Liberalisation of public services – company reactions and consequences for employment and
working conditions
Jörg Flecker & Christoph Hermann,
Working Life Research Centre (FORBA), Vienna, Austria
Paper prepared for the
28th International Labour Process Conference at Rutgers University,
New Jersey, 15-17 March 2010
1. Introduction
Although the public service sector included a large variety of activities and types of providers as the sector continued to grow during the postwar decades, these providers shared a number of specific characteristics that distinguish them from companies operating in the private economy.[1] First of all, the services were essential for collective welfare, economic development and social coherence, and as such they were considered to serve a broader public interest (Clifton and Díaz-Fuentes, 2008: 26; Mahnkopf, 2009). Secondly, many public service providers were monopoly suppliers. Monopolies existed on the local, regional and national level, mainly to exploit economies of scale, partly for security reasons and partly because of disappointing experiences with private contractors (Clifton, Comín and Díaz-Fuentes, 2003: 23ff; Ambrosius, 2006). Monopoly suppliers were sheltered from competition, but in exchange they were expected to supply all customers in a specific territory. Thirdly, because they operated on monopolistic markets, many public service providers were publicly owned, and even if they were fully or partly in private hands they were subjected to comprehensive and detailed regulation, demanding for particular levels of investments and imposing certain limits on prices and tariffs (Millward, 2005: 288). Price regulation not only imposed limits that providers could charge from their customers, it also made sure that all customers pay the same price for the service regardless of the specific costs of provision (regardless, for example, if a customer lives in a highly populated or a rural area, or of his or her medical history). As a result prices only partly reflected production costs and when revenues did not cover costs providers received additional public subsidies.[2]
As a downside of this development, the pressure to cut costs was weak, fuelling the propensity to add new capacities to solve new problems, instead of redirecting existing resources. On the other hand, accessibility and service quality were not compromised for cost-cutting and profit-making was subordinated to a broader public interest (ibid., 186).[3] This, again, meant that providers had few incentives to expand into other business activities or into foreign markets with the result that foreign ownership played no or only a marginal role in public service provision (Clifton and Díaz-Fuentes, 2008: 24).[4] To some degree the subordination of profit interests was reflected in the management of public service providers, which was primarily oriented towards the establishment of clear, transparent and therefore often bureaucratic rules and procedures, rather than on rapid and flexible exploitation of market opportunities.[5] It certainly was conducive for the emergence of a specific public sector employment regime, characterised by strong trade unions, centralised bargaining, homogenous employment and working conditions and high levels of employment protection (Schulten, Brandt and Hermann, 2008; Hermann and Atzmüller, 2008).
In the United Kingdom since the mid 1980s and in the rest of Europe since the mid 1990s public services have increasingly been liberalised and marketised (Bieling, Deckwirth and Schmalz, 2008; Frangakis et al., 2009). The rationale behind this development is that providers who are exposed to competition will deliver better services at lower costs. Evaluations of liberalisation processes have focused on the impact on prices and partly on certain, quantifiable, efficiency and quality criteria (for one of a several critical assessments see Fiorio, Florio and Doronzo, 2009), but few research has explored how those organisations that provide public services have responded to the introduction of competition and related changes in regulation. Yet as Judith Clifton and Daniel Díaz-Fuentes (2008: 23) have pointed out, “[t]he policies of privatisation, liberalisation and deregulation … have profoundly affected the ownership, management and the overall raison d’être of these public service providers.”
