In Search of a Third Way Beyond the Public and the Private Options, by Thomas Perroud

In a recent post on LPE Blog, professor Jon Michaels warns against the dangers that State intervention in the economy may carry. Indeed, as the State is likely to come back as never before in the regulation of the economy as a reaction to the economic consequences of the Covid-19 pandemic, with nationalisations programs being implemented everywhere, it seems to be a good time to reflect on new forms of property and therefore of capitalism.

The current pandemic shows to what extent our public services are essential, but were threatened by years of disruptive reforms everywhere. In addition, the pandemic will certainly create a crisis for privatized public services, such as railways, airports, or airways. These companies being crucial to our well-being, the economy, the interconnection between our countries, and our social connections, they will receive public funding to overcome the crisis. However, most of them being private corporations, and most of them being on the financial markets, this creates an issue. How can we be sure this public money will really go to the collective mission of these corporations and not to their shareholders? How do we know this taxpayers’ money will not be diverted to private pockets instead of being spent on collective goods? The Covid-19 crisis puts the question of privatized public services at the forefront again. They are not too big to fail but too crucial to fail.

In Europe, some politicians already argue in favour of an outright nationalization of these companies. However, such a public solution is not without any weakness. Sure, public ownership should at least ensure that these companies are democratically accountable, which is extremely important. But here also capture can happen. Management of these companies under democratic pressure is not without its flaws: pricing water or electricity to what people demand can conflict with a sustainable development of these resources, for instance.

State ownership does not necessarily entail that a policy will be in the public interest of all the stakeholders, and the environment. State policies can be captured, and all the more so that most of the time public participation to the decision-making process is not mandatory. In France, public corporations or regular administrative bodies running public properties are not under an obligation to include the public when taking decisions. In other words, the diffuse interests of the public could be discarded.

The crux of the issue is how to find a governance structure, beyond public and private, that would ensure that the management structure does not behave as an “owner” of the general interest. In other words, the question is how to find a power structure that ensures the fulfillment of the broad social function of the resource or the activity. The centre of the issue is property itself, be it public or private! The current interest for commons, coops, community land trusts, community benefits agreements in the United States should trigger new thinking into this debate. Let us study the progression of ideas in the ownership of public services and how the commons ideals could reshape the debate.

From Public to Private and From Private to Public

Since the end of the WWII in Europe, the debate on public services has turned around (public or private) ownership and not about governance and how to break or to accommodate the power structure of these utilities in order to have them fulfill the bigger interest of the community. In the United States, the scare of socialism has never made the public option of utilities possible (except for water and energy at local level and for the post office at federal level). At any rate, the shift has been between monopoly and full competition. In Europe competition and privatization have gone hand in hand since the 1980s.

The idea behind the nationalisation program in France and the United Kingdom after WWII was to balance the “brute force of monopoly” – to use the term of the founder of the BBC – with democratic accountability. The pricing structure, for instance, could always be discussed in the democratic arena. With the collapse of this system in the 1980s, the power these monopolies wielded has been transferred to private hands. Competition was thought to emerge in time and render unnecessary all public regulation. In other words, the system that takes precedence in the 1980s transfers public responsibilities to the market that is supposed to do a better job at regulating utilities. Competition has not fully emerged though. How could it, with the utilities being based on the private ownership of the network?

The intern contradiction of the privatization program lies here: you transfer an infrastructure into private hands while hoping that competition will appear – as if by magic. But ownership being what it is since modern times and its first elaboration by Grotius, and later by the thinkers of possessive individualism, the owner of the infrastructure is absolutely free to allow access. That is why complex procedures of dispute resolution have been put in place. New entrants can appeal to the regulators to force entry into the infrastructure and set the price.

The privatisation of utilities has put essential facilities into private hands creating fortunes for individual entrepreneurs. We are now faced with an oligarchic structure of property that is most certainly not in the public interest. 

Has privatisation been successful? For one thing the regulatory framework is extremely complex. How could it not be, regulation being based on this paradox of a private company owning an infrastructure and being obliged to open its use to competitors against its will? Also, indicators show that, compared to the previous situations when public services were public, many citizens are left behind. In France, while Paris should soon benefit from the 5G, many areas in the country still do not enjoy mobile services at all. Empirical studies have shown negative distributional effects of privatisation programs in developing countries such as Western China but also in the United States. Many studies have shown the effect of privatisation on rising inequality. Universality and equality were prime in the previous system ensuring a sort of citizenship of public services. Clearly the previous system had also its flaws. Public management clearly does not ensure success but at least it could infuse these services with public values.

Also, contracting out has meant the placing in private hands of essential facilities that can extract monopoly rents from consumers. In France for instance, the privatisation of the highways has given these private companies huge profits than cannot serve any longer to finance greener modes of transportation or other public services through the State’s budget (see the report of the French Competition Authority and the Audit Court). Also contracting out creates high risks of corruption and risks of disrupting democracy because these companies will lobby to preserve their privilege. The privatization of public services has, everywhere, reinforced the oligarchic structure of our societies and explains rising inequality in the western world, and populism.

