Public-private partnerships: Another disguise for privatization

Last November El Salvador signed a trade agreement with the United States called Partnership for Growth. El Salvador undertook to promote Public-Private Partnerships and President Funes has already introduced the bill to create them. These partnerships will provide continuity to the wave of privatization,. putting the assets that are still retained by the Salvadoran State into the hands of investors, mainly from the United States, who will get even richer at the expense of our taxes.

Elaine Freedman

Public-private Partnership schemes “are what we need to push our country forward and overcome the crisis we’re facing,” said President Mauricio Funes during his visit to Brazil in August 2010. Twenty months later, in April of this year, participating in the Sixth Summit of the Americas in Cartagena, Colombia, he nailed it: “In those countries where both the international and national business sector is strategically banking on productive investment with a medium- to long-term perspective, a virtuous circle of high sustained growth begins to build sooner rather than later, employment increases and as a result individual and family incomes increase.”

Although it was encouraging to hear so much certainty in the President’s voice, his words couldn’t help but evoke the speeches of his predecessors Alfredo Cristiani, Armando Calderón Sol, Francisco Flores and Elias Antonio Saca justifying privatization, so characteristic of the neoliberal model. Their privatization discourse promised to reduce the size of the State, decrease the fiscal deficit, provide better services and inject the State with immediate resources. But the real result of the privatization wave was the loss of approximately 10,000 public sector jobs and only some US$334 million net for the State from the sale of assets valued at over US$5.7 billion. Moreover, the cost of services provided to consumers soared, while the companies that took over energy distribution, tele-communications and the banks registered joint profits of more than US$291 million in 2007 alone.

What are these partnerships?

According to the US government, which is currently promoting this approach, public-private partnerships (PPPs) are partner agreements contracted between the government or its institutions and private enterprise, which allow more than “traditional” participation by the private sector in the public sector. A public-private partnership exists when public sector institutions are associated with private sector entities (corporations, foundations, academic institutions or individuals) and come to a commercial agreement to achieve a common goal that also meets each partner’s objectives.

They’re nothing new

Partnerships aren’t really new. In his book, Provincializing the First Industrial Revolution, Patrick O’Brien argues that public-private partnerships are as old as capitalism, noting that their first traces could already be found in England during the Industrial Revolution.

In the 1980s, at the height of the neoliberal boom, this approach began to play a more important role in economic policy in the United States and the countries that today make up the European Union, which also promoted the model. In those years Chile, under the boot of Augusto Pinochet, was the “pioneer” of public-private partnerships in Latin America. Examples already exist even in El Salvador: Nejapa Power, Duke, LaGeo, Diego de Holguín and the Gold Road.

The novelty is in the legal framework

If they already exist in so many countries, including here, what’s new? President Funes explains that the bill he presented to the Legislative Assembly in January 2012 seeks to reduce “bureaucratic excesses” in order to increase private investment, especially foreign private investment. The purpose of the proposed law is to “establish the regulatory framework for developing public-private partnership projects for the effective and efficient provision of infrastructure and public services of general interest. In a framework of legal security, the private sector will provide the necessary economic resources, skills and knowledge so that, in conjunction with the State, it can develop such projects for the benefit of the people.”

Okay, so what are “general interest” projects? The bill establishes that they are “those that have driving strategic sectors of the economy as their purpose by encouraging technology, science, higher education, innovation, and research and development.” The first projects on the list are ports, airports and highways.

There are three
types of partnerships

The bill establishes three PPP models. In the first, a State institution, whether ministry, semi-autonomous institution or municipal council, hands over material goods or constructions in the public domain to a private company so that, “as appropriate, it can build, expand, equip, repair or maintain works to be used as intended to provide a public service through a public works concession.” These partnerships are of two types: those involving the handover of goods or construction works that are “national assets for public use,” such as streets, plazas, bridges, roads, and even the sea and its adjacent beaches; and those that are “fiscal goods”: road maintenance, expansion and/or maintenance of the Comalapa airport or the ports of Acajutla, La Libertad or Cutuco.

The second model is used in cases where a ministry, semi-autonomous institution or municipal council hands over its own property to a private company to provide a public service. These partnerships are split into contracts where the assets used must be transferred to the State on conclusion and those that do not require the return of the assets to the State. Concessions for supplying and maintaining water purification and distribution services or prison administration can be found within this model.

