Has Privatization Benefitted the Public?

Jerri-Lynn here. Another succinct post by Jomo Kwame Sundaram that makes clear the “benefits” of privatization are not evenly distributed, and in fact, typically, “many are even worse off” when the government chooses to transfer ownership of the family silver.

Note that SOE is the acronym for state owned enterprise.

For those interested in the topic, see also another short post by the same author from last September, debunking other arguments to promote the privatization fairy, Revisiting Privatization’s Claims.

By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development. Originally published at Inter Press Service

In most cases of privatization, some outcomes benefit some, which serves to legitimize the change. Nevertheless, overall net welfare improvements are the exception, not the rule.

Never is everyone better off. Rather, some are better off, while others are not, and typically, many are even worse off. The partial gains are typically high, or even negated by overall costs, which may be diffuse, and less directly felt by losers.

Privatized Monopoly Powers

Since many SOEs are public monopolies, privatization has typically transformed them into private monopolies. In turn, abuse of such market monopoly power enables more rents and corporate profits.

As corporate profits are the private sector’s yardstick of success, privatized monopolies are likely to abuse their market power to maximize rents for themselves. Thus, privatization tends to burden the public, e.g., if charges are raised.

In most cases, privatization has not closed the governments’ fiscal deficits, and may even worsen budgetary problems. Privatization may worsen the fiscal situation due to loss of revenue from privatized SOEs, or tax evasion by the new privatized entity.

Options for cross-subsidization, e.g., to broaden coverage are reduced as the government is usually left with unprofitable activities while the potentially profitable is acquired by the private sector. Thus, governments are often forced to cut essential public services.

In most cases, profitable SOEs were privatized as prospective private owners are driven to maximize profits. Fiscal deficits have often been exacerbated as new private owners use creative accounting to avoid tax, secure tax credits and subsidies, and maximize retained earnings.

Meanwhile, governments lose vital revenue sources due to privatization if SOEs are profitable, and are often obliged to subsidize privatized monopolies to ensure the poor and underserved still have access to the privatized utilities or services.

Privatization Burdens Many

Privatization burdens the public when charges or fees are not reduced, or when the services provided are significantly reduced. Thus, privatization often burdens the public in different ways, depending on how market power is exercised or abused.

Often, instead of trying to provide a public good to all, many are excluded because it is not considered commercially viable or economic to serve them. Consequently, privatization may worsen overall enterprise performance. ‘Value for money’ may go down despite ostensible improvements used to justify higher user charges.

SOEs are widely presumed to be more likely to be inefficient. The most profitable and potentially profitable are typically the first and most likely to be privatized. This leaves the rest of the public sector even less profitable, and thus considered more inefficient, in turn justifying further privatizations.

Efficiency Elusive

It is often argued that privatization is needed as the government is inherently inefficient and does not know how to run enterprises well. Incredibly, the government is expected to subsidize privatized SOEs, which are presumed to be more efficient, in order to fulfil its obligations to the citizenry.

Such obligations may not involve direct payments or transfers, but rather, lucrative concessions to the privatized SOE. Thus, they may well make far more from these additional concessions than the actual cost of fulfilling government obligations.

Thus, privatization of profitable enterprises or segments not only perpetuates exclusion of the deserving, but also worsens overall public sector performance now encumbered with remaining unprofitable obligations.

One consequence is poorer public sector performance, contributing to what appears to be a self-fulfilling prophecy. To make matters worse, the public sector is then stuck with financing the unprofitable, thus seemingly supporting to the privatization prophecy.

Benefits Accrue to Relatively Few

Privatization typically enriches the politically connected few who secure lucrative rents by sacrificing the national or public interest for private profit, even when privatization may not seem to benefit them.

Privatization in many developing and transition economies has primarily enriched these few as the public interest is sacrificed to such powerful private business interests. This has, in turn, exacerbated corruption, patronage and other related problems.

For example, following Russian voucher privatization and other Western recommended reforms, for which there was a limited domestic constituency then, within three years (1992-1994), the Russian economy had collapsed by half, and adult male life expectancy fell by six years. It was the greatest such recorded catastrophe in the last six millennia of recorded human history.

Soon, a couple of dozen young Russian oligarchs had taken over the commanding heights of the Russian economy; many then monetized their gains and invested abroad, migrating to follow their new wealth. Much of this was celebrated by the Western media as economic progress.

