Competing logics in the expansion of public service corporations

Utilities Policy xxx (2016) 1e9

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Competing logics in the expansion of public service corporations Daniela Argento a, *, Francesca Culasso b, Elisa Truant b a b

€gen 15, 29188 Kristianstad, Sweden Department of Business Administration and Work Science, Kristianstad University (Sweden), Elmetorpsva Department of Management, Turin University (Italy), C.so Unione Sovietica 218 bis, 10134, Torino, Italy

a r t i c l e i n f o

a b s t r a c t

Article history: Received 15 June 2015 Received in revised form 9 February 2016 Accepted 9 February 2016 Available online xxx

This paper contributes to the current debate on the evolving nature and meaning of public service corporations. It draws upon notions of neo-institutional theory and adopts a case study methodology. The study focuses on the case of SMAT, an Italian water corporation, whose value has been recognized at home and internationally. Findings show how a public service corporation's priorities and activities, particularly commercialization and internationalization, are constrained by various factors. These include: the burden of regulatory frameworks, the public nature of the corporation and its governance, the expectations of users, and the need for infrastructural investment. © 2016 Elsevier Ltd. All rights reserved.

Keywords: Public service corporation Institutional logics Water service

1. Introduction A growing body of research is focusing on the roles served by public service corporations and their public owners (Almqvist et al., 2013; Wettenhall and Thynne, 2005). Public service corporations are defined as public service providers with public ownership, that is, corporations owned by one or more governments. As such, public owners should implement coordination and controlling mechanisms to steer their corporations toward the fulfillment of the public interest (Peda et al., 2013). However, over time, public service corporations have become more commercially oriented (Reichard, 2006), diversifying their core activities and seeking territorial expansion beyond their national boundaries (Furlong, 2015). These developments lead people to question what the ‘public ownership’ of such corporations means, given that they adopt behaviors and follow life cycles that resemble those of private corporations whose aim is profitability (Thynne, 1994; Clifton et al., 2014). It can be argued that the institutional context in which public service corporations operate is complex and capable of generating levels of ambiguity that may enable, but may also hamper their activities and agendas (Lounsbury, 2008). For example, in the context of Europe, various national laws and EU directives and regulations were endorsed to regulate the business and

* Corresponding author. E-mail addresses: [email protected] (D. Argento), francesca.culasso@unito. it (F. Culasso), [email protected] (E. Truant).

geographical areas of corporations delivering public services (for example, Directives 2008/105/EC, 2004/35/CE, and 2000/60/EC). However, laws and regulations have not always been effective, especially when they generate an unstable scenario by continually changing the requirements with which public service corporations have to comply (Argento, 2008; Argento and van Helden, 2010; Clifton and Diaz-Fuentes, 2013). In addition to regulatory issues, financial constraints affect daily operations and investment opportunities, and costs and tariffs by consequence. As such, they are a continual concern and influence the strategies and operational choices of public service corporations (Grossi and Reichard, 2008). Finally, such choices do not go unnoticed as the affordability and quality of public services are under continual public scrutiny (Hartley and Skelcher, 2008). Thus, the behavior and response to institutional complexity of public service corporations can be understood as the outcome of the interplay between external and internal factors (Greenwood et al., 2011; Greenwood and Hinings, 1996). This paper contributes to the current debate on the evolving nature and meaning of public service corporations by addressing two research questions. First: how do public service corporations deal with the complexities they face when making decisions? Second, and more specifically: which factors encourage or discourage the expansion of public service corporations beyond their core business and local geographic areas (such as commercialization and internationalization)? To answer these questions, we present a theoretical framework drawing on the concepts of institutional logics, complexity, and

