Industry specific regulation needed for the Swedish welfare sector

Apr. 07, 2015

Per Strömberg, SSE Centennial Professor of Finance and Private Equity at Stockholm School of Economics recently contributed with a special report to the Ownership Assessment Inquiry (Ägarprövningsutredningen) on whether certain forms of ownership should be excluded from the welfare sector.

– If you look at the research, there is no evidence that any one type of ownership form would be better or worse when it comes to the welfare sector.

Instead, the most important factor for stable and efficient companies is the long term economic potential of the business. Negative short-term behavior is mostly a problem when a company is not doing well, says Per.

At the moment the political uncertainty in Sweden regarding future regulation of the welfare sector is affecting the industry. A new inquiry has been initiated and many companies are postponing investments. This is of course troublesome for the Swedish society, especially as the new inquiry will not be ready for at least another year argues Per Strömberg.

– I believe that we need private companies in the welfare sector to handle the huge challenges in the future as the need for welfare services is going to increase. We need actors with an incentive to constantly improve productivity to be able to handle the welfare demands of the future. I don’t see profits in this sector necessarily leading to any problems as long as there is a functioning regulatory environment adapted to each industry within the welfare sector, says Per.

One of the reasons behind the inquiry was the bankruptcy of a private school company owned by a private equity fund a few years ago. Concerns over the suitability of these funds ownerships of companies providing welfare services contributed to a debate about profits in the welfare sector.

– The problem with this debate is that the focus is too narrow. The studies available now show no difference in quality between private and publicly owned service providers but more research is needed to explore this area. If you want to criticize private equity owners of welfare companies for anything it should be for the tendency to have rather high leverage in the companies that increases the risks. You could argue a case for introducing a capital requirement similar to the one already in use for the financial sector, says Per.