PSIRU Economic Justice and the Sustainable Global Society The difference between public and private services By David Hall Public Services International Research Unit (PSIRU) University of Greenwich, UK June 2011

PSIRU Economic Justice and the Sustainable Global Society Acknowledgements and summary The presentation is mainly based on PSIRU reports ‘Why we need public spending’, available from and ‘More public rescues for more private finance failures’ commissioned by Public Services International (PSI) and the European Federation of Public Service Unions (EPSU). The problems of privatisation The positive economics of public spending The future

PSIRU Economic Justice and the Sustainable Global Society Some examples Uganda and electricity - Umeme, prices and death penalty Africa and healthcare –investment only for private patients Indonesia and water – bribes and unfit tap water Russia and former USSR – death and privatisation Chile – water markets and sewage mistreatment UK and cleaners– loss of pay, holidays,pensions and security UK and care homes – cost-cutting Refuse collection worldwide – casual, dangerous, marginal

PSIRU Economic Justice and the Sustainable Global Society Economics 1: cost of private capital higher Cost of private capital is higher UK privatisations and PFI –shareholder dividends and company debt cost more than government debt e.g. bonds (in crisis, much more) So: PFI costs 2% extra interest = £20 billion total (FT 2011) So: water bills would be £900 million lower per year if public (PSIRU 2008) True in developing countries too –e.g. for power stations Indonesia pays lower interest rate than multinationals; Shell+Bechtel get same credit rating as Philippines government

PSIRU Economic Justice and the Sustainable Global Society Economics 2: private sector not more efficient Empirical evidence does not support assumption that private sector will be more efficient –“While there is an extensive literature on this subject, the theory is ambiguous and the empirical evidence is mixed.”(IMF, March 2004) Studies across countries and sectors find no consistent difference –Water and electricity: “no statistically significant difference in efficiency scores between public and private providers.” (Estache et al, 2005) –Telecoms: global study comparing private and public companies found that “efficiency growth following privatizations…is significantly smaller than growth in public sectors.” (Knyazeva, Knyazeva and Stiglitz 2006) –Buses: no significant difference in efficiency between public and private bus operators, or mixed systems (Pina and Torres 2006) –Auditing: Australia: ‘outsourced audits are more costly’ (Chong et al 2009) –Prisons: Lundahl 2009 “ private prisons provide no clear benefit” –“No evidence of consumer benefits from electricity/gas/telecoms liberalisation” (Florio et al, 2008, Goto and Makhija 2009)

PSIRU Economic Justice and the Sustainable Global Society Empirical evidence on efficiency….. Bel G. and Fageda X Does privatization spur regulation? Evidence from the regulatory reform of European airportshttp:// Bel G., Warner M Does privatization of solid waste and water services reduce costs? A review of empirical studies Resources, Conservation and Recycling 52 (2008) 1337–1348 Cabeza García L. and Gómez-Ansón S The Spanish privatisation process: Implications on the performance of divested firms International Review of Financial Analysis Volume 16, Issue 4, 2007, Pages International Review of Financial AnalysisVolume 16, Issue 4 Cho, Hsun-Jung and Fan, Chih-Ku Evaluating the Performance of Privatization on Regional Transit Services: Case Study J. Urban Plng. and Devel., Volume 133, Issue 2, pp (June 2007) Cowie J The British Passenger Rail Privatisation Conclusions on Subsidy and Efficiency from the First Round of Franchises Journal of Transport Economics and Policy, Volume 43, Part 1, January 2009, pp. 85–104 D'Souza J., Megginson W and Nash R The effects of changes in corporate governance and restructurings on operating performance: Evidence from privatizations Global Finance Journal Volume 18, Issue 2, 2007, Pages Global Finance Journal Volume 18, Issue 2 Estache A. and Gomez-Lobo A Limits to Competition in Urban Bus Services in Developing Countries Transport Reviews, Vol. 25, No. 2, 139–158, March 2005 Estache A. Tovar B., Trujillo L How efficient are African electricity companies? Evidence from the Southern African countries. Energy Policy 36 (2008) 1969–1979 Estache A., Perelman S., Trujillo L Infrastructure performance and reform in developing and transition economies: evidence from a survey of productivity measures. World Bank Policy Research Working Paper 3514, February Farsi M., Fetz A., and Filippini M Economies of scale and scope in local public transportation CEPE Working Paper No. 48 April Figueira, C., Nellis, J. and Parker, D Does Ownership Affect the Efficiency of African Banks? The Journal of Developing Areas - Volume 40, Number 1, Fall 2006, pp

