New: Privatization Illogic

PrivatizationIllogic(1)(PxMag)(Vol12No02)(Cover)By: Mark H Goodrich – Copyright 2015

In the 1980s, the western world began to hear politicians talk about the “advantages” of privatizing public functions. Those statements were not the start of a movement, but represented politicians running to the front of a parade of public opinion that was already underway, and pretending that they had been leading it all along. Whether Progressive Conservative, Republican or Tory, Mulroney, Reagan and Thatcher were sailing on political winds generated a decade earlier by an expanding corporatocracy that had begun to flex the muscles of its enormous economic power. Indeed, the nearly simultaneous elections of those leaders on the political right were testament to the effectiveness of corporate advertising in creating and cultivating a public mood favoring smaller government, notwithstanding that expanding populations required government to grow in commensurate fashion. Like so many destructive ideas that have captured the mood and minds of the public throughout recorded history, many non-critically accepted the simplistic idea that government was their enemy, rather than a reflection of collective political will and the requirements of a modern social contract.

Not surprisingly, the public debates became very one-sided, and devoid of discussion about potentially negative effects. Corporate money flowed into advertising that oddly looked like public service announcements, and not so oddly contained no clear indication of just who was sponsoring the messages. As full-page advertisements appeared across the spectrum of both trade and general press, few gave thought to who had the financial capacity to pay for counter-advertising in order to correct factual inaccuracies and fully illuminate the issues. The idea of regulating corporations was demonized in ways that seemed like news, but in reality was little more than corporate propaganda. The corporatocracy learned that it could use financial power to control not only perceptions of the public, but also political action. The times were ripe for what would become an unrestrained pattern of privatization, outsourcing, deregulation, merger, acquisition, expansion, and corporate concentrations of economic and political power greater than ever seen before.

Accompanying the implicit generalities that government was inherently “bad” and business “good”, were undercurrents of an ideology favoring the outsourcing of increasingly large segments of control over national economies to the private sector while simultaneously moving to immunize those privatized interests from responsibility. So-called “government contractor immunity” was based on the idea that a corporation doing government work should be immunized as if the government itself. Not surprisingly, most liability limitation statutes were drafted by the legal departments at large corporate enterprises, and then offered to legislators as ready-to-file documents.

Expansions of the international corporatocracy in most areas of commerce were the result, and few industries were more affected than aviation. There are similarities across industries in the ways that this historically unparalleled shift in ownership and control have become manifest, but what makes the impact within the aviation industry different arises from the nature of the industry itself. Safety of the traveling public is a principal “stock in trade” for aviation, and political experiments therefore place more than economic assets at risk. Public transportation must run during ups and downs in the economic climate. Corporations hire, layoff, purchase to expand and fire-sell to downsize depending upon economic weather conditions in the free-market, but air traffic control services, air navigation facilities, airports and airlines themselves must operate safely, dependably and efficiently in both good economic times and bad.

Public transportation is more than just a convenience to individual people. It is a critical part of a nation’s economy. It is critical to commerce broadly, and thus an essential part of and fundamental to the workings of more than its own industrial segment. Also different from other industries, the internal workings of the aviation industry are not within the knowledge, experience, observation or understanding of the average person. The quality of the product in aviation – the standards to which: air traffic control handles the separation and flow of traffic; air navigation facilities are maintained and operated; aircraft and component parts are designed and manufactured; airlines train pilots, dispatch flights and maintain aircraft – is impossible for ordinary people to discern. Absent such knowledge, the public is without the tools to analyze the price over quality and safety point that free-marketers tout as the holy grail of “consumer choice”.

The idea of privatizing public functions is most often “sold” as a cost-saving to the taxpaying public resulting from a purported efficiency of corporations. But, contrary to the often-stated proposition that corporations are inherently more efficient than agencies, the efficiency of an organization is mostly related to its size. That is, a corporation and agency of equal size require the same levels of middle management and organizational structure, and suffer from the same nature and levels of inefficiency. Repeatedly over the past four decades, close inspection of the history reveals that arguments for privatization were based on myths, rationalizations, partial-truths and outright lies. In most cases, privatization was pushed through the legislative process to reward corporate sponsors, or to avoid making and taking responsibility for difficult political choices.