The third model provides for the handover of fiscal assets so a private company can exploit them. Private enterprise may also devote its own assets to implementing this activity of “general interest.” State assets, for example, might be ceded to a company to set up an ethanol plant or perform research in biotechnology. The facilities of the National University of El Salvador and its installed capacity could even be privatized in this way as well.

President Funes explained the case of Embraer Aeronáutica Ltd., a Brazilian company that started out state-owned and was privatized in 1994. “Embraer needs a maintenance plant for its aircraft that is close not only to Brazil, but also to the other market where it sells. We have the Ports and Airports Executive Committee land that we could put at the service of this plant and Embraer will provide the capital, technology and human resources.”

They aren’t like
traditional privatizations

Until now, the preferred privatization model in El Salvador has been the outright sale of State assets. Banking, for example, nationalized in 1980 as part of the counterinsurgency reforms, was transferred to the Cristiani, Llach Hill, Salaverría, Baldochi, Simán and Mathies Hill families in 1990. The national oil import company, Petrocel, was sold to RASA, which is owned by Shell and Esso. And ANTEL, the State telecommunications agency, was sold to France Telecom and the Salvadoran Consortium.

Another form of privatization, much more similar to partnerships, has been the outsourcing of public services. Using this model, FEPADE took over administration of the Central American Institute of Technology (ITCA); the Salvadoran Social Security Institute hired private hospitals, private clinics and laboratories to conduct specialized tests and consultations; and private companies were awarded contracts to read water meters and construct infrastructure for the National Water and Sewage Authority (ANDA).

PPPs are obviously a particular form of concession. What’s the difference between concessions that have emerged in the context of classic neoliberal structural adjustment programs and the new partnerships? In conventional contracts, private companies provide the services but the State is still responsible for them. Under the PPPs, private enterprise is fully in charge of the project for the length of the concession. Central government will approve partnership projects and participate in formulating bidding procedures through the El Salvador Export and Investment Promotion Agency (PROESA), a state agency founded three years ago, and some auxiliary entities that perform the regulatory function.

Commercial, not technical criteria

PROESA is heir to the old state bodies now linked to the transnationals that are getting rich in El Salvador. This agency’s staff knows a lot about international business but little about providing public services, which the Constitution states is the State’s responsibility. Although the Constitution allows these services to be contracted out, one would think it would have to be done on the basis of technical criteria to meet the needs of the population and not on the basis of international trade criteria.

In addition, the bill authorizes the creation of a new regulatory agency known as OFAPP. It states that this agency will not replace existing regulators, such as the Maritime Port Authority, the Civil Aviation Authority or the Superintendence of Electricity and Telecommunications. But its considerations and decisions will prevail. when a conflict crops up between its business criteria and the technical criteria of these regulators.

This calls into question the State’s ability to fulfill its constitutional duty to “ensure that the inhabitants of the Republic enjoy freedom, health, culture, economic wellbeing and social justice.”

Long-term contracts
and amounts in millions

In the PPPs, concessions have a ceiling of up to 40 years. According to the bill, “The amount of investment and current spending on operation and maintenance of these projects must exceed the equivalent of 45,000 times the minimum monthly wage in force in the trade and services sector.” The current minimum wage in the trade and services sector is US$224.29 a month, which means that the minimum amount of a PPP is estimated at a little over US$10 million. Both the duration, which in a traditional concession may last from one to five years, and the exorbitant amounts benefit big private enterprise. In the classic model, the contracting institution pays the contracted company for services provided, which means that payment comes from the national budget, financed by taxes from the Salvadoran population.

The Partnerships bill envisages two classifications: Those cases where the contracted company is “self-sustaining” and will charge the consumer directly and those that are “co-financed” and can depend on a constant budget contribution from the State throughout the concession. “Self-sustaining” can include cases such as toll charges for road use or rates for drinking water. “Co-financed” can include prison administration or infrastructure maintenance at the University of El Salvador.

Dedicated to the transnationals

The public-private partnerships legislation is a reactivation of the wave of privatizations that so affected the people of El Salvador and so enriched the ruling class of both this country and imperialist countries during 20 years of unbridled neoliberalism.

