**1. Introduction**

In several countries, especially in western and central Europe, local self-government is independent, and direct state interference in its competences is prohibited (Aleksee 2013). However, Zhang et al. (2020) note that when local self-governments have sufficient fiscal autonomy, decentralizing fiscal power to sub-provincial governments is found to have a greater impact on increasing marketization and market efficiency. Moreover, in the environment of modern liberal democracies, there is an ever-increasing trend towards the application of the subsidiarity system (Levický et al. 2019; Pauliˇcková 2010). On the other hand, there is a theory that the provision of financial needs of local self-government should be set in proportion to the performance of its competencies and tasks (Oplotnik et al. 2012; Klimovský 2008). Revenues of self-governing budgets generated through

**Citation:** Ágh, Peter, Roman Vavrek, Marek Dvoˇrák, and Viera Papcunová. 2021. Economic Evaluation of the Management of Municipal Firms at the Level of Rural Local Self-Governments (Case Study). *Economies* 9: 130. https://doi.org/ 10.3390/economies9030130

Academic Editor: Burcin Yurtoglu

Received: 28 May 2021 Accepted: 25 August 2021 Published: 9 September 2021

**Publisher's Note:** MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affiliations.

**Copyright:** © 2021 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/).

81

the use of the self-governing property for business purposes contribute to increasing the financial independence of local self-governments. In recent years, the business of local self-governments has proved to be one of the central interests of public administration worldwide. Local self-governments are expected to play a broad and proactive role in supporting local economic development, in addition to performing traditional public service functions. To achieve this, they must constantly innovate to attract talent and investment in the process of meeting the needs of the people in their jurisdictions through the provision of public services (Mei et al. 2016). According to Mbecke (2015), to define and generalize the phrase municipal business is not easy at all. According to him, conducting business in municipalities is not easy for two reasons. First, business is limited and still a subject of research. Second, the managemen<sup>t</sup> of public services is also an area where much remains to be explored, including in the area of public sector business. Municipal business is a scientific discipline that seeks to understand the extent to which local self-governments and their representatives shape the discovery, creation, exploration, exploitation, and diffusion of new opportunities and the economic, social, and environmental consequences. Although public sector business capacities have not been comprehensively examined, it is worthwhile to start with some features that can contribute to the success of business at the local level. We can understand the business activity of the municipality in a narrower or broader sense. In a narrower sense, we can understand the combination of "municipal business" only as the municipality's own business activity. In a broader sense (from the point of view of using public property), we can also understand the business activity of legal entities established or funded by the municipality and legal entities in which municipalities participate with property as business deposit (Hudec 2011). By conducting business, municipalities secure part of their revenue, and at the same time, they create a competitive environment for other entrepreneurs. Municipal firms also participate in creating activities that are necessary for the municipality in terms of complexity. Gorzelak (2019) states that, in addition to revenue, municipal firms also directly create job opportunities for the inhabitants of the municipality in which the municipal firms have their registered office, which improves the overall image of the municipality. This is also confirmed by Babun (2020), who states that local self-government with adequate administrative and financial autonomy has the ability to find and attract labor power for municipal firms, which also ensures the growth of human capital in the area. Entrepreneurial activity enables municipalities to cooperate with other municipalities to solve development programs that they cannot implement from their own resources (e.g., construction and operation of a municipal solid waste landfill). This form of using municipal property can be decided by the municipal council or the mayor. The municipality is obliged to set aside the property used for business, keep it in special records and to depreciate it in accordance with the accounting for the municipality's business activities. Decision making in the managemen<sup>t</sup> of municipal property in the Slovak Republic is the competence of the municipal council and the mayor of the municipality, who can decide on the market method or non-market method of management. In the market method of management, local self-government prioritizes revenue generation with the main goal of strengthening the local budget. In non-market management, the local self-government uses the municipal property to fulfil its competencies arising from the law, while the social characteristics of the provided goods are preferred, and the generation of revenue has only a secondary role. According to Bumbalová et al. (2021), the main purpose of municipal firms should be to carry out economic activities in the public interest. On one hand, this does not automatically exclude activities unrelated to the competences of self-government; on the other hand, self-government favors the achievement of social well-being over profitability.