This contribution presents evidence from a series of 23 company case studies from four public service sectors (electricity, postal service, local public transport, hospitals) and six countries (Austria, Belgium, Germany, Poland, Sweden, United Kingdom). The objective of the case study research was to assess changes in management, work organisation, working conditions, training and quality management practices in the respective establishments, to analyse the impact of the regulatory framework as well as the strategies and views of management and labour, and to pay special attention to changes in work organisation, training and worker-participation schemes. The company case studies themselves are based on, between them, 185 qualitative interviews conducted with managers, works council and trade unions representatives and workers.[6] We define case study as a research strategy which focuses on understanding the dynamics present within single settings (Eisenhardt 1989) which, in our case, are public service organisations or companies in the context of liberalisation. Case studies are generally used to investigate a contemporary phenomenon within its real-life context; they are particularly helpful when the boundaries between phenomenon and context are not clearly evident; and they use multiple sources of evidence (Yin 2003). In the case of the research presented in this paper, case studies were used to establish causal links between complex developments both internal and external to the organisation. In turn the interpretative approach helps to understand the actual impact liberalisation and privatisation have on work, employment, productivity and service quality.
The reminder of the article is structured in the following way: The first section deals with company reactions and organisational change. The next section analyses the consequences of liberalisation, privatisation and marketisation in terms of employment, industrial relations and human resource management, followed by a presentation of the changes in work organisation and working conditions. Another section explores the impact on productivity and service quality. The last section contains a brief summary and some conclusions.
2. Market changes, company reactions and organisational change
With liberalisation markets were gradually opened to competition. While in electricity all customers can now choose between two or more providers, in postal services former monopolists included in the survey still enjoy a limited monopoly (for mail weighing 50 grams or less) in Austria, Belgium and Poland, whereas postal markets in Germany and Sweden are fully liberalised. In local public transport the situation is different, as here corporations mostly do not compete for customers but for several-year service contracts. In the hospital sector, too, hospitals only compete for patients under exceptional circumstances. Yet hospitals are increasingly subjected to marketisation processes caused by changes in funding schemes and stagnating public budgets (Pollock, 2009; Hermann, 2009).
Regardless of the duration and intensity of the liberalisation process, overall market changes in the liberalised public service sectors in which the case study companies operate have been modest. Former monopoly providers successfully defended their market positions, while new competitors are struggling to win significant market shares. Exceptions include parcels and express services and the German letter market, where a new competitor challenged the position of the former monopolist but has meanwhile run into serious economic difficulties (Schulten, Brandt and Hermann, 2008). Even in Sweden, where the post market was fully liberalised more than 15 years ago, the former monopolist still holds more than 90 per cent of the letter market (Thörnqvist, 2008). As comparison of market structures in 24 public service sectors show, liberalisation and marketisation were generally more successful in increasing the share of private ownership than in creating highly competitive public service markets (Hermann/Verhoest 2007).
While market changes were modest, public-service companies frequently changed ownership through privatisation and mergers and acquisitions. This is partly reflected in the sample of case study companies. In the electricity sector, all but one of the companies covered by the case-study analysis have changed ownership and all but one as a result are now predominantly foreign owned. If the ongoing merger between the Danish and the Swedish post is successful, only one out of four post incumbent monopolists included in the analysis will still be fully publicly owned. While the examples from the electricity and postal sectors can be generalised due to the limited number of companies in these sectors, in local public transport and the hospital sectors generalisations are more problematic. However, both sectors saw a shift from public to private ownership. Two of the case study companies in local public transport were privatised as a management and employee buy-out and one of these was later purchased by a multinational foreign-based company. In the hospital sector, where hospitals are confronted with increasing financial pressures, two hospitals were privatised, one of which is now owned by a foreign investor the other by a national private hospital chain with overseas investments. The other two hospitals were part of a merger or integrated in a larger hospital group.
Apart from mergers and acquisitions, which in the extreme case let to the creation of national and increasingly even European public service oligopolies, the former monopoly providers have responded to liberalisation by internationalisation – i.e. investing outside their home markets – and by diversification – i.e. investing in related business activities. The two strategies are particularly prevalent in electricity and postal services. One of the post companies included in the sample prides itself on being the leading world logistics and post company and raises a large part of its revenue outside its home market (Brandt, 2008a). The company is no exception. In a number of cases, formerly nationally-bound public service providers have emerged as some of the world’s largest transnational corporations (Clifton and Díaz-Fuentes, 2008; Clifton, Comín and Díaz-Fuentes 2007). The new post competitors are also frequently foreign owned and several of them combine mail delivery with the delivery of newspapers. Electricity companies also diversify supply by combining the provision of electricity with the provision of natural gas. Rather than focusing on diversification, one electricity company has pushed for vertical integration and now generates, distributes and retails electricity, after the electricity value chain was initially broken up through privatisation (Paraskevopoulou and Pond 2008).
