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The 'b' Word


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Privatization / BUREAUCRACY

The ‘B’ word
Bureaucracy drives us all crazy. But does that mean selling the family silver to the
highest bidder? David Hall suggests a recipe for making the public sector work.

When public services go wrong everyone notices. In some countries it means waiting months for a telephone. Elsewhere it may mean waiting years for a sewer connection. Often it means waiting too long for medical treatment. Usually, this is because of underfunding. But sometimes it's because of corruption and sometimes because of inefficiency - for example, when doctors or customs officials expect bribes, or when the payroll is bloated by political cronies of those in power.

So when Margaret Thatcher, Ronald Reagan and other free-market enthusiasts came along in the 1980s offering privatization as a solution to bureaucratic ineptitude, their message fell on open ears. They promised to sweep away an inefficient public sector and replace it with efficient, dynamic, private companies. Driven by the engine of competition, the companies would cut costs and improve services. Above all they would listen to what their customers - that's us - wanted. Market forces would be cost-effective and responsive in a way the public sector could never be.

Now we are all in that world and it looks different from the brochure. People in Britain wait on privatized stations for trains that are late, overcrowded and dangerous. People in California suffered months of blackouts and skyrocketing electricity prices while private power companies made a killing. The Argentinean economy is a wreck - partly as a result of unsustainable profits extracted from privatized services. Do we just have to live with two discredited systems? Or does the public sector offer better prospects of efficient, accountable services than we've been told?

Let's deal with the mythology first.

There have now been dozens of studies showing that the private sector is not, by definition, more efficient than the public sector. Some have concluded the private sector is more efficient and some that the public sector is more efficient. But most have concluded that there is no significant difference.

If we look at water services, public companies in the Netherlands, Japan and the US look to be more efficient than private water companies in France and England.1 Electricity is another area where private provision doesn't seem to help. An exhaustive comparison of public and private electricity companies worldwide by researcher Michael Pollitt found that ownership makes little difference. In fact public ownership turned out to be a plus in California's 2001 elec-

tricity crisis when Los Angeles residents escaped without the power cuts or price hikes suffered by their fellow Californians. LA's power was generated and distributed by a city-owned utility.2

The public sector may even be better at improving productivity. A review of the Thatcher Government's privatized industries found that most of the improvements came before privatization, not after. Where there was partial privatization, as in refuse collection, services that stayed in the hands of local councils improved as much as privatized ones.3 The Finnish economist Johan Willner recently concluded that political control through public ownership can lead to better economic results, especially in sectors which are 'natural monopolies'.4

Improved reliability
Even in the poorest parts of Africa and Central America the public sector has shown it can deliver services efficiently. The water authority in Lilongwe, Malawi, reduced leakage to 17 per cent in the 1990s5 - a record that compares well with the performance of Thames Water in Britain in 2001. And in 1994 there was a successful restructuring of SANAA, the state-owned water company in Tegucigalpa, Honduras. They dramatically improved efficiency by introducing computers, decentralizing the company's work and tightening up on overstaffing due to corruption. Leakage rates fell and the reliability of supply improved allowing the majority of the city's populations to receive piped water 24 hours a day.6

In Honduras the trade union at the water utility took a central role in the restructuring, whereas in the private sector the first step towards efficiency is usually to cut jobs. Public-service workers are a vital source of expertise and commitment and authorities in some countries are beginning to recognize these strengths.

In developing countries the most pressing need is to extend public services as widely as possible - but many people are too poor to be profitable customers. Here public utilities have a built-in advantage - because they take the risk for the sake of the country and because they don't have to maximize profits for shareholders. In São Paulo the public water company SABESP extended water to an extra 940,000 households and sewer pipes to an extra 787,000 households in the space of four years, an increase of 25 per cent in both cases. At the same time it turned around a financial deficit and maintained employment.7

Cross-subsidy is crucial to this process - otherwise the poor will never be connected to services they can't afford. This subsidy has to come from other people - either through taxes or by charging the wealthy more for the service they receive. Privatization supporters claim cross-subsidies are wasteful and counter to good business sense. But in Buenos Aires the newly privatized water company found the only way it could afford to connect the shanty towns was by imposing a special 'solidarity charge' on middle-class consumers. The company also had to rely on the municipality to provide the pipes and the poor themselves to provide their labour free.8

For services like public transport some level of subsidy is usually necessary for the service to function at all. So privatization doesn't get rid of subsidies, it just changes who receives them. The private companies now running the British railways rely on public subsidies - Vivendi's rail subsidiary Connex successfully demanded another $86 million from the Government in December 2002 to continue running the trains. The difference is that the subsidy has to keep Vivendi shareholders happy, too.