PSIRU Economic Justice and the Sustainable Global Society More empirical evidence on efficiency…… Florio M The Great Divestiture. MIT Press. GONZÁLEZ-GÓMEZ F. and GARCÍA-RUBIO M Efficiency in the management of urban water services. What have we learned after four decades of research? Hacienda Pública Española / Revista de Economía Pública, 185-(2/2008): Gruber H. and Verboven F.1999 The Diffusion of Mobile Telecommunications Services in the European Union” CEPR Paper No European Economic Review, 2001, vol. 45, issue 3, pages European Economic Review International Monetary Fund 2004 Public-Private Partnerships March 12, Knyazeva A, Knyazeva D., and Stiglitz J Ownership change, institutional development and performance. March 2006 Knyazeva A., Knyazeva D, Stiglitz J., Ownership changes and access to external financing, Journal of Banking & Finance 33:10 October 2009 doi: /j.jbankfin doi: /j.jbankfin Kraft, E.; Hofler, R.; Payne, J Privatization, foreign bank entry and bank efficiency in Croatia: a Fourier-flexible function stochastic cost frontier analysis Applied Economics, Volume 38, Number 17, 20 September 2006, pp (14)Applied Economics Lundahl et al Prison Privatization : A Meta-analysis of Cost and Quality of Confinement Indicators Research on Social Work Practice : Ohemeng F. and Grant J When markets fail to deliver: An examination of the privatization and de-privatization of water and wastewater services delivery in Canadian Public Administration Volume 51 Issue 3, Pages 475 – 499 Published Online: 27 Oct 2008Canadian Public AdministrationVolume 51 Issue 3 Parker, D. and C. Kirkpatrick (2005) ‘The Impact of Privatization in Developing Countries: A Review of the Evidence and the Policy Lessons’, Journal of Development Studies 41(4): 513–41. Pina, Vincente and Torres, (2006) 'Public-private efficiency in the delivery of services of general economic interest: The case of urban transport', Local Government Studies, 32:2, 177 — 198

PSIRU Economic Justice and the Sustainable Global Society Even more empirical evidence on efficiency….. Pollitt M. 1995) Ownership and performance in electric utilities. OUP Pucher J., Korattyswaroopam N., Ittyerah N The Crisis of Public Transport in : Overwhelming Needs but Limited Resources Journal of Public Transportation, Vol. 7, No. 4, 2004 Sohail M., Maunder D. and Cavill S Effective regulation for sustainable public transport in developing countries. Transport Policy Volume 13, Issue 3, May 2006, Pages Wallsten S. and Kosec K The effects of ownership and benchmark competition: An empirical analysis of U.S. water systems International Journal of Industrial Organization Volume 26, Issue 1, January 2008, Pages International Journal of Industrial OrganizationVolume 26, Issue 1 Willner J. and Parker D. The Performance of Public and Private Enterprise under Conditions of Active and Passive Ownership and Competition and Monopoly Journal of Economics Volume 90, Number 3 /April, 2007 Wu H. and Parker D The Determinants of Post-Privatization Efficiency Gains: The Taiwanese Experience. Economic and Industrial Democracy 2007 Vol. 28(3): 465– Yvrande-Billon A. (2006) The Attribution Process Of Delegation Contracts In The French Urban Public Transport Sector: Why Competitive Tendering Is A Myth. Annals of Public and Cooperative Economics 77 (4), 453–478. Zhang, Y.-F., Parker, D. and C. Kirkpatrick, 2002, ‘Electricity Sector Reform in Developing Countries: An Econometric Assessment of the Effects of Privatisation, Competition and Regulation’, Working Paper No.31, Centre on Regulation and Competition, Institute for Development Policy and Management,.

