Examples of How City Services Privatization Leads to Inequality Are Piling Up

https://nextcity.org/daily/entry/privatization-water-utilities-inequality-poverty

by merraksh • 10 years ago

103 56 10 years ago

nextcity.org

tjic• 10 years ago

Front page of news.yc:

3. How privatization increases inequality

4. Examples of How City Services Privatization Leads to Inequality Are Piling Up

each with EXACTLY 7 up-votes.

Sock-puppets, or just a voting brigade?

merraksh3• 10 years ago

I submitted the NextCity article after reading the article, but then decided to submit the report as well. I do think they can be read without redundancy, as the NC article is a bit easier. I'll leave it up to the mods to drop either, though for completeness that if one of them is drop it should be the NC one, not the original report.

I don't know sock puppets or voting brigades in HN, but I would expect those who upvoted one to do the same to the other. They appeared next to each other in the /new page.

DanielBMarkham• 10 years ago

Meta comment. I'm not even sure this is the right place for it.

I love things that are fascinating and make me think. Privitization and inequality are in that category.

I don't like feeling that I'm being bullshitted. Two articles on the same politically-charged topic both at the top of HN is whack. I do not want to be on the end of somebody's PR funnel.

Not your fault, I know. Just please post some more Erlang innards stories between the "Evidence continues to validate this thing I know you guys aren't going to agree on" stories.

KODeKarnage• 10 years ago

Pfft, how public city services stole from everyone via inefficiency and rort for decades maybe?

YC is broken if this is up top.

fsloth• 10 years ago

Free market works in fixing prices if there is competition. In the case of privatized municipal services only is there no competition, the residents are forced to use the service. It's often a super-monopoly.

nkoren2• 10 years ago

I consider myself a relatively gung-ho free-market type, where it's appropriate. Utility and transport networks are one place where it isn't appropriate. This is for three fundamental reasons:

1. A free-market dynamic requires an actual market. If the buyer can't chose among competing sellers, then it's not a market. At the grocery store you can choose from among many different sellers: that's a functional market. The point where your plumbing connects to the water main, simply isn't.

2. The entire purpose of infrastructure is to generate positive externalities. Ready availability of transport, water and electricity, etc., makes it easy and desirable to do business in a place and with each other. This leads to emergent urban economies, where mutual comparative advantage among a heterogeneous population leads to mutually beneficial exchange, which in turn leads to more growth and prosperity for everyone. The fewer low-level frictions, the more prosperous everyone becomes. But capturing value at the point-of-use -- which is what private operators generally do -- creates a low-level friction with substantial knock-on effects. Every dollar you extract from the farebox of a public transport system, for example, is many dollars removed from the wider economy. It's much more appropriate to subsidise the infrastructure networks and then tax the positive externalities (via sales, income, and property taxes) after the uplift has been created.

3. There are broader socio-economic issues of accessibility to services that profit-driven companies have no incentive to be responsive to.

koolba4• 10 years ago

I consider myself a relatively gung-ho free-market type, where it's appropriate. Utility and transport networks are one place where it isn't appropriate. This is for three fundamental reasons:

Cable internet falls into that category too. The common setup in the USA is effectively a municipally sponsored monopoly.

1. A free-market dynamic requires an actual market. If the buyer can't chose among competing sellers, then it's not a market. At the grocery store you can choose from among many different sellers: that's a functional market. The point where your plumbing connects to the water main, simply isn't.

Sure but rather than directly hiring N people to run the water works and plumbing crews, the city could contract out the maintenance of those things to a private company. It would still own the pipes and be on the hook for the maintenance, but it wouldn't be directly employing the workers. If company X doesn't work out (say due to crappy service), then they could award the maintenance contract to company Y. In this model, the private company doesn't get a local monopoly on the resource, only a contract to provide the service for some limited duration (say N years).

It may well be that there are services that are not profitable to operate. It's governments job to fund those based on excess tax dollars it collects from other services. A bus route to a poor part of town that it's particularly popular isn't going to fund itself. Government smooths those bumps to provide services where they're needed.

nkoren2• 10 years ago

Agreed. The government using private contractors to maintain the infrastructure is fine. In that instance, the government can still account the resource in a holistic fashion. Where it makes sense for end-user-fees to completely pay for the infrastructure, then fine (sometimes it will). But where it makes sense to minimise end-user-fees so as to maximise the positive externalities (and recoup the costs out of taxes), then they can still do that. Whether the workers on the infrastructure are managed by a public or private manager, in this case, doesn't make a lot of difference.