As a matter of law, corporations are to be operated principally for the interests of shareholders, although modern exemplars reveal that this legal requirement is now often hijacked by managements to evade the board oversight and shareholder inputs once observed. Instead, many corporations are now operated for the principal benefit of a few control group managers and executives, while only pretending to consider the interests of shareholders, employees, customers and host nations. Conversely, government agencies are to be operated for the benefit of the public. Seldom do we see agency managers absconding with embezzled cash, being paid exorbitant salaries and bonuses in excess of any reasonable level by hundreds of percentage points, or personally enjoying perquisites like the use of corporate jets and vacation homes ostensibly maintained for business purposes.

To work well, free enterprise through corporate models requires strong regulations, with effective oversight and enforcement to ensure legislative and regulatory compliance, and to prevent monopolization of entire markets or industries. In the absence of such oversight, corporations will inexorably expand towards monopoly, evading the competition that their managers so vociferously claim to love by using every possible advantage from political to economic in order to buy up, buy out or disadvantage and quash competitors. Absent anti-trust restrictions, economic power so misused will include predatory pricing practices at one end of the spectrum, and conspiracy to fix prices at the other. Self-regulation may sound like free enterprise to the political right, but when the fox is entrusted to guard the hen-house, expect chicken for dinner.

Despite political arguments to the contrary, most modern corporations do not establish and operate under long-term plans, but instead elect practices that are detrimental to the long-term interests of both themselves and their broader industry towards goals of increased share value and executive bonuses at the end of the next fiscal period. This places short-term and often fundamentally flawed practices at the top of corporate “to-do lists”. Although nothing more or less than greed, this reflects the inherent inability of the corporatocracy to work in long-term interests of even itself, much less the broader economies that it strives to manipulate and control. This fact should be cautionary when considering that ever fewer corporations control ever larger segments of national economies, employments, balances of international payments and exchange, military procurements, and political processes of the countries in which they have a presence.

The so-called multi-national corporations are not national in any respect. They recognize no nationality, and are devoid of allegiance to any country beyond their ability to use its laws to financial or competitive advantage. When convenient to their own selfish purposes, they claim the flag of any of the countries in which they have a presence, but conversely eschew those same claims to avoid the taxation and legal constraints of any and all. Using holding companies, subsidiaries, and other mechanisms of proxy, they play the international legal framework to their advantage, and to the disadvantage of taxpayers worldwide.

In aviation, this worldwide corporatocracy is most visible where the foundational monuments of aviation infrastructure – airports, air navigation facilities and air traffic control services – have been the subject of sale from public to private ownership and operation. Reasons for this trend have most often been articulated by the political forces as providing much needed liquidity to governmental budgets, and allowing the efficiencies of the private sector to replace the rigid structure of agencies. Not explained has been why divesting a public asset for a short-term cash infusion meets any standard of guarding the public trust. If sold to a for-profit corporation, the long-term ability to make money is implicit in any corporate decision to buy, and implies that managing and operating the asset for the public benefit would continue to be better in the long-term for the taxpaying public. Creating the appearance of a fiscal benefit over only the short-term would certainly be the very definition of breaching the public trust. Arguing that existing laws are too restrictive to allow an agency to hire, fire, procure or otherwise manage and operate a public asset is similarly nonsensical. The legislature that enacted the very laws complained of also has the power to rescind or alter those laws in order to allow an agency to meet the same goals. Thus, selling out a public asset in order to avoid making difficult political choices merely reflects an abrogation of public duty in favor of an easier path – in short, political cowardice.

To Canadians, the sellout of the Avro Arrow Project, the Airbus Affair and the Lockheed Bribery Scandals all represent the undue influence of the corporatocracy on governmental actions, while the sale of Petro-Canada and the Air Navigation Services of Transport Canada reflect privatization of governmental functions. In the United States, the sellout of massive home mortgage underwriting to Fannie Mae, Ginnie Mae and Freddie Mac – the equivalent of “crown corporations” – and the mass purchase of military weaponry beyond the requests of military services reflect the undue influence feature, while the corporatization of the criminal prison system reflects the worst of privatization.

To the credit of the Canadian Government, it elected a not-for-profit format in the Civil Air Navigation Services Commercialism Act, and with the inherent tilting of stakeholder interests, sought to balance that reality with four non-aligned members on the board of directors. In addition, the restriction to funding through publicly-traded debt and user fees provides some longer-term measure of independence from undue outside influence. Although the basis for its decision to directly privatize was principally explained as allowing for necessary upgrading of assets and expansion of employment during a time of fiscal restraint, it would have been more honest for parliament to admit that it wanted to shift to a user-based funding system without seeming to be responsible for the increased fees that were certain to result. With air navigation and air traffic separation so clearly a national responsibility, and tied directly to commerce in so many ways, the question of why a legislature would want to sell a public asset and relinquish control to a corporate entity reflects the political cowardice described above, and raises the issue of whether it also intended to evade governmental responsibility for the ways in which the necessary safety functions were handled by its “straw man” operator.