PSIRU Economic Justice and the Sustainable Global Society Economics 3: Marketing Market segmentation –Selecting countries or services or groups of customers –differential pricing (lower for big customers = regressive cross-subsidy); pre-pay metering vs. direct debit Pricing strategy –for monopolies e.g private water in France 16% more expensive than public (Chong and Sauusier) –Opaque contracts to deter switching e.g. electricity Strategic marketing –loyalty incentives (bribes); forecast errors; 25 yrs notice –Strategic withdrawals e.g. AES, Veolia, Suez –Public policy influence with governments, IFIs, univs

PSIRU Economic Justice and the Sustainable Global Society Economics 4: Cost-cutting, transaction costs, incomplete contracts Cost-cutting –Lower pay, fewer jobs, underinvestment Transaction costs –Tendering and selection –Monitoring Incomplete contracts –Cannot foresee all eventualities –and renegotiation –Unequal resources e.g. lawyers

PSIRU Economic Justice and the Sustainable Global Society Value for money assessment of PPPs vs public sector FactorComparingEvidence indicates 1Cost of capitalDebt interest + dividendsPPP more expensive 2Cost of construction Comparative costs and completionPPP more expensive/neutral 3Cost of operationComparative efficiencyNeutral 4Transaction costsProcurement + monitoring, management PPP more expensive 5UncertaintyIncomplete contracts, contingent liabilities, impact on service PPP riskier Cost of capital :always higher for private sector Construction ‘on time’ :is costly ‘turnkey’ contract, for bankers’ benefit No efficiency savings Real transaction costs and uncertainty No reduction in public spending under PFI schemes: government pays

PSIRU Economic Justice and the Sustainable Global Society Problems with public services and public spending Bureaucracy Delays Affordability –‘luxuries’ that cannot be afforded –Burden on real economy –Sacrifice for collective good But this is contrary to evidence Future needs more public spending, not less

PSIRU Economic Justice and the Sustainable Global Society How much public spending? Long-run association between higher GDP and higher public spending as a proportion of GDP The positive economic links –Productivity gains from infrastructure –Efficiency gains from public health/education –Equality boosts economy, reduces social problems –human capacity, dignity and happiness: beyond GDP –counter recession: 1930s and now

PSIRU Economic Justice and the Sustainable Global Society Higher GDP, higher public spending Higher GDP per capita is positively linked to higher public spending as % of GDP (OECD 2008)

PSIRU Economic Justice and the Sustainable Global Society Long-run rise of public spending as % of GDP, in line with GDP per capita: “Wagners Law” (Tanzi 2000)

PSIRU Economic Justice and the Sustainable Global Society Even in the USA……

PSIRU Economic Justice and the Sustainable Global Society Government spending trends in developing countries Source: Yu B. et al 2009: Does Composition of Government Spending Matter to Economic Growth? n.edu/bitstream/51684/ 2/IAAE%20government%2 0spending.pdf n.edu/bitstream/51684/ 2/IAAE%20government%2 0spending.pdf

PSIRU Economic Justice and the Sustainable Global Society Why? Infrastructure Infrastructure investment and growth Change in ave per capita growth between and Calderon and Serven 2008

PSIRU Economic Justice and the Sustainable Global Society Why? Efficiency: public healthcare is more efficient and effective Life expectancy in USA is lowest in high income OECD, lower than Cuba Infant mortality in USA is 2x the rate in Czech republic, Portugal, Japan (source: OECD health statistics)

PSIRU Economic Justice and the Sustainable Global Society Why? Equality: redistribution via benefits & public services (£ per year) Ratio Top/Bottom Bottom 2nd 3rd 4th Top All ho us eh ol ds Original income plus cash benefits Gross income less taxes Post-tax income plus benefits in kind (health, education etc) Final income in money and services

PSIRU Economic Justice and the Sustainable Global Society Equality: countering social problems

PSIRU Economic Justice and the Sustainable Global Society How? Democracy Source: C Boix ‘Democracy, development, and the public sector’ American Journal of Political Science, grenoble.fr/articles/demo/democracy_development_and_the_public_sector.pdf. grenoble.fr/articles/demo/democracy_development_and_the_public_sector.pdf

PSIRU Economic Justice and the Sustainable Global Society Taxation issues Taxation as primary source of finance Overall level must be linked to level of spending –deficits necessary in recession, not long-term norm –Rising spending and services > rising level of taxation General level of taxation too low (pre-recession) Distribution of taxation not progressive –Shift to indirect tax –Shift to employment taxes/ social insurance –Under-taxation of land and property

PSIRU Economic Justice and the Sustainable Global Society Spending and taxation: anglo-saxon deficits 2009 Spending as % of GDP Tax revenue as % of GDP Canada France Germany Euro area (16 countries) United Kingdom United States Public spending and tax as % of GDP 2009 (source: OECD stats PSIRU calculations)

PSIRU Economic Justice and the Sustainable Global Society Post-tax inequality between profits and households, USA (Source: US Dept of Commerce, Bureau of Economic Analysis