Efficiency is not enough in the public service. State-owned agencies must also be open to scrutiny and responsive to the needs of the public - the owners. Where government services have declined into remote bureaucracies or corrupt machines for rewarding cronies there is bound to be cynicism and mistrust. But this is neither universal nor inevitable. There are places where participation and transparency are central features of local government - and the outstanding examples are in developing countries.

In Porto Alegre, Brazil, the municipality has adopted a system of 'participatory budgeting' in which over 14,000 people take part each year. There has been far greater transparency - detailed information is made available to the Council on request. As a result of direct citizen input, resources have been redirected to small infrastructure projects in poor neighbourhoods. The idea of citizens helping to set local budgets was developed by the Workers Party, whose leader Lula is now Brazil's President. Participatory budgeting is also being tested in other municipalities where the Workers Party has been elected.

Citizen involvement
A similar system has been developed in the southern Indian state of Kerala. It is based on directing funds for services to local village councils (panchayats). The councils are then required to draw up spending plans through a series of public assemblies which are heavily publicized. All elected councillors are given three days of training and are supported in their duties by a cadre of volunteer professionals. Kerala has a strong tradition of literacy and political activity which may be more important in involving people than more diffuse notions of 'civil society'. The danger of corruption is dealt with by ensuring that all documents and decisions are open to public scrutiny. This works at the most basic level - for example the public now knows what hours a local doctor for the state-funded health service is paid to work.

Openness can be a key part of transforming a public authority, too. In Maharashtra, India, the regulatory commission responsible for setting electricity prices decided to have statewide hearings about a proposed price rise of 18 per cent. Community groups got intensely involved, demanding a wealth of detailed information. Eventually, the electricity authority admitted errors in its own data. Over a period of six months the regulator, the electricity board and the public worked to set a new price increase of 6.5 per cent, instead of the original 18 per cent.

There is one final advantage that public-sector operators have over private companies - they can't pack up and leave when the going gets tough. Last year the US energy company, AES, walked away from its operations in Orissa, one of the poorest states in India, because it couldn't make enough profit. The world's leading water transnational, Suez, gave up running the water services for half of Manila because it couldn't cover its debts and still make a profit. And the British firm, National Express, recently walked away from its contract in Victoria, Australia - leaving the local bus company with a $55-million debt. These are not accidents. They happen because private-sector operators are obliged to maximize shareholder return. When it becomes unprofitable to stay, the private companies have to go.

But while the private sector often can't afford to carry on running a service, the public sector cannot afford not to. So the public sector can and must do better and it needs the framework to do so. Adequate funding is always crucial so services for all who need them are supported by contributions from those best able to pay.

Accountability to local people is vital - through vigorous public participation, complete transparency and accessiblity of information. There also needs to be a management system which uses workers' knowledge instead of distrusting their organization.

These are serious, perpetual challenges for the public sector. But they are challenges which cannot be ignored.

David Hall [image, unknown] David Hall is Director of the Public Services International Research Unit at the University of Greenwich, London. email: [email protected]

1 Blokland M, Braadbaart O, Schwartz K (Eds) Private Business, Public Owners - Government Shareholdings in Water Enterprises. Ministry of Housing, Spatial Planning and the Environment of the Netherlands (1999)
2 See for example 'The California Electricity Crisis - overview and international lessons', www.psiru.org/reports/2001-02-E-Calif.doc
3 Bishop, Kay, Mayer, Privatization and Economic Performance (OUP 1994)
4 Johan Willner, 'Ownership, efficiency, and political interference', European Journal of Political Economy, Volume 17, Issue 4 November 2001.
5 'Water in Public Hands', David Hall, June 2001, PSIRU, www.psiru.org/reports/2001-06-W-public.doc
6 Lobina and Hall, 'Public Sector Alternatives to Water Supply and Sewerage Privatization', International Journal of Water Resources Development, March 2000. Available at www.psiru.org/reports/9908-W-U-Pubalt.doc
7 Ibid
8 See D Hall, 'The Water multinationals 2002 - financial and other problems', PSIRU, August 2002, www.psiru.org/reports/2002-08-W-MNCs.doc

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