With the bulk of its income from user fees, costs of Nav-Canada services quite predictably rose at a steep rate over its first nine-years of operation. It must be acknowledged that Nav-Canada received high marks for the ways that it established and maintained safety standards. At the same time, a fundamental weakness in separating the governmental function from public funding was revealed by the recession of the late-2000s, when intervention of the judicial system was required to adjust the values of assets that backed commercial paper floated by Nav-Canada for the very modernization and expansion that the legislature sought to avoid. This very predictable adventure essentially juxtaposed the concept of corporate bankruptcy against a necessary public function. How this will affect the willingness of third-party lenders to support borrowings in the future remains an open question, but whether necessary governmental functions should be privatized and exposed to the instabilities of the economic marketplace remains squarely at issue. There is nothing within the capability of Nav-Canada that could not also have been done by the government directly, had the political courage existed to be honest with the public. Yet, a recession of far less than depression-era proportions exposed a weakness in the privatized model when external factors overwhelmed even the well-managed corporation that is Nav-Canada.

The privatization of other air navigation and traffic control services around the world has been far more problematic, most often where a for-profit model has been used, and corporate actions to increase profits have been at odds with practices and procedures that are essential to safe operation. In one classic example, a corporate efficiency expert saw that an average of four operations per hour occurred between midnight and five in the morning, and therefore recommended that a scope, data and supervision position were not justified, without understanding that the four operations per hour sometimes occur during a single five-minute period. In another example, a privatized service determined that a radio navigation station should be relocated by several miles in order to make use of less expensive electrical power, only to subsequently learn that the power was less expensive because it was also less reliably available.

In the United States, multiple attempts to privatize air traffic control over the past forty years have so far failed, except for the Federal Contract Tower Program. Started under President Reagan in the recession of 1982, the effort was initially seen by the political right as a first step in a general effort to maximize outsourcing of government functions. The right saw an opportunity to privatize the entire air traffic service, but the FAA was able to continue operation of the enroute air traffic control centers and most towers. Closures of control towers were proposed where traffic levels were low, but the right successfully coerced privatization of 225 towers, shifting operation to three corporate contractors.

Those favoring privatization used accounting tricks to claim that each contract tower saved some $200,000.00 USD annually over federally-operated towers. The true facts were that private interests were able to attract employees already vetted and trained by the FAA, thus dramatically lowering training expenses. By offering the ability to work part-time and often near their home towns, contractors were able to steal experienced people, while offering lower wages, fewer benefits, and avoiding overtime pay, all the time falsely claiming that privatization itself was responsible for reduced operating expenses. In addition, corporate operators elected to shut down during periods of low activity – an option not available to the government at the many international airports where it retained operation.

In 2015, the political right has taken control of the national legislature, and is again pressing for privatization of air traffic control. As the minority party two years ago, the right forced a 10% reduction in budgets for all federal agencies. The result for air traffic control was the closure of 129 control towers, staffing freezes that drove up overtime pay, and the halting or slowing of system upgrade projects. Incredibly, the argument of the right is now that the air traffic service failed to force its contractors to meet procurement targets, and should therefore be privatized and sold to the same corporate interests that have failed for decades to meet their contractual commitments for upgrades to the very same agency.

The scope of privatized governmental functions in the United States now ranges from the operation of federal and state prisons, to the management of local governments, operation of municipal water and sewage systems, provision of quartermaster functions for military services, and collection of classified data on behalf of intelligence agencies. In what should be a warning, these privatized functions have customarily left in their wake a trail of higher costs to taxpayers, lower accountability, inefficiency, fraud, illegal actions, and ruined lives.

The political questions remain manifest. Should it not be the long-term interests of the public upon which focus is maintained when considering the privatization of a public function or sale of a public asset? Is it sound policy to sell off public assets as a means of addressing short-term budgetary issues, or to place corporate profit-making at the center of necessary governmental functions? Must all public functions be sustained by user-fees, or are there some as to which a broader public benefit is properly considered?

One thing is clear – neither allowing elected legislators to evade responsibility for difficult political choices required to properly manage public assets nor allowing them to reward their corporate sponsors through a breach of the public trust, provides a logical justification for the sale of public assets or privatization of public functions.

Mark H. Goodrich – Copyright © 2015

“Privatization Illogic” was first published in the May 2015 Issue (Vol 12 No 2) of Position Report magazine.