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organizational response. We adopt a case study methodology focusing on SMAT, the publicly owned water corporation operating in the northwest of Italy. It was recognized as the top Italian public utility in 2014 and is also widely recognized beyond national boundaries. This case study is relevant because SMAT is gaining recognition while showing a commercial orientation and a special concern toward internationalization. At the same time, the case shows how various factors may constrain a public service corporation's priorities and activities. The burden of regulatory frameworks, the public nature of the corporation and its governance, the expectations of users, and the need for infrastructural investment may all influence decisions to expand the business abroad. The remainder of this paper is structured as follows. Section 2 presents the theoretical framework of this study and is followed in Section 3 by a description of the methods used to conduct the empirical research. Section 4 highlights the findings stemming from the case study. Section 5 closes the paper by discussing results and providing concluding remarks. 2. Theoretical framework First, we assume that organizations and their environment are interdependent phenomena (Albu et al., 2014). Thus, it is suitable to draw upon neo-institutional theory to propose a theoretical framework for analyzing how external and internal factors, and their interplay, shape the strategies and operational choices of public service corporations. This paper builds upon the notions of institutional logics (Thornton et al., 2012) and complexity, focusing on how organizations respond to such complexity (Greenwood et al., 2011). According to Albu et al. (2014), an organization's structures and systems are influenced by its environment. Applying this idea to public service corporations, it follows that the legal, regulatory, financing and taxation systems generate multiple institutional logics that affect the public service corporation's behavior. Institutional logics ‘represent frames of reference that condition actors' choices for sense-making, the vocabulary they use to motivate action, and their sense of self and identity’ (Thornton et al., 2012, p. 2). This means that, when making strategic decisions and operational choices, public service corporations are influenced by the institutional logics they are exposed to because those logics may define expectations, legitimate activity and become embodied in organizational structures and practices (McPherson and Sauder, 2013). However, when the prescriptions and proscriptions of different logics are incompatible, they generate challenges and tensions for the organizations exposed to them (Greenwood et al., 2011, p. 318). It follows that public service corporations operate in a context characterized by ambiguity when they face multiple logics that are not always aligned. In line with the managerial principles instilled by New Public Management reforms (Osborne and Brown, 2005; Van Dooren et al., 2010), public service corporations are expected to comply with a business logic, which requires them to adopt business-like behaviors and to seek operational effectiveness and efficiency. In other words, this logic encourages management to seek opportunities that guarantee economic growth and expansion (including cost cutting, profit orientation, partnerships, commercialization, and internationalization) as major goals (McPherson and Sauder, 2013). Given that public service corporations operate in a network of different actors, including regulators with coercive powers (such as the European Union, national legislators, and regulatory agencies), they also deal with a logic of compliance with a variety of rules and requirements. These include the stipulations in concession contracts, privatization and merger programs, governance settings

and/or the opportunities allowed by the law and regulations, such as commercialization and internationalization (Boscheck, 2013; Clifton and Diaz-Fuentes, 2013). Public service corporations also face a community logic (Thornton et al., 2012) stemming from their mandate to serve the public interest by delivering services with a certain degree of quality and affordability. This impels management to prioritize local citizens/consumers and to be accountable to them. The expectations and demands for accountability of citizens with respect to service quality are increasing, raising the standards by which public services (and their respective providers) are judged by the public and by the media (Hartley and Skelcher, 2008). Being simultaneously exposed to different logics implies that public service corporations may have multiple and discrepant goals (Thornton et al., 2012). For example, pursuing the delivery of quality services often requires (infrastructural) investments, which in times of financial constraint result in the need to increase the tariffs paid by citizens/consumers. Situations like this create tensions because even if a tariff increase can potentially increase quality, it negatively affects affordability and shows how logics can ‘provide inconsistent expectations’ (Greenwood et al., 2011). Considering the business logic, public service corporations strive for financial independence from their owners, meaning that a tariff increase may constitute a rational choice. The ultimate goal of improving quality may be to meet the expectations of the compliance logic, unless specific laws regulate/limit tariff increases. In connection with the community logic, citizens/consumers may not expect the quality improvements to be completely funded via tariffs. This example shows how public service corporations face complexity and have to make trade-offs between diverging goals and activities (Greenwood et al., 2011). This is reflected in strategic and operational planning and, consequently, in the operations carried out by public service corporations. In order to understand how organizations react to the pressures generated by different institutional logics, Lounsbury (2008) suggests that an analysis of both the broader logics and the activities of people and organizations is desirable. That is, the interplay between external and internal factors (Greenwood and Hinings, 1996) may explain specific responses. Responses are important as they can have implications for the legitimacy and survival of an organization (DiMaggio and Powell, 1983). Organizations may enact an array of strategic responses that range from the most passive acquiescence, to the most active manipulation of institutional pressures, via compromise, avoidance, and defiance (Oliver, 1991). This means that public service corporations may be more or less sensitive to certain logics and thus react in different ways by exerting discretion over how the logic is incorporated into organizational structure and practice. Greenwood et al. (2011) suggest that such sensitivity depends on four organizational characteristics, namely field position, organizational structure, ownership and governance, and identity. In line with the arguments of these authors, field position can influence how public service corporations experience complexity. A peripheral organization may be less exposed to contradictory logics, experience less complexity, and exert more discretion. Central organizations (that is, large, high-status organizations) can have different degrees of discretion at their disposal. On the one hand, because of their size and status, public service corporations could perceive high complexity as they are visible in the field and attract varying levels of media attention (hence, having less discretion at their disposal). On the other hand, large, high-status public service corporations may be able to deviate from the prevailing cultural expectations because they are immune to institutional pressure (hence, having more discretion at their disposal). Reflecting on the second characteristic identified by Greenwood

