“Public Good” and “Profit Motive” Don’t Mix
Looters Turn Public Goods and Services into Private Profit
By Paul Bucheit
Buzzflash at Truthout, Jun2 30, 2012
The privatization of public goods and services turns basic human needs into products to buy and sell. That’s more than a joke, it’s an insult, it’s a perversion. It generally benefits only a privileged group of businesspeople and their companies while increasing inequality and undermining the common good.
Various studies have identified the ‘benefits’ of privatization as profitability and productivity, efficiency, wider share ownership and good investment returns. These are business benefits. More balanced studies consider the effects on average people, who have paid into a long-established societal support system for their schools and emergency services, water and transportation systems, and eventually health care and retirement benefits. These studies have concluded that:
Privatization has generated large profits for new owners but these have not been shared with the general public. The potential benefits of privatization are often outweighed by high contracting costs and opportunism.
Most privatization programs appear to have worsened the distribution of assets and income, at least in the short run. While privatization may lead to efficiencies in producing goods, it is generally only true under conditions of competition and regulation. The New Jersey Privatization Task Force asserted that “States that have had the most success in privatization created a permanent, centralized entity to manage both privatization and related policies aimed at increasing government efficiency.”
In the U.S. and around the world, privatization has simply not worked in industries that provide essential public goods and services:
The notion that the public school system needs to be ‘saved’ by charter schools is not supported by the facts. A Stanford University study “reveals in unmistakable terms that, in the aggregate, charter students are not faring as well as their traditional public school counterparts.” A Department of Education study found that “On average, charter middle schools that hold lotteries are neither more nor less successful than traditional public schools in improving student achievement, behavior, and school progress.”
Charter schools also can take money away from the public system, and their teachers have fewer years of experience and a higher turnover rate.
Our private health care system has failed us. We have by far the most expensive system in the developed world. The cost of common surgeries is anywhere from three to ten times higher in the U.S. than in Great Britain, Canada, France, or Germany.
Everyone has their hand in the money pot: insurance companies, pharmaceutical firms, physicians, hospitals, the AMA, lobbyists. But 50 million Americans can’t afford the price of health insurance.
Medicare, on the other hand, which is largely without the profit motive and the competing sources of billing, is efficiently run, for all eligible Americans. According to the Council for Affordable Health Insurance, medical administrative costs as a percentage of claims are about three times higher for private insurance than for Medicare.
Banking and finance are largely responsible for the mortgage crisis, the largest private failure in history. The public need for home value security, especially among low-income people whose homes were their only source of wealth, gave way to corporate greed. Estimates for bailout funds from the Treasury and the Federal Reserve range between $3 trillion and $5 trillion.
The industry is bloated with deceit and depravity. Financial insiders have figured out how to cheat other investors by fixing interest rates, creating sure-to-fail financial products, timing the purchase of a stock option to precede good corporate news, or timing the sale of a stock option to precede bad corporate news.
Hope for the future has surfaced in public banks, such as the Bank of North Dakota, which prioritize loans for small business, sustainable agriculture, worker-owned coops, renewable energy, and other “people-oriented” needs.
Corrections Corporation of America has offered to run the prison system in any state willing to guarantee that jails stay 90% full. “This is where it gets creepy,” says Business Insider’s Joe Weisenthal, “because as an investor you’re pulling for scenarios where more people are put in jail.”
This push for privatized prisons is occurring at a time when almost half of the inmates in federal prisons are jailed for drug offenses, and when African Americans constitute 53.5 percent of all persons who entered prison because of a drug conviction.
Studies show that private prisons perform poorly in numerous ways: prevention of intra-prison violence, jail conditions, rehabilitation efforts. A 10-month investigation by the New York Times concluded that “the state’s halfway houses have mutated into a shadow corrections network, where drugs, gang activity and violence, including sexual assaults, often go unchecked.” Yet New Jersey Governor Chris Christie insisted that “Places like this are to be celebrated.”
