Why we need public spending, and why we don’t need PPPs

PSIRU Auckland NZ 2011 www.psiru.org

Why we need public spending, and why we don’t need PPPs

By David [email protected]

Public Services International Research Unit (PSIRU) University of Greenwich, UK

www.psiru.orgFebruary 2011

http://www.psiru.org/

mailto:[email protected]



Acknowledgements



Economic role of public spending

• Public spending and economic growth• Infrastructure, efficiency, equality,

employment• Public spending and the crisis• PPPs • Some conclusions

The presentation is 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 EPSU.


http://www.psiru.org/reports/2010-10-QPS-pubspend.pdf

http://www.psiru.org/reports/2010-03-PPPs.doc


The economic and social role of public spending

• 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

• PPPs presented as part of solution– Private investment instead of public investment– Greater efficiency and reliability

• Empirical evidence shows– Rising public spending is linked to economic growth– Productive benefits of health, education– Economic and social benefits of equality– No significant difference in public/private efficiency– PPPs relatively expensive, inflexible , and risky



Public spending as % of GDP (source: OECD stats http://stats.oecd.org/Index.aspx , PSIRU

calculations)Country 2008 2009

Australia 35.3%Canada 39.8% 44.1%Denmark 51.9% 58.4%France 52.8% 56.0%Germany 43.8% 47.5%Japan 37.1%Korea 30.4%New Zealand 41.9%Norway 40.6% 46.3%Slovak Republic 35.0% 41.5%Switzerland 32.2% 33.7%United Kingdom 47.4% 51.7%United States 38.9% 42.2%EU average (27) 46.9% 50.8%


http://stats.oecd.org/Index.aspx


Spending/GDP and GDP per capita, 2008, OECD



Long-term link between public spending and growthGovernment spending as % of GDP 1870-1996, ave of 14 countries



Recent trends: levelling-off or temporary dip?

Government spending as % of GDP, USA, 1903-2010



Questions and issues• Explaining the positive links

– Productivity gains from infrastructure, – Productivity gains from public health/education– Demand effects of equalising income distribution

• Social benefits from greater equality


PSIRU Auckland NZ 2011 www.psiru.org Infrastructure investment and growth 1991-2005

Change in ave per capita growth between 1991-1995 and 2001-2005. Calderon and Serven 2008



Public and private capital spending on infrastructure USA 2007



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



Public services and equality

Effects on equality of public services in UK (£ per year) Bottom 2nd 3rd 4th Top All

householdsRatio Top/Bottom quintile

Original income 4 970 12 020 23 305 38 321 73 810 30 485 15

Income after tax and benefits 7 269 13 507 19 731 27 553 50 006 23 613 7

plus benefits in kind from public services (health, education etc)

6 315 6 411 5 969 5 000 3 870 5 513

Final income 13 584 19 918 25 699 32 553 53 876 29 126 4



Half the jobs in the world

Jobs supported by public spending and

public servicesTotal Of which

Public employees

Private sector employees

Percentage of all jobs in the world

50 17 33



Public spending and the crisis – in contextSome factors in the crisis

• Unsustainable banking practices (CDS etc.)• Unsustainable personal borrowing (sub-prime)• Unsustainable corporate borrowing (leverage)• Inequality (wages-profits shares, high/low

incomes)

• NOT excessive government borrowing or spending

• NOT numbers or wages of public employees



Household and government debt in Eurozone

Household and government debt in eurozone(percent GDP)

20

30

40

50

60

70

80

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

perc

ent

Government debt

Household debt



Response to crisis: public spending and borrowing

• Bailout of banks – Overall, the total value of actual and contingent support in

North America and Europe rose to over US$14 trillion, equivalent to about 50% of annual GDP in those economies’ (Bank of England 2009a, p.6)

– This equates to over $2000 for every person on the planet

• ‘Stimulus’ to boost demand through higher deficit– Least impact if used for tax reductions– Most impact if used for public spending or benefits

• Automatic stabilisers absorb shock: tax down, benefits up

• Also spending on public services stabilises – counteracts 16% of economic ‘shocks’– Especially spending on elderly, health care



Crisis: cost of rescuing the banks- equals global revenue from 30 years of

privatisation



Crisis: Economic stimulus as % of GDP 2009

Total stimulus as % of GDP

All G-20 countries 3.9

Of which:

Advanced countries 4.3

Emerging market countries 3.3



Higher government debt levels

Government debt in Eurozone and US(2009, 2010 forecasts)

40

50

60

70

80

90

100

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

perc

ent o

f GD

P

EA-12

USA

Source: European Commission



Corporate profits now at record levels



Global political contests over public spending

• Post-crisis global contests over public spending

• Two key drivers, for IMF and some govts– curb growth of public spending on healthcare and

pensions, ageing populations• But contrary to efficiency evidence on public healthcare

– drive to cut stimulus packages• IMF concerned with lasting shift: why?