 

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20 comments

  1. Jerri-Lynn Scofield Post author

    Yes it does. I’ve now added a sentence to my introduction to make that clear. I noticed the omission when I was uploading the post, but wasn’t sure whether readers would be confused.

    Thanks for your comment.

    Reply
  2. caloba

    As a rule of thumb, I’d say that any privatisations that require the introduction of convoluted pseudo-market structures or vast new regulatory bureaucracies or which derive most of their ongoing income from the public sector are likely to be contrary to the long-term public interest. In the UK, unfortunately, all these ships sailed a long time ago…

    Reply
  3. DJG

    After the recent Chicago municipal elections, I wrote up some notes on the reasons for the discontent. This article by Sundaram explains exactly how these schemes work. Further, you can apply his criteria of subsidies for the rich, skimming, and disinheriting the middle class and poor to all of the following instances in Chicago.

    If I may–some for instances of how Sundaram’s observations turn up in U.S. cities:

    Chicago is the proving grounds for thirty or so years of the Democrats’ surrender to neoliberalism and austerity politics. Let us not forget, brethren and sistren, that Rahm is the Spawn of Bill + Hill as well as dear friend and advisor of Obama. So there is the work of Daley to undo and the work of the Clintonians to undo. It will take more than one term for Lightfoot.

    Consider:
    –Parking meters and enforcement have been privatized, starving the city of funds and, more importantly, of its police power.
    –Taxes have been privatized in TIFs, where money goes and is never heard from again.
    –There have been attempts to privatize the park system in the form of the Lucas museum and the current Obama Theme Park imbroglio, involving some fifty acres of park land.
    –The school system has been looted and privatized. The Democrats are big fans of charter schools (right, “Beto”), seeing them as ways to skim money off the middle class and the poor.
    –Fare collection on public transit has been privatized using a system so deliberately rudimentary and so deliberately corrupt that it cannot tell you at point of service how much you have paid as fare.
    –Boeing was enticed to Chicago with tax breaks. Yes, that Boeing, the one that now deliberately puts bad software in your airplane.
    –Property tax assessment has been an opaque system and source of skimming for lawyers.
    –Zoning: Eddie Burke, pond scum, is just the top layer of pollution.
    –And as we have made our descent, all of these economic dogmata have been enforced by petty harassment of the citizenry (endless tickets) and an ever-brutal police force.

    And yet: The current Republican Party also supports all of these policies, so let’s not pretend that a bunch of Mitch McConnell lookalikes are headed to Chicago to reform it.

    Reply
    1. California is no better

      Providing professional services i.e. architecture, engineering, etc. for a public entity, local or federal, does not yield unreasonable profits. Typically, the public agencies have their own staff to monitor and cost control a project. The professional services provided to private developers yields far more profit- oftentimes twice the profits associated with public agency work. Most professional services companies will transition their work to the public agencies during a recession.

      At any rate, especially in Illinois, privatizing the work to avoid pension liabilities is no longer a choice. Michael Madigan pension promises will require the public to maintain a public service budget with no staff to fill potholes. Essentially, these are the no work jobs made popular by the Soprano crew twenty years ago.

      Discussion of the downside of the privatization of public services is merely an oscillation from discussing the weather, the Bears or any other kitchen table discussion – nothing more than pleasant small talk to pass the time.

      Privatization, at any cost, is no longer a choice. We have abused the pension system and now the public must pay for private companies to provide the most basic services.

      Reply
    2. stan6565

      The question is, what can one do to help arrest this wholesale theft of public resources and their expropriation into the hands of well connected. ” Public”, as in, it is the working public over the last 100 or 200 years that created (or paid for), the electricity grid, or public schools, or entire armed or police forces…

      I keep thinking that perhaps an Act could or should be introduced here in UK (same for the States, i suppose), which should ensure that all politicians that enable any type of privatisation of public resources or PFI arrangement (yes that old chesnut), should be made personally responsible for the results therof.

      And any losses to the public accidentally or “accidentally” occasioned by such commandeering over public resources, to be treated like deliberate misappropriation by the said public officials.

      With the financial and custodial penalties as may be appropriate.

      Anybody out there with similar thoughts or should i really try harder and give up on drugs?

      Reply
      1. Tyronius Maximus

        I vociferously disagree with the assertion that the wrecking of pension funding in the past is the reason we are forced to leave privatization schemes in place today.