This bill, even more than the previous privatization policies, is tailor made for the benefit of transnational corporations, mostly those from the United States. The World Bank does not consider acceptable a principle of differential treatment that could give priority to national or Central American companies, just as it was not permitted in CAFTA, the Central American free trade agreement with the United States (CAFTA). The single criterion for awarding bids is the lowest price and, as the transnational corporations obviously have greater installed capacity and better technology, they can come in with the lowest price and win the concession.

Who’s backing this scheme?

In addition to the President, promoters of the partnerships include members of the Socio-Economic Council (CES), a body created by Funes during his first months in office. It is headed by the Technical Secretariat of the Presidency and includes 30 directors from the business sector, 30 from the wider grassroots and trade union movement, 10 “academic” representatives, including the National University (UES), and some private universities. It was created to discuss various public policies, including the much persecuted “fiscal pact” systematically sabotaged by business associations.

Throughout the past three years, this council has been moving towards acting as a sounding board for the National Association of Private Enterprise (ANEP). The majority of trade unionists taking part represent pro-employer unions belonging to the Movement of Trade and Guild Unity of El Salvador (MUSYGES).

Baited hooks that deceive

In August 2011, the CES endorsed the partnership initiative, taking part in defining deadlines, parameters and processes. In misleading media language, they agreed on two points that became unconvincing bait to attract grassroots trade unionists either not in the CES or who left it.

The first point was that the PPPs shouldn’t be viewed as privatization processes, since all stakeholders are interested in the State retaining ownership of natural resources and other assets that provide vital services to the population. The second was that they also shouldn’t encourage lowering labor or environmental standards, as companies must respect the rights of working people and the environment. Contradicting this, reducing “bureaucratic excesses” for private investment allows for subcontracting and disassociates the State from acting as a guarantor of labor rights, which is a clear reversal of the essential labor gains embodied in the Law of Public Administration Purchases and Contracts.

Yet another misleading argument attempts to confuse the PPP model with the joint ventures promoted in Cuba. This malicious argument ignores the fact that the Cuban State maintains control of strategic services, while in the joint ventures open to private investment the State owns at least 50% of the shares and private investors purchase tax obligations that contribute to the national budget. None of this appears in the PPP model, where the State assigns all responsibility to the private company and cedes to it all the profits for the duration of the concession.

Finally, exclusion of the partnerships law from the “health, social security, public safety and formal education sector, in the terms of the General Education Law” is almost imperceptible. It only appears in two lines of the bulky 56-page draft. As it goes into no detail on these points, it would be easy to argue that hiring private security firms in prisons is not a public safety issue or even that hospital food isn’t a public health issue. Moreover, the Salvadoran Foundation for Economic and Social Development (FUSADES), a rightwing think tank, has already said it will continue to fight even this exception “because it would restrict private investment and limit the objectives of the law.” Business is business.

Public services will be merchandise

The most offensive fallacy by the promoters of partnerships is that this legislation will be the key that opens doors to foreign investment, creates jobs and lifts the country out of crisis. Yet another stale old argument, one we heard over and over again in the CAFTA advocacy and negotiation process.

Economist Raúl Moreno explains that chapters 9, 10 and 11 of the bill, which deal with public procurement, investment and cross-border trade in services, deregulate almost 100% of the “obstacles” to foreign investment in El Salvador. They provide the legal framework for internationalizing the government’s tenders in public service concessions and turn public services into goods, viewed primarily according to market laws and understood very differently from the way they are understood by the Constitution of the Republic and the Universal Declaration of Human Rights. The bill even allows dissatisfied transnationals to sue the Salvadoran government in an international court controlled by business executives, as has already happened in the case of the Commerce Group and Pacific Rim mining companies.

Will they attract foreign investment?

Did foreign investment and jobs increase with CAFTA? We know investment rose in the area of finance, thanks to selling off the banks to transnational corporations in 2007. And it grew in telecommunications, thanks to the proliferation of mobile phones. It also grew in the area of electricity, thanks to the privatization of energy distribution and the dam projects that today threaten the lives of people who live in the areas where they are being built.