• More upward pressures on public spending– climate change, broadband, development

• Major political conflicts already especially in healthcare, pensions



IMF and politics: effects of crisis and IMF ‘exit’ plans

Average cut called for by 2030 by IMF

High-income countries

-8.70%

Developing countries -2.75%



New demands: climate change• Global costs of measures required to cut

carbon emissions between 1% and 3% of global GDP. – UN estimates about three-quarters of this will have

to come from public finance. – So globally, public spending will have to be higher

by about 1.5% of total GDP, just on account of actions to deal with climate change.

• Problems with liberalised energy markets– “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


http://www.theccc.org.uk/reports/progress-reports


Broadband, housing• Other continuing needs for public investment• Broadband internet access

– Telcos reluctant to invest in necessary networks, so governments have to raise public finance

– Eg Portugal state provides 85% of the financing for a €1 billion investment programme.

• Housing– Sub-prime crisis highlights role of public investment in

affordable housing– Slum problems in developing countries requires public

housing programme• General needs for investment in developing countries

– Private sector does not invest any significant amount in infrastruicture in Africa, Asia, limited in Latin America



Private alternatives: PPPs• Different channels for using private sector

– Privatisation by sale of enterprises– PPPs– liberalisation

• Key questions for PPPs: – Comparative value for money (VFM)– cost of finance, efficiency, risk– Accountability, governance



PPPs, PFI and Ryrie rules• PPPs fail VFM tests

– UK Ryrie rules in 1980s were about VFM, scrapped because no PFI proposal ever passed them

“(i) decisions to provide funds for investment should be taken under conditions of fair competition with private sector borrowers; any links with the rest of the public sector, government guarantees or commitments, or monopoly power should not result in the schemes offering investors a degree of security significantly greater than that available on private sector projects; and

(ii) such projects should yield benefits in terms of improved efficiency and profit from the additional investment commensurate with the cost of raising risk capital from financial markets”

(Treasury, 1988, Annex; quoted in Heald 2003).



A VFM framework for PPPs

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

• Cost of capital :always higher for private sector• Construction ‘on time’ :is costly ‘turnkey’ contract, for bankers’

benefit • No systematic efficiency savings (IMF: “the theory is ambiguous

and the empirical evidence is mixed.”) • Real transaction costs and uncertainty• No reduction in public spending under PFI schemes: government

pays



PPPs pay higher interest rates: UK data

Govt bonds pay 4.5%, PPPs 6%, post-crisis 7% Source: PAC 2010Cf Build America Bonds as successful public finance alternative



The high cost of private financeCost of capital: equity, debt, and government (% rate of return)

6

4

3

1

0

1

2

3

4

5

6

7

Equity Private debt Government debt Government debt (long-termindex-linked bonds)

perc

enta

ge

Source: PSIRU calculations, OFWAT, D Helm 2006 ‘Ownership, Utility Regulation And Financial Structures: An Emerging Model’ 14 January 2006

http://www.dieterhelm.co.uk./publications/OwnershipUtilityReg_FinancialStructures.pdf

.





Efficiency, privatisation, PPPs• 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

– UK privatisations in general: “little evidence that privatisation has caused a significant improvement in performance” (Martin and Parker 1997, Florio 2004)

– Water and electricity: “no statistically significant difference in efficiency scores between public and private providers.” (Estache et al, 2005, Warner and Bel 2009)

– 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: “privately managed prisons provide no clear benefit” (Lundahl et al. 2009 )– Airports: “Empirical evidence regarding the effects of privatization on the efficiency

of airports is scarce and largely inconclusive (Bel and Fageda 2010)