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et al. (2011), the organizational structure of the public service corporation matters because it is up to the individuals and groups within the organization to make sense of, interpret, and enact institutional prescriptions (Greenwood et al., 2011, p. 344). In other words, a logic can penetrate an organization if key internal actors are engaged, have the appropriate resources and the support of different organizational groups and of the organizational field (Battilana, 2006). That is, value commitment, power dependencies, and capacity for action (Greenwood and Hinings, 1996) are significant when analyzing an organization's behavior. In this sense, a bureaucratic organization might be more sensitive to community and compliance logics, whereas a decentralized organization, with managerial autonomy, might be more sensitive to the business logic. The third organizational characteristic is related to the ownership and governance arrangements of public service corporations. Greenwood et al. (2011) argue that the ownership composition (who the owner(s) is/are) and related governance mechanisms shape the receptivity of organizations to multiple logics. It follows that the prioritization of certain logics depends on how active the owner or owners (in case of fragmented ownership) of public service corporations are and the extent that their authority can be exercised (Grossi and Thomasson, 2011). In this respect, Furlong (2015) highlights that many studies have demonstrated that municipalities influence their corporations e indicating a certain degree of proactiveness on the part of the public shareholder. This could mean that the community and compliance logics might be prioritized compared to cases of distant or inactive shareholders, leaving more room for the business logic. The last characteristic advanced by Greenwood et al. (2011) is identity, including both institutional identity (‘we belong to the category of public service corporations’) and organizational identity (‘we are members of and work at a specific public service corporation’). The authors claim that both identities will shape how an organization will perceive and respond to institutional complexity. In particular, the stronger the identity (the more it is shared by organizational members), the larger the discretion available when prioritizing the expectations from various competing institutional logics. Given that public service corporations are also influenced by the environment in which they operate, besides organizational characteristics, the reaction to pressures generated by different logics also depends upon the local situation (McPherson and Sauder, 2013) and the geographic location (Lounsbury, 2008). This means that because local reactions to similar pressures may differ, the local context can also be included in our theoretical framework, which is summarized in Fig. 1. 3. Method The methodology of the research presented in this paper is the case study. Given the research aim and the specific focus on one public service corporation, this case study can be classified (in line with Ryan et al., 2002) as explanatory.  Metropolitana Acque Torino S.p.A. (henceThe case of Societa forth SMAT) was selected because it is an established water utility, headquartered in Turin, which is situated in the Piedmont Region in the northwest of Italy. SMAT's origins date back to 1945 when the Azienda Acquedotto Municipale di Torino was established to manage water services in the City of Turin. After some mergers, in  Metropolitana Acque Torino S.p.A. (SMAT) was 2001 the Societa created. The corporation has a commercial orientation and engages in internationalization initiatives. SMAT is entirely publicly owned. Its ownership is divided among 291 municipalities, of which the City of Turin is the main shareholder, with 65.31% of the share

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capital. The case is relevant for a number of reasons. Firstly, SMAT manages some of the largest, most advanced drinking water supply and wastewater networks and treatment systems in Europe. It produces more than 250 million cubic meters of drinking water every year, which is transported through 12,000 km of drinking water supply networks, and whose quality is verified through more than 250,000 analyses. It also collects 365 millions of cubic meters of wastewater through 8500 km of sewers. Secondly, the corporation's core business e integrated water services including drinking water provision, wastewater collection, and wastewater treatment e is directed to a large number of users located in the ‘Ambito Territoriale Ottimale 3 Torinese’ (ATO3). This area includes the City of Turin and the surrounding municipalities within the Piedmont Region. Since 2007, SMAT has delivered integrated water services to 291 Piedmont municipalities, with 2.2 million inhabitants. SMAT was entrusted the task of delivering integrated water services directly e without public tendering e through an in-house contract which expires in 2023. Thirdly, within the frame of the Italian law, which allows 20% of turnover be dedicated to non-core activities, SMAT has tried to expand its international presence along three lines: - as a technical partner, participating in international projects both on-site and in designing or leading training activities in Guatemala, India, Lebanon, Palestine, Serbia, Kosovo, and Ethiopia; - as twinning partner, providing consultancy support to foreign public utilities, including Poland, Slovakia, and Kosovo, to achieve best practices and comply with European Union standards; - by winning competitions for contracts to design, manage, and construct two plants in Guadalajara and Mexico City. SMAT has wide recognition both at the national level (2014 Top Italian public utility) and abroad. For example, SMAT was chosen to be a partner in a research team to select and optimize a disinfection process to produce potable water during future ‘long-range’ and ‘long-term’ space missions (SMAT Research Center., 2015, p. 40). SMAT's ability to efficiently and effectively manage the business is reflected in its latest financial results published 31 December 2014. The turnover was V 310 million and the net profit V 43 million, while dividends distributed to shareholders were V 8 million. The cash flow, which corresponds to the equity available for investments and is represented by the net income and nonmonetary costs, was V88 million, while the net financial position was V 241 million. Return on equity (ROE) and return on investment (ROI) were respectively 9.23% and 6.71%. These results are particularly high if compared with the average values of the Italian water sector e which respectively are 3% (ROE) and 4% (ROI) (Bordin et al., 2015). They stem from SMAT's high level of internal efficiency, mainly correlated to the high levels of employee productivity resulting in a low incidence of labor costs on turnover, compared to the other operating costs. The equity per share is V 80 and the nominal value of a share is V 64.55. SMAT's revenues come almost entirely from the tariffs paid by citizens/consumers (95.6%). The tariff is one of the lowest in Europe, even though it has increased by 36% over the last five years. Multiple sources of data collection were used. Firstly, semistructured interviews were conducted with the chairman of the board of directors, the chief executive officer (CEO), and the director of development and marketing of SMAT, the head of ATO3 (representing the local regulatory authority), and the head of the control unit of municipal corporations (representing the main shareholder, the City of Turin). Interviews lasted between 60 and 80 min, were recorded and transcribed. Only one interview could not be recorded, but a written summary was approved by the respondent. At a

