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Public spending, the economic crisis, privatisation, efficiency, and remunicipalisation. by David Hall [email protected] Public Services International Research Unit (PSIRU) University of Greenwich, UK www.psiru.org March 2012. Summary. The economic crisis Austerity and the IMF and EU

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

by David Hall

[email protected]

Public Services International Research Unit (PSIRU)

University of Greenwich, UK www.psiru.org

March 2012


Summary
Summary efficiency, and remunicipalisation

  • 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


The economic crisis origins government responses imf exits
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


Government debt levels only rise after crisis
Government debt levels only rise AFTER crisis ‘exits’

Source: European Commission


Region and ukraine hardest hit by crisis
Region and Ukraine hardest hit by crisis ‘exits’

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


Governments stimulate economies
Governments stimulate economies ‘exits’

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


Crisis cost of rescuing the banks equals global revenue from 30 years of privatisation
Crisis: cost of rescuing the banks ‘exits’- equals global revenue from 30 years of privatisation


But imf countries cut public services pensions
But IMF countries cut public services, pensions ‘exits’

  • 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


More cuts less support under imf eu conditions source world bank
More cuts, less support under IMF/EU conditions ‘exits’(Source: World Bank)



Ukraine imf conditions and conflicts

IMF loan and austerity policies 2008-2011 ‘exits’

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


Ukraine eu association agreement

EU Neighbourhood Policy and Eastern Partnership ‘exits’

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



Cutting staff services benefits 40 30 30
Cutting staff, services, benefits (40:30:30) plans

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



Contradictory messages cutting deficit means cutting growth
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


Contradictory messages good governance is bad for economy
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#


Employment changes in eu during crisis 2007 q4 and 2010 q4
Employment changes in EU during crisis economy: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


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)


Links are even closer if are closely linked, except for 4 countries with IMF programmes: IMF countries are excluded. It is the IMF policies which distort the relationship by suppressing public sector pay rises below the norm


The economic and social role of public spending
The economic and social role of public spending are closely linked, except for 4 countries with IMF programmes:

  • 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


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


Long-term link between public spending and growth higher public spending as a proportion of GDP (OECD data for 2008)Government spending as % of GDP 1870-1996, ave of 14 countries


Government spending as of gdp usa 1903 2010
Government spending as % of GDP, USA, 1903-2010 higher public spending as a proportion of GDP (OECD data for 2008)

  • www.usgovernmentspending.com/


Usa government spending around recessions
USA: Government spending around recessions higher public spending as a proportion of GDP (OECD data for 2008)

  • 1930 and 2009: rise after recession, then dip and level?


But falls back after wartime spikes
But falls back after wartime spikes higher public spending as a proportion of GDP (OECD data for 2008)

  • Patterns in and after wars


Questions and issues
Questions and issues higher public spending as a proportion of GDP (OECD data for 2008)

  • 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


Oecd 2008 functions of public spending
OECD 2008: Functions of public spending higher public spending as a proportion of GDP (OECD data for 2008)


Infrastructure investment and growth 1991-2005 higher public spending as a proportion of GDP (OECD data for 2008)Change in ave per capita growth between 1991-1995 and 2001-2005. Calderon and Serven 2008



Public healthcare is more efficient and effective
Public healthcare is more efficient and effective 2007

  • 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





Forecast increase in public health spending imf
Forecast increase in public health spending (IMF) 2007

“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)



Affordable and fair taxation
Affordable and fair taxation 2007

“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


Can the private sector do it better efficiency privatisation ppps liberalisation
Can the private sector do it better? 2007Efficiency, 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)


Economics 1 cost of private capital higher
Economics 1: cost of private capital higher 2007

  • 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
Economics 2: private sector not more efficient 2007

  • 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)





Economics 3 marketing
Economics 3: Marketing 2007

  • 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


Value for money assessment of ppps vs public sector
Value for money assessment of PPPs vs public sector 2007

  • 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


The summary failure of metronet london underground pfi
The summary failure of Metronet (London underground PFI) 2007

  • “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)


Summary1
Summary 2007

  • 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


Water remunicipalisation
Water - remunicipalisation 2007

  • 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


Electricity
Electricity 2007

  • 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


Public transport
Public transport 2007

  • 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,


Other services
Other services 2007

  • Waste management

    • some re-municipalisation of contracts in many countries

    • But e.g. Italy municipal companies still own operations, but may contract out most labour-intensive services

  • Cleaning

    • UK hospital cleaning in Scotland, Wales, N. Ireland brought back inhouse; some councils remunicipalise cleaning to provide decent work, and saves money

  • Banking and finance

    • Nationalisation used to save some banks from collapse

    • Hungary, Bulgaria renationalise some pension liabilities to ensure payment of pensions


Factors
Factors 2007

  • Politics

    • Some progressive politics e.g. Paris water, Italy water, Swedish non-privatisation of Vattenfall, UK cleaning

      • Hungary more complex: Fidesz is nationalist party

    • against mainstream austerity politics – Greece etc

      • Bank bailouts not based on progressive policies

  • Efficiency, effectiveness and services

    • key factor in failed PPPs etc e.g. London transport, German energy, Hungary water

    • Evidence supports publicly run services


Issues
Issues 2007

  • Political and economic issues

    • Financing: charging ‘full cost recovery’ to users is not inevitable or necessary. The choice of taxation or user charges is a political choice for all services e.g. public transport, water, waste, energy, housing.

