The perpetuum mobile of privatisation

Privatisation is a truly fantastic thing. Privatising public services would result in four benign consequences, we are told: (1) the production of services becomes more efficient and, therefore, cheaper; (2) the quality of the services is improved; (3) the cost of services for the consumer is reduced; and (4) companies providing these services can still make a profit. And this all as a result of private services being subject to the competitive pressures of the free market. Like a perpetuum mobile, a hypothetical machine which continues to function once activated, privatization would have an inevitable and continuing positive impact once implemented. In this post, I will critically evaluate these claims against the background of my research on the Italian water movement against privatisation (see Road to Victory and La lotta continua) and discuss why it is that this discourse continues to enjoy such widespread acceptance, although it is empirically so obviously wrong.

Privatising water in Italy – the empirical developments on the ground.

Water privatisation in Italy started in the late 1990s, early 2000s especially in the region of Tuscany but also some other locations in central Italy. Suez arrived in Arezzo in 1998 and in Firenze in 2001. In 1999, Veolia bought a stake in the water company in Aprilia in the region of Lazio. Almost immediately upon privatisation, prices for consumers increased drastically, while investment in the maintenance of infrastructure went down. As one of my interviewees told me, the price for water in Arezzo is now four times as high as in Milano, where water services are still run by a publicly owned company. Less investment in infrastructure, in turn, undermines the quality but also efficiency of managing water provision in the future.

Privatisation in other areas and countries have also taught us that they generally come hand in hand with downward pressure on wages and working conditions of these companies’ employees. As a result of the privatisation of some units of the National Health Service (NHS) in the UK, for example, pension benefits have been cut and salaries eroded, resulting in a two-tier workforce in the health system overall, with employees in the privatised part being employed on inferior conditions to employees in the public part. Of course, it is only a matter of time until the currently better conditions of the latter will be assimilated to the conditions in the private sector as a result of market competition.

In short, these fantastic, mysterious benefits of the perpetuum mobile of privatisation do not materialise in reality. Why is this?

The objective of capitalism: profit maximisation.

In the capitalist social relations of production, it is not only workers, which reproduce themselves through the market, but also employers, capital. They are in constant competition with other capitalists for market share. Should they be unsuccessful, they will go bankrupt. It is this constant competitive pressure, which makes capitalism such a dynamic production system, but also implies that it is prone to periodic crises as a result of overaccumulation (David Harvey), a situation when no further profitable investment opportunities can be found for the re-investment of profits from past business dealings.

Photo by Adolfo Lujan

Importantly, the purpose of making profits is not to satisfy any specific needs of capitalists. Despite of all the fancy cars, luxurious yachts and expensive houses individual capitalists may buy themselves, they will never be able to use up all the profits in their own private consumption. They are simply too high and this not only for the 400 richest people in the world. Instead of private consumption, profits constantly have to be re-invested in order to generate yet further profits and, thus, stay ahead under the pressures of capitalist competition. The type of production, in which profits are invested, does not matter. Money is used to generate yet more money. This is the current problem. We are in a situation of overaccumulation, in which the enormous amounts of private wealth in the global economy find it increasingly difficult to establish new opportunities for profitable investment. And this is the moment, when the privatisation of public services comes in.

The provision of certain public services such as education and health, water and energy, is the responsibility of the state in industrialised, developed countries. The privatisation of the production of these services has not implied to date that the state would give up on this responsibility. In fact, states have set up regulatory agencies to oversee the private production of services, as it occurred in the case of water in Italy, when a regulatory agency was established to set the tariffs for the whole industry. And it is this state responsibility, which makes the privatisation of services like water such an attractive investment opportunity for capital. At times, when the global economy is in crisis, investing in services provision, with profits guaranteed by the state and state bailouts ensured should anything go wrong, promises super profits, when any other investment opportunities have dried up. It is profit maximisation, which drives privatisation, and not the efficiency and quality of the services provided. The latter is simply the discourse with which privatisation is justified. 

As the case of water in Italy demonstrates, profits cannot only be reaped through increasing the price for water or reducing the investment into infrastructure maintenance. As I was told in interviews with activists from the water movement, there were clear instances of cartel formation, when two consortiums were both bidding for the contracts in two different areas and withdrew shortly before the conclusion of the competitive tender in one area each, ensuring that both of them secured one contract without the public authorities having been able to engage in any meaningful negotiations about the contents of the contract. Moreover, the contracts for infrastructure maintenance, which privatised water providers do put out, often end up with subsidiaries of these private providers.

Why do public authorities then carry out privatisations considering that the assumed benefits are simply not materialising in reality?

The power of capital

Photo by freestyle

The privatisation of water in Italy, as privatisations of services in general elsewhere in the world, is driven by powerful transnational corporations, which put enormous effort and resources into pressuring and convincing political authorities about the benefits of privatisation. French industrial giants such as Veolia and Suez dominate the water market and despite their poor record elsewhere in the world also operate in Italy. They maintain close contacts with political decision-makers and it should be no surprise that the Italian regulatory agency responsible for setting water tariffs has had meetings with Suez, which is involved in a number of Italian water companies (see La lotta continua).

Nevertheless, it is also the structural power of large TNCs and their ability to threaten governments with the moving of production facilities or the withdrawal of investment, should they not pass legislation facilitating TNCs’ operations. Especially in times of economic crisis, when the situation is already bad, pressure of this type weighs heavily on the minds of decision-makers.

And finally, if individual governments are not privatising themselves voluntarily, they may be forced to do it. In the past, it had been the IMF’s and World Bank’s conditionality programmes, which had forced developing countries in Africa and Latin America to open up to foreign investors. The current Eurozone crisis is now used by the Troika of European Commission, European Central Bank (ECB) and IMF to enforce privatisation on countries in the periphery including Greece and Portugal. Italy too came under pressure. In August 2011, Jean-Claude Trichet, the then President of the ECB, and Mario Draghi, who succeeded him in November 2011, urged ‘“the full liberalisation of local public services … through large scale privatisations”, ignoring the fact that 95.5 per cent of Italian voters had rejected the privatisation of local water services in a valid national referendum less than eight weeks earlier’ (Erne 2012: 229).

The possibilities of resistance

And yet, the Italian water movement has also provided hope and inspiration that privatisation is not inevitable, but can be challenged successfully (see Road to Victory). It has demonstrated that it is possible to bring broad alliances of different groups together in one movement and to mobilise large amounts of people in this process.

And it may be the discourse around the commons, collectively owned and administered by the people, which may provide a basis for challenging the discourse of the perpetuum mobile of privatisation.

Prof. Andreas Bieler

Professor of Political Economy

University of Nottingham/UK

Andreas.Bieler@nottingham.ac.uk

Personal website: http://andreasbieler.net

7 May 2014