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Fig. 1. Theoretical framework.

later stage of the research, follow-up telephone interviews were conducted with the three managers of SMAT and with the new head of the control unit of municipal corporations in order to discuss key research findings and enrich the case analysis. Secondly, to obtain insights from the minor shareholders, a questionnaire was sent via e-mail to a sample of 200 municipalities. The questionnaire consisted of 17 (closed and open) questions focusing on the role of minority shareholders, tensions between institutional logics, how actors deal with those tensions, the relationship between the public ownership of SMAT and the opportunities for its commercialization and internationalization. After two reminders, 30 municipalities responded (response rate of 15%). Thirdly, additional data were collected through a documentary analysis (see Appendix A). A variety of documents were analyzed and information downloaded from the webpages of the focus organizations (SMAT, City of Turin, local regulatory authority) and other stakeholders, such as consumer associations, the Regional Agency for the Protection of the Environment (ARPA Piemonte), the Institute for Environmental Protection and Research (ISPRA), and others. Interview materials were analyzed and triangulated with the data collected through other sources. Finally, the case study was written up by iterating with the concepts present in the theoretical framework (Section 2).

4. Case analysis In this section, we first focus on SMAT's external context, describing both the institutional field and the local context. Then, we analyze the institutional logics (business, compliance, and community) and related tensions. Finally, we examine SMAT's organizational factors, distinguishing among field position, organizational structure, ownership and governance, and identity.

4.1. Institutional field The Italian water sector is quite complex, especially in terms of regulatory and legislative processes. To address concerns of historical inefficiency and high fragmentation, Law 36/1994 launched a process of radical transformation of the Italian water sector with the aim of achieving economies of scale and increasing the effectiveness of water service provision (Argento and van Helden, 2010). Unfortunately, the transformation process has not been smooth and until the enactment of Legislative Decree 152/2006, Italian water policy was characterized by a high fragmentation of laws and regulations. This does not stem solely from domestic issues, the proliferation of laws also resulted from the need to cope with various European Union Directives. Indeed, the head of ATO3 (the local regulator) claimed that: ‘The legislation on public services is constantly evolving and is strictly influenced by the changes in the requirements regarding the safeguard of public goods, the citizens-users and the environment.’ Even though the legal and regulatory systems have changed over time, making conditions unstable and sometimes challenging the survival of water organizations (see Argento, 2008), nowadays three alternative ways to delegate water services delivery are allowed: in-house contracts, public tenders aimed at identifying a private service provider, or public-private partnerships (PPPs). However, the Italian water sector is still characterized by the presence of about 2200 providers, and most of them are not compliant with Legislative Decree 152/2006. Overall, the number of water service providers is still high although considerable progress has been made since 1994, when over 13,000 operators existed (Bordin et al., 2015). Among the providers operating in compliance with the law, it is estimated that the majority (94%) are publicly owned or are of mixed public-private ownership, while only 6% are privately owned (CONVIRI, 2011; Intesa Sanpaolo, 2013). Besides European Union requirements, SMAT is subject to Italian

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national laws and Piedmont regional laws.1 In addition, SMAT falls under the authority of two regulatory bodies. The Italian Regulatory Authority for Electricity, Gas and Water (AEEGSI) is responsible for regulating, and monitoring water services at the national level and establishes the formula for tariff setting. The local regulatory authority represents the municipalities belonging to the area served by a service provider and is responsible for planning and controlling water service provision at the local level. This authority delegates the provision of integrated water services to the water service provider, which is in charge of achieving the goals for efficiency and productivity while fully covering operating costs and investments (Argento, 2008). Italian citizens have a relatively unified opinion regarding the public nature of water supply. In a 2011 referendum, 27 million Italian citizens voted in favor of a ‘public’ water management system, confirming the deeply rooted idea in Italy that water is a public good that must be provided by publicly owned corporations. 4.2. Local context The Piedmont Region, with Regional Law 13/1997, divided its territory into six territorial areas, leading to the formation of six local regulatory authorities. SMAT operates in the area ATO3, which encompasses the City of Turin and 305 surrounding municipalities. The local regulatory authority ATO3 represents 306 municipalities and has a board of 20 members. The voting rights are assigned to the 20 members, each of which represents a group of municipalities, in proportion to the number of inhabitants living in the represented municipalities. The local regulator coordinates the activities of the different municipalities and acts as an interface between them and SMAT. Its main functions are (1) the identification of the water service needs, including the quality of the service; (2) the approval of investments and financial plans; (3) the setting of the tariffs by approving the proposal made by SMAT in line with the tariff determination formula established by the national regulatory authority (AEEGSI); and (4) the technical and managerial control on SMAT's activities. Concerning tariffs, the head of ATO3 (the local regulator) states: ‘The aim is to create a uniform tariff in the ATO3 territory: for each municipality, the impact of the new tariff has been evaluated and an alignment path has been defined.’