      • May be a problem for some green positions on using

    • Profits: it is not necessary for municipal/state companies

      • To compete for business and expand like private companies

      • to make profits, or a ‘return on capital’: debt can be just deferred payment/taxation

    • Employment: public ownership of an asset or system is not enough, one core political issue is decent pay and conditions and security of employment.

    • Range of services: there is no defined list. We can decide to extend extend or reintroduce services e.g. housing, public sector banking as a public service - not as a bailout or commercial venture

    • Democratic control. Public assets and finance should be subject to democratic control i.e. Not captured by corporate interests


Conclusions
Conclusions 2007

  • Crisis has mixed effects in region

  • PPPs and privatisation not efficient alternatives

  • General future upward pressures on public spending: economic recovery, infrastructure, healthcare, pensions, equality, climate change, broadband, development

  • Political conflicts with international institutions

  • The Italian referendum: 96% (25 million) 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


David Hall is director of the Public Services International Research Unit (PSIRU– see www.psiru.org) in the Business School, University of Greenwich, London. He researches and teaches the politics and economics of public services and privatisation, with special expertise in the sectors of water, energy, waste management and healthcare. His publications include articles in academic journals, book chapters, many reports published by PSIRU and others, and two books. He was the coordinator of the Watertime project, an EC-funded 3-year research project on decision-making on water in 29 cities in Europe, involving a group of five universities and research institutes, from 2002-2005. He was guest editor of a special issue of Utilities Policy in 2007. He led a 2-year research project on corruption, funded by the Wallace Global Foundation, from 2001-2003.He had a leading role in the EC-funded CIRIEC report on cohesion and SGEI for DG Regio in 2004. He has contributed to the EC-funded SWITCH project, a major 5-year study of water governance and finance across the world, and the EC-funded PRESOM project, a 3-year project studying privatisation and the European social model.He has been invited to address meetings organised by the World Bank infrastructure division, the United Nations department of economic and social affairs (UNDESA), the OECD, UNCTAD, the ILO, the European Parliament, the EU Social and Economic Committee, the Belgian parliament, and the UK Department for International Development (DFID), and has been an expert witness at the constitutional court of Indonesia. He has been an invited speaker at seminars and conferences at universities and research institutes in many countries, including the universities of Athens, Bandung, Berlin, California, Cambridge, Harvard, Lima, London (UCL), Madrid, Milan, New York (Cornell), Oxford, Paris 8, and St Petersburg. He has spoken to meetings of trade unions and civil society groups in over 40 countries.Acknowledgements and disclaimerThis presentation is based on research carried out by the PSIRU over many years. This research has been financed by various bodies including the European Federation of Public Service Unions (EPSU www.epsu.org), Public Services International (PSI www.world-psi.org ), the European Commission the PRESOM network http://www.presom.eu ); the International Labour Organisation (ILO www.ilo.org); the United Nations Research Institute for Social Development (UNRISD www.unrisd.org ); and others.


Issues for union strategies national level
Issues for union strategies: national level Research Unit (PSIRU– see

  • Defensiveresistance

    • to austerity 'exit' packages of cuts: campaigningeffectively

    • to privatisation, whichseems to bereviving in the region, egRussia, Kazakhstan

      2. Positive campaigning, social dialogue, and politics :

    • For expansion of public healthcare, public pensions, etc in RU & CA countries

    • For the role of the state in public services, macroeconomicpolicy

      3. Somestrategic issues

    • whoare our allies? Civil society, social movements, students, professionals?

    • do we have a clear 'alternative' economic and social (and fiscal) policy?


International union strategies with epsu
International union strategies with EPSU Research Unit (PSIRU– see

  • IMF packages

    • Similar packages in Romania, Hungary, Latvia, Greece, Portugal, Ireland

    • EPSU/PSI publicity and support for union actions, demands, dialogue

  • EU Neighbourhood policy and EU-Ukraine Association Agreement

    • EU neighbourhood policy is vehicle for extending EU internal market liberalisations

    • Association Agreement is key instrument, includes structural reforms as condition for trade agreement

  • Other EU policies impacting on Ukraine

    • EC ‘2020 framework’ and new fiscal rules: tighter

    • EU internal market and procurement policies eg liberalising services

    • promotion of PPPs by EU (and OECD, and UNECE)

    • labour rights issues especially fair wages clauses

  • Potential impact of possible customs union with Russia


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