The U.S. Department of Justice offered this appraisal: “There is no evidence showing that private prisons will have a dramatic impact on how prisons operate. The promises of 20-percent savings in operational costs have simply not materialized.”
Water and Other Utilities
How’s this for a profit incentive? Nestle buys water for about $.00008 per gallon, and sells it back at a rate 127,000 times higher.
The vital human resource of water is being privatized and marketed all over the country. In Pennsylvania and California, the American Water Company took over towns and raised rates by 70% or more. In Atlanta, United Water Services demanded more money from the city while prompting federal complaints about water quality. Shell owns groundwater rights in Colorado, oil tycoon T. Boone Pickens is buying up the water in drought-stricken Texas, and water in Alaska is being pumped into tankers and sold in the Middle East.
A 2009 analysis of water and sewer utilities by Food and Water Watch found that private companies charge up to 80 percent more for water and 100 percent more for sewer services.
The horror stories go beyond water, to roads and parking facilities and school buses. Chicago surrendered its parking meters for 75 years and almost immediately faced a doubling of parking rates. California’s experiments with roadway privatization resulted in cost overruns, public outrage, and a bankruptcy; equally disastrous was the state’s foray into electric power privatization. In Pennsylvania, an analysis of school busing by the Keystone Research Center concluded that “Contracting out substantially increases state spending on transportation services.”
Blackwater, which renamed itself Xe, and then ACADEMI, to repress bad memories, is the most obvious example of military contract failures. The company, which landed contracts worth almost a half-billion dollars between 2004 and 2006, became infamous for abuses at the Abu Ghraib prison near Baghdad, the shootings of 17 Iraqi civilians in 2007, and years of fraudulent billing at U.S. taxpayer expense.
A study by the Commission on Wartime Contracting found that “as much as $60 billion…has been lost to contract waste and fraud in America’s contingency operations in Iraq and Afghanistan.”
Privatization around the World
Where to start? Perhaps with the suicides in India after Monsanto’s GM crops destroyed the livelihoods of small farmers, or the suicides in Apple’s Foxconn factory in China, or the suicides in France after massive job cuts and harassment of employees at France Telecom.
Or with the takeover of water rights by Bechtel in Bolivia and Coca Cola in India and Mexico, and the exploitative profitmaking on water in Australia and Argentina and South Africa and numerous other countries.
Or with the too-rapid privatization of a ‘liberated’ Russia in the early 1990s, which led to a degree of inequality that literally shortened the lives of citizens; and similarly in Mexico when NAFTA’s concessions to big agribusiness doomed as many as a million small Mexican farmers, many of whom came to the U.S. searching for work.
Or with the privatized rail system in London, where the profit-seeking companies chose financial managers instead of railroad managers to run the trains, and where “profiteering” with public money caused failed hospital projects in the UK and Canada, numerous other mismanaged projects in Canada, and most recently the private security debacle at this year’s Olympics.
Or with the textbook case in Latin America, which experienced a surge in inequality after the imposition of neoliberal IMF and World Bank policies in the 1980s, and then an equally dramatic decrease in inequality after the “Washington consensus” was scrapped in the late 1990s.
As summarized by the UN’s International Policy Centre, “Privatisation has failed on several counts…the focus of investors on cost recovery has not promoted social objectives, such as reducing poverty and promoting equity.” Policy Dialogue adds the reminder that the most prosperous countries in recent years – China, India Vietnam – have relied on millions of small enterprises rather than a large-scale privatization policy.
The League of Women Voters takes the position that “Privatization is not appropriate when the provision of services by the government is necessary to preserve the common good, to protect national or local security or to meet the needs of the most vulnerable members of society.”
President Obama helps us understand the business point of view: “If you’re a head of a large private equity firm or hedge fund, your job is to make money…It’s not even to create a successful business — it’s to make sure that you’re maximizing returns for your investor.”
“Public good” and “profit motive” don’t mix. It’s a cruel joke to put them together, except in the distorted world of people who view the needs of society as products to be bought and sold.