1 Among the national laws, the following are the most important: Legislative Decree 152/2006 (complying with the European Directive 2000/60/EC) clarifies the powers and responsibilities within the water sector. It establishes a governance system based on three ‘levels’: national, regional, and local. It also emphasizes the importance of the quality of water, minimizing the environmental impact, and accentuating the citizen interests, introducing the full cost recovery and ‘polluters pay’ principles. Law 166/2009 forced local governments to assign water service provision to privately owned companies chosen through a public competitive tender or to a mixed-ownership company where the private partners owned at least 40% of the shares. However, the results of the referendum held in 2011 safeguarded the ‘public’ management of water services, meaning that the local regulatory authorities were no longer obliged to assign water services only to mixed or privately owned companies. ‘Salva Italia’ Decree 201/2011 transferred the power to supervise the Italian water sector to the Italian Regulatory Authority for Electricity, Gas and Water (AEEGSI), an independent body responsible for protecting the interests of consumers and promoting efficiency and the provision of services with adequate levels of quality within the energy, gas and water sectors.Key regional laws include the following: Regional Law 13/1997 divided the Piedmont region into six areas and defined the forms of cooperation between the municipalities forming the respective six local regulatory authorities. Regional Law 7/2012 clarified the functions of the local regulatory authorities: organization of the integrated water service, including the drafting, approval and updating of investments and financial plans, selection and control of the service provider, and tariff setting.

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The Regional Agency for the Protection of the Environment (ARPA Piemonte) exercises technical control of SMAT's activities, analyzing the quality of the water released into the environment. This agency publishes an annual report containing the outcomes of the monitoring activities and seeks to dialog with the different operators in order to minimize environmental damage. 4.3. Institutional logics and tensions Given the institutional field and local context, SMAT is exposed to the three institutional logics identified in the theoretical framework. The business logic is present because SMAT pursues full cost recovery stating that the users have to pay a tariff covering all the costs incurred by the water service provider. In this way, water service providers should ensure an adequate return on the capital invested and efficiency improvements. That is, SMAT has to be financially independent from the municipalities (the owners) and has to efficiently use its tariff-related income to address resource scarcity and invest in water resource protection. This means that SMAT should also continuously maximize the utility of the corporation by identifying opportunities to create economic value and eventually diversify the business. Such opportunity is allowed by Italian law (Bill 1678/2015) and European Directives 2014/24/EU and 2014/25/EU, which state that 20% of turnover can be devoted to non-core activities (such as commercialization and internationalization). SMAT also deals with the logic of compliance with laws and regulations affecting their activities as well as others related to environmental protection and the improvement of water quality. For example, the national regulatory authority sets rules on the definition of eligible costs and the criteria to determine the tariff, service standards, and pro-forma contracts regulating the relationship between local regulators and the water service provider. Directive 2000/60/EC and Legislative Decree 152/2006 require water service providers to cover both operating and investment costs. Laws concerning public service provision via in-house contracts also have to be observed. In addition, SMAT has to respect the obligations outlined in the service contract, made with the local regulator, and in the agreements made with other institutional actors. In terms of the community logic, municipalities exert pressures both directly in the shareholders assembly and indirectly through the local regulator. Requirements for accountability are evident because SMAT needs to meet the demands of its consumers directly by signing an agreement with all consumer associations. This includes a variety of initiatives, such as direct communication channels with the members of the associations and biannual meetings to examine results and suggest actions to improve the service and communication (SMAT website, 2015). Consumers and environmental associations are often in conflict with SMAT's targets in terms of income and investments in the territory. In particular, the Italian Forum for Water Movements ideologically leads these associations by advocating against the commercialization of water, including: profit generation, significant tariff increases, and business expansion. Pressures are exerted through citizen mobilization, petitioning local authorities, interviews in newspapers, participation in debates on local TV, and publishing editorials. The findings seem to reveal that even though there are different logics, the expectations and pressures stemming from them might not necessarily come into conflict. For example, laws imposing financial sustainability generate pressures that stimulate businesslike behaviors, meaning that the business and compliance logics might have some level of coherence. In addition, some municipalities have also highlighted that the business logic, with its expectations of commercialization, internationalization, and cost

