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Liberalization of Public Service: A Democratic Achievement is Subjected to Competition

by Christine Wicht and Carsten Lenz Thursday, Jan. 25, 2018 at 7:29 AM

Public service guarantees and influences the living conditions of our society and has a proven tradition in Germany for over 100 years. Privatizations have mainly led to private oligopolies. Corporations evade their responsibilities and expect intact infrastructure.


By Christine Wicht and Carsten Lenz

[This article published in September 2005 is translated abridged from the German on the Internet,]

Public service guarantees and influences the essential living conditions of our society. Public service by the public authority has a proven tradition in Germany for over 100 years. It is oriented in the basic idea that services should be available all over the country to all citizens without discrimination. The public authority aims at permanently protecting the foundations of life for everyone and guaranteeing a higher standard of hygiene, health, and environmental protection.

The basic provision of citizens is a core responsibility of local self-government. Communities decide over the benefits available to their citizens. Local or communal public service has become an important pillar of our society with the common good obligation to guarantee the same quality, absolute reliability, and fair prices to every citizen. The public authority fulfills its provision mandate responsibly and sustainably that never has a priority for private service providers since they must consider the profit interests of their shareholders.

According to the principles of neoliberal economic policy, a liberalization and privatization policy is single-mindedly emphasized worldwide by companies, the WTO, the EU, governments, and parliaments. According to current experiences, privatizations mainly led to private oligopolies which did not represent any improvement over state monopolies. In this article, we will explain the importance of a public authority managing public service, why a private provision cannot accomplish the same services as the public authority, what interests underlie the liberalization policy and what effects this has on the care of citizens.

Again and again, the state is criticized for not spending money sensibly, for uneconomical administration and ineffective work and therefore the services are too expensive. Public service is a more expensive realm of the public authority because it sets the social aspect of equal treatment and sustainability above all profit maximization and not because the state works uneconomically. Private providers only fulfill their task through cost-reductions joined with cuts in quality and higher prices.

Why is public service a task of the public authority?

Why should the public authority provide services and not be limited to monitoring market transactions? The answer to this question is obvious with some state services. The expenses of the police for guaranteeing public security are borne by the state and not carried out by the market. If public security were a commodity like every other, the wealthy could afford more security than poorer citizens. In poorer countries, the consequences of inefficient and corrupt security organs can be studied. The rich live in exclusive ghettos that are monitored by private security services. Criminality and gangs of criminals prevail in the poor parts of town. The state with public service creates the basic presupposition of a humane life.

If the distribution of these goods is left to the market, only those who can pay the market prices can purchase the public service. A two-class society would arise. To prevent this division of society, the state assumes the responsibility for a socially-just distribution with certain goods. The underlying idea is that these goods be made available to the individual citizen independent of his or her individual and economic situation. Those living on the land off the beaten track should also have access to basic institutions of the infrastructure as for example water-, sewage and telephone connections, road networks and public transportation. The quality of secondary education, another important part of public service and may not depend on the income of the parents. The social equality of all citizens is the purpose of state services. The poor and the rich should be treated as equals in society. A just distribution policy leads to prosperity and security for all sectors of the population.

Danger of monopoly formation

To guarantee this, the distribution of some goods must be regulated and cannot be left to the free play of market forces. Many public services made possible by the state have peculiarities. For example, the basics tend to the formation of monopolies. The high standing expenses in many areas of supply like electricity or gas are an important reason for that. The construction and operation of the mains system and the rest of the infrastructure are tremendously expensive. When the infrastructure exists, the production can increase with relatively trifling expenses. The best example is the water market. If the supplier has the facilities, the quantity of available water can increase at relatively trifling costs. The energy supply is also similar. New suppliers can seldom become established on the market and smaller providers are pushed back. New providers must build parallel supply-networks to compete with existing businesses. This entails enormous investment costs that are only profitable – if at all – on a long-term basis. A tendency to the formation of private monopolies can be seen wherever state supply facilities were formerly privatized within the last decades. A few companies divide up the market for energy services in Germany. This is similarly true for the water economy in Britain. There are many examples worldwide of these concentration processes. No competition arises in which several providers compete for the favor of consumers through the manipulation of supply prices.

The advocates of liberalization often campaign with the ideal of such competition and argue that the citizen as a consumer can influence the suppliers of services, for example by choosing another product from another business. Since oligopolies or even monopolies form private supply businesses very quickly, the elective possibilities of consumers are greatly limited and do not even exist anymore under some circumstances. In contrast to this, citizens in the care of the public authority have the democratic possibility of turning to the city council or starting a citizen's initiative. Politicians are obliged to cover these areas. Their reelection is endangered if they do not meet their obligations. In private enterprise, particularly with private oligopolies, citizens do not have rights to join in the conversation anymore. The influence of politicians no longer exists when state structures are replaced with private structures – supervisory boards, boards of directors and management decide over investments, quality, and service. Private oligopolies (RWE, EON, Vattenfall, and EnBW) demonstrate their economic power. Only creating a regulatory authority to stop the excesses is left to the state as the last possibility.