5 Ways Privatization Is Ruining America
We spend lifetimes developing community assets, then give them away to a corporation for lifetimes to come.
By Paul BuchheitAlterNet
, August 13, 2012
A grand delusion has been planted in the minds of Americans, that privately run systems are more efficient and less costly than those in the public sector. Most of the evidence points the other way. Private initiatives generally produce mediocre or substandard results while experiencing the usual travails of unregulated capitalism -- higher prices, limited services, and lower wages for all but a few 'entrepreneurs.'
With perverse irony, the corruption and incompetence of private industry has actually furthered the cause of privatization, as the collapse of the financial markets has deprived state and local governments of necessary public funding, leading to an even greater call for private development.
. . . .
1. We spend lifetimes developing community assets, then give them away to a corporation for lifetimes to come.
The infrastructure in our cities has been built up over many years with the sweat and planning of farsighted citizens. Yet the dropoff in tax revenues has prompted careless decisions to balance budgets with big giveaways of public assets that should belong to our children and grandchildren.
. . . .
2. Insanity is repeating the same mistake over and over and expecting different results.
Numerous examples of failed or ineffective privatization schemes show us that hasty, unregulated initiatives simply don't work.
. . . .
3. Facts about privatization are hidden from the public.
Experience shows that under certain conditions, with sufficient monitoring and competition and regulation, privatization can be effective. But too often vital information is kept from the public.
. . . .
4. Privatizers have suggested that teachers and union members are communists.
Part of the grand delusion inflicted on American citizens is that public employees and union workers are greedy good-for-nothings, enjoying benefits that average private sector workers are denied. The implication, of course, is that low-wage jobs with meager benefits should be the standard for all wage-earners.
. . . .
5. Privatization often creates an "incentive to fail."
Privatized services are structured for profit rather than for the general good. A by-product of the profit motive is that some people will lose out along the way, and parts of the societal structure will fail in order to benefit investors.
. . . .
In too many cases, privatization means success for a few and failure for the community being served.
Let’s NOT Privatize the US Postal Service
The chutzpah of a former OMB director turned Citigroup profiteer
By David Morris
If chutzpah is killing your parents then throwing yourself on the mercy of the court because you’re an orphan then Peter Orszag is the poster child for chutzpah. In his recent article
in Bloomberg News he insists the best fix for the post office is to take it private. Where does the chutzpah come from? Orszag was Director of the Office of Management Budget (OMB), an agency that played a key role in crippling the USPS with a manufactured financial crisis.
Here’s the back-story. In 1970, after almost two centuries, the Post Office was transformed from a Cabinet agency to the quasi-independent US Postal Service (USPS). In keeping with its new status, Congress eventually moved its finances off budget. Yet, as I’ve discussed before
, the OMB and the Congressional Budget Office (CBO) ignored Congress and continued to include the USPS in the unified budget, the budget they use for “scoring” legislation to estimate its impact on the deficit.
Fast forward to 2001. The Government Accountability Office put the Postal Service on its list of “high-risk” programs because of rising financial pressures resulting from exploding demand from both the residential and commercial sectors. Then in 2002 the anxiety level fell dramatically when the Office of Personnel Management found the Postal Service had been significantly overpaying into its retirement fund.
It seemed a simple matter to reduce future payments and tap into the existing surplus to pay for current expenses. And would have been if the OMB and the CBO did not insist on adhering to their make-belief accounting system.
Several times between 2002 and 2005 Congress did overwhelmingly approved tapping into the existing surplus. Each time the White House nixed the idea because it would increase the deficit.
Finally, in 2006 the Post Office and Congress agreed to literally buy off the CBO and OMB. Budget neutrality over a ten-year period was achieved by requiring the USPS to make ten annual payments of $5.4-5.8 billion. The level of the annual payments was not based on any actuarial determination. They were produced by the CBO to equal the amounts necessary to offset the loss of the escrow payments. Under the Postal Accountability and Enhancement Act of 2006 the USPS was forced to prefund its future health care benefit payments to retirees for the next 75 years in ten years, something no other government agency or private corporation is required to do.
