes, however, that this issue should be investigated further and that the Government should give such an assignment to an appropriate commission of inquiry.

Should an internal audit function be instituted?

The Government's commission has specifically included Statskontoret highlighting the need to institute an internal audit function at SMA.

In our opinion, there are good arguments both for and against instituting an internal audit function at SMA. On the one hand, it can be said that the solution SMA has hitherto chosen for its internal control, with a centralised controller function, appears to work relatively well. The Swedish National Audit Office has assessed SMA's internal control to be good. The question of instituting an internal audit has also been raised in SMA's board, which has assessed SMA's operational management to exercise a good control of SMA's economy. The board has considered SMA's internal control to be good and has not considered itself in need of an internal audit. The introduction of an internal audit also entails new costs. On the other hand, it may be assumed that an internal audit could be an important support with respect to dealing with the financial problems that have characterised SMA in recent years. Unlike a controller function, an internal audit is also more independent in relation to the day-to-day operations as it works on behalf of the board and reports to it. The issue of whether an internal audit should be instituted is therefore also affected by whether the Ministry of Enterprise, Energy and Communications sees a need for an independent control of operations.

All in all, we can establish that there are no formal barriers to the institution of an internal audit at SMA. Whether an internal audit should indeed be instituted at SMA is, however, more difficult to assess and ultimately a matter for the Government to determine.

The Government should in the near future determine whether R&I is to be included in the Swedish Maritime Administration's agency duties

Statskontoret wishes to draw attention to the fact that SMA conducts certain work on research and innovation (R&I) which is not among the agency duties that SMA is to be responsible for according to its instruction. The agency analysis has not provided sufficient basis for assessing whether this work is of such central importance to SMA that it should be included in its agency duties. But we believe that the Government should take a position on this immediately. If the Government were to come to the conclusion that R&I should not be entered in the instruction, then neither do we see reason for SMA's continued engagement in this activity. This is especially so in view of the strained financial situation that SMA is in – albeit that this activity does not expend particularly great resources at present.