Public spending, the economic crisis, privatisation, efficiency, and remunicipalisation

1. Public spending, the economic crisis, privatisation, efficiency, and remunicipalisation by David Hall d.j.hall@gre.ac.uk Public Services International Research Unit (PSIRU) University of Greenwich, UK www.psiru.org March 2012

2. Summary • The economic crisis • Austerity and the IMF and EU • Links topay and employment • The economic and social role of public spending • Privatisation and PPPs: not more efficient • Re-municipalisation: a growing trend in Europe

3. The economic crisis: origins, government responses, IMF ‘exits’ • Crisis and recession originates from financial sector • banking practices, personal and corporate borrowing • inequality (wages-profits shares, high/low incomes) meant too many people increasingly dependent on debt • But NOT excessive government borrowing or spending • Governments respond with ‘stimulus’,increasing spending to maintain economic activity and jobs • Same all over world, very effective • Increased borrowing to do this, deliberately • Now free market ideology demands ‘exits’ from the stimulus: IMF, G-8, EU, rightwing governments • General pressures for cutbacks

4. Government debt levels only rise AFTER crisis Source: European Commission

5. Region and Ukraine hardest hit by crisis Sources: The Jobs Crisis: Household and Government Responses to the Great Recession in Eastern Europe and Central Asia. World Bank 2011 http://go.worldbank.org/ZWFZ7IGHJ0; IMF WEO September 2011

6. Governments stimulate economies e.g. Ukraine – like Germany – “provided subsidies to companies that agreed to retain workers, leading to less unemployment” Sources: IMF 2009 The State of Public Finances: a Cross-country Fiscal Monitor SPN/09/21 http://www.imf.org/external/pubs/ft/spn/2009/spn0921.pdf ; World Bank 2011 The Jobs Crisis: Household and Government Responses to the Great Recession in Eastern Europe and Central Asia. http://go.worldbank.org/ZWFZ7IGHJ0

7. Crisis: cost of rescuing the banks- equals global revenue from 30 years of privatisation

8. But IMF countries cut public services, pensions • Russia, Armenia, Moldova, Turkey increase public spending on health and education and public services, despite fall in GDP • But countries under conditions from IMF/EU cut spending (Latvia, Ukraine, Bulgaria) The Jobs Crisis: Household and Government Responses to the Great Recession in Eastern Europe and Central Asia. World Bank 2011 http://go.worldbank.org/ZWFZ7IGHJ0

9. More cuts, less support under IMF/EU conditions (Source: World Bank)

10. Ukraine: Unemployed less likely to receive benefits

11. IMF loan and austerity policies 2008-2011 Cuts in public sector pay and jobs Pension age for women raised 55>60, required contributions increased by 10 years Reduction in minimum wage from Hr 1,180 UAH ($148) in 2011 to Hr 1,073 ($134) in 2012 IMF now (March 2012) refuses to pay further money unless the government increases energy prices to consumers Public opposition In early July 2011, thousands of protesters took to the streets in the Ukrainian capital Kiev to try to block pension reforms promised as part of the country's IMF loan. The protest involved both Ukraine's trade unions and the political opposition. The law was approved anyway, raising the retirement age for women from 55 to 60, though the country has relatively low life expectancy. http://www.brettonwoodsproject.org/art-568916, http://www.brettonwoodsproject.org/art-567920 IMF policies not working “the programmes sponsored by the IMF – in Ukraine, in Latvia, in Hungary, in Romania, in Greece, in Ireland, in Portugal – are not yielding the benefits which were initially claimed for them by the advocates of the “structural reform path”, in particular in the growth area. In addition, years of fiscal austerity are now starting to take their toll on the populations concerned. Expectations are not being fulfilled, and a backlash is underway.” (Edward Hugh Staring Into the Ukrainian Economic and Political Abyss http://www.economonitor.com/blog/2012/02/staring-into-the-ukrainian-economic-and-political-abyss/) Ukraine: IMF conditions and conflicts

12. EU Neighbourhood Policy and Eastern Partnership Governs EU relations with neighbouring countries Implemented through series of bilateral agreements EU-Ukraine Association Agreement Negotiations finalised December 2011 Not yet initialled (as at 19 March 2012) Includes: “Ukraine's gradual integration in the EU Internal Market including by setting up a deep and comprehensive free trade area” Includes: “a reform agenda for Ukraine.. Comprehensive Institutional Building Programme (CIB) particularly important” (Association Agreement in a nut-shell http://ec.europa.eu/commission_2010-2014/fule/docs/news/20111221_more_information_fule_visit_to_ukraine.pdf ) negotiations on association agreements are also going on with Armenia, Azerbaijan, Georgia and Moldova. (LaimaAndrikiene 15 March 2012 Europe's relations with its eastern neighbours, work in progress http://www.publicserviceeurope.com/article/1651/europes-relations-with-its-eastern-neighbours-work-in-progress Ukraine: EU Association Agreement

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

14. Cutting 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

15. Greece: the impact of an IMF/EU package (-157,000 jobs)

16. Contradictory messages – cutting deficit means cutting growth • Source: IMF Fiscal Monitor Update January 24, 2012 As Downside Risks Rise, Fiscal Policy Has To Walk a Narrow Path

