Corporate profits through public subsidies
The sales pitch for privatization usually stresses savings for the public treasury. Yet mounting evidence from privatization experiments shows that promised savings are more apparent than real. Costs may shift from one budget line to another but in the end taxpayers and government still foot a much higher bill.
For corporate interests its the perfect deal: low-risk, high-return ventures with guaranteed funding and little in the way of public accountability.
Tax dollars are still collected and spent. The dramatic difference is that public control over that spending is slipping into the hands of corporations and investors, converting public funds into private capital.
Deals shrouded in secrecy are a hallmark of many private takeovers of public services. Yet the results are very public. Auditors general and other accountability watchdogs across the country are unearthing case after case of PPPs and privatization efforts that have ended up as enormous drains on the public purse.
An inherent flaw of privatization is the high cost of private financing. Governments can borrow at lower interest rates, making public financing far cheaper. The most recent report of the New Brunswick auditor general concludes that two flagship public private partnerships failed to deliver on promised savings in large part due to ballooning borrowing costs. The high price of private credit accounted for nearly half of the $899,639 more it cost the private sector to finance and build Monctons Evergreen School. Costly credit also helped drive up the price by $404,379 for U.S.-based Wackenhut Corrections Corporation to build the Miramichi youth detention facility. Public opposition in light of the abysmal track record of American prison corporations had already forced the province to cancel plans for Wackenhut to operate the facility.
Hastily struck deals are also common. Several lease-back schools are already under construction in Nova Scotia, yet leases with the government have not yet been signed. Andersen Consulting worked at restructuring New Brunswicks welfare system for over a year without a signed contract. The New Brunswick government also cancelled a failed overhaul of the provinces tax collection system that had begun without a signed contract with an IBM-led consortium, at a cost of $10 million. Unsigned contracts pave the way for costs to skyrocket or private partners to simply walk away from a project.
Many private ventures cost far more to provide the same service, leaving no logical explanation for privatization. The New Brunswick privatized toll highway is a prime example. The province is privatizing this 195km stretch of the Trans-Canada highway to a multinational consortium at a cost to the taxpayers of $2 billion. Under the privatized scheme, highway operation and maintenance will cost $5 million more per year than if provincial highway workers did the job directly. The government will pay to lease back land it used to own, and assumes all of the financial risk of the Maritime Road Development Corporation a dangerous aspect of many public private partnerships. By all accounts it would be far cheaper for the government to maintain ownership and control of the road once construction was complete.
Out-of-control costs have the Ontario government under fire for a $180 million social assistance reform deal with Andersen Consulting. According to the Ontario auditor general, the province hadnt looked first to its own in-house resources and was unable to show the Andersen deal was cost-effective. The deal price tag ballooned from Andersens original estimates of $50 to $70 million. The project had lax spending controls, with the province failing to get receipts for the bulk of Andersens $1.4 million in out-of-pocket expenses. The auditor general criticized the balance of the independent council established to oversee the project, noting the presence of an Andersen partner in the absence of a government representative could be perceived as a conflict of interest.
Many expenses dont show up until after private companies get their foot in the door. Having underbid public providers to secure a contract, corporations then introduce user fees or increase rates once theyve gained control of a public service. The New Brunswick Evergreen schools 25-year lease commits the province to pay any increase in cleaning and maintenance costs, with no limit on possible increases. The Ontario social assistance agreement gave Andersen the power to unilaterally charge higher rates during the life of the deal, again without any cap or guidelines. Andersens rates are already an average of six times higher than ministry rates.
A 1996 bid to privatize part of Manitobas home care services by the Olsten Corporation, an American-based transnational, came in far below other private bids and the provinces costs. This led some to speculate the home care giant viewed the contract as a loss leader, with an eye to establishing a beachhead for further privatization in the province. In December 1997, the government announced Olstens one-year contract would not be renewed, having concluded the public system provided better and cheaper care.
While bidding processes lend the illusion of cost-effectiveness, many costs associated with the tendering process and subsequent contract arent factored into comparisons with public sector work. Preparing and evaluating requests for proposals to privatize is a costly process, often involving private consultants and lawyers. Negotiating contracts and leases are sizeable expenses, as are managing contractors and monitoring compliance with quality guidelines. A wide-ranging study of municipal services in Surrey, BC concluded the citys numerous contracted-out services could be delivered cheaper, better and more efficiently by in-house staff, pointing to new layers and styles of management as a hidden cost of handing over services. The study found everything from sidewalk repair to garbage collection to landscaping cost more when contracted out.
Once a service has been handed over to a private company, public agencies soon find themselves without the in-house equipment, infrastructure and know-how to provide the service directly, leaving the public at the mercy of a newly-created private monopoly. While many public services are de facto monopolies, there exists a far higher level of accountability than the cloak of corporate secrecy enveloping private enterprise, shielding them from auditors general and legislation governing access to information. Once a corporation corners the market in a service, they are well-placed to impose new user fees, extract higher service charges from government and cut corners to maximize profit.
The push to privatize often leaves little time to consider the consequences. The Newfoundland and Labrador Housing Corporation didnt factor the tenants into its plans to sell a public housing complex to a private condominium developer. The residents, mainly seniors who had lived at Linden Court for up to 40 years, faced the prospect of buying apartments they had rented for decades. In the ensuing public outrage, the housing corporation offered to buy back apartments at nearly double the sale price, and then rent them to seniors unable or unwilling to take on a mortgage so late in life. The corporation also offered to assume the risk for any resident taking a mortgage. In the final analysis, privatizing the housing complex was about much more than a real estate transaction.
User fees and user-pay systems are often part and parcel of privatization initiatives. This shift from public payment through the tax system to individual payment is inherently inequitable, hurting low-income families in particular. However inequitable the current taxation system, it has far more success redistributing wealth and funding programs than user fees, which consume a disproportionately large portion of low income earnings and limit access to everything from swimming pools and libraries to health care and hockey rinks.
But in addition to these direct charges, taxpayers assume other hidden costs of privatization, including tax breaks available to corporations providing public facilities for profit. For example, corporations building lease-back schools use the capital cost allowance to write off up to 100 per cent of the costs. As a result, the public pays twice: through revenue lost to deferred taxes and then again through government lease and buy-back payments.
The public treasury is also being hijacked in subtler but equally dangerous ways. A growing reliance on corporate and other private charity, rewarded with matching grants and tax breaks, can divert tax dollars from general program funding into narrow areas benefitting the donor more than the public.
As one example, under the federal Canadian Foundation for Innovation, introduced to overhaul aging research infrastructure at post-secondary institutions, provincial, voluntary sector and private donations form at least 50 per cent of total funding with the balance paid from federal funds. Given cash-strapped provincial and voluntary sector budgets, private sector donors can wield considerable sway, directing public money into projects compatible with business, not scholarly pursuits. Wealthy individuals can also wield considerable influence over public funds as highly-publicized donations trigger tax breaks and matching funds.
Taxpayers are also left on the hook for business failures. Public private ventures that guarantee generous profits for investors are likely to be sustained. But when these ventures fail, as in the case of the SkyDome in Toronto, it is the taxpayer who absorbs the loss. Similarly, when corporations merge or fold and public services are left stranded, it is the taxpayer who is left with the bill.
Privatization isnt about saving public money. Its about private interests gaining control of public infrastructure and funds. Its about tax dollars pressed into service for private profit. And its about governments surrendering their role as overseers of the public treasury. As the smoke clears in this game of smoke and mirrors, its obvious the public is much better served by publicly-owned, managed and financed services.