A wave of privatisations made its way from the coast of Britain towards the Continent in the 1980s; gaining momentum after the fall of the Berlin Wall, privatisations became a tsounami hitting the shores of Europe in the 1990s, east and west. Former state monopolies in “strategic sectors” were privatised for all sorts of reasons: to encourage innovation, promote economies of scale, reduce public debt, attract foreign direct investment and improve productivity.
Privatisation was the new conventional wisdom.
Goods formerly considered public – water, transport, housing, energy, electricity, telecommunications, waste treatment, health, education – were treated as commodities. Under the guise of consumer protection, often, privatisation eroded the quality and accessibility of public goods and services.
Still, state-owned companies and institutions in Europe have largely become passé, although they are very much the norm in China, India, Russia, and other emerging markets. However, in Europe too, there is movement in the opposite direction.
A recent study published by the Amsterdam-based Transnational Institute (TNI) reveals a pattern of return to public ownership. Lavinia Steinfort is a researcher at the TNI and gave New Europe the gist of the story.
New Europe: Your report suggests there is a political movement for the return of public services to public ownership. However, this movement appears to be linked to municipalities rather than the state. What is the difference between municipalization and nationalisation.
Lavinia Steinfort: The findings of the Reclaiming Public Services report suggest that 835 (re)municipalisations and 49 (re)nationalisations of public services have a lot in common. Both strategies are employed when private operators of public services fail to live up to expectations. The objective is to lower prices, increase investment and improve overall service quality.
The remunicipalisation of energy services across Germany and the United Kingdom indicate a movement away from privatization, primarily in cases of market failure. But these are not merely disputes about ownership. Reclaiming public services also has a political dimension, because municipal, regional and national public services are often more responsive to citizens’ environmental concerns and political demands.
Reclaiming public services also has a political dimension, because municipal, regional and national public services are often more responsive to citizens’ environmental concerns and political demands.
Concerning the difference between remunicipalisation and renationalisation, much depends on the scale on which the (privatised) public service has been organised.
In South America, Asia, Africa and several East European countries public services are often centrally organised. In these cases, “deprivatisation” means nationalisation.
However, because the European Union encouraged governments to decentralise as well as privatise public services – especially water and energy – “deprivatisation” frequently means municipalisation. As many of these privatisations failed, many municipal governments were pressured by their citizens to use their political power to reclaim the water supply (France) and the energy grids (Germany).
New Europe: You were recently a Labour Party Conference in London debating the benefits of alternative (to private) ownership models of public services. However, it is often the case that successful public companies own private assets in other European countries. Is there no logic in achieving economies of scale in water, energy, and transport?
Lavinia Steinfort (TNI): It is true that many state-owned enterprises operating in other countries behave like private firms, both in European countries and elsewhere. This shows that public companies should not only be publicly-owned but also publicly accountable, ensuring effective democratic control. These principles are difficult to achieve when a big corporate entity is in control.
As for economies of scale, that is not an end in itself. Bigger does not always mean better. Economies of scale can also be achieved through cross-subsidization between public services and the clustering of metropolitan, intermunicipal and provincial services. For example, in 2015 the city of Nice remunicipalised its water services in the metropolitan area, clustering services on the basis of ‘territorial solidarity.’ Pooling resources on such a scale is something that private management can’t achieve.
Economies of scale can also be achieved through cross-subsidization between public services and the clustering of metropolitan, intermunicipal and provincial services.
The water sector pioneered the building of alternative economies of scale. In response to the failing Public Private Partnerships (PPPs) in Europe, Asia and the Americas, public utility companies have been experimenting with Public Public Partnerships (PUPs) to exchange expertise, reduce unit cost and increase productivity. The logic of cooperation is underpinned by peer-to-peer solidarity rather than profit.
A recent example is the (remunicipalised) public water company Eau de Paris, which provides legal and technical support to Barcelona in its struggle to deprivatise water services.
In the energy sector, transmission and distribution networks tend to be organised at national or regional levels. However, considering climate change pressures, local electricity production and distribution from renewable sources – such as solar and wind – make more sense on a local scale. Politically too, local pressure to is much more effective.
New Europe: In Greece, Portugal, Slovenia, and Ireland there is an ongoing wave of privatisations linked to paying off public debt. How would you counter the argument that privatisation rationalises management, decreases clientelism and increases productivity?