Given the shortcomings of the private provision of public services, we are now facing a new trend, especially at local level, to take essential services back into public hands (the “pendulum” is swinging back again). It is visible in water or energy provision but also in other sectors in Germany, France, Italy, and the UK. Municipalization is a strong trend in many countries. London has launched a public program called London Power. A research conducted worldwide concludes that: “Our research shows there have been at least 835 examples of (re)municipalisation of public services worldwide in recent years, involving more than 1,600 cities in 45 countries. And these (re) municipalisations generally succeeded in bringing down costs and tariffs, improving conditions for workers and boosting service quality, while ensuring greater transparency and accountability.”

Would there be a way between public and private ownership of essential facilities/utilities?

Is a Third Way Possible?

Although the notion of third way is often associated with the progressive Labour/democrat evolution in the 1990s towards accepting market ideologies, we argue here that the real third way would be to find a compromise between full State and full private solutions (within a regulatory structure). The idea of the commons is the only one that really tackles the issue that is never asked when thinking about public services: the problem of the ownership and how to find a governance structure that manages to fulfill the public interest.

Indeed, in the past, in both France and the United Kingdom, there were other ideas concerning the ownership of essential services. These other ideas were progressively discarded to favor public property in the form of state property. In the United Kingdom these ideas are associated with Guild Socialism and the idea of participation of workers to the management of the firm. Self-management is an idea that was prominent in western Europe at the beginning of the 20th century. The problem here is that there is no way in these systems of self-management to ensure accountability to the public. In France, the idea of state ownership was enshrined in the Constitution after the Second World War. Section 9 of the Preamble of the 1946 Constitution provides that assets and companies that are or that become a national public service or a natural monopoly must be appropriated by the community. During the debates on this article, some deputies argued for another formula: “must cease to be at the service of private interests”. This wording allows for more invention in the property structure. The sponsors of this wording argued that this would allow for taking other property arrangements into account. A deputy said that the article, stressing public property, discards the cooperative option. He said that cooperative property is not public property.

In other words ideas of property won in the nationalisation program. By eliminating alternatives, the debates missed the opportunity of promoting other ideas.

Since then progress has been made in economics and political science. Oström especially has given new legitimacy for the self-management of resources. The major difference between the ostromian commons and public services lies in exclusion. Access and exclusion are at the heart of Oström’s definition of common pool resources, which are, to outsiders, similar to private goods. Conversely, public services should not exclude consumers.

Under which conditions could self-management of public services be implemented effectively to work for the public good? This area of research should be developed. For instance, in the United States, electricity infrastructures are managed under a model of collaborative governance.

In the 1990s, the Federal Energy Regulatory Commission issued Order 888 that ordered the unbundling of the industry into the three segments of generation, transmission and distribution. For the management of the transmission segment (the transport of electricity in the big wires), the Regulator promoted the reorganization of the industry around not-for-profit organizations called independent systems operators (ISOs). The management of this part of the network is in the hand of an entity managed by all the stakeholders (industry, consumers, governments). The most important part of the model is of course the non-for-profit element.

This example shows that utilities and especially the infrastructure could be remodelled on an ad hoc basis to favor an inclusive management model. The biggest issue here is the institutional design of each institution. How do you include the employees? How do you include the public? How do you include environmental concerns or future generations concerns that may not have a voice? The ad hoc nature of the commons is a good way to solve the polycentricity of the stakes in public services. Although corporate law works on a limited number of corporation models, one solution could be to use freedom of contract to let the stakeholders design the best institution to manage the service. The State should be present obviously but it should not take the whole place because it is not the exclusive agent of the general interest, which should be co-produced by the different stakeholders. The issue here remains to protect and empower weaker interests that could be discarded in the co-production. Co-production should not mean a “cartellisation” of strong interests to produce a public service in their favour. Institutional design and identification of all interests (weak and strong) is key here.

Also, institutional design should take into account one important aspect: representing the interest of nature or future generation. That is why these institutions should include units like the Intergovernmental Panel on Climate Change (IPCC) integrated in the decision-making process to evaluate and integrate values that cannot have a voice. In public service, research is essential to infuse discussion and knowledge into the management of the service.

In other words, integrating the commons research and its idea of self-management into the public services world still needs a lot of debates (the question might be how to frame them and how to include research into the debates – but research on its own can also be either elitist or utopian or a form of hubris)  in order, for each case, to strike the right institutional balance between all the stakeholders (and especially those that have no direct representation like nature) and entities that cannot be adequately represented. It seems to us a way to overcome and go beyond the public/private debate to ask how the community could self-manage its public services.

Posted by Thomas Perroud, professor of public law at Panthéon-Assas University (CERSA)