        In a similar vein, the are lots of private services that are suspiciously similar to public utilities in terms of natural monopoly, such as cable TV, internet and even railroads. Maybe these should be nationalized and treated more like public services. It can work when they’re adequately funded and oversight accountability has teeth; major airports are a good example.

        Reply
    3. rps

      Let’s not forget the privatization of the Chicago Skyway, not once but twice.

      Plus the state giveaways includes tens of millions of dollars each year in corporate tax credits in the name of job creation. A report by the nonprofit “Good Jobs First” revealed that over 300 Illinois companies are keeping the state taxes paid by their employees. EDGE- the Economic Development in a Growing Economy is a corporate freebie tax credit, which is partly from the state personal income taxes paid by workers. That’s right, the biggest welfare queens are the corporations collecting and keep their employees state income tax payments.

      Can it get worse? According to the Chicago Trib, “The Chicago Mercantile Exchange (CME), for example, with billions of untaxed contracts worth well over a quadrillion dollars, and whose profit margin in recent years is higher than any of the top 100 companies in the nation, had the hubris to demand an $85 million per year tax break. They got it.” The money is there to secure the pensions and budget but has been diverted to the corporate welfare queens for honoring us mere serfs with their presence in the humble fiefdom of Illinois.

      Paging Mike Madigan- The Institute on Taxation and Economic Policy lists Illinois as one of the “Terrible Ten” most tax-regressive states, imposing a much higher rate on poor residents for sales and excise taxes, property taxes and income taxes. Al Capone would be proud of him.

      Reply
  4. eg

    Michael Hudson, to his immense credit, explains the pernicious effects of privatization of common goods repeatedly throughout his work, and demonstrates that it has been with us at least as long as the ancient practice of land alienation and rural usury.

    Natural monopolies ought to be nationalised, full stop.

    Reply
  5. Grizziz

    I support public ownership of natural monopolies, however it would be helpful if these pieces contained data, case studies or footnoted entries providing some empirical evidence of the author’s thesis.

    Reply
  6. Thuto

    This article comes at a time when the clarion call for privatizing Eskom, SA’s electricity utility, is hitting deafening levels. To the private sector, efficiency = maximizing profits by making the “bloated” enterprise lean (aka cutting the workforce) and quite literally mean (aka cutting services to “unprofitable” segments of the market, iow, the poor and vulnerable). When profits soar because the holy grail of efficiency is achieved, the mainstream business press brings out the champagne and toasts this “success” as proof that the previously “moribund” (they always exaggerate the state of things) monopolistic monolith has been given a new lease on life by privatizing it and the template is set for rescuing other “ailing” SOEs.

    The drawbacks are never laid out as cleary as they are in this article and the plight of those worst affected, whether laid-off workers or those whose services have been cut, never makes it into the headlines.

    Reply
  7. PhilB

    And then there is prison privatization where the burden of operation and maintaining the institution should clearly be on the public so as to be constant reminder of the burden, among others reasons. The motivations by private prison operators to reduce services and costs out of site of the pesky prying eyes of the public are manifold.

    Reply
    1. RepubAnon

      Privatization is a great way to avoid having user fees wasted by providing services, and instead put to better use funding the re-election campaigns of politicians supporting privatization. Plus, it provides much-needed consulting fees for former politicians as well as job-creating 7-figure salaries for the CEOs,

      (/snark, if you couldn’t tell)

      On a side note, the Dilbert comic strip is written about private industry…,

      Reply
  8. Iapetus

    There was a rudimentary plan put forward last June that recommended some pretty substantial privatizations of U.S. government assets and services which include:

    -Privatizing the US Post Office ( through an Initial Public Offering or outright sale to a private entity ).
    -Sell off U.S. government owned electricity transmission lines ( U.S. government owns 14% of this nations power transmission lines through TVA, Southwestern Power Administration, Western Area Power Administration, and Bonneville Power Administration ).
    -Spin-off the Federal Aviation Administrations air traffic control operations into a private nonprofit entity.
    -Spin-off the Department of Transportations operations of the Saint Lawrence Seaways Locks and Channels into a private non-profit entity.
    -End the federal conservatorship of Fannie Mae and Freddie Mac, then regulate a new system of private guarantors for their MBS securities.

    Not sure if these are still being considered.