Loss of democratic control

The question whether the areas of public service that were built and financed through taxes of the citizens belong to the citizens is interesting. From this perspective, an alienation of public service is not possibly purely theoretically without the approval of the citizens. Seen this way, citizens are robbed since they worked for this service. Even if a sale of public service may be legally allowed, the democratic control and the possibilities of influence are alienated.

From service providers to guarantors

Even advocates of liberalization often admit the state must care for the distribution of certain goods on the free market – like schooling. However, the proponents of privatizations claim private business should be entrusted that compete on the market for state projects even if the state must provide these services. The state develops from service-provider to guarantor or promoter. Its function consists only of monitoring the observance of the framing conditions. For example, it is sometimes argued a local community cannot operate a transportation business. Equal service of the population can be guaranteed if a private bus company is commissioned. The local community must pay to serve stops that are not profitable. According to this model, the private business is like a customer inquiring about a public service. The state then only ensures that the private business meets the standard.

This idea sounds enticing in theory. As a rule, it is joined with the promise that private businesses are more efficient and ultimately provide the service more reasonably for the state and for the taxpayer. But, unhappily, all the experiences with privatizing public enterprises in the last years showed that this model by no means had the promised positive effects. On the contrary, the services became more expensive and quality declined. Investments in the infrastructure (rails, mains system) were not made because they did not bring any short-term profits. Private enterprises are by no means more efficient since they spend enormous amounts of money for marketing and must gain profits for their shareholders. Moreover, additional state regulatory agencies are necessary for their monitoring.

Why the rush to privatize? The financial misery of local communities

The problematic that revenues are taken away from cities and communities on account of tax policy and international tax dumping means funds are lacking to finance public service. Corporations evade their responsibility toward society but nevertheless expect an intact infrastructure on which they can rely. Mainly workers and employees finance our system through income taxes, sales taxes, and social fees. Corporations use the legal possibilities for tax avoidance and the system is imbalanced. Local communities seek alternatives and get involved with private investors. A balanced budget is an important goal of a community. In their desolate budgetary situation, many mayors see themselves forced into a privatization or partial privatization policy to reach this goal. The public authority sells its silverware. Often foreign investors take over these realms with an initially high-profit rate. But high profits can only be realized when investments and maintenance costs are lowered. These savings in services are connected with dismissals and are at the expense of consumers.

The business of public service

Private providers gladly enter this service sector and take over areas of public service. There are many reasons for this. One reason is that the public authority built the facilities over years with costly investments in electricity, water, sewage, rail and public transportation.

Since the infrastructure already exists, corporations can skim off profits and only need to make the necessary investments in the next years. Therefore, the private business with public service is very attractive because every citizen depends on clean drinking water, waste removal, education and so forth. The supplier can assume a stable demand for these elementary goods. Therefore, companies have a great interest in gaining the regular customers of the public authority. Another goal is pursued with the battle for lower business taxes and abolishing the trade tax alongside the pure avoidance of taxes by businesses. The public authority should be weakened so much it cannot fulfill the tasks of public service in many areas. Private investors take over the public enterprises and cash in on the services they offer citizens on other conditions.

What are the consequences of privatization?

Rationalization measures at the expense of the service, maintenance, and quality of the supply are necessary so private providers can realize their desired profits. Employees are dismissed into unemployment and family structures are broken up with grave social consequences. The state is less and less able to cushion this situation. In the long-term, citizens are robbed of their rights and their dignity. The financial and intellectual poverty of society is unstoppable. Social stability can only be achieved and preserved when the state can fulfill its provision mandate completely and permanently. When public service follows neoliberal economic principles, a two-class society inevitably arises since the benefits of public service are no longer available to socially disadvantaged members of society. Equal opportunities lead to increased social tensions and endanger social cohesion and ultimately the security. Remarkable parallels in social development are manifest in countries where a radical policy of liberalization and privatization was carried out in the past years. Criminality and the expenses for the police and prisons rose in New Zealand, Chile and Britain where the praised "remedies" of the neoliberal precursors Margaret Thatcher and Ronald Reagan were implemented (cf. John Gray, The False Promise. Global Capitalism and its Consequences, 2001).

How privatization of public service affects the social structure as clearly manifest in the example of New Zealand that had a similar social state tradition as Germany. A radical reorganization of the whole political system was introduced in the 1980s under a social democratic government. The government opened the realms of public service to private investors on the pressure of transnational corporations and subjected public service to the laws of the market with fatal consequences for society. International competitiveness was the reason or substantiation. The creation of new jobs was promised (full-time jobs were reduced and wages cut) and prosperity when the reforms took hold. The same arguments are always proffered. Behind them are always the same interests and the same fatal effects always occur.

The New Zealand experiment failed and the people bear the consequences. A sustainable, responsible politics that defends the interests of citizens is not possible with the models of liberalization and privatization. Private investors only exploit or cannibalize public service and do not earnestly participate in it. The state is pushed back more and more and profit interests now stand in the limelight. When the state first evades responsibility, it finds itself in a defensive position and cannot influence private businesses anymore.

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