#### **2. Theoretical Background**

The theory of business emerging in the public sector is an unmistakable sign that it is difficult to draw the line between the private and public sectors. Additionally, the municipal firm is one of the elements that, by nature, are located at the intersection between these two sectors (Bumbalová 2011). This is also confirmed by Vinnari and Näsi (2008), who state that municipal firms in Finland are, therefore, explicitly at the intersection of private and public organizations, as they fulfill primary commercial objectives, are an integrated organizational unit of local self-government and are covered by local legislation. However, Pirošík (2014) notes that in such a firm there may be a possible conflict of public and private interest. He states this in the example of Slovak municipal firms. Slovak legislation does not prohibit the combination of the performance of functions in the legislative and executive bodies of the municipality with activities in municipal firms. Although such a situation is often desirable, especially in the case of the mayor, as he is the statutory body of the municipality and bears direct responsibility for it, it is not possible to overlook the related problems that arise. These elements are contained in the concept of the socalled municipal firm, which Stoilova (2010) and Fil'a et al. (2020) define as an entity engaged in economic activities that are beneficial for society but unprofitable for the private sector; beneficial to the private sector, but cannot be implemented by that sector; natural monopolies. This is also confirmed by the research of Bumbalová and Balážová (2014), who note that approximately half of municipal firms are engaged in activities directly related to self-government competencies, and the other half of firms have differently oriented main subjects of activity. However, the direct provision of public services for the inhabitants, which were identified in the questionnaire as municipal services, was mentioned by only 9% of firms, another 13% stated a combination of municipal services and another focus. It follows that municipalities do not set up their municipal firms primarily for the purpose of providing services to the inhabitants, but search for ways to manage property (33% of firms), or try to generate their own funds through profits of firms operating in the market, outside the sphere of public services. This is also confirmed by Klimovský (2008), who notes that under certain conditions, municipal firms are governed by the motive of profit and competitiveness. This is also confirmed by Stoilova (2010), according to whom municipal firms are able to profitably produce goods and provide services and also compete in the conditions of the private sector. Another confirmation of this is by Clifton et al. (2010), who state that some municipal firms in Italy have managed to achieve such a degree of competitiveness that they have also penetrated global markets (e.g., energy companies from Milan and Brescia), and their stocks have appeared on the stock exchange. However, Bumbalová (2011) notes that in the case of municipal firms, the profitability aspect may not play a key role. Municipalities often seek to provide local public services for inhabitants through a municipal firm. It is precisely this role that is the base of these firms, as opposed to firms operating in a competitive private sector. The framework of the private sector, therefore, does not seem to be a completely satisfactory context for the placement of the term "municipal firm". It is in this context of several different views of the authors on the municipal firm that we decided to focus in our research on the profitability of municipal companies in terms of individual identification factors (region, number of employees, municipality size, and longevity).

**Hypothesis 1 (H1).** *We assume statistically significant differences in the profitability of municipal firms in terms of individual identification factors (a—region and b—number of employees).*

**Hypothesis 2 (H2).** *We assume a statistically significant linear dependence of the profitability of municipal firms on individual identification factors (a—size of the municipality and b—longevity).*

Fölster et al. (2016) adds that some municipalities have a large number of municipal firms, which on the one hand, provides private consumption and, on the other hand, competes with private firms or tries to push private firms out of the market. Nevertheless, it is possible to perceive a municipal firm from the point of view of building local self-government for several key reasons: they create stable and quality jobs for community members; they increase local economic stability by reducing local self-government dependence on private firms; they often provide goods and services to areas lacking access that are overlooked for profit-only service providers; they often provide goods and services