    Reply
  9. Jack Parsons

    At heart, the problem with privatization is that marketing to a government-employed purchaser or “purchase influencer” is ridiculously cheap, due to their poor accountability strictures.

    This is abetted by the Katamari Damacy process (self-accretionary tendency) of money and power.

    https://youtu.be/-U_Tccwyh70?t=139

    Reply
  10. The Rev Kev

    In Oz the electricity grids were privatized as they would be cheaper that way – or so people were told. Instead, the cost of electricity has risen sharply over the years to the point that it is effecting elections on both the State and Federal level as the price hikes are so controversial. A problem is that those companies have to pay back the loans used to buy the public electricity grids and as well, the senior management award themselves sky-high wages because they are totally worth it. These are factors that were never present when it was publicly owned. And just to put the boot in, those very same companies have been ‘gold-plating’ the electricity grid for their gain-

    https://www.abc.net.au/news/2017-07-18/australian-gold-plated-power-grid/8721566

    Meanwhile, whatever money the governments made selling their electricity companies has been long spent on white elephants or buying themselves re-elections by giving out goodies to voters.

    Reply
  11. Procopius

    … buying themselves re-elections by giving out goodies to voters.

    I don’t reside in the states, so I don’t see much of the detail of daily life. What are these “goodies” of which you speak? In what I am able to read on the internet, people aren’t being given goodies any more. At least the old-time politicians handed out jobs, and turkeys at Christmas. The current crop do hand out jobs to their kids and immediate family, but not so much to anyone else.

    Reply
  12. John Rose

    The county “poorhouse” in Lebanon County, PA over the years evolved into a bare-bones but very well run nursing home with caring, long-term staff. The Republican county commissioners, however, year after year, avoided raising taxes by underfunding the retirement plan for the employees. Then, “suddenly” there was a crisis because the underfunding had become legally untenable.
    The solution was to sell the operation to a for-profit operator to fund the pansion plan shortfall at the minimal level required legally. In the next contract, the new owner cut health care and other benefits. The wages had always been minimal and he was free of the old pension plan requirements.
    The employees went on strike for many months, the owner brought in replacements from companies that specialize in that service, until the employees had to cave in.
    I had been counting on that facility when my sister was diagnosed with Alzheimers. I have family that is able to step in so she is provided for. Many others in the county are not so fortunate. Here are some staff comments: https://www.indeed.com/cmp/Cedar-Haven-Healthcare-Center/reviews?fcountry=ALL

    Reply
  13. Stratos

    “… instead of trying to provide a public good to all, many [ordinary working people] are excluded because it is not considered commercially viable or economic to serve them.”

    There are also social and class dimensions to the exclusion. Private Internet Service Providers (ISPs) in the USA have made the “not…commercially viable or economic to serve them” argument for decades when pressed about their refusal to wire the entire country. Their “business model” leaves millions without reliable broadband service in a variety of settings, from rural areas and small towns to inner cities and low income suburbs. In many cases, citizens in those areas have no access to broadband at all.

    When small towns and counties in the US have taken the initiative to wire their localities, the ISPs have bribed state legislatures to pass laws prohibiting public broadband throughout the rest of the state. Talk about subversion of democracy! Insult to injury: the ISPs who wailed about “unfair competition” to state legislators then refuse to wire areas throughout the rest of the state.

    Meanwhile, less affluent countries like Korea and Romania have lightning fast fiber optic broadband universally available at affordable prices.
    https://motherboard.vice.com/en_us/article/jp5aa3/why-romanias-internet-is-so-much-faster-than-americas

    Lack of universal and affordable broadband has two major effects:

    ➤ Local governments are shut out of economic opportunities because they lack connectivity. They are unable to shepherd business startups and existing businesses that need broadband to thrive. People move away. Businesses relocate or downsize. Local economies are left with erroding tax bases and boarded up downtowns.

    ➤ Children and young people in “broadband deserts” cannot tap into the many sources of learning that exist on the web. In particular, they don’t have the opportunity to learn anything about frontend or backend web development applications such as, html, php, Ruby on Rails, Photoshop or Indesign.

    That is one reason the US tech industry lacks workers from different backgrounds. Most tech workers grew up in areas the ISPs considered “commercially viable”. In addition, many tech workers are self taught to some degree, even those with computer science degrees. It is difficult to be self taught if you lack access to the most basic resources and tools.

    Reply

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