PSIRU Economic Justice and the Sustainable Global Society Affordable and fair taxation “our tax collectors are like honey bees, collecting nectar from the flowers without disturbing them, but spreading their pollen so that all flowers can thrive and bear fruit” Pranab Mukherjee, India’s finance minister, budget speech, July 2009

PSIRU Economic Justice and the Sustainable Global Society The summary failure of Metronet (London underground PFI) “The return anticipated by Metronet’s shareholders appears to have been out of all proportion to the level of risk associated with the contract…” “In terms of borrowing, the Metronet contract did nothing more than secure loans, 95% of which were in any case underwritten by the public purse, at an inflated cost…” “Metronet’s inability to operate efficiently or economically proves that the private sector can fail to deliver on a spectacular scale..” “The Government should remember the failure of Metronet before it considers entering into any similar arrangement again. It should remember that the private sector will never wittingly expose itself to substantial risk without ensuring that it is proportionally, if not generously rewarded. Ultimately, the taxpayer pays the price…” “we are inclined to the view that the model itself was flawed and probably inferior to traditional public-sector management. We can be more confident in this conclusion now that the potential for inefficiency and failure in the private sector has been so clearly demonstrated. In comparison, whatever the potential inefficiencies of the public sector, proper public scrutiny and the opportunity of meaningful control is likely to provide superior value for money. Crucially, it also offers protection from catastrophic failure. It is worth remembering that when private companies fail to deliver on large public projects they can walk away—the taxpayer is inevitably forced to pick up the pieces.” (UK House of Commons Transport Committee January 2008)

PSIRU Economic Justice and the Sustainable Global Society The ‘exit route’: cuts in staff, services, benefits (40:30:30) A Status Update on Fiscal Exit Strategies” IMF Working Paper WP/10/272 org/external/pub s/ft/wp/2010/wp pdf org/external/pub s/ft/wp/2010/wp pdf

PSIRU Economic Justice and the Sustainable Global Society Increased future needs for public spending Servicerise in annual public spending Health and social care +4.5% GDP Public? or inefficient and inequitable PensionsSecure? or linked to returns on investment? Climate change+1.5% GDPPublic finance will cover 2/3 of all cost Fibre-optic etc? Also transport (+€1.5 trillion in EU) Developing countries? (about 10% behind) Necessary: schools, health, infrastructure

PSIRU Economic Justice and the Sustainable Global Society Climate change and renewables “Several countries source over 70% of their power generation from low-carbon sources. For these, investment has typically only occurred with substantial government intervention, even where markets have subsequently been liberalised” “we should not accept the significant risks and costs associated with the current market arrangements… changes to the current arrangements are both required and inevitable.” (UK Committee on Climate Change, )

PSIRU Economic Justice and the Sustainable Global Society Forecast increase in public health spending (IMF) “the top priority is to contain the high rates of spending growth that have led to marked increases in spending-to-GDP ratios over the past 50 years” (IMF 2010)

PSIRU Economic Justice and the Sustainable Global Society Conflicts over healthcare USA healthcare conflicts –public health policies vs. incumbent corporate interests Central and eastern Europe healthcare conflicts –Czech, Slovak, Poland, Hungary –public reject fees, privatisation of insurance/hospitals –Referenda, elections, court cases –Corporate use BIT law to constrain policies: Slov, Poland IMF fiscal targets vs healthcare public spending –“Many of the reforms involve difficult tradeoffs, as they –would result in a reduction in the quantity of services financed by the public sector.” –“the difficulty of health reform is underscored by the dearth of prominent reforms in advanced countries aimed primarily at reducing spending.”

PSIRU Economic Justice and the Sustainable Global Society The relative importance of state pension provision

PSIRU Economic Justice and the Sustainable Global Society IMF and politics: effects of crisis and IMF ‘exit’ plans Primary public expenditure as % of GDP, 2007 Annual real growth : Primary public expenditure Annual real growth : GDP Average adjustmen t called for by 2030 by IMF High-income countries %-0.20%-8.70% Developing countries %5.10%-2.75%

PSIRU Economic Justice and the Sustainable Global Society Conclusions The economic, social, developmental and environmental role of public spending new demands for public spending: stimulus, infrastructure, healthcare, pensions, equality, climate change, broadband PPPs and project bonds etc not VFM No known limit The Italian referendum: 96% (25 million) of 57% turnout vote to repeal law promoting privatisation of water and law providing 7% return on capital to be built into water prices. Good democracy, good economics