Improving State Capacity-building / The P3 Paradox 1
Improving State Capacity-building
The P3 Paradox
A presentation by the Confédération des syndicates nationaux (CSN)
OCDE Seminar on Public-Private Partnerships
Zurich
February 21st and 22nd, 2008
Improving State Capacity-building / The P3 Paradox 1
Improving State Capacity-building / The P3 Paradox 1
The Confédération des syndicats nationaux (CSN) – or, in English, the Confederation of National Trade Unions - is the second largest central union organization in Canada. We represent workers in public and private sectors, organized both regionally and in nine sectoral federations: health and social services, higher education, public services (such as municipalities and public transit), communications, pulp and paper, metalworking, commerce and construction. More than 50% of our members are women, and half of our membership works in the public sector. Although largely concentrated in Québec, a province in Canada, the CSN is also present elsewhere in the country, especially in telecommunications, trucking, and federal penitentiaries, where it represents correctional officers.
General context
The last five years have been a period of major transition for public service worldwide. Citing a lack of revenue and public services that are too costly and inefficient, government’s intention was to “re-engineer” the State, with the goal of downsizing the government apparatus. A such, it opened the door to privatization of entire sectors of government by allowing contracting out; by giving the go-ahead to the creation of public-private partnerships (P3s), in reference to the UK’s experience of Private Finance Initiatives (PFIs); and by developing government units for public-private partnerships.
In Quebec, the government has also attacked union organizations by removing the right to organize for groups of health and child care workers, by decertifying unions that had previously been legally recognized, and by imposing working conditions on half a million government employees. P3s are part of a larger strategy which in some countries has become the way to radically influence the role of each public player.
The position of the workers’ union regarding P3s
The CSN and several other global unions are firmly opposed to the privatization of public works and services, and in particular to the expansion of public-private partnerships as a method of financing, managing and operating infrastructure assets and public services. We maintain that the main arguments used by the proponents of P3s – cost reduction and value for money, improving public infrastructure and services, competition, durability of public assets and risk transfer - do not withstand detailed analysis. Furthermore, we also maintain that P3s distance us from the fundamental goal of improving employment and working conditions, democratic governance and State capacity-building. As you can see, we need to open lines of communication, to understand each other and find solutions for the workers and citizens we represent.
For us, this doesn’t exclude the private sector from being one of the players. Government has a long tradition of collaboration with the private sector. You may recall one of the very earliest P3s – the construction of the Canal du Midi in France – in the 17th century Public and private sectors have both strengths and areas of expertise. But the sectors’ fundamental objectives are dramatically different. The goals of the State, and within it, the public sector, are to ensure the proper functioning of society and the common good, while the private sector’s goal is simply to make a profit. Government objectives can be aligned with the profit objectives of the private sector to a limited degree only, and only when the State is in command. Infrastructure, goods and specialized services required by government in specific areas should be obtained by way of traditional public procurement based on tried-and-true contracts. This doesn’t mean that public assets, delivery of services, and public management do not need to be improved or reformed. They should be improved but on a basis other than the P3s. The relationship between public and private sectors is not necessarily a “win-win scenario”. The more complex and asymmetrical the relationship, the higher the stakes, the longer its duration, as in the case of a P3 – the higher the risk for the public sector.
Why oppose P3s as a method of financing, ownership, management and operation of infrastructure assets and public services?
Do P3s reduce costs or provide value for money?
The partnership contract and the project society created for the implementation of a P3, a pyramidal structure of sub-contractors and investors, are too complicated and convoluted to bring about improvement in productivity and to reduce the cost of infrastructure assets and delivery of service. The related costs are many: the higher cost of private capital, ballooning of the profit margin, resulting legal and commercial expenses, all spread out over time, not to mention eventual re-financing and speculation, et cetera. That the P3s reduce the overall cost of new infrastructures and public services, thereby creating more value for money, is an allegation that has never been systematically demonstrated. So what does the private sector do better than good public sector management?
Are P3s improving services for all citizens?
Despite the fact that the surveys are still incomplete, a general trend has appeared. According to the World Health Organization, P3s lead to higher costs of new facilities, loss of quality and flexibility, maintenance deficiencies, reduction in services, imposition of fees, unequal access to services and a decline in the public institution’s ability to render services.[1]
Are P3s creating monopolies or improving competition?
In market societies, competition is never perfect. In the case of a P3, competition is drastically narrowed during calls for tender, because of the expertise and capital required. Only a few private firms can qualify. This explains and “justifies” the creation of a consortium. When selected, the consortium becomes a monopoly for the duration of the contract and has a wide competitive edge when the contract is renewed. In the future, how many consortia will bid on a project worth 3 billion Euros? Perhaps one or two?
Do P3s guarantee optimal maintenance of public assets?
In many P3 contracts, the cost of preserving infrastructure assets is prohibitive and higher than it would be if the public sector had operated in a more traditional manner, and had the legal obligation to ensure maintenance of those assets.
Are P3s improving jobs and working conditions?
The International Labour Office and a number of academic researchers point out that the consequences of P3s on jobs and working conditions are considerable: reduction of employment, loss of good-quality jobs, decrease in pay, increases in atypical workers, those who experience job instability, and placement agency workers; the emergence of two-tier work, intensification of work, general deterioration of conditions in terms of health, safety, job security and training, loss of collective agreements, decline in unionization, and weakening of the influence of trade unions[2]. For us and for the workers we represent, this just doesn’t look like a fair deal!
Are P3s transferring any risk to the private sector?