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reductions, could be in line with the community logic if such cost reductions are used to reduce tariffs. However, in practice, the community logic, strongly determined by the ideological positions of consumer and environmental associations, generates pressures that oppose the business logic. Indeed, the local regulator, on behalf of the municipalities, has its mandate to serve the public interest and to promote the delivery of high quality services. For this reason, it defines the priorities of the water service provider primarily in terms of the interests of citizens/consumers. These are clearly expressed in the municipal deliberation of Turin dated 4 March 2013, signed by the citizen representatives, claiming that ‘the will of the citizens (and also of the current legislation) is that the water sector should remain public. The income derived from the water service must be dedicated to improve the quality of water services for the whole population and to safeguard water resources, excluding the logics of profit.’ In addition, the compliance logic would stimulate investments in innovations with the aim of improving efficiency and the quality of the services provided. However, the community logic may exert conflicting pressures and it could happen that the most important infrastructural investments are postponed in favor of less important ones, in order to limit tensions with users and consumers associations. As the head of the control unit of municipal corporations affirms: ‘Municipalities are all interested in making investments for their specific territory, while if SMAT could have [freely] chosen its own investments, it would have set different priorities. In this way, the voters are satisfied.’ It could also be possible that the allowed tariff increases are not proportional to the investments needed to guarantee service quality. Such decisions are taken to avoid the negative effects that an increase in tariffs could generate in terms of affordability. 4.4. Organizational characteristics 4.4.1. Field position SMAT is a large, high-status public service corporation with a significant field position. In 2014, it was awarded the ‘Top Italian public utility’ prize on the basis of 153 parameters in different areas such as financial performance, operating results, capacity for innovation, sustainability, attention to customers and the environment, and communication. In 2015, SMAT was a prizewinner in the ‘SMART Communities 2015’ project. SMAT was awarded the prize for having made a significant contribution to the development of modern smart cities. In particular, SMAT participated with the project called ‘IoTibevo,’ aimed at encouraging the consumption of public as opposed to bottled water. According to our findings, SMAT can be considered a central organization, visible in the field, which attracts media attention. For this reason, it is not immune to the institutional pressures stemming from the widespread idea that democracy and water are interrelated. This implies that water policies should guarantee sustainability and equity for all citizens. SMAT perceives the complexity of the field and tries to manage the contradictory pressures therein. Still, it is unable to deviate too far from the expectations associated with the community logic. SMAT has abandoned some initiatives in response to pressures exerted by the local regulator, municipalities, and consumer and environmental associations to limit commercialization and internationalization and to focus resources on local investments. One example is its participation in the construction of the water supply of the city of Huainan in China. However, given the expectations to be efficient, to avoid ‘public

waste’ and to generate profits, in order to finance innovation (business logic) and improve quality (compliance logic), SMAT tries to take a proactive approach by explaining that being efficient entails more benefits for shareholders, and for citizens/consumers by consequence. For example, SMAT has decided to distribute dividends to the municipalities, up to a maximum of 20% of net income, in order to help reduce municipal taxes. 4.4.2. Organizational structure SMAT is a limited company with 850 employees. Of these employees, 10% have an academic degree and 17% occupy management positions. It is a hierarchical functional organization, articulated on three main levels: chairman and CEO (level I), second level managers (e.g. director of development and marketing, and CFO), and clerks, technicians and other employees (level III). The key internal actors interpreting and enacting the institutional logics are the nine top managers and the 25 middle managers, who work with Management by Objectives (MBO) within SMAT. The involvement of other employees occurs periodically, with the chairman and the CEO determining which objectives of the business plan and actions have to be achieved/implemented. The CEO of SMAT deems the corporation to be bureaucratic, claiming that: ‘The organization could surely be improved, in particular by reducing the bureaucracy and increasing the decentralization of powers to lower managerial levels, even if we are aware of the importance of a certain kind of internal regulation … In the next strategic planning, we are going to explain our project to become a more process-driven corporation, necessary in order to achieve sustainability.’ This quote shows how a corporatized organization that still presents elements of traditional public bureaucracy, can be bound to community and compliance logics, lowering the possibility of adopting a full managerial approach to problems. The limited ability to fully prioritize the business logic is perceived by the CEO who described his efforts to promote the strategic expansion of the non-core turnover from the current 6% to 20% (maximum allowed by law) through activities like the sale of consultancy services and participation in international projects. 4.4.3. Ownership and governance SMAT is owned by the City of Turin, the main shareholder, and another 290 municipalities acting as minority shareholders. The corporate governance of SMAT follows the traditional Italian model involving a board of directors, with a chairman and a CEO, an audit committee, and a shareholders' assembly. The board of directors consists of five politically appointed members: three by the City of Turin and the other two by the minority shareholders. The mayor of Turin appoints the CEO, while the minority shareholders appoint the chairman. Both the current CEO and the chairman of SMAT have previous work experience in the management of private companies. The City of Turin, as dominant shareholder, exerts its control on SMAT through the means provided by SMAT's statute or through municipal resolutions. Its areas of control include the: (1) formulation of operational guidelines about personnel (recruitment, remuneration, and internal mobility); (2) approval of the business plan and the operating budget as well as the identification of their main goals; (3) right to information and access internal documents; (4) regular reporting by the chairman or the CEO to the city council; (5) approval of proposals emanating from managers via the shareholders' assembly; and (6) monthly oversight of financial results and annual oversight of non-financial results. Indeed, SMAT