The Postal Regulatory Commission noted that those payments “transformed what would have been considerable profits into significant losses.” Indeed, 90 percent or more of the current deficit is a result of these artificially created debts.
The Post Office is indeed in a financial crisis, but not one of its own making.
Enter Peter Orszag who still subscribes to the make believe world created by his old agency. His article lists three problems the USPS faces. The artificial debt is not among them. He lists three counterarguments people might use to oppose privatization. The artificial debt is not among them.
A real world solution to the USPS fiscal crisis would be to remove the artificially generated financial noose from its neck and then build on its two most important assets: its ubiquitous physical infrastructure and the high esteem in which Americans hold it. In combination, these assets offer the post office an enviable platform upon which to generate many new revenue-producing services.
But for Peter Orszag the solution is to ignore the fraudulent financial burden imposed on the USPS and sell off and dismantle its ubiquitous infrastructure. “In addition to its 32,000 post offices, it has 461 processing facilities
, monopoly access to residential mailboxes and an overfunded pension plan,” he writes. “These assets would attract bidders. Consider, for example, that many processing facilities and post offices sit on valuable real estate, and it may be smarter to sell many of them than to keep them.”
Did I forget to mention that Peter Orszag is currently vice chairman of corporate and investment banking at Citigroup? Citigroup certainly be in the running to oversee the privatization of the post office, a process that would generate tens of millions of dollars in fees and undoubtedly handsomely benefit Mr. Orszag personally. Now that’s chutzpah.
Background and Statement of the Issue
Living in Michigan for the past twenty two years I have heard the question asked more than once: can anyone really own water? Ownership of natural resources is not a new concept. While ownership entails exclusive rights to that which is being owned, it does not necessarily exclude people.
Privatization of water resources is a trend of the last couple hundred years which generally relates to transferring ownership of business from the public to the private sector. Ownership of water is increasingly becoming privatized. When water becomes privatized it is viewed as a commodity. State and private involvement have not always played such a large role in water services management. Historically water has been controlled and managed by local communities as a common resource (Shiva, 2002).
On one side of the issue privatization is seen as a means for economic growth and progress. Privatization of water resources is seen as a means to protect water resources from the neglect of failing municipal water services. It is thought that without a proper economic value placed on water resources there will be shortages due to abuse of the resource.
On the other side of the issues is the concern that privatization is limiting access of water resources. Communities of people worldwide are lacking adequate water supplies while privatization is allowing for global corporations to profit from local water resources. These global corporations are not tied to any one national boundary and are accused of manipulating and exploiting watershed resources with limited consequence by state law. It is argued that private corporations are given power to abuse human rights while seeking profits in the free market.
The objectives of my research were to explore basic questions about the privatization of water resources. Exploring basic questions I felt would lead me into the heart of the debate over this water issue. I began this process with very limited knowledge. I asked the questions: what is privatization, what is the correlated economic drive, how does it relate to water resources, and why is it controversial? To answer these questions I researched three aspects of water resource privatization: the history of water resource management and privatization, the economic drive behind privatization, and a case study of the Hoover Dam. I reviewed and referenced books, newspaper articles, and online resources to gain the knowledge I needed to begin to understand the issues.
Simply put privatization is the transfer of business from the public sector to the private sector. More specifically; “Privatization is a growing practice by local governments whereby private firms are utilized to deliver public services (Cech, pg 384).” Privatization of environmental resources is a growing trend in neo-liberal capitalist societies. (Harvey, 2005)
So why is privatization of water resources controversial? Some environmentalist ask the questions: “Who does water belong to? Is it private property or a commons (Shiva, pg 19)?” Under the Doctrine of Prior Appropriation the old saying goes first in time, first in right. The ESA 324 course text poses the question: “Should water resources be viewed as a public good or a private good (Cech, pg 383)?” Many people argue that water rights should not be bought and sold by private companies on the free market.
