Download HALL-FriendsHouse-2011

PSIRU
Economic Justice and the Sustainable Global Society
2011
www.psiru.org
The difference between public and
private services
By David Hall
[email protected]
Public Services International Research Unit (PSIRU)
University of Greenwich, UK
www.psiru.org
June 2011
PSIRU
Economic Justice and the Sustainable Global Society
2011
www.psiru.org
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
PSIRU
Economic Justice and the Sustainable Global Society
2011
www.psiru.org
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
2011
www.psiru.org
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
2011
www.psiru.org
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
2011
www.psiru.org
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 Journal
Volume 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
PSIRU
Economic Justice and the Sustainable Global Society
2011
www.psiru.org
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, .
PSIRU
Economic Justice and the Sustainable Global Society
2011
www.psiru.org
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
2011
www.psiru.org
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
2011
www.psiru.org
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
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
PSIRU
Economic Justice and the Sustainable Global Society
2011
www.psiru.org
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
2011
www.psiru.org
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
2011
www.psiru.org
Higher GDP, higher public spending
70.0%
Public spending as % of GDP
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
0
10000
20000
30000
40000
50000
60000
70000
GDP per capita
Higher GDP per capita is positively linked to higher public
spending as % of GDP (OECD 2008)
PSIRU
Economic Justice and the Sustainable Global Society
2011
www.psiru.org
• 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
2011
Even in the USA……1903-2010
www.psiru.org
PSIRU
Economic Justice and the Sustainable Global Society
Government
spending trends
in developing
countries 19802004
Source: Yu B. et al 2009:
Does Composition of
Government Spending
Matter to Economic
Growth?
http://ageconsearch.um
n.edu/bitstream/51684/
2/IAAE%20government%2
0spending.pdf
2011
www.psiru.org
PSIRU
Economic Justice and the Sustainable Global Society
2011
www.psiru.org
Why? Infrastructure
Infrastructure investment and growth 1991-2005. Change in ave per capita growth
between 1991-1995 and 2001-2005. Calderon and Serven 2008
PSIRU
Economic Justice and the Sustainable Global Society
2011
www.psiru.org
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
2011
www.psiru.org
Why? Equality: redistribution via benefits & public services
(£ per year)
Bottom
2nd
3rd
4th
Top
All
ho
us
eh
ol
ds
4 970
12 020
23 305
38 321
73 810
30 485
6 431
7 602
5 787
3 609
1 805
5 047
11 401
19 622
29 092
41 930
75 615
35 532
4 132
6 115
9 362
14 377
25 609
11 919
7 269
13 507
19 731
27 553
50 006
23 613
6 315
6 411
5 969
5 000
3 870
5 513
13 584
19 918
25 699
32 553
53 876
29 126
Ratio
Top/Bottom
Original income
15
plus cash
benefits
Gross income
7
less taxes
Post-tax income
7
plus benefits in
kind (health,
education etc)
Final income in
money and
services
4
PSIRU
Economic Justice and the Sustainable Global Society
2011
www.psiru.org
Equality: countering social problems
PSIRU
Economic Justice and the Sustainable Global Society
2011
www.psiru.org
How? Democracy
Source: C Boix ‘Democracy, development, and the public sector’ American Journal of
Political Science, 2001 http://pics3441.upmfgrenoble.fr/articles/demo/democracy_development_and_the_public_sector.pdf.
PSIRU
Economic Justice and the Sustainable Global Society
2011
www.psiru.org
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
2011
www.psiru.org
Spending and taxation: anglo-saxon deficits
2009
Spending as
% of GDP
2009
Tax revenue as
% of GDP
Canada
44.1
38.5
France
56.2
48.7
Germany
Euro area (16
countries)
47.5
44.5
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)
PSIRU
Economic Justice and the Sustainable Global Society
2011
www.psiru.org
Post-tax inequality between profits and households, USA
(Source: US Dept of Commerce, Bureau of Economic Analysis http://research.stlouisfed.org/fred2/graph/)
PSIRU
Economic Justice and the Sustainable Global Society
2011
www.psiru.org
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
2011
www.psiru.org
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
2011
www.psiru.org
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/pub
s/ft/wp/2010/wp
10272.pdf
PSIRU
Economic Justice and the Sustainable Global Society
2011
www.psiru.org
Increased future needs for public spending
Service
rise in annual
public
spending
Health and social care
Pensions
+4.5% GDP
Public? or inefficient
and inequitable
Secure? or linked to
returns on investment?
Public finance will
cover 2/3 of all cost
Climate change
+1.5% GDP
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
2011
www.psiru.org
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)
PSIRU
Economic Justice and the Sustainable Global Society
2011
www.psiru.org
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
2011
www.psiru.org
The relative importance of state pension provision
PSIRU
Economic Justice and the Sustainable Global Society
2011
www.psiru.org
IMF and politics: effects of crisis and IMF ‘exit’ plans
Primary public
Annual real
Annual real
Average
expenditure
growth 2008- growth 2008- adjustmen
as % of GDP,
2010:
2010:
t called for
2007
GDP
Primary public
by 2030 by
expenditure
IMF
High-income
countries
35.8
4.30%
-0.20%
-8.70%
Developing
countries
24.5
9.30%
5.10%
-2.75%
PSIRU
Economic Justice and the Sustainable Global Society
2011
www.psiru.org
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