to local people at a lower cost than providers providing profit-only services; they generate new local revenues that can be used for other self-government expenses; they often provide greater reliability, transparency and democratic control than providers providing profit-only services (Community-Wealth ORG 2018). Achieving and adhering to all of the abovementioned principles is not an easy task in the environment of municipalities. From a theoretical point of view, these problems are dealt with in business theory, which is understood as a critique of the bureaucratic approach to public administration. The basis of this theory is to find a way to systematically avoid a collision between allocation economy and efficiency, on one hand, and inefficiency of use, on the other. The starting point is in the environment of business managemen<sup>t</sup> (Osborne and Gaebler 1993). Kraftová (2002) devotes much of her own theory to a municipal firm, stating that it is an economic entity that provides products without a profit motive and without the driving force of market competition. On the other hand, she argues that since these firms operate through the use of public resources, which are very limited, they need to be managed efficiently. Through the effectively implemented business activities of the municipality, it is possible to obtain additional resources to ensure the needs for the performance of self-government and the production of local public goods or services. Financial resources obtained from businesses can be reused in the expansion of the implemented business activities or in the expansion, reconstruction and modernization of municipal property (Takác 2006 ˇ ). Municipal firms are, therefore, a fundamental part of the business activities of municipalities. The business activity of the municipality represents a tool for creating suitable economic conditions for the development of business activities in the private sector (Országhová and Gregánov ˇ á 2018; Smutka and Steininger 2016). Arapis (2013) states that these firms have helped the governmen<sup>t</sup> in various ways at all levels, including building infrastructure, stimulating economic growth, providing public services and diversifying governmen<sup>t</sup> revenue sources. Grossi and Reichard (2008) state that the trend in several European countries is relatively high employment in municipal firms, e.g., in Germany, almost 50% of the municipality´s labor power work in municipal firms, and in Italy, it is almost 30%. In Sweden, 34% of the total number of employees of state-owned enterprises work in municipal firms (PWC 2015). Valach and Bumbalová (2020) state that in the Slovak Republic, the largest group (51.23%) consists of municipal firms with less than 10 employees. Based on this indicator, such firms belong to so-called microfirms. In contrast, there are only five municipal firms with more than 250 employees. In this context, in our research, we focused on the evaluation of the sales of municipal companies in terms of individual identification factors (region, number of employees, municipality size and longevity).

**Hypothesis 3 (H3).** *We assume statistically significant differences in the sales of municipal firms in terms of individual identification factors (a—region and b—number of employees).*

**Hypothesis 4 (H4).** *We assume a statistically significant linear dependence of the volume of sales of municipal firms on individual identification factors (a—municipality size and b—longevity).*

The establishment of a successful business in local self-governments is not only an ambitious but also an important step in maximizing the provision of services at the local level (Mbecke 2015). However, Rundesová (2008) expressed the opinion that many municipalities are in fact "forced" into business activities, which means that they allegedly carry out business activities "voluntarily by force", although ultimately, they increase their welfare. Therefore, according to Halásek et al. (2002), it is necessary for municipalities to make very careful decisions about the business activities of municipalities. The municipal authorities should have access to an analysis of the managemen<sup>t</sup> of the municipal firm in order to reduce the level of risk to a minimum so that the property of the municipality invested in the joint venture is not impaired. Bumbalová (2011) notes that, among the most frequently used organizational and legal forms of entities that municipalities base on the implementation of business activities, are limited liability companies and joint stock companies. Valach and Bumbalová (2020) state that the vast majority of Slovak municipal firms have the legal form of a limited liability company, while in more than 60%, their capital does not exceed EUR 50,000. Sýkora (2021), however, adds that the municipality is not obliged to create a specific liability company or joint stock company as a legal entity for the performance of business activities. Kuoppakangas (2013) also adds that, in accordance with legislation and policies adopted at the municipal level, these firms can use their own resources to support their development goals, even without the consent of the political actors involved, but only within the limits explicitly stated in the statutes. However, according to Kali ˇnák (2016), it is important to emphasize that the purpose of the business activities of municipal firms should not only be financial profit, but also non-financial profit. This means that their activities should increase the scope and quality of services provided in the framework of public benefit activities. Among some of the benefits of setting up a municipal firm according to Ledecký et al. (2014) are the cheapening and improvement of public services; emergency workers are "always at hand" in case of accidents and emergencies; a source of interpersonal relationship; irreplaceable help in organizing cultural sports and social life; starting and improving the business environment; the use of municipal resources; and the fact that the municipal firm is an important part of the development of the municipality. On the other hand, Ronˇcák and Mateiˇcková (2011) claim that the area of municipal firms is one of the areas that is the least controlled by the public. This increases opportunities for corrupt and non-transparent behavior (e.g., the process of creating firm bodies, rules for hiring firm employees, the method of public procurement and prices of selected commodities) of representatives of municipal firms.