Of all the arguments used to justify public-private partnerships, risk transfer is the most important one used by P3 supporters. But as trade union delegates, we have to separate fact from fiction. As value for money, the risk-transfer argument is a smoke screen. When the risk is calculated in monetary terms and included in the cost of the P3 project, at each step nothing is transferred but money. As the government is always financially and politically responsible for contractor bankruptcy, failure of projects, and other unexpected long-term risks, the most significant risks are therefore not transferred to the private partner. And if the risks are over-estimated and the list grows longer, the result is a higher profit margin for the private partner who has taken the gamble. Thus, the real aim of the so-called risk transfer is obviously to create more value for money for the shareholder and not for government.
Are P3s improving democratic governance?
Public-private partnerships lead to a loss of transparency and democracy. In order to protect business confidentiality, P3s limit access to information. The lack of information, as well as its control, threaten the governance process of P3s as a whole. Public accountability is greatly reduced by the absence of complete data regarding contracts and their fulfilment, information that might enable government to make better decisions. At a time when people aim to encourage democracy, citizen involvement in the building and management of public services is curtailed by P3s. And to whom are we accountable You and I are working for our fellow citizens, for each other. We cannot forget the real goal of our States: to further democracy and citizenship! And finally with P3s, ethical risks, such as favouritism, conflict of interest and corruption are even more acute.
Are P3s improving the State’s capacity-building?
Public-private partnerships are bringing about profound change in the State apparatus. P3s downgrade the role, size and functioning of government. They force public authorities to abandon their traditional role of purchasing, owing and managing assets, as well as their role in conceiving, managing and delivering services. P3s transform government into a tenant of infrastructure, a “broker-purchaser of services”, and a designer of policy framework and procedural tools in order to create, manage and regulate P3s.
Policy framework and procedural tools usually include a dedicated P3 unit, comprehensive contract arrangements, adaptation of existing legislation to the P3scheme, consultation and participation of all stakeholders, a worker protection policy, regulations to ensure complete access to information, improve transparency and accountability, prevent asymmetric relations, collusion, conflict of interest and political financing; rules defining standards for infrastructures, buildings and services, to ensure quality control, fairpricing and universal access to facility-use, to treat various conflicts of interest; pricing mechanisms (incentives and penalties) to ensure compliance and enforcement; adequate appeal procedures; sub-contracting regulations, et cetera.
Taking into consideration the interests of workers and of all citizens, the trade unions are in favour of a strong regulation framework for P3s. If the question were “Do the unions agree to increase control of P3 projects with the aim to have better control of public funds?” - of course the answer would be “Yes!” Nevertheless, the elements of this framework are the residual functions of a minimal State. And many of these elements have never been implemented or, if they have, the implementation was very slow, with limited resources, following much criticism, public opposition, confrontation among those involved, and in some cases, resulting in outright failure of the projects.
The P3 paradox
The implementation of a dedicated P3 unit is often presented as the fundamental criterion in the expansion and evolution of P3s. However, the real question is whether improving the State’s capacity-building is possible, when a general trend in occidental countries is the outsourcing of a major portion of government activity. Have P3s become the Trojan horse of the privatization process?
In addressing State capacity-building, we encounter what we refer to as the P3 paradox. The illusion depends first on the fact that the laws adopted and the regulation of the P3s allow one to believe that the State has not reduced its capacity-building; second, the P3 unit creates the illusion that the State always controls the process. However, both the P3s and the P3 units weaken State capacity- building because the P3s increase the general outsourcing process and because the P3 unit, by using multinationals consultants to manage a large portion of its responsibilities, further diminishes public expertise. Therefore two processes which claim to be supportive of State capacity-building, in reality continually undermine it. Thus the paradox lies in the fact that government creates the illusion of increasing State capacity-building when in actuality, it allows it to erode.
If the reason to have a dedicated P3 unit is to ensure that the P3 will fulfil the expectations of the private partners regarding risk transfers and future payment obligations of government departments, we cannot agree. We are frightened by the idea that the role of the unit is to regulate, in the long-term, the downloading of a large portion of the State’s financial resources, which will further reduce the State’s capacity-building.
How do we increase the State’s capacity-building?
Overall, one can see that P3s distance us from the fundamental goal of improving public infrastructure and services at the lowest possible cost; and we have our doubts about the necessity of P3s in modernizing the State and public management. As participants of this seminar, we all have the same goal: to enhance the quality and quantity of infrastructures and public services for our fellow citizens. In doing so, we must look for new ways of accomplishing this, without transferring the role and power of public authorities to the private sector. Many techniques that have been applied to P3s, such as “phased design and construction”, could be adapted to public management. Therefore, the role of the P3 unit must also transfer to the public sector all knowledge accumulated in the process of regulating P3s.
Public-private partnerships lead to an impoverishment of governance and a loss of democracy. P3s are harmful to the collective interests. The role of the private sector is to sustain the action of the State, not to take its place or to use it as a tool for the promotion of one’s own financial interests, to the detriment of the common good and democracy.
And this is why we should promote and improve traditional public procurement instead of multiplying and regulating P3s.
How can we achieve good governance, when the ultimate argument used to justify public-private partnerships, the risk transfer, is false? Are P3s merely castles in the air?
The trade union’s role is to defend the interest of workers in both the private and public sectors. But we are also citizens, and as such we are the guardians of good governance. If value for money makes sense, it makes sense for the people who need and pay for services! We are not consumers first and foremost; we are part of democratic governance and in this sense we think that P3s do not meet our needs! We must work together to find a public alternative for financing our need for infrastructure and public services. And, finally, we must reform public governance in a more efficient and democratic way.
Thank you.
Louis Roy
Vice-president
[1]Bulletin of the World Health Organization November 2006, 84 (11) Public-private partnerships for hospitals Martin McKee, Nigel Edwards and Rifat Atun. pp.890- 896.
[2]Winners or Losers? Liberalizing Public Services. Edited Ellen Rosskam. ILO International Labor Office, 2006. Geneva.