Where have all the public services gone?

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Sunday, 19 October 2014 18:30 by Ken Wolff

Where have all the services gone?
Gone to corporates every one.
When will they ever learn?
When will they ever learn?

A year or two back, where I live, the local water provider received approval to increase the price of water. It had been involved in major infrastructure spending to enhance the local water supply, so some increase in price seemed justified, but hidden in the details was a line that part of the price increase was to offset ‘losses’ incurred during the drought some years earlier. A water company makes ‘losses’ during a drought! — wtf!.

Obviously it sold less water during the drought: it had less water to sell and the government had imposed water restrictions to conserve what water we had. What is the alternative? — that it continues selling water as if there is no tomorrow to keep up its profit and we run out well before the drought ends. For the life of me, I can’t see the logic in that. The body I am talking about is still fully owned by the government and pays an annual dividend to government but like many public utilities these days it has been ‘corporatised’. (Corporatisation is often used as a prelude to full privatisation but the evidence suggests that many government-owned bodies that have been corporatised are just as efficient, and profit-making, as any private company and have a history of paying healthy dividends to their government.)

Unlike America, which has a history of privately owned services, Australia has a tradition of government provided public services including, not just health and education, but transport, utilities (energy and water), even financial services (the original Commonwealth Bank). In recent decades our governments have been backing away at a rate of knots from the provision of such services in the name of ‘the market’ but does it make sense?

In the case of the water provider, if it had still been a purely public utility (that is providing a public service) losses during a drought would be a non-issue because it is in the public interest to sell less water and preserve what is left as far as possible. Why should a water supply be put in the hands of a private (or commercially-oriented) supplier when it is an essential service for the community as a whole? No community will survive long without water but it is now a commodity on which to make a ‘profit’.

Transport services provide the classic difference between private and public provision.

A private provider will operate, or continue to operate, those services and routes that it deems profitable. Occasionally it will run less profitable services but only to maintain the goodwill of its customers.

By contrast, a publicly run transport service is there to do just that, provide a necessary public service whether or not it is profitable. Prices that contribute to meeting running costs are justified and a public provider is more likely to offset loss-making services by the surpluses reaped during peak hour services (cross subsidisation). One issue is which costs should be taken into account in fixing prices? I recall from the 1970s, in the days when complaints about the NSW rail network running at a loss were being made, that there was a small article buried on about page 12 of the Daily Telegraph that during that year the railways actually made a profit on ‘operating costs’ — the ‘loss’ arose from the fact that loans were still being repaid, some to British banks dating back to the 1800s when the NSW railways were being established.

In an effort to offset the ‘losses’ many rail services were cut and lines closed. Regional services in particular were hard hit. That didn’t mean there were no people in those areas who needed the rail service, just not enough to ‘justify’ its continued operation. People became more reliant on cars. Some farmers lost freight services and had to turn to heavy road transport companies (that relied on making a profit, not providing a service). Of course, this pushed higher costs onto local councils to maintain the regional road network, which no doubt meant an increase in rates. So the loss of a service does not come cheap!

In a modern society, electricity is almost as essential as water and is being made more so by the many services now being provided on-line. The ATO no longer routinely distributes printed tax return forms (you have specifically to request one) and is encouraging people to do their return on-line but without electricity that would be impossible. So we now need electricity not only for energy needs — heating, cooking, light — but to participate in our society and use government services.

Despite that, some electricity services are now privatised and the rest operating on a commercial basis. In other words, a profit is being made from goods and services which I have no choice but to use.

In my view, much of the privatisation of public services came about because governments had avoided long term planning for the assets. Water, transport, electricity, health and education services require major infrastructure. There is obviously a capital cost in establishing that infrastructure and also in its ongoing maintenance, but there comes a point in time when the infrastructure needs replacement or major upgrading.

The time when much privatisation took place seems to have been that point where governments faced the replacement or upgrading costs. Instead of having planned for it over the life of the infrastructure, governments had not put money aside, always expecting they could meet it out of general revenue at the time — until they realised they couldn’t. (Although, ironically, they often poured money into the enterprises to prepare them for privatisation.) Of course, they could borrow but they were already running up debt and in the face of the political pressure to reduce debt, felt constrained. Privatisation was supposedly a double win for governments to the extent that they made money from the sale and off-loaded the expense of upgrades and replacement. John Quiggin has shown, however, that, in most cases, there wasn’t a significant financial gain to the governments over the medium term as compared to keeping the service in government hands. Whatever the financial outcome, they reduced public services.