Some efficiency referencesBel 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 JournalVolume 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


http://www.ub.edu/irea/working_papers/2010/201004.pdf

http://www.sciencedirect.com/science/journal/10575219

http://www.sciencedirect.com/science?_ob=PublicationURL&_tockey=



http://go.worldbank.org/919KQKSPS0

http://www.cepe.ch/download/cepe_wp/CEPE_WP48.pdf


More efficiency referencesFlorio 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


http://econpapers.repec.org/article/eeeeecrev/

http://www.imf.org/external/np/fad/2004/pifp/eng/031204.htm

http://dx.doi.org/10.1016/j.jbankfin.2008.12.016

http://rsw.sagepub.com/content/19/4/383

http://www3.interscience.wiley.com/journal/118902552/home

http://www3.interscience.wiley.com/journal/121489076/issue


Even more efficiency referencesPollitt 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, .




http://eid.sagepub.com/content/28/3/465.abstract


Efficiency and liberalisation• Liberalisation expected to deliver efficiency via competition

• Not found in EU liberalisation of network industries• “No evidence of consumer benefits from electricity/gas/telecoms

liberalisation” (Florio et al, 2008)

• USA unbundled electricity systems are less efficient: – electricity systems in deregulated states “have lower productive efficiency,

and have also experienced decreases in efficiency over time. In particular, the vertical separation of generation, a hallmark of an effort to deregulate the industry, is associated with an adverse impact on productive efficiency” (Goto and Makhija 2009)

– Deregulation halted in USA after California crisis 2000



PPPs/PFI: dynamic problems• UK cases

– M25 motorway: worse technical option , financed by govt at private rates, long-term costs of £1billion

– Major London Underground PPPs cancelled, = 25% by value of entire PFI programme– “we found no clear and explicit justification and evaluation for the use of PFI in

terms of its value for money…The Department for Communities and Local Government has undertaken a limited analysis of capital costs on new build schemes but this did not take account of all project costs such as finance costs.” (HoC 2010)

– “Many PFI housing procurements have taken very much longer, and cost a great deal more, than originally planned” (Hoc 2010)

– Supporting PPPs post-crisis means that: “higher financing costs increased the annual charge of PFI projects by six to seven per cent and that between £500 million to £1 billion of higher cost has been built in over 30 years”

– Refinancing advantages for companies, rarely an option for public authorities• Little evidence of learning process by government

– Little monitoring of outcomes– high spending on advisers: “insufficient commercial and technical skills within the

Agency. The Agency risks advisers controlling projects and having little incentive to transfer knowledge back to the Agency.” NAO 2010

– Same experience in France after decades of concessions



Risks• Risk transfer is not an objective in itself

– Only if improves VFM– used to massage comparisons

• Cannot transfer risk of public service delivery– Private sector indifferent to public service– Eg Brussels sewerage treatment PPP pollutes river

for 10 days • PPPs create risks to other services, especially

with proposed cutbacks– Eg UK spending cuts affect PFI hospitals more,

due to contractually fixed expenditure on PFI



Public sector aid for PPPs• Post-crisis inability to finance for PPPs

– cost of capital even higher, PPPs even more unpopular– VFM response should be: use public sector option

• But massive efforts by public sector bodies to support, rescue and promote PPPs despite this– By governments – eg UK, France, India create special

public financing mechanisms for private projects– By international institutions eg IFC creates special fund,

UNECE et al create special unit to promote PPPs – By EU, with range of special propaganda and legal

initiatives to support PPPs alone (Nov 2009 paper)– Misleading language of



Skewed choices and government deficits• Why so much effort for such poor results?• Avoidance of deficit rules key motive for PPPs

– Note implication that infrastructure projects are more important than deficit rules

– EU Deficit rules mean projects only allowable if ‘off-balance sheet’, hence importance of Eurostat rules

– EIB/UK reports find 'there is no alternative‘• Deficit avoidance now harder because

– Statisticians in UK, EU, elsewhere rule must be on balance sheets (control, liability)

– New international standards say on balance sheet– Greater public awareness and opposition


PSIRU Auckland NZ 2011 www.psiru.org Conclusions 1: 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)



Conclusions 2• The economic, social, developmental and

environmental role of public spending

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

• Political conflicts, national and global

• PPPs and privatisation not efficient alternatives

• A world without PPPs is possible and viable



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


Documents

Why we need public spending, and why we don’t need PPPs