Nonetheless, foreign investment in El Salvador continued to be the lowest in Central America in 2010, attracting only 2.5% of foreign investment in the region. Furthermore, for every US$1 that comes into El Salvador in the form of foreign investment, $0.46 leaves as profit repatriation, $0.70 cents to be invested by national entrepreneurs in other countries and US$2.77 leaves because those same Salvadoran businesspeople prefer to deposit their profits in foreign banks. In short, US$3.93 goes out of the country for every $1 that comes in.

CAFTA’s first year showed a net loss of 11,457 jobs, and during the five years it has been in force, the unemployment rate has risen from 6 to 7%. According to economist César Villalona, “investment doesn’t grow because the domestic market is very small and purchasing power doesn’t increase because salaries are very low. A mere six thousand Salvadorans receive 60% of the national income; another 25% goes to workers and only the remaining 15% to the State. Public investment is low because the State has no money.”

With or without partnerships, El Salvador won’t “attract investment” as long as big business is unwilling to redistribute national income, which would imply paying better wages. And public investment won’t grow while employers are unwilling to pay the government the US$1.6 billion a year in taxes they dodge and continue to put obstacles in the way of real tax reform.

Will they contribute to growth?

It’s no surprise to anyone that this initiative grew out of the framework of the Partnership for Growth (PFG) process between the United States and El Salvador signed in November, 2011. In the founding PFG document, El Salvador undertook to promote the PPP law. Six months later, the “growth” process has already started. PROESA Executive Director Giovanni Berti explained that “there is already a commitment by President Barack Obama’s administration to support the search for big US investors.” Partnerships will be an opportunity to put Salvadoran state assets, sustained by our taxes, and our national territory into the hands of foreign investors so they can increase profits that will be repatriated to their country of origin or to another country “more attractive for investment.”

In the co-financing model, it’s not only the State’s assets that will be handed over. There will also be a fiscal contribution to make the private company projects work. In a nutshell, part of the national budget, which doesn’t even cover the State’s main needs, will be used to finance the profits of multimillionaire transnationals. There’s no doubt that PPPs complement the PFG and both are consistent with the US Global Development Policy (2010), which defines global development as “vital to US national security” and “a core pillar of American power.”

What about grassroots movements?
And what about the FMLN?

Because of all this, the good news from the promoters of public-private partnerships has no credibility with the trade union movement committed to transforming our country. Wilfredo Berrios, leader of the Salvadoran Trade Union Front, tells how government officials from the Ports and Airports Executive Commission have taken on the task of trying to convince leaders in several trade unions that the PPPs are “very different from privatization. But the trade unionists can clearly see that it means the continuation of privatization and that “the US government and World Bank are pressuring Funes in exchange for loans.”

On May 1, International Workers’ Day, not only trade unions but a broad array of grassroots movements and groupings
from the church, market and educational sectors, as well as the peasant and cooperative movement demanded that
the Partnerships Law be rejected. FMLN leaders have also expressed their disapproval of public-private partnerships. Legislator Lorena Peña said: “I don’t know what innovation they bring. It’s offering other assets we already have. Moreover, the investment will mean more public spending for co-financing.”

In the May Day march, the FMLN secretary general put it more bluntly: “The FMLN will not go along with public-private partnerships,” words that indeed came as good news to the grassroots movement. Even so, the FMLN would need 12 more votes than it has to stop this bill.

Difficult but not impossible

Stopping the partnerships will be hard, because the correlation is unfavorable in both the country and the Central American region, with laws of this type already in place in Honduras and Guatemala. But it’s not an impossible task. The case of Panama provides a ray of hope for Salvadoran grassroots organizations.

In the last quarter of 2011, Panama’s Medical Associations struck for 29 days, forcing the government to withdraw the private-public partnership bill from the Legislative Assembly. A more extensive national debate on the subject is still going on in that country.

The “white marches” that stopped the privatization of health services in El Salvador in 2002 are an important precedent for believing that a joint effort between the grassroots movement and the FMLN could halt a project of this type.

The debate is now open. Today, as Funes announces “increasing change” at the end of three years of his presidential term, he needs to understand that paralyzing the re-introduction of privatization policies once and for all is precisely what El Salvador needs so it might have a chance at change that benefits the country and its population, not foreign investors.

Elaine Freedman, a grassroots educator, is envío’s correspondent in El Salvador.

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