psiru economic justice and the sustainable global society2011 the difference between public and...

PSIRU Economic Justice and the Sustainable Global Society 2011 www.psiru.org

The difference between public and private services

By David [email protected]

Public Services International Research Unit (PSIRU) University of Greenwich, UK

www.psiru.orgJune 2011


Acknowledgements and summary• The presentation is mainly based on PSIRU reports ‘Why we need public spending’, available

from http://www.psiru.org/reports/2010-10-QPS-pubspend.pdf , and ‘More public rescues for more private finance failures’ http://www.psiru.org/reports/2010-03-PPPs.doc , 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


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


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


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)


Empirical evidence on efficiency…..Bel G. and Fageda X. 2010 Does privatization spur regulation? Evidence from the regulatory reform of European airportshttp://www.ub.edu/irea/working_papers/2010/201004.pdf

Bel G., Warner M. 2008 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. 2007 The Spanish privatisation process: Implications on the performance of divested firms International Review of Financial Analysis Volume 16, Issue 4, 2007, Pages 390-409

Cho, Hsun-Jung and Fan, Chih-Ku. 2007 Evaluating the Performance of Privatization on Regional Transit Services: Case Study J. Urban Plng. and Devel., Volume 133, Issue 2, pp. 119-127 (June 2007)

Cowie J. 2009 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. 2007 The effects of changes in corporate governance and restructurings on operating performance: Evidence from privatizations Global Finance JournalVolume 18, Issue 2, 2007, Pages 157-184

Estache A. and Gomez-Lobo A. 2005. 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. 2008 How efficient are African electricity companies? Evidence from the Southern African countries. Energy Policy 36 (2008) 1969–1979

Estache A., Perelman S., Trujillo L. 2005 Infrastructure performance and reform in developing and transition economies: evidence from a survey of productivity measures. World Bank Policy Research Working Paper 3514, February 2005. http://go.worldbank.org/919KQKSPS0 Farsi M., Fetz A., and Filippini M. 2006 Economies of scale and scope in local public transportation CEPE Working Paper No. 48 April 2006 http://www.cepe.ch/download/cepe_wp/CEPE_WP48.pdf

Figueira, C., Nellis, J. and Parker, D. 2006 Does Ownership Affect the Efficiency of African Banks?The Journal of Developing Areas - Volume 40, Number 1, Fall 2006, pp. 37-62


More empirical evidence on efficiency……Florio M. 2004 The Great Divestiture. MIT Press.

GONZÁLEZ-GÓMEZ F. and GARCÍA-RUBIO M. 2008 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): 39-67

Gruber H. and Verboven F.1999 The Diffusion of Mobile Telecommunications Services in the European Union” CEPR Paper No. 2054 1999 European Economic Review, 2001, vol. 45, issue 3, pages 577-58

International Monetary Fund 2004 Public-Private Partnerships March 12, 2004 http://www.imf.org/external/np/fad/2004/pifp/eng/031204.htm

Knyazeva A, Knyazeva D., and Stiglitz J. 2006. 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:10.1016/j.jbankfin.2008.12.016

Kraft, E.; Hofler, R.; Payne, J. 2006 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. 2075-2088(14)

Lundahl et al. 2009 Prison Privatization : A Meta-analysis of Cost and Quality of Confinement Indicators Research on Social Work Practice 2009 19: 383 http://rsw.sagepub.com/content/19/4/383

Ohemeng F. and Grant J. 2008 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 2008

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 2011 www.psiru.org Even more empirical evidence on

efficiency…..Pollitt M. 1995) Ownership and performance in electric utilities. OUP

Pucher J., Korattyswaroopam N., Ittyerah N. 2004 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. 2006 Effective regulation for sustainable public transport in developing countries. Transport Policy Volume 13, Issue 3, May 2006, Pages 177-190

Wallsten S. and Kosec K. 2008 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 186-205

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. 2007 The Determinants of Post-Privatization Efficiency Gains: The Taiwanese Experience. Economic and Industrial Democracy 2007 Vol. 28(3): 465–493. http://eid.sagepub.com/content/28/3/465.abstract

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, .