The problem with much of this privatisation is that it is occurring in what the economists call ‘natural monopolies’, where it is more efficient to have a single supplier of a good or service to the many, rather than many providers each supplying to the few: for example, it is wasteful to have three different water companies each constructing pipelines past every house to provide ‘their’ water. The neo-liberal economists supporting privatisation have overcome this by ‘disaggregation’. Just see how they have split electricity and rail: electricity is split into generation, distribution and retail; and rail has been split into the rail networks (the tracks) and the actual services (trains). This allows them to privatise parts, if not all, of the system.

In relation to electricity, John Quiggin points out that this approach means economies of scale and economies of scope are lost. There is evidence that the so-called competitive electricity market, with many retailers now competing for customers, has led to a large increase in non-productive staff — involved in management, human resources, administration and marketing, not in electricity production or distribution. Whereas a single state-owned provider needed only one set of administrative staff (and no marketing staff), now each separate company needs a set. Previously the state-owned body operated the generation, distribution and sale of electricity (some even had their own coal mines). Electricity prices are extremely volatile, partly because electricity cannot be stored, and can vary from a few dollars to a few thousand dollars per megawatt/hour depending on the time of day. When a single entity handled the whole supply chain, that volatility was more easily absorbed. Now it is in the interests of the generators to keep supply as low as possible (that is, the minimum necessary to meet anticipated demand) so as to maintain the highest price but that becomes a cost to the retailers (and hence consumers).

The reason often quoted to support privatisation is that competition will ensure the lowest prices and more efficient and better services meeting customer needs. Consider, however, the privatisation of ports and airports that has taken place. There are not six port facilities to choose between in Brisbane or Port Kembla, or four or five airports, capable of handling commercial jet flights, to choose from in the capital cities, so there is no competition — they are monopolies. In such situations the government has to retain a regulatory responsibility just as it does for any monopoly that exists in the market: even economists acknowledge that regulatory responsibility exists in regard to monopolies so that the monopoly power is not used to set prices at what the market ‘will bear’, rather than the price being controlled by competition. If the government still needs to regulate, why privatise in the first place?

One argument, often put without question and without supporting evidence, is that private enterprises are more efficient than government enterprises. Economic theory apparently suggests that this should be so but factual evidence often suggests otherwise. Productivity in the electricity industry has not increased as fast as across the economy overall, partly a result of the increase in non-productive staff (discussed earlier). There are many examples of so-called efficiencies and productivity gains coming primarily through lower wages and lesser non-wage conditions. This is effectively a ‘gain’ to the private provider but a ‘loss’ to the worker — and, if we follow ‘middle out’ economics, a loss to the economy. Losses to the economy are magnified when the new private owner is an overseas company, as is often the case, and most of the profit leaves the country. These are ‘social costs’.

Other ‘costs’ occur when private operators incur debt, either to make the purchase in the first place or to provide infrastructure improvements after they own it. The cost occurs here because governments can raise money by issuing government bonds at a lower rate than companies can obtain finance through financial institutions or equity (shares). These higher costs are inevitably passed on to the consumer.

When efficiency is measured in dollar terms, we can end up with examples like this. In the USA in the 1980s and ‘90s, medical waste was disposed of by private companies. Normally this should be done by high temperature incineration but the private companies decided it was more efficient (cheaper) to dump it at sea. When dangerous material started washing up on California and New Jersey beaches, the public became aware of what was happening and, of course, there was an outcry, forcing the governments to intervene and legislate tighter controls.

In Europe the arguments for privatisation seem to have changed slightly. While ‘efficiency’ remains central, two new arguments have been added: ‘strengthening financial markets’ and ‘reduction of public debt’. Reduction of debt was always on the edge of this debate, at least so far as governments were concerned, but, following the GFC, it appears it is now becoming more central in economic arguments. And I think there is hypocrisy in economists suggesting governments should act to ‘strengthen financial markets’ — isn’t that interference in the market?