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produces a monthly report to inform the City of Turin about the corporation's financial performance, and informal mechanisms, such as meetings, phone calls, and e-mails, are used to manage its relationship with the main shareholder. The minority shareholders who responded to the questionnaire stated that their capacity to influence SMAT's planning and management was very limited and their decisional power was low, given the predominant role of the City of Turin as main shareholder. Turin, together with the other municipalities, regulates the provision of services with specific contracts and is able to exercise significant contractual power that is also enabled by a reward and sanction system linked to SMAT's performance. Even though SMAT has significant managerial freedom, it is not completely independent when it identifies its mission, vision, and strategies. The compliance logic is connected to the public nature of SMAT, which delivers a public service under a natural monopoly. SMAT's activities are strongly regulated, and consumers have no ability to change service provider. The revenues from core activities are raised through tariffs, which depend on the quantity of water sold and the number of consumers served. Tariff levels cannot be autonomously defined. SMAT is only allowed to make a proposal (on the basis of the formula established by the national regulatory authority), which the local regulator has to approve. Similarly, the investments made by SMAT (70e80 million euros per year) are not discretionary as they result from the compromise between, on the one hand, the shareholders and the local regulator that define investment priorities, and on the other hand, by the corporation, which best knows the condition of the physical infrastructure. Given that the owners can also exercise regulatory powers at the local level, they embody a double role that connects the community and compliance logics, enabling them to be aligned and prioritized. However, the current shareholders have an interest in ‘keeping SMAT public’ because thanks to its excellent performance, the corporation allows the owners to improve their own financial indicators. This is desirable in terms of the Spending Review and the ‘Salva Italia’ Decree 201/2011. The following quote is from the head of the control unit of municipal corporations: ‘Two main forces drive the municipalities in determining the tariff: the possibility of value creation for the community and the need to gain dividends.’ This may indicate that, by earning dividends and reducing the tax burden on citizens, the owners ‘carefully’ favor the business logic, including commercialization and internationalization. Indeed, the minority shareholders see possibilities for expansion through cooperation and collaboration with other public utilities or public authorities. 4.4.4. Identity Our findings reveal that organizational identity is developed as all the members that were interviewed feel the importance of being public, improving service quality, maintaining low costs, and being innovative. In the words of the chairman: ‘For SMAT the main issue is not the commercialization of water, but innovation enabling the improvement of customer satisfaction in a smart city environment, and supporting international cooperation.’ This attitude toward innovation is shared by the director of development and marketing: ‘SMAT has 29 innovation projects developed by its research center and it will participate in Horizon 2020 as coordinator of two projects, in order to improve the smart use of the capillary network

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at low frequency, implementing [consumption] measurement systems able to equitably determine the service charge.’ The need to maintain the strength of SMAT and the health of community is shared by the CEO who claims that: ‘The internationalization of the business is acceptable only if it can be considered as risk-free, avoiding investments in construction plants in countries such as China that impose too much risk.’ In 2003, SMAT adopted an ethical code in order to regulate internal and external activities, with particular attention to environmental offenses. In addition, in 2013, SMAT organized a course for its employees in order to obtain the Lean Six Sigma Green Belt certification. That same year, a total of 8500 h were dedicated to employee training and education. Even though there is a ‘SMAT identity,’ it seems that management does not fully share the same priorities. The chairman appointed by the minority shareholders, for example, is more focused on local investments and the CEO (appointed by the City of Turin) is fully oriented toward commercialization and internationalization. 5. Discussion and conclusions The aim of this paper is to contribute to the debate on the evolving nature and meaning of public service corporations. We addressed two questions: How do public service corporations deal with the complexities they face when making decisions? Which factors encourage or discourage the expansion of public service corporations beyond their core business and local geographic areas through commercialization and internationalization? To answer these questions, we focused a case study on SMAT, a publicly owned water service corporation operating in the northwest of Italy. The theoretical framework presented in Section 2 (Fig. 1) suggests that organizational behavior may be explained by the interplay between external and internal factors (Greenwood and Hinings, 1996). In line with this argument, we noticed how a complex institutional field, characterized by the presence of many legislators and regulators, and a demanding local context, including pressures from citizen and consumer groups, can produce different pressures and expectations embodied in distinct logics (Greenwood et al., 2011; Lounsbury, 2008; Thornton et al., 2012). We argue that SMAT is exposed to three logics: business, compliance, and community. The business logic requires the corporation to operate under conditions of financial independence and to seek continuous utility maximization, with commercialization and internationalization as potential strategies (McPherson and Sauder, 2013). The compliance logic requires SMAT to respect laws, regulations, and plans prepared by local, regional, national, and EU bodies (Boscheck, 2013; Clifton and Diaz-Fuentes, 2013) and to use the opportunities they allow (such as the possibility to allot 20% of turnover to non-core activities), while the community logic (Thornton et al., 2012) constantly reminds SMAT that water services are not freely managed but are constrained by accountability and citizen expectations. Our analysis reveals that the business and compliance logics generate coherent expectations by favoring commercialization and internationalization with the aim of improving efficiency and sustainability. However, in practice tensions emerge because the pressures generated by the community logic, which embodies an endogenous socio-cultural view (i.e. water is a public good to be protected), work against commercialization and internationalization. Commercialization and internationalization can be perceived

