PRIVATIZATION REDUCES THE FISCAL BURDEN?
By Heather Whiteside
Revenue-challenged states around the world often turn to public-asset sales as an easy way to pay down debt and balance the books. Auctioning off revenue-generating, state-owned enterprises and infrastructure to reap one-time, lump-sum payments is not only a desperate maneuver; it is also short-sighted and counter-productive in the long run. Whether it is Greece selling its airports, harbors or telecommunications systems at fire-sale prices, to meet the repayment demands of the ‘troika’ (the European Commission, the European Central Bank and the IMF), or less fiscally-troubled states, such as Canada, engaging in ideologically-motivated privatization efforts, the notion that privatization reduces fiscal burdens for the state can be challenged on three fronts. Asset sales cut into state revenues, corporate welfare endures in areas of strategic importance and privately-financed public works are often poor value for money.
Canadian examples are drawn on here. It is a country with decades of neoliberal- and austerity-inspired privatization, at multiple levels of government, yet it has also retained a mixed economy with government involvement in public infrastructure, as well as in the delivery of other public goods. As such, Canada offers examples of how public ownership can benefit a modern capitalist economy, and provides a cautionary tale of how privatization can lead to higher costs and lower revenue for government.
Myth: privatization reduces fiscal burden; reality: asset sales cut revenue streams
In a University of Calgary School of Public Policy research paper of 2012, ‘The role of crown corporations in the Canadian economy’, Iacobucci and Trebilcock, two law professors, summarize the privatization urge as being ‘when either the rationale for government involvement no longer exists … or when privatization … has been identified as better fulfilling the government’s policy objectives’. Austerity objectives, such as paying down debt through one-time, lump-sum payments via privatized public assets, have frequently dominated ‘government policy objectives’ and provide the ‘rationale’ needed to end public ownership. Ideologically-motivated asset sales may be a boon for private investors but are often a bust for government.
For example, under the aegis of austerity, in 2012 British Columbia’s provincial government sold 101 government properties to balance the budget, through its Release of Assets for Economic Generation plan. Six years later, the auditor general found that these assets were undervalued by upwards of two-thirds, concluding that government ‘should have done more to assess the costs and benefits of selling versus holding surplus assets prior to their sale’. Essentially government was targeting upfront revenue rather than long-run economic activity and cost savings.
Ontario, Canada’s largest province by population and income, has the largest subnational debt burden in the country, approximately C$350 billion. In December 2018, the credit-rating agency Moody’s downgraded Ontario’s debt to Aa3 stable (from Aa2 stable), citing not only high debt and low growth but also cuts to revenue associated with austerity- and privatization-related maneuvers. While excessive public debt should be a concern for any government, this can be addressed not only through austerity cuts and asset sales but also through new revenue sources. For example, with cannabis recently legalized nationally, the Ontario Cannabis Store—a dividend-remitting, government-owned company—is now the legal pot dealer in the province, and society is anticipated to profit from this multi-billion-dollar market.
Myth: privatization reduces fiscal burden; reality: corporate welfare is rampant in strategically important sectors
Privatization does not necessarily mean fewer financial burdens for government in strategic areas of the economy. Once a state-owned enterprise, for Air Canada privatization has been a financial disaster. Despite slashing jobs, cutting unprofitable routes and increasing fares, Air Canada required bankruptcy protection in 2003. And privatization has yet to signify an end to public financial support: in July 2009 the company received a C$250 million bailout from the federal government.
Likewise, in the important auto sector, public bailouts have led to a socialization of private debt. In December 2008, Ottawa and the province of Ontario announced they would provide GM and Chrysler with short-term repayable loans. By April 2015, reporting in the Globe and Mail assessed that ‘Canadian taxpayers will fall about $3.5-billion short of breaking even on the money the federal and Ontario governments invested in the bailouts’. More recently, in October 2018, the Canadian Broadcasting Corporation uncovered that ‘the [federal] government has quietly written off a $2.6-billion auto-sector loan that was cobbled together to save Chrysler during the 2009 global economic meltdown. The write-off [is] among the largest ever for a taxpayer-funded bailout …’
Myth: privatization reduces fiscal burden; reality: privately financed public works offer poor value for money
Over several decades, the Canadian federal government has incrementally withdrawn from public capital investment and the ownership of public capital stock. As the economist Hugh Mackenzie showed in his 2013 report for the Canadian Centre for Policy Alternatives, Canada’s Infrastructure Gap, in 1955 the federal government owned 44 percent of the Canadian public capital stock but by 2011 its share had dropped to 13 percent. As early as 2004, groups like TD Economics and Deloitte began pushing public-private partnerships (PPPs) as a ‘solution’ to the infrastructure gap. PPPs emerged in the 1990s as neoliberal ‘build now, pay later’ schemes, aimed at carving out markets for profit-making from private involvement in public-sector projects.
While the model has long been used, and widely criticized for its high cost and scandalous track record around the world, in the post-2008 context of very low prime rates, institutional investors—pension funds, mutual funds, insurance companies and so on—renewed the push for PPP investment, given its relatively low-risk, high-reward profile. And once again McKinsey, BlackRock and other finance-industry beneficiaries pressed the ‘infrastructure gap’ as one that had to be filled through PPPs, particularly in the context of post-2010 austerity (ignoring the reality that private financing must be paid back by government through taxes or by the public directly through user fees).
PPPs however offer poor value for money and have not performed as promised, a situation detailed in my recent books Purchase for Profit and About Canada: Public-Private Partnerships. Private finance is more expensive, PPP procurement involves complicated and lengthy negotiations, and project needs are often supplanted by profit necessities. A great many of the more deleterious aspects of privatization are also denied, downplayed or ignored by proponents, such as their impact on local control, democracy, unionization and service quality.
The 2018 bankruptcy of the global PPP infrastructure services giant Carillion provided a painful example of how problematic the privatization of public services can be. It was also instructive. In October 2018, the UK, home of the Private Finance Initiative (PFI), abolished its PPP program, in large part due to the Carillion debacle and the mountain of PFI debt now strangling UK authorities. As the chancellor, Philip Hammond, put it, ‘I remain committed to the use of public-private partnership where it delivers value for the taxpayer and genuinely transfers risk to the private sector. But there is compelling evidence that the Private Finance Initiative does neither … I have never signed off a PFI contract as chancellor and I can confirm today that I never will.’