Basically, privatisation means the government has less ability to direct the provision of services for the public benefit, which essentially means, in the case of many of these type of services, ensuring reliability and quality. Under public ownership many electricity systems included built-in redundancies to ensure safety and reliability of supply. In market terms this is a ‘waste’ of resources but ‘redundancy’ is a critical issue for safety and reliability: almost every commercial aircraft in the world has duplication of many systems (redundancy) because safety is critical, even for commercial success. For areas where safety is less critical, the market will certainly see redundancies as pointless but, in services like water and electricity, it is reliability that is the critical issue and some redundancy may be necessary to ensure that. There is evidence that the privatisation and corporatisation of electricity supplies has led to less reliable supply. If the emphasis is on the efficient allocation of resources to achieve profits, then reliability may move down the list of priorities. Maintenance, also necessary for reliability, is one of the first aspects to be downgraded as it is ‘efficient’ to maintain only to the minimal level necessary to deliver the service. For example, in SA in 2001:

There were 500 outages in January 2001 alone. Unions claimed that the 900 workers employed to check and repair powerlines in 1991 had been reduced to about 300, whilst maintenance crews were reduced from 270 to 90.

The problem with the shift of many services to a commercial or profit-making basis is that public benefit is overlooked and government loses some control over its policies, just as in the example of making up for the ‘loss’ of water sales during a drought. Similarly, we were previously being encouraged to reduce our energy consumption in a bid to reduce greenhouse gases. If electricity consumption is reduced two things happen: some of the infrastructure may become redundant and a loss is incurred by the generators, meaning companies will increase the price of energy to make up for the loss both in consumption and from ‘wasted’ assets. But even in economic terms that is a ‘price signal’ that may counter the policy intent of reducing consumption because people may well say what is the point of reducing consumption if every time we use less, the company puts the price up to cover the ‘loss’. People may still reduce consumption based on the higher ‘price signal’ but no longer as much as they would if they felt there was a ‘moral obligation’ or a ‘community benefit’ (when they know everybody else is acting in the same way) in doing so. If these were public assets, governments should, in accord with both policy intent and public benefit, allow people to benefit (lower bills) from the effort they make to reduce consumption, which would send a positive ‘price signal’ that reducing consumption is good. When it is privatised there are conflicting messages: a government policy saying use less but the private provider saying consume more or, at the least, not rewarding people for using less.

A significant change that can occur was expressed in relation to health care in an editorial in the New England Journal of Medicine in August 1999:

Our main objection to investor-owned health care is not that it wastes taxpayers’ money, nor even that it causes modest decrements in quality. The most serious problem with such care is that it embodies a new value system that severs the communal roots and Samaritan traditions of hospitals, makes doctors and nurses the instruments of investors, and views patients as commodities.

To my mind, that is the main danger of privatisation, not economic arguments but what it is doing to our society. The neo-liberal economists argue that the only responsibility of the CEO and board of a company is to maximise returns for shareholders. That may work providing consumer goods in the market, when people have a clear choice whether or not to buy, but when it comes to water, electricity, health and education, in which people have no real choice, surely there must be a public interest criterion. The neo-liberal economic approach says no.

Governments need to step back from this privatisation fiasco that places financial markets and shareholder interests above the public interest, particularly in relation to the ‘natural monopolies’. It was once seen that such natural monopolies were the ‘natural’ province of government but no longer. Governments have bowed to the market and the neo-liberal economists promoting it, to the detriment of society, not to its benefit.

It is not too late to turn back. Although in many cases it would mean governments having to buy back what they previously owned, that is what has happened in some countries as the failures of privatisation became apparent. The UK government had to re-take the rail track network when private owners were not maintaining it as well as they should (a brief history here). The NZ government also had to buy back its rail network. In NSW, an attempt at privatising the Port Macquarie Base Hospital was a disaster and the government had to bring it back under the public umbrella. They are but the tip of the iceberg.

You would think that with so many failures, and with the supposed benefits of privatisation not eventuating, that governments would have learned by now but the words of King and Pitchford in 1998 still apply today:

… governments at both the state and federal level in Australia appear to pay little attention to the reality of privatisation, preferring to follow their own rhetoric.

What do you think?