17. Contradictory messages – ‘good’ governance is bad for economy • IMF study of 102 countries found that: • countries which scored well on the quality of the public sector regulation…as measured by the Worldwide Governance Index—quality of regulation did worse economically in the recession than others. • the same results with banking sector liberalisation: “the countries that liberalized their financial systems the most, were most affected by the banking and economic crisis.” • It concluded that: • “the countries with the best ratings in terms of public sector regulatory framework, as well as those countries with the most far reaching financial deregulation, were hit the hardest economically” • The results confirm previous studies: • by ECB economists who found that countries did better if they scored badly on ‘market friendliness’ – especially in the financial sector. • in Latin America in the 1980s, which found that financial liberalisation damages growth. Sources: IMF WP/11/261 The Economic Crisis: Did Financial Supervision Matter? November 2011 http://www.imf.org/external/pubs/ft/wp/2011/wp11261.pdf; Worldwide Governance Indicators Ukraine (March 2012) http://info.worldbank.org/governance/wgi/sc_chart.asp#

18. Employment changes in EU during crisis :2007 Q4 and 2010 Q4 Sources: Eurostat database Employment (lfsq_egan2, lfsq_egana) downloaded 08/07/2011 http://epp.eurostat.ec.europa.eu/portal/page/portal/employment_unemployment_lfs/data/database

19. EU: public and private change in real wages during recession are closely linked, except for 4 countries with IMF programmes: Greece, Latvia, Hungary and Romania (Eurostat, 2008Q1-2011Q1, data for 20 EU countries)

20. Links are even closer if IMF countries are excluded. It is the IMF policies which distort the relationship by suppressing public sector pay rises below the norm

21. The economic and social role of public spending • Public spending = spending by governments and municipalities on public services and social security • Public services/spending/workers presented as: • Parasitic on ‘real’ productive sectors of the economy • ‘luxuries’ to be sacrificed for general economic benefit • Inefficient compared with private/market provision • But empirical evidence shows • Rising public spending is linked to economic growth • Post-crisis trends reflect long-term path • Productive benefits of health, education • Economic and social benefits of equality

22. OECD countries with higher GDP per capita tend to have higher public spending as a proportion of GDP (OECD data for 2008)

23. Long-term link between public spending and growthGovernment spending as % of GDP 1870-1996, ave of 14 countries

24. Government spending as % of GDP, USA, 1903-2010 • www.usgovernmentspending.com/

25. USA: Government spending around recessions • 1930 and 2009: rise after recession, then dip and level?

26. But falls back after wartime spikes • Patterns in and after wars

27. Questions and issues • Explaining the positive links • Productivity gains from infrastructure, • Productivity gains from public health/education • Demand effects of equalising income distribution • Employment impact • Political mechanisms > contestable • citizen not consumer preferences • General constraint of taxation? • But varying levels, and global trend is upwards

28. OECD 2008: Functions of public spending

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

30. Public and private capital spending on infrastructure USA 2007

31. 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

32. Public services and equality

33. Equality: countering social problems

34. Half the jobs in the world

35. 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)

36. Increased future needs for public spending

37. 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

38. Can the private sector do it better?Efficiency, privatisation, PPPs, liberalisation • 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 efficiency gains from liberalisation in EU or USA • “No evidence of consumer benefits from electricity/gas/telecoms liberalisation” (Florio et al, 2008, Gotoand Makhija 2009)

39. 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

40. 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)

41. Empirical evidence on efficiency…..

42. More empirical evidence on efficiency……

43. Even more empirical evidence on efficiency…..

44. 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

45. 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

46. 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)

47. Summary • Re-municipalisation trends by sectors • Water • Electricity and gas • Public transport • Other services • Banking and finance • Some issues • Political and economic factors • Finance • Ownership and employment • Democracy

48. Water - remunicipalisation • France: city of Paris remunicipalised water 2010 • Reduces prices by 8% • Also some other French cities/communes: Bordeaux, Brest, Varages, Montbeliard, Durance-Luberon, Castres, Cherbourg etc • Others do not eg Toulouse • Hungary: Pecs terminates Suez, remunicipalises • Unclear future possibilities: • Other central and eastern Europe • Tallinn tries to renegotiate/cut tariffs • Contracts in Czech rep, Hungary, Poland expire in next 10 years • UK England/Wales renewal due 2014, but no campaign • Successful defences eg Italian referendum • Remunicipalisations also in North and South America • But: Greece is forced to privatise water by EU/IMF

49. Electricity • Germany: municipalities buy energy companies • BW buys 45% of EnBW from EdF (€4.6bn.) • under CDU/FDP, Greens/SDP opposed • Hannover, Frankfurt et al buy Thuga from E.on (€2.9bn) • Essen, Bochum etc buy Steag from Evonik (€649m.) • NRW passes law to facilitate municipalisation of energy companies • Other municipalities buying as 2,000 grid concessions expire • Seen as way for greater policy control, plus profitable • Other cases • Finland: state takes 53% control of Fingrid • Swedish parliament rejects privatisation of Vattenfall • Hungary: state buys back shares in MOL, discusses buying gas/power from E.on • Latvia: illegal to privatise Latvenergo • Lithuania: re-integrated state energy company • But: Greece forced to sell shares in PPE • Elsewhere: • Latin America: renationalisation of some electricity companies • Japan: state bails out Tep

50. Public transport • UK: London terminates 4 PPPs (out of 6) • TfLremunicipalised two very big PPPs for underground metro renovation: Metronet in 2007, Tubelines in 2010 (£30bn.) • Parliament: “Metronet’s inability to operate efficiently or economically proves that the private sector can fail to deliver on a spectacular scale” • TfLremunicipalised Croydon Tramlink 99-year concession in 2008: paid £100m. • TfL terminated Oyster-card PPP (£100m. p.a.), saving 18% per annum through refinancing, new contract issued • Germany: DB privatisation postponed • Other cases: rail renationalisation in Estonia • But: continuing privatisation of rail companies eg Poland, Slovakia, etc • Elsewhere: • Renationalisation of railways in New Zealand, Guatemala,