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the risks and the business-like nature of those initiatives. Therefore, the public nature of SMAT is in line with the consultancy activities that SMAT performs to help some foreign countries with cost measurements, tariff setting, and technical issues in order to comply with European Union wastewater treatment standards. In other words, twinning activities are seen as an opportunity. On the contrary, commercialization involving the engineering, execution, and management of new plants in foreign countries faces opposition because the investments might not comply with SMAT's externally defined constraints. These issues could force SMAT to abandon such initiatives. Whether or not SMAT will manage to become more commercially oriented and follow the examples of other international public service corporations (see Clifton et al., 2014) will only be known with time. All in all, this case study shows that a financially stable public service corporation may adjust to the prevailing logics by postponing engagement in international activities when the local and institutional pressures work against them. Public shareholders, regulatory bodies and frameworks, in concert with strong endogenous views by citizen, consumer and environmental associations, can limit organizational autonomy. This paper also offers theoretical contributions. Firstly, it has identified and discussed the three logics of business, compliance, and community in the context of public service corporations. This enriches existing neo-institutional theory, which according to Greenwood et al. (2011) has mostly concentrated on two competing logics instead of focusing on the multitude of logics to which organizations are exposed. In addition, this paper also provides a tentative empirically based understanding of how local actors mediate institutional demands, as recommended by McPherson and Sauder (2013). Still, we believe that future research could address the strategies adopted by public service corporations to legitimize their efforts to expand and diversify their business in a context of multiple and competing logics.

as a threat, as the public service corporation may neglect local community interests in the pursuit of profit. When this is the case, it can affect the compliance logic by creating pressures to regulate the corporation's activities in pursuit of opportunities for long-term profit generation (including strategic investments, commercialization, and internationalization). It can thus indirectly moderate the business logic. In addition, the organizational factors of field position, organizational structure, ownership and governance, and identity (Greenwood et al., 2011) explain why SMAT activities need to be aligned with the institutional demands that stem from the community and compliance logics. SMAT is a central organization, visible in the field, which attracts media attention; such exposure implies a reduced level of autonomy when making strategic decisions. This is also connected to the organizational structure, ownership and governance, and identity of SMAT. SMAT is 100% publicly owned. As such, its management is influenced by its public shareholders (Furlong, 2015), both directly (via corporate governance settings) and indirectly (through the local regulator). This means that SMAT's capacity for action (Greenwood and Hinings, 1996) in terms of promoting commercialization and internationalization is limited by a lack of support (Battilana, 2006) on the part of some internal actors and the community. Even if SMAT's CEO declared an intention to expand the non-core turnover to the 20% allowed under the law, such an objective would prove difficult to achieve due to existing pressures from the local community (in particular, consumer associations and local authorities). For now, it does not seem to be the priority of the chairman. The public nature of SMAT, with public shareholders and politically appointed managers, explains the tensions between the business, compliance, and community logics (Thornton et al., 2012; Greenwood et al., 2011), especially regarding commercialization and internationalization, and the need to compromise (Oliver, 1991) when prioritizing decisions and activities. On the one hand, commercialization and internationalization could improve the profitability of the corporation, so that tariffs can be kept low and additional investments be made. On the other hand, the public nature of SMAT may conflict with these non-core activities due to

Appendix A. Document study.

No.

Author

Type of document

1. 2. 3.

AEEGSI ARPA Piemonte ATO3

4. 5. 6.

Consumer associations CONVIRI European Commission

7. 8. 9.

Intesa Sanpaolo ISPRA Italian National Legislator

10.

Piedmont Region

11.

SMAT

12.

Turin Municipality

-

Documents and information available at www.autorita.energia.it Documents and information available at www.arpa.piemonte.it ATO3 Plan years 2015e2017 Documents available at www.ato3torinese.it 2013 Report ASSOUTENTI 2011 Report on water services Directive 2008/105/EC Directive 2004/35/CE Directive 2000/60/EC 2013 research on Italian water industry Documents on water services available at www.isprambiente.gov.it Bill 1678/2015 ‘Salva Italia’ Decree 201/2011 Law 214/2011 Legislative Decree 152/2006 Law 36/1994 Regional Law 7/2012 Regional Law 13/1997 Regional Plan to safeguard the water 2013 Unioncamere research report on water tariffs Financial statements year 2014 Information available at www.smatorino.it SMAT establishing agreement SMAT constituent act Agreement between SMAT and Turin municipality for integrated water service Turin municipality council deliberations concerning SMAT and the water sector Information available at www.comune.torino.it

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