The problem occurs when a private entity must make a self-contained business case off the back of the infrastructure. Since they'll never be able to capture any of the positive externalities, they have to take everything out of end-user-fees, externalities be damned. This can be very, very bad for the city as a whole.

And yes, agreed about cable internet being in this category too!

MarchHare• 10 years ago

Sure but rather than directly hiring N people to run the water works and plumbing crews, the city could contract out the maintenance of those things to a private company. It would still own the pipes and be on the hook for the maintenance, but it wouldn't be directly employing the workers. If company X doesn't work out (say due to crappy service), then they could award the maintenance contract to company Y. In this model, the private company doesn't get a local monopoly on the resource, only a contract to provide the service for some limited duration (say N years).

This American Life had an example of this with Colorado Springs city services, act 3 of http://www.thisamericanlife.org/radio-archives/episode/459/w...

sseagull2• 10 years ago

Sure but rather than directly hiring N people to run the water works and plumbing crews, the city could contract out the maintenance of those things to a private company.

I know this can work, but in addition to the usual misalignment of goals between public and private sector, I still see more inefficiency with this than just letting the government do it.

For example, the government has to pay all the workers (indirectly, at least). On top of that, it has to pay to negotiate contracts, and an entire layer of oversight of the contractors (which also have their own HR and bureaucracy that you are paying for). On top of that, they will likely have built-in some extra profit to give them some flexibility in case they don't get the next contract. Plus money for lobbying in many instances.

If you find the contractors aren't doing their job, now you will probably have to get lawyers and whatnot, and have expensive, time-consuming litigation. Then, if the government wants to change companies at some point, you have a large expense in finding a new one, with bidding, etc. And that is if there is another contractor available in your area. And then you have lobbying, cronyism, and other political issues.

The entire reason for hiring another company to do this is to get around public pay and pension issues. If this is all just a workaround for that, fix the source of that problem, rather than trying to abstract away responsibility.

erentz• 10 years ago

A problem with this approach is often you see corruption or crony-capitalism seep in. These contracts are then given in very favorable terms to certain bidders, or they are locked in for a very long time that can't be broken without paying huge penalties to the service contractor, no matter how terribly they are performing. You also can't adjust the goals of the service under contract over time - say you set your KPIs for the contract one way at the start but realize later actually this isn't working the best for the community and we need to manage it differently. Screwed.

ancap• 10 years ago

I would invite you to reconsider your position, at least as it relates to utilities. In the early, "wild west" days of utilities, when utilities were just beginning to be a thing, there was a large surge of competition to provide electricity and gas in the major cities. It was only after a lot of lobbying that monopolies were formed to push out the competition.

See "Myth of the Natural Monopoly" by Thomas DiLorenzo https://mises.org/system/tdf/rae9_2_3_3.pdf?file=1&type=docu...

smokeyj• 10 years ago

I consider myself a relatively gung-ho free-market type

I'm skeptical.

A free-market dynamic requires an actual market.

Not really. A free-market type would say the supply is limited. Even if the supply is zero it's still a free-market if the actors are trading voluntarily. The supply for many markets is zero, but it typically correlates with demand.

The entire purpose of infrastructure is to generate positive externalities

A free-market type would probably use the word value rather than positive externalities. But isn't the purpose of any action to create positive value? Your argument is essentially that forced trades via central planning can create more value than voluntary trades.

3. There are broader socio-economic issues of accessibility to services that profit-driven companies have no incentive to be responsive to.

A free-market type would probably say that the supply of accessibility services is low due to limited demand / profitability. While true maybe this is where charity plays a role.

prasadjoglekar• 10 years ago

There is inequality in city-services, whether private or public. The underlying economics of delivering water or transportation don't change because of ownership. It's just that inequality manifests itself differently. I actually skimmed through the report. Example after example shows how poor people are gouged by fees piling up, onerous interest rates and so forth. That has nothing to with privatization - there are just as many examples of public sector asset forfeitures.