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


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


Value for money assessment of PPPs vs public sector

Factor Comparing Evidence indicates

1 Cost of capital Debt interest + dividends PPP more expensive

2 Cost of construction

Comparative costs and completion PPP more expensive/neutral

3 Cost of operation Comparative efficiency Neutral

4 Transaction costs Procurement + monitoring, management

PPP more expensive

5 Uncertainty Incomplete 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


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


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


Higher GDP, higher public spending

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

0 10000 20000 30000 40000 50000 60000 70000

Publ

ic s

pend

ing

as %

of

GD

P

GDP per capita

Higher GDP per capita is positively linked to higher public spending as % of GDP (OECD 2008)


• Long-run rise of public spending as % of GDP, in line with GDP per capita: “Wagners Law” (Tanzi 2000)


Even in the USA……1903-2010


Government spending trends in

developing countries

1980-2004

Source: Yu B. et al 2009:

Does Composition of Government Spending

Matter to Economic Growth?

http://ageconsearch.umn.edu/bitstream/516

84/2/IAAE%20government

%20spending.pdf


Why? Infrastructure

Infrastructure investment and growth 1991-2005. Change in ave per capita growth between 1991-1995 and 2001-2005. Calderon and Serven 2008


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)


Why? Equality: redistribution via benefits & public services

(£ per year)Ratio

Top/Bottom

Bottom 2nd 3rd 4th Top

All households

Original income 15 4 970 12 020 23 305 38 321 73 810 30 485

plus cash benefits

6 431 7 602 5 787 3 609 1 805 5 047

Gross income 7 11 401 19 622 29 092 41 930 75 615 35 532

less taxes 4 132 6 115 9 362 14 377 25 609 11 919

Post-tax income 7 7 269 13 507 19 731 27 553 50 006 23 613

plus benefits in kind (health,

education etc)6 315 6 411 5 969 5 000 3 870 5 513

Final income in money and

services 4 13 584 19 918 25 699 32 553 53 876 29 126


Equality: countering social problems


How? Democracy

Source: C Boix ‘Democracy, development, and the public sector’ American Journal of Political Science, 2001

http://pics3441.upmf-grenoble.fr/articles/demo/democracy_development_and_the_public_sector.pdf.


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


Spending and taxation: anglo-saxon deficits

2009 2009Spending as

% of GDPTax revenue as

% of GDP

Canada 44.1 38.5

France 56.2 48.7

Germany 47.5 44.5Euro area (16 countries) 50.9 44.5

United Kingdom 51.4 40.3

United States 42.2 31.0

Public spending and tax as % of GDP 2009(source: OECD stats http://stats.oecd.org/Index.aspx , PSIRU

calculations)


Post-tax inequality between profits and households, USA(Source: US Dept of Commerce, Bureau of Economic Analysis

http://research.stlouisfed.org/fred2/graph/)


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


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)


The ‘exit route’: cuts in staff, services, benefits (40:30:30)

A Status Update on Fiscal Exit Strategies” IMF Working Paper WP/10/272 http://www.imf.org/external/pubs/ft/wp/2010/wp10272.pdf


Increased future needs for public spendingService rise in

annual public spending

Health and social care

+4.5% GDP

Public? or inefficient and inequitable

Pensions Secure? or linked to returns on investment?

Climate change +1.5% GDP

Public 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


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, 2009 http://www.theccc.org.uk/reports/progress-reports )

PSIRU Economic Justice and the Sustainable Global Society 2011 www.psiru.org 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)


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.”


The relative importance of state pension provision


IMF and politics: effects of crisis and IMF ‘exit’ plans

Primary public

expenditure as % of GDP,

2007

Annual real growth 2008-

2010:Primary public expenditure

Annual real growth

2008-2010:GDP

Average adjustment called

for by 2030 by

IMF

High-income countries

35.8 4.30% -0.20% -8.70%

Developing countries

24.5 9.30% 5.10% -2.75%


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

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