The Effects of Subsidies on MSW Treatment Companies: Financial Performance and Policy Implications

Round 1

Reviewer 1 Report

Dear authors, 

you accepted all my requirements. Thank you 

Author Response

Thank you!

Reviewer 2 Report

Dear Authors, you made a great and hard work to rewrite your article. Congratulation!

Author Response

Thank you. We have improved the discussion of  hypotheses on section 5.

Reviewer 3 Report

This is the 2nd version that I am reviewing. There are tangible improvements in the content and the narrative, and the coherence has substantially improved. 

However, I still perceive gaps in the structure of the article, especially on the following points:

1) the article should be more explicit on the question of subsidies: the article seems to have a black-white approach on subsidies, but it is normally more subtle. May be the authors could elaborate on where this data is coming from, and what type of content it has: subsidies can take multiple forms: tax rebates, per employees, per activity (privilege contracts, etc...). It would help to discuss this matter. While this is well done on para 5.2, the direct link to the data could be improved.  

2) The article has now 2 hypotheses. The article would gain on clarty to discuss better the validation of these hypothesis. This should be rather part of the discussion (chapter 5), then as reminder on chapter 6.

 

Author Response

This document contains the replies to Reviewer #3

Dear reviewer,

Thank you for your comments and for the opportunity to revise and resubmit the paper. Your comments were helpful to improve the quality and relevance of this manuscript.

Regarding subsidies, we are aware that exist different typologies of subsidies, and it can cause impact in the results.

 

Please find below our additions in the manuscript:

 

Section 4

In the beginning, it was added:

The annual amount of non-refundable subsidy correspond to a government support in which there is an individualized agreement towards its concession, if certain conditions are met. Financial statements do not disclose what these conditions are.

 

Section 5.

The structure of the section changed to:

Here we discuss the results vis-à-vis the established hypotheses. We start to discuss and validate H1 considering the barriers to operational activity. Subsequently, we discuss and validate H2 in the framework of the Agency theory and discuss the effects of subsidies at regional level. The objective of this section, besides validating our hypotheses, is to provide hints on ways to overcome barriers; and to contribute to the discussion on the need to attribute subsidies to these activities.

 

5.1. Barriers to Operating Activity and Corporate Indebtedness

The aforementioned barriers force large investments by companies to overcome them. Since financial resources are scarce, these companies need to obtain external funding. The Debt ratio of the total companies in the sample shows that, on average, the debt capital used to finance their activities represents 62% -63%, meaning that they have positive equity. Furthermore, as the value of this indicator is less than 70%, these companies seem to be able to pay their debts in the future. To know whether this value for the debt ratio is high or low compared to other sectors in the period considered, we used the Pordata database to analyze the level of indebtedness by sector. Since that, in Pordata, the Nace sector 38.0 is included under the heading of “Electricity, Gas, and Water”, it is only possible to make a comparison with the aggregation of these 3 sectors. Even so, we can observe that in this period, according to Figure 6, the companies under analysis rank in third in the top 3 sectors with a higher level of indebtedness, after “Wholesale and Retail Trade” and “Manufacturing and Extractive Industry”. However, the analysis over the years, allows us to conclude that this indebtedness met a substantial reduction from 2016 to 2020, indicating a significant improvement in the performance of companies in the sector.

5.2. Government Subsidies and Corporate Performance

Government provides grants to companies in financial difficulties to meet their long-term goals to help companies in financial difficulties. In this perspective, public service concessionaires that carry out the collection and treatment of waste are entitled to receive government benefits to protect their economic sustainability. However they are also subject to different forms of control and regulation. Subsidies can be awarded for R&D activities or aimed at increasing production efficiency. The former are always awarded to high-tech companies or companies with excellent performance; while the latter are intended for underperforming companies. In this framework, one aspect to consider concerning corporate performance, and especially governance, is that the focus on “equity governance” may cause the agency problem. This stems from a conflict of interest in any relationship (for example, between owners and managers and/or between majority and minority shareholders) where one party acts to maximize its benefit, to the detriment of others’ benefits [84]. Hence, this theory explains why managers are tempted to successively underestimate the company’s profit and show an inferior performance to receive more public subsidies. Accordingly, they are expected to spend more time and resources on influence activities (rent-seeking) than on productive activities, which can significantly reduce the potential positive subsidies’ effects [85]. As a result, granting discretionary subsidies can distort the government's initial intention and lead to misallocation of capital within companies, since government is diverting scarce resources to less productive companies. Furthermore, information asymmetries, improper incentives and bad implementations can also lead to undesirable results, namely, unfair competition, moral hazard and corruption, which is counterproductive for government policies aimed at correcting possible market failures [86]. In addition, in weak institutional contexts, government is especially intrusive and the rules of the game for granting subsidies remain fluid. Therefore, the consistent empirical demonstration of the relationship between subsidies and corporate performance remains controversial and inconclusive. Thus, knowing whether subsidies meet the intended objectives requires more empirical research. Accordingly, this article assumes (H2) that companies with subsidies exhibit worse financial performance than companies without subsidies. From Table 4, we can observe that the standard deviation of the sample of companies without subsidies is very high, indicating a wide heterogeneity between companies. Moreover, since the results between the mean and the median are conflicting in terms of conclusions about the greater or lesser degree of indebtedness between clusters of subsidies, we believe that by employing the median analysis (instead of the mean) we can obtain more accurate hints on the clustered corporate performance. Thus, it appears that companies without subsidies are less indebted than companies with subsidies, although the percentage difference is not large (1.4% in the median). With regard to the remaining ratios that serve as a basis for evaluating corporate performance, we found that, in just over half of the cases, companies without subsidies present better financial performance than companies with subsidies, suggesting that companies with subsidies are not using them in the best way to improve their economic sustainability. Thus, we validate our H2.

 

Figure 6. Debt (Mil. €) across industries in Portugal, 2016-2020

 

Thus, we can validate our H1.