Most cities and municipalities have huge budget deficits - primarily due to excessive labor and pension costs. As a result, services have to be cut or rationed. In a public ownership setting, services just happen to be cut where they are least politically problematic. Private ownership, faced with the same problem, might cut services as well as raise prices. Citizens expect services, and don't want to pay too much for it. Funding solutions typically lie with those that don't have political voices, and those that can't just get up and leave.

pdkl95• 10 years ago

There is inequality in city-services, whether private or public.

While implementations can be a problem in any system, private business has an additional expense: profit for the owners. Labor and production costs will be roughly similar, but private will always have some amount of the money diverted to profits (which can take many forms). Worse, because many of these services (e.g. water) are a natural monopoly, privatizing the service won't gain any benefit from competition.

primarily due to excessive labor and pension costs

This is a common talking point that isn't based in reality. We've been cutting services for a long time, while also cutting revenue. If corporations actually paid proper taxes and/or we taxed wealth-creation properly as income, then most budget deficits would disappear.

raise prices

That's the point; governments can do the equivalent by increasing taxes. Unfortunately, most people panic at the very idea.

koolba4• 10 years ago

This article is terrible. Sure you can find examples of privatization having less than stellar results. But it's not uniformly so and I doubt it's even commonly so.

The report, “How Privatization Increases Inequality,” is full of such examples. There’s the transit system of Nassau County, New York, privatized in 2012 in an effort to cut costs. Almost immediately after Veolia signed a contract with the city, the company reduced service on 30 routes, and eliminated several lines all together. A year later, fares increased. They’ve gone up every year since. More lines have been eliminated, and still the transit system continues to face budget shortfalls.

If they care so much about which lines are operated, that should be part of the contract. Why would the company continue to operate lines that would be running at a loss? Sounds like the residents should be complaining about whoever negotiated this terrible contract (i.e. whoever was wined and dined into signing it).

Oftentimes, it’s worker’s wages, which worsens income inequality. Government jobs used to offer healthy salary and benefit packages, making them steady careers that could stabilize communities, the report notes. But privatized positions for the same work often offer lower wages, reduced benefits and little to no retirement security.

Who's going to pay those healthy salaries and pensions? If the latter are just unfunded mandates, it's hardly fair to compare them against a private company that has to cover it's obligations as they come in, via defined contribution plans or into a sinking fund, based on the money it's actually collecting (v.s. future higher taxes).

Retric4• 10 years ago

The basic privatization question is this:

Service was not producing a profit, it will be. Where exactly is that money coming from?

merpnderp3• 10 years ago

Historically it's from improved efficiencies, which privitazation incentivizes and government does not.

chatmasta2• 10 years ago

One interesting example of pensions hurting public enterprise is the USPS. IIRC, the government mandated that the USPS guarantee pensions for 70 years, meaning they literally have to have enough cash on hand to guarantee pensions even in the case of total organizational collapse.

Requirements like this render it impossible for government services to profitably compete with private enterprises unencumbered by such stipulations.

This results in zombie public organizations operating indefinitely at a loss in order to subsidize the wages and livelihood of employees. Sure, maybe the employees are better off and therefore "inequality is reduced," but this is a misdirection. The loss needs to be absorbed economically somehow, and in many cases its the taxpayers who foot the bill. Even worse, often "the bill" will not arrive until decades later, in the form of a massive deficit compounded by years of interest rates requiring future tax hikes.

csomar• 10 years ago

These are examples of monopolies, and not free market. I think, and it's my opinion: If you make something private in a free market, it's always good for quality and prices.

There are two possibilities that can make this promise false:

1. The market is not free. For example, a metro subway. It's a monopoly. You can't have 6 subway lines and you pick one of them.

2. The market was heavily financed by tax payers money. For example, a bus route that it is not profitable but still running for the benefit of the few poor people using it. This can happen in a government situation but not in a private situation.

usgroup• 10 years ago

I think surprisingly many services and products do not fit this paradigm. Recall that in a free market, no company nor buyer is a price setter. Price is determined in aggregate only.

rubidium• 10 years ago

Article discusses inequality, not quality and prices.

In a free market, quality and prices will (eventually) optimize for what the market can sustain. What the market can sustain may be _very_ unequal for the rich and poor in the market.

djschnei6• 10 years ago

Kind of an interesting problem, no? It's a question between what things we want to economize and the things we don't want to economize. In the long run, however, I fail to see how we really have a choice. Since "public" services are tied to some pretty basic realities; they still rely on human labor and they still rely on finite resources. So the real question is - do we want to realize the inherent inequality of existence now or push the ball down the road and assume (usually on behalf of future generations) the inherent inefficiencies of public work?

