PSIRU
Auckland NZ 2011
www.psiru.org
Why we need public spending, and why we
don’t need PPPs
By David Hall
d.j.hall@gre.ac.uk
Public Services International Research Unit (PSIRU)
University of Greenwich, UK
www.psiru.org
February 2011
PSIRU
Auckland NZ 2011
Acknowledgements
www.psiru.org
PSIRU
Auckland NZ 2011
www.psiru.org
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-QPSpubspend.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.
PSIRU
Auckland NZ 2011
www.psiru.org
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
PSIRU
Auckland NZ 2011
www.psiru.org
Public spending as % of GDP
(source: OECD stats http://stats.oecd.org/Index.aspx , PSIRU calculations)
Country
Australia
Canada
Denmark
France
Germany
Japan
Korea
New Zealand
Norway
Slovak Republic
Switzerland
United Kingdom
United States
EU average (27)
2008
35.3%
39.8%
51.9%
52.8%
43.8%
37.1%
30.4%
41.9%
40.6%
35.0%
32.2%
47.4%
38.9%
46.9%
2009
44.1%
58.4%
56.0%
47.5%
46.3%
41.5%
33.7%
51.7%
42.2%
50.8%
PSIRU
Auckland NZ 2011
www.psiru.org
Spending/GDP and GDP per capita, 2008, OECD
PSIRU
Auckland NZ 2011
www.psiru.org
Long-term link between public spending and growth
Government spending as % of GDP 1870-1996, ave of 14 countries
PSIRU
Auckland NZ 2011
www.psiru.org
Recent trends: levelling-off or temporary dip?
Government spending as % of GDP, USA, 1903-2010
PSIRU
Auckland NZ 2011
www.psiru.org
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
PSIRU
Auckland NZ 2011
www.psiru.org
Public and private capital spending on infrastructure USA
2007
PSIRU
Auckland NZ 2011
www.psiru.org
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
PSIRU
Auckland NZ 2011
www.psiru.org
Public services and equality
Effects on equality of public
services in UK (£ per year)
Original income
Income after tax and benefits
plus benefits in kind from
public services (health,
education etc)
Final income
All Ratio
households Top/Bottom
quintile
30 485
15
Bottom
2nd
3rd
4th
Top
4 970
12 020
23 305
38 321
73 810
7 269
13 507
19 731
27 553
50 006
23 613
6 315
6 411
5 969
5 000
3 870
5 513
13 584
19 918
25 699
32 553
53 876
29 126
7
4
PSIRU
Auckland NZ 2011
www.psiru.org
Half the jobs in the world
Jobs supported by
public spending and
public services
Total
Of which
Public
Private
employees sector
employees
Percentage of all
jobs in the world
50
17
33
PSIRU
Auckland NZ 2011
www.psiru.org
Public spending and the crisis – in context
Some 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
PSIRU
Auckland NZ 2011
www.psiru.org
Household and government debt in Eurozone
Household and government debt in eurozone
(percent GDP)
80
70
percent
60
50
Government debt
Household debt
40
30
20
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
PSIRU
Auckland NZ 2011
www.psiru.org
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
PSIRU
Auckland NZ 2011
www.psiru.org
Crisis: cost of rescuing the banks
- equals global revenue from 30 years of privatisation
PSIRU
Auckland NZ 2011
www.psiru.org
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
PSIRU
Auckland NZ 2011
www.psiru.org
Higher government debt levels
Government debt in Eurozone and US
(2009, 2010 forecasts)
100
percent of GDP
90
80
70
60
EA-12
50
USA
40
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: European Commission
PSIRU
Auckland NZ 2011
www.psiru.org
Corporate profits now at record levels
PSIRU
Auckland NZ 2011
www.psiru.org
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
PSIRU
Auckland NZ 2011
www.psiru.org
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%
PSIRU
Auckland NZ 2011
www.psiru.org
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/progressreports
PSIRU
Auckland NZ 2011
www.psiru.org
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
PSIRU
Auckland NZ 2011
www.psiru.org
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
PSIRU
Auckland NZ 2011
www.psiru.org
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).
PSIRU
Auckland NZ 2011
www.psiru.org
A VFM framework for PPPs
• 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
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
PSIRU
Auckland NZ 2011
www.psiru.org
PPPs pay higher interest rates: UK data
Govt bonds pay 4.5%, PPPs 6%, post-crisis 7% Source: PAC 2010
Cf Build America Bonds as successful public finance alternative
PSIRU
Auckland NZ 2011
www.psiru.org
The high cost of private finance
Cost of capital: equity, debt, and government (% rate of return)
7
6
6
5
percentage
4
4
3
3
2
1
1
0
Equity
Private debt
Government debt
Government debt (long-term
index-linked bonds)
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.
PSIRU
Auckland NZ 2011
www.psiru.org
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)
PSIRU
Auckland NZ 2011
www.psiru.org
Some efficiency references
Bel 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 Journal
Volume 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
PSIRU
Auckland NZ 2011
www.psiru.org
More efficiency references
Florio 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
PSIRU
Auckland NZ 2011
www.psiru.org
Even more efficiency references
Pollitt 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, .
PSIRU
Auckland NZ 2011
www.psiru.org
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
PSIRU
Auckland NZ 2011
www.psiru.org
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
PSIRU
Auckland NZ 2011
www.psiru.org
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
PSIRU
Auckland NZ 2011
www.psiru.org
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
PSIRU
Auckland NZ 2011
www.psiru.org
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)
PSIRU
Auckland NZ 2011
www.psiru.org
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
PSIRU
Auckland NZ 2011
www.psiru.org
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