Another set of measures introduced by public-service companies in liberalised markets centres on the relationship between the company and its customers. Companies in liberalised public-service markets have allocated increasing resources to advertising and the improvement of customer relations, mainly through the establishment of new customer care call centres. However, while the role and scope of call centre services has been greatly extended, other forms of customer contact, such as walk-in centres have been cut back if not altogether eliminated. Some of the case study companies in the electricity sector have resorted to new and rather aggressive sales techniques and one company has been fined for talking electricity customers into changing their supplier (Paraskevopoulou and Pond 2008). In addition to investing in advertising and introducing new sales techniques, public-service companies have also responded to market challenges by advancing customer differentiation. Large customers can negotiate specific terms of service delivery, including individual prices, while small customers are treated according to general standards and charged standard tariffs. As a result large customers may gain price reductions, while small customers have more than once suffered from price increases after liberalisation and privatisation.[7]
While electricity and postal-services customers can choose between different providers, and the price of the respective service certainly plays an important role in these decisions, in local public transport and the hospital sectors price competition plays only a marginal role if any. Providers in these sectors have very limited influence on prices. Prices instead are set by transport or health authorities. However, in both sectors there is competition in the sense that providers attempt to undercut competitors when competing for bids in public tenders or in the case of hospitals by pushing costs for individual treatments below the lump-sum rates paid by the funding organisations. In fact such forms of competition can be more effective than price competition, because they do not depend on sufficiently competitive markets. In some countries, electricity and post companies have had similar experiences with the regulators, who set mandatory prices for electricity distribution and for post services provided as part of the universal service obligation.
Regardless of the market situation and the nature and degree of competition, all case-study companies report growing cost pressure from the market, the regulator, the funding authority, or, as several trade union and works-council representatives have emphasised, the profit interests of the new private shareholders. And despite the fact that several companies have still managed to increase prices in liberalised public service markets, all of them have responded to liberalisation, privatisation and marketisation by cutting costs. This has mainly been done on three levels: investment in cost-saving technology, restructuring (concentration and outsourcing) and the reduction of labour costs through employment cuts, lower wages and intensification of work.
Apart from adopting the legal form of public limited corporations (in several countries this is even true for hospitals), most public service providers introduced far-reaching organisational changes in response to liberalisation, privatisation and marketisation. Some of them were driven by the implementation of new technology, others by regulatory requirements and again others by the objective of cutting costs. As a result there are two major tendencies that in one form or another have affected most of the case-study companies: the concentration of structures and activities and the outsourcing of certain parts or functions either by contracting with external suppliers or by setting up independent subsidiaries. The latter is particular widespread in the electricity industry, where the regulator has required providers to set up independent business units for generation, distribution and supply.
Several electricity companies, as a result, have set up independent sales departments and call centres, while one company was virtually split into two equal parts (another company was also split up, but the newly created firm is much smaller and has to borrow workers from the sister company). In a similar way, municipalities have responded to legal concerns about the funding of municipal transport systems by converting parts of the service into independent companies (e.g. bus service). The result was the creation of sometimes rather complicated business structures with cross-shareholding among various actors (Brandt, 2008b). In postal services it is the new competitors that often rely on extensive networks of subsidiaries and partners in order to reach into areas where they do not have their own delivery network. In Germany, a major competitor of the incumbent post monopolist was in fact made up by a total of 91 independent firms (Hermann, Brandt and Schulten, 2008: 47).