For me, I find it troublesome to take out credit cards in my children's names and hope for the best... I'd rather accept the realities of resource allocation now and maximize the system's efficiency. And sure, that might expose us to inequalities; I, for one, am super psyched for a post-scarcity economy :)

jellicle• 10 years ago

You're using "free market" when you mean "competitive market". There are very many free markets that are not competitive. The primary goal of companies selling a good or service is to reduce competition to minimal levels, as that allows maximal profits.

jrockway3• 10 years ago

1. The market is not free. For example, a metro subway. It's a monopoly. You can't have 6 subway lines and you pick one of them.

New York City had three subway companies until the 1940s and the city took them over (one was already owned by the city). Tokyo has two metros and a large number of independent railroads (one metro is owned by the city; one railroad was owned by the government until the late 80s).

bryondowd• 10 years ago

Were these companies actually competing, or just operating separate but likely connected routes? In other words, if you need to go from specific place A to specific place B, what are the odds you could choose which company to use. If location rather than choice dictate which service you use, it is essentially the same as what we have with cable companies. Each company has a monopoly in the zones they operate, and can charge whatever the consumers will bear without worrying about being undercut by competition, because a competitor would need to build significant infrastructure at which point the original company would just lower prices and the competitor would be unable to recover their costs.

It makes sense that infrastructure like this should be publicly owned, even if operation is contracted privately.

mason240• 10 years ago

For example, a bus route that it is not profitable but still running for the benefit of the few poor people using it. This can happen in a government situation but not in a private situation.

It is if running that route is part of the contract.

Pmop• 10 years ago

Ask any brazilian if he can think of any public service that works.

merraksh3• 10 years ago

Then ask a German, or a Swede. The answer might be different.

andrenth• 10 years ago

Then compare the size of the state and the amount of economic freedom in these countries to Brazil's and everything will become clear.

chatmasta2• 10 years ago

I hear the "government hiring private contractors" argument often as a compromise between complete free market economics and public utilities.

The argument falls apart when there exists effectively no competition between contractors. At thiat point, the government may even end up paying more for its favorite contractor (whether by choice or lock-in) than it would if it managed its own staff.

The advantage of privatization is supposedly efficiency. Private companies must be efficient in order to survive, in large part because if a private company is not efficient, a competitor will be. Therefore, in order to capture this efficiency advantage, there must exist at least two private competitors for every government contract.

I'd be interested to hear of solutions that prioritize competition between private contractors, rather than encouraging nepotism or cronyism in the procurement process. Otherwise, you're just replacing the public monopoly with a private one, losing any gains from what should be the chief advantage of privatization: a competitive market.

fruktstav• 10 years ago

As far as I know, all prices are unreal - meaning that products prices have no actual fixture in what it costs to create them. For example, I create a beautiful night gown with materials costing me $5 and sell it for $10 - because I think that I should get $5 for my 30 minutes of work I put in creating. If somebody in China makes it, maybe they can buy the materials for 5 cents and feel like charging 10 cents for the entire night gown - because that's a "standard chinese wage" (inb4 exaggerated numbers). Meaning that my nightgown is valued at 100 times the price of the chinese counterpart. This means that any comparison between my nightgown and the chinese one is meaningless, because the person in China doesn't do the job 100 times more efficently, or with materials created 100 times cheaper. Meaning that racism, sexism and other prejudice values are more important than actual quality and profit. It's because the system isn't based on declaring true value of anything, it's a (incredible crude) system of driving people into overpricing everything for profit - and calling the final agreed upon price a real price, even though the seller often has the upper hand and can simply choose prices by deflating the supply. That's typically done by buying competators, bribing lawmakers and if all else fails: underpinning the competitions prices until they die. So to make an economical argument about a humanitarian issue is no better than giving a religious argument.. "Our current numbers are telling us that you can't have welfare" is equal to saying "Our current belief system is telling us you can't have welfare". Why? Because the idea that capitalism can give us a fair handle on price, supply and specifically demand is just retarded. The only way to create a real scientific price is to have a planned economy that tracks all demands and supplies simultaneously, so that demand doesn't mean lust.

Examples of How City Services Privatization Leads to Inequality Are Piling Up

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