Water Allocation Laws have been developed over centuries by many civilizations. Allocation laws have been put in place to regulate and promote economic development, public health, and environmental protection. How services are regulated is greatly debated. There are two main foundations for the world’s water allocation laws; the Riparian Doctrine and the Doctrine of Prior Appropriation.
I must state that bias in this paper lean toward the Riparian Doctrine which is a landowner perspective rather than the concept of water as a private property right, such as the Doctrine of Prior Appropriation. The researcher’s bias is based on a deep spiritual belief in Midewiwin (Medicine Society of the Anishnabe). The researcher’s bias is also a result of an understanding of earth democracy, watershed management, forest and wildlife ecology, and agro-ecology. Overall the researcher is bias towards a permaculturalist approach to water resource management.
Analysis of the Issue
In the Water Resources Development Act of 1986 the eight Great Lakes States and two Canadian Provinces declared that the Great Lakes are their most important natural resource (WRDA, 1986). Some people may argue that water is the most important natural resource on earth. Water is an essential element for all of life. Humans cannot survive without water every day of their lives. To deprive them of water is a violation of their human rights (UN Declaration of Human Rights). In 1972 the United States of America passed the Clean Water Act which established that everyone has a right to clean water. These regulations are examples of public control over water resources.
When water resources are viewed as a public good all people have the right to the use of water (Cech, 2005). Historically water has been managed locally as a common resource (Shiva, 2002). The Doctrines of Riparian Rights and Common Law were practiced for centuries by peoples all over the globe (Cech, 2005). Community control ensured sustainability of local water resources through local governance. Community control suffered when states partnered with private companies and took control over water (Shiva, 2002).
“When water is viewed as a private good it is to be developed, used, traded, and sold for economic and financial gain (Cech, pg 384).” Arguments for privatization have been based on the poor performance of public sector utilities (Shiva, 2002). Although poor public performance is usually due to the utilities lack of accountability, but there is no indication that private companies are more accountable (Shiva, 2002). Private companies often violate operation standards and engage in price gouging with no consequence (Shiva, 2002). A benefit of privatization is that it reduces direct cost of the state upfront.
The transitions of power between local and federal control of water resources development and management alternate from a riparian doctrine to a doctrine of prior appropriation. American Water Law rapidly changed during the 1800’s. Water was viewed as a private good by cowboys and gold miners. The Ancient Riparian Doctrines used for centuries by indigenous inhabitants in the arid western states was replaced by “Cowboy Economics”. The Doctrines of Prior Appropriation were enforced by the state. This protected private companies and individuals seeking a claim and profit by exploiting water resources.
In the American west acquisition by the state of water rights has eroded community control of water resources. State and private corporations collaborated in the early 1900’s to build dams, aqueducts, and generally control water rights. Water projects were generally financed by the public but driven by private corporations, such as the Hoover Dam (Shiva, 2002). These collaborations are referred to as Public-Private Partnerships (PPP). A PPP is a partnership between government and private companies where governments use tax revenue for capital investment while the private companies manage operations. This collaboration is still taking place today.
What are the economic theories driving privatization and who benefits? Water services have traditionally been managed, organized, and produced under social relations. The current trend towards privatization is a neo-liberal capitalist relation to water services. The American water market for water supply and treatment in now estimated at 90 billion dollars the largest in the world (Shiva, 2002). It is easy to see the monetary interest that corporations have for the development of the water market and why states would want to reduce their direct cost of managing water resources.
In the United States water has been viewed as a private good to be used for economic productivity and financial gain since the 1800’s (Cech, pg 384). Water has now become a commodity of the free market. The course text states that: “many of the world’s water shortages occur because we do not place proper economic value on water supplies (Cech, pg, 383).” The idea behind this is that underpriced water services result in inefficient and wasteful practices (Cech, 2005).
Although Shiva argues that: “higher prices under free market conditions will not lead to conservation (Shiva, pg 31).” An ecological perspective is needed for the conservation of water resources. This would include local peoples in the planning and decision process of water projects. Political boundaries would coordinate with environmental boundaries such as watersheds.
