The difference between public and private services

1. The difference between public and private services By David Hall d.j.hall@gre.ac.uk Public Services International Research Unit (PSIRU) University of Greenwich, UK www.psiru.org June 2011

2. 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

3. 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

4. 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

5. 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)

6. Empirical evidence on efficiency…..

7. More empirical evidence on efficiency……

8. Even more empirical evidence on efficiency…..

9. 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

10. 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

11. Value for money assessment of PPPs vs public sector • 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

12. 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

13. 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

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

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

16. Even in the USA……1903-2010

17. Government spending trends in developing countries 1980-2004Source: Yu B. et al 2009: Does Composition of Government Spending Matter to Economic Growth? http://ageconsearch.umn.edu/bitstream/51684/2/IAAE%20government%20spending.pdf

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

19. 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)

20. Why? Equality: redistribution via benefits & public services

21. Equality: countering social problems

22. How? Democracy Source: C Boix ‘Democracy, development, and the public sector’ American Journal of Political Science, 2001http://pics3441.upmf-grenoble.fr/articles/demo/democracy_development_and_the_public_sector.pdf.

23. 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

24. Spending and taxation: anglo-saxon deficits Public spending and tax as % of GDP 2009(source: OECD stats http://stats.oecd.org/Index.aspx , PSIRU calculations)

25. Post-tax inequality between profits and households, USA(Source: US Dept of Commerce, Bureau of Economic Analysis http://research.stlouisfed.org/fred2/graph/)

26. 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

27. 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)

28. 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

29. Increased future needs for public spending

30. 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 )

31. 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)

32. 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.”

33. The relative importance of state pension provision

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

35. 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