Lavinia Steinfort (TNI): The pressure by the International Monetary Fund, the European Central Bank and the European Commission has been mostly driven by the objective to protect the short-term interests of creditors. The so-called Troika is less concerned with the quality of public services.
The first and foremost objective of foreign investors taking over control of public services is to make a profit for their shareholders. In this context, “rationalising management” often means little other than cutting labour costs: from reducing salaries and firing staff to attacking unionisation.
When you look at the specific impact of privatisation on public services, it’s clear that instead of “increased productivity” there is deterioration of service access, quality, and efficiency. This was the conclusion of a joint World Bank-IMF report on Private-Public Partnerships.
When you look at the specific impact of privatisation on public services, it’s clear that instead of “increased productivity” there is deterioration of service access, quality, and efficiency.
The case study of the Oslo waste management services led to dreadful labour conditions and tens of thousands of complaints about deterioration of service. That is why in 2017 the waste management service was reclaimed by the municipality.
Private ownership of public services is evidently no guarantee of protection against clientelism or corruption. The 15-year privatisation of the Vilnius district heating system – and that of several other municipalities – shows that Veolia’s subsidiary pushed up the energy costs for households, making a profit of €24.3 million in the process. That is why this process was reversed in 2017 with the municipalisation of the system.
New Europe: Where does the money to buy back public services come from? Do municipalities pay market prices?
Lavinia Steinfort (TNI): When public authorities terminate a concession because of severe wrongdoings, they can earn the money back over time. How long this will take depends on the compensation they will be required to pay to previous shareholders.
Research by Professor David Hall at the University of Greenwich Business School suggests that if the UK were to renationalise its energy system – and restructure it on the basis of a new model that combines national, regional and local public ownership – it could pay itself back in 10 years. The system could achieve annual savings of £3.2bn, which should be sufficient to both compensate private shareholders and reinvest into energy infrastructure.
It’s important that the price municipalities pay to terminate a private contract and reclaim a public service reflects the actual value of the service company. However, it is not uncommon for private operators to inflate the value of their assets when a government decides to return the service to public ownership.
For example, when the city of Terassa in eastern Catalonia decided to remunicipalise its water supply, the municipality’s valuation of the company was €2 million while the operators’ was €60 million. It is certainly conceivable that the two parties will not agree or compromise on an inflated price. In 2013, Berlin remunicipalised its water supply and sewage treatment company at the cost of €1.3bn, which will take three decades to recover via tariffs. Significantly, the debt also limits the scope for innovation and social policy.
Generally speaking, finding the capital should always be possible. Governments are backed by tax revenue, so they can take on direct loans typically at lower interest rates than other borrowers.
At other occasions governments may think that reclaiming a public service is more expensive than it will actually turn out to be. When the municipality of Bergen remunicipalised two elderly care homes, they expected losses of over €1 million. In fact, the municipality saved €500,000 as in-house service provision was cheaper. Water remunicipalisation in Paris even meant a saving of around €30 million every year.
New Europe: Are there common legal challenges to this process?
Lavinia Steinfort (TNI): Deprivatisation can trigger domestic litigation as well as international investment arbitration (Investor-State Dispute Settlement). However, these two legal proceedings should not be confused. International investment arbitration can only be initiated by foreign investors and not governments, small and medium-sized enterprises, civil society organizations or ordinary people.
International investor-state dispute settlement involves opaque and biased international tribunals consisting of three for-profit arbitrators that typically favour international investors. Domestic litigation involves public, professional and impartial judges, is accessible to everyone and is therefore more transparent.
International investor-state dispute settlement involves opaque and biased international tribunals consisting of three for-profit arbitrators that typically favour international investors.
The currently expanding trade and investment regime provides foreign investors with additional rights that go beyond the legal and constitutional framework of the European Union. These rights enable foreign investors to initiate international investment arbitration and effectively sue governments for billions when they decide to reclaim – or even merely regulate – a public service.
The Reclaiming Public Services report shows that decisions to deprivatize public services have triggered at least 20 international arbitration cases (ten in the water sector, four in telecommunications, and three each in energy and transport). For example, Veolia challenged the decision of Vilnius and other local authorities to remunicipalise district heating, suing Lithuania for €100 million under the France-Lithuania Bilateral Investment Treaty.
Argentina has been ordered to pay a whopping $320.8 million to a foreign investor for renationalising its air transport. These uncapped amounts require populations to pay for failed privatizations, placing a significant burden on public finances that would have been far better spent on infrastructure and lower tariffs.