Neo-liberal economics sometimes referred to as “cowboy economics” places water rights in the hands of private companies and the state. “Neo-liberalism tends to reinforce and celebrate strong private, individual, and exclusive property rights (Heynen, Nik, James McCarthy, Scott Prudham, and Paul Robbions, 2007).” Neo-liberal Economics is a major drive in the privatization of water resources.
Case Study: Hoover Dam
The Hoover Dam was commissioned by the Bureau of Reclamation during the Great Depression. The Bureau of Reclamation is largely responsible for the economic development of the Western United States through water projects. The primary beneficiary of the Hoover Dam Project is the state of California. Water from the dam is transferred in a 242 mile aqueduct from the Colorado River Basin.
The dam marked the era of partnership between government and corporations in control over water. Six private companies were awarded the bid for the Dam construction and design. The Colorado River Compact, which approved the dam, excluded local governments and communities (Shiva, 2002). Native Americans who had been living in the Colorado River Basin for centuries were completely excluded from the decision to dam the river. The state of Arizona refused to ratify the compact because it was considered to be a theft of the state’s natural resources.
Although California comprises less than 2% of the Colorado basin, the state now uses ¼ of the basin’s water, much of which goes to big farms that export most of their crops. Continually, the state of California leads the world in water consumption. (Shiva, 2002)
The Colorado River Compact is an appropriation of the Colorado River System by the states of Arizona, California, Colorado, New Mexico, Utah, and Wyoming. This is an example of an interstate compact, a binding agreement between states, ratified by the U.S. Congress. Governors of upper and lower states within the compact are given powers to override community efforts.
Water Allocation Law has become many Acts by the U.S. Congress to allow states to privatize water resources. The Colorado River Compact has depleted a once sustainable water resource. Towards the end of the compact you will read a rather contradictory statement. “Nothing in this compact shall be construed as affecting the obligations of the United States of America to Indian tribes (Article 7, Colorado River Compact).”
“Water is a commons because it is the ecological basis of all life and because its sustainability and equitable allocation depend on cooperation among community members (Vandana Shiva, 2002).”
In conclusion, privatization of water resources often limits the access of water to local communities and depletes local water resources while allowing global corporations the ability to profit. Water resources that are managed and controlled as a public good rather than a private good often give communities access to local water resources and promotes water conservation.
I recommend that states give local communities more power to regulate and control water resources rather than corporate businesses. I recommend using Riparian Doctrines to develop a bioregional approach to water resource management. States should assist communities in watershed management plans to decide best how to manage and use water resources. Having primarily local governance over water resources communities can invest in indigenous knowledge and community control of water resource management. I suggest that states promote local and indigenous, when appropriate, water technologies for agriculture, water supply, and treatment.
2. Barlow, Maude. Blue Covenant The Global Water Crisis and the Coming Battle for the Right to Water. New York: New P, 2008.
4. Cech, Thomas V. Principles of water resources history, development, management, and policy. Hoboken, NJ: John Wiley & Sons, 2005.
6. Harvey, David. A Brief History of Neoliberalism. Oxford: Oxford UP, 2005.
7. Heynen, Nik, James McCarthy, Scott Prudham, and Paul Robbions, eds. Neoliberal Environments. New York: Routledge, 2007.
9. Shiva., Vandana. Water Wars Privatization, Pollution, and Profit. New York: South End P, 2002.
Vulture Capitalists Descend on Public Water Supplies in the US
Wall Street Tightens Grip on Public Water as Local Residents Suffer
Investment bankers and other major financial players are increasingly swooping in on public water utilities and other municipal services in cash strapped towns to the detriment of local residents, according to a new report released today by advocacy group Food & Water Watch
. Vulture capitalists are increasingly facilitating the privatization of public infrastructure, taking control of public utilities while skimping on services and causing steep price hikes — all the while making massive profits.