Privatizing Philippine Public Service Delivery

Privatization may seem like a perfect solution for deficit-plagued governments, but the morning after can bring some unpleasant surprises. As a city or country drowned in deficits and faced multiple lawsuits, city leaders saw outsourcing as a light at the end of a collapsing tunnel. But it was only a mirage. The search for financial salvation is sweeping the country as local governments grapple with waning sales and property tax revenues. The economic recession has strangled budgets, forcing layoffs and the disbanding of departments. Feeling pushed to the brink of bankruptcy, cities are trying to find effective ways to make do with less.

Over the year, more public officials have turned to outside sources for help in providing services at a lower cost to the country’s provinces or cities. In theory, the idea of contracting public services to private companies to cut costs makes sense. If someone is willing to fix streets or put out fires for less money, that should be a plus for a government’s bottom line. Many provinces and local governments have identified hundreds of millions of pesos in savings by hiring outside contractors -- or a neighbouring city’s services -- to handle tasks like trash collection, electricity repair, and water and wastewater treatment.

For me, privatization of public services is by no means a perfect solution. Some agencies don’t have the metrics in place to prove in advance that outsourcing a service will save money. Problems from poorly conceived contracts can create cost increases that surpass the costs of in-house services, and if there’s shoddy contract oversight, a government is vulnerable to corruption and profiteering. The privatization of public services can erode accountability and transparency, and drive governments deeper into debt.

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Governments at all levels are just desperate to balance their budgets, and they’re grasping at privatization as a panacea. But there’s evidence that it often is a very bad deal with hidden costs and consequences when you turn over public service to a for-profit company. Various governments -- from small towns all the way up to provinces-- have been sending public services to the private sector since the 1980s. The trend stems from the common belief that private companies can help governments save or make money by doing jobs faster and cheaper, or managing a public asset more efficiently. Sterile philosophical debates bout ‘public versus private’ are often detached from the day-to-day world of public management. Over the last several decades, in governments at all levels throughout the world, the public sector’s role has increasingly evolved from direct service provider to that of an indirect provider or broker of services; governments are relying far more on networks of public, private and non-profit organizations to deliver services. Like most countries, the Philippines telecommunications industry was once a monopoly of the Philippines Long Distance Telephone Company (PLDT) overseen by the Philippines government.

In 1995, the government decided to privatize the industry and created the Public Telecommunications Policy Act of 1995 (RA 7925) in the hopes of creating a more level playing ground for all companies. The Act was defined as the new legal, policy, and regulatory framework in the promotion and governance of Philippine telecommunications development. The country was divided up into eleven regions, opening up the market to various competing telecommunication companies.

The Act covers all telecommunications entities, protects users' rights, increases the roll-out period from five to three years, enforces the deregulation of value-added services and the complete privatization of all government telecommunications facilities by 1998. The dismantling of the monopoly and opening of the country to other telecom companies has resulted in a drastic improvement in teledensity. Local telephone service is provided by 78 private telephone companies and 4 government units. PLDT, the largest of the local telephone service providers, accounts for 67. 4% of the telephone service in the country. All the other telephone service providers combined account for 32. 76%. The government’s most successful in privatization created a permanent, centralized entity to manage and oversee the operation, from project analysis and vendor selection to contracting and procurement. For governments that forgo due diligence, choose ill-equipped contractors and fail to monitor progress, however, outsourcing deals can turn into costly disasters. The problem is that outsourcing deals are really about risk. We are taking the risk of the unknown and dumping that on your supplier.

We are outsourcing a problem to a company that has limited control over the root cause of the problem. The only way for a public-private partnership to work, is to drive transformation from within the agency, and that’s the hard part. Red tape usually prevents governments from making significant modifications, and private companies lack the authority to enforce real changes. When such a public-private stalemate stunts a project, it helps to have an exit strategy. Before governments hire outside contractors, it’s important to examine the cost-effectiveness.

More times than not, it’s less expensive to use public workers instead of outside contractors. Take what happened in Metro Manila, the privatization of MWSS was initially welcomed by residents. Between 1997 and 2001, the two companies granted concessions for the eastern and western zones of the metropolitan area installed 238,000 new water connections, 128,000 of which were in urban poor communities. New service connections, which averaged only 17,040 per year from 1991-1995 tripled to 53,921 after privatization in 1997.

Communities that used to have only limited water services found that they had water coming in 24 hours a day. Manila Water was allowed to raise its tariff six times higher than its original bid and Maynilad, which had a higher rate to begin with, was allowed to raise its rate four-fold. Even these rate increases, however, were insufficient to stabilize the situation and in March 2004, Benpres Holdings, the company in charge of Maynilad indicated it wanted to return its concession to MWSS as it was unable to pay its concession fees to the water agency.

Under the original contract, Benpres had put up a performance bond of $120 million in favor of MWSS. As a compromise, Benpres forfeited $50 million of that bond but it did not have to pay its arrears in concession fees amounting to Pesos 8 billion. Moreover, Benpres was allowed to continue managing the company although its stake in its capitalization had been reduced to 2 per cent from an original 60 per cent. The Pesos 800 million that Benpres invested in Maynilad were wiped out. All in all, therefore, Benpres was losing P3. 2 billion in the fiasco.

Interestingly, Manila Water, which got the eastern zone concession, has not suffered the same kinds of problems encountered by Maynilad. The main reason for this is the fact that Manila Water got a smaller zone of the metropolitan area, a relatively new area where the water infrastructure was not as badly dilapidated. Manila Water also assumed only $80 million of the debt of MWSS. When it was hit by the foreign exchange crisis, the government allowed it to raise its water rates six-fold because it had a much lower initial rate.

A good outsourcing deal starts with a thorough cost-benefit analysis to see if a third party can effectively deliver services better and more cheaply than public employees. Government should hire an outsourcing consultant who can provide an independent assessment. But even with a consultant, conflicts of interest can tarnish a golden opportunity. After all, private companies may want to provide a service efficiently and well -- and often do -- but governments must ride herd on implementation of the contract. A company’s motivation is not the common good; it’s profit.

If they can cut corners in any way, they often do. In that regard, the provider that offers the lowest bid might not be the best option. But with our country’s experience in several large-scale government outsourcing deals, we have seen first-hand that in a bidding war, the company that has a liberal interpretation for the lowest price wins, which inevitably leads to strife when high expectations meet underachievement. Anyone can bid any outsourcing deal 5 percent cheaper, but the problem is you don’t know what they cut out. When price reductions appear unrealistic, there’s no magic.

They are unrealistic. Even with the proper oversight channels, policies won’t work if departments don’t participate. The laws were created to promote transparency and to ensure that agencies complete an effective cost-benefit analysis prior to procurements. But compliance has been low over the years. With these, I have come up with a generalization that the pros and cons of privatization of Philippines service delivery are as follows:

PROS:

• Government can raise funds to pay off other debts fast because of relieve from financial burden of the public sector enterprises being privatized;
• It removes government’s monopolistic status and inability to be responsive to citizens' needs, resulting in inefficient, one-size-fits-all services. Like the above-cited case of PLDT.
• In practice, all levels of government, seeking to reduce costs, have begun turning to the private sector to provide some of the services that are ordinarily provided by government. The spread of the privatization movement is grounded in the fundamental belief that market competition in the private sector is a more efficient way to provide these services and allows for greater citizen choice. Similar to the goal of the above-cited case of MWSS.
• With privatization solidly on ground, costs will be reduced at the long run.
• Public sector workers are not harmed by privatization. Displaced workers can be hired by contractors or transferred to other government positions.
• It stops loss-making public sector enterprises from adding to government debts;
• It gives new businesses access to investment capital that government cannot provide.

CONS:

• One of the disadvantages is that the privatized company will no longer operate in the public interest.
• While a state-owned company primarily serves the citizens of the state, the primary goal of a privately operated company is to make profit. It may make these profits at the expense of its customers without serving them properly. For example, it may choose the market which is most profitable to operate in and leave less wealthy customers without a service.
• Prices may actually rise if the service was previously subsidized by the government like what happened to MWSS.. This is a common experience after a successful privatization process. This becomes imperative in a bid to provide qualitative service, improve efficiency and profitability.
• Privatization alone may not lead to better quality or cost reduction in public service delivery.
• Government no longer receives profits (if it was previously profitable), therefore, the revenue accruing to the government from public sector enterprises becomes shortened as a result of privatization.
• The standard economic measures used to make privatization decisions fail to accurately assess the real costs and benefits of care.

With all of the foregoing, I therefore conclude that privatization, when done right, works well. Privatization of public services is by no means a perfect solution. Privatization is not a blanket solution for the problems of poorly performing public sector enterprises. It cannot in and of itself make up totally for lack of competition, for weak capital markets, or for the absence of an appropriate regulatory framework. But where the market is basically competitive, or when a modicum of regulatory capacity is present, private ownership yields substantial benefits.

A good outsourcing deal starts with a thorough cost-benefit analysis to see if a third party can effectively deliver services better and more cheaply than public employees. The success of any privatization arrangement, whichever technique is adopted, will be dependent on the sincerity of government to pursue it with unblemished policy implementation, support, co-operation and understanding of the citizenry. At the onset, privatization bites very hard, but at the long run, the benefits are multifarious and immeasurable.

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