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Rethinking Corporatization and Public Services in the Global South
By David A. McDonald
Zed Books LtdCopyright © 2014 David A. McDonald
All rights reserved.
PUBLIC AMBIGUITY AND THE MULTIPLE MEANINGS OF CORPORATIZATION
David A. McDonald
After three decades of privatization and anti-state rhetoric, government ownership and public management are back in vogue. Governments around the world are taking back control of services previously sold or contracted out to the private sector, with the overall number of public enterprises around the world having 'actually increased' since the 1990s (Clò et al. 2013: 1). Even the Anglo-American heartland of privatization has seen more insourcing than outsourcing over the past decade, as public sector managers become increasingly frustrated with the 'inadequate' quality and scant cost savings of privatization, particularly in essential service sectors such as water and electricity (Warner and Hefetz 2012: 318; see also Cardwell 2013; Warner 2010).
Corporatization has proved to be one of the most popular forms of this renewed interest in government ownership. Sometimes described as agencies or parastatals, corporatized entities are fully owned and operated by the state but have a degree of autonomy from government. They typically have a separate legal status from other public service providers and a corporate structure similar to publicly traded private sector companies, such as a board of directors. Water and electricity utilities are common examples, although the practice extends to a much wider range of goods and services, including airports, childcare, universities, forests, hospitals, transport and manufacturing (Aivazian et al. 2005; Bilodeau et al. 2007; Fink 2008; Meyer 2002; Moynihan 2006;Nelson and Nikolakis 2012; Oum et al. 2006; Preker and Harding 2003;Sumsion 2006; Zatti 2012).
The primary objective of corporatization is to create arm's-length enterprises with independent managers responsible solely for the operation of their own immediate organization, and where all costs and revenues are accounted for as though it were a stand-alone company. This ring-fencing – or agencification as it is often called – is intended to create greater financial transparency, reduce political interference, and strengthen managerial accountability within relatively autonomous service entities. It can also serve to enhance the borrowing status and credit ratings of agencies, less encumbered by complex intra-governmental finances.
More controversially, corporatization has been used to create market-friendly public sector cultures and ideologies. Since the late 1970s, corporatized public utilities have been run increasingly on market-oriented operating principles such as financialized performance indicators, cost-reflexive pricing and competitive outsourcing. This is part of a larger neoliberal trend towards new public management, often with the express intent of outright privatization once the profit potential of a corporatized entity has been realized (Hood 1991; McDonald and Ruiters 2012a; Moynihan 2006; Osborne and Gaebler 1992; Shirley 1999). As one observer notes with regard to the corporatization of state-owned enterprises (SOEs) in China, 'such reforms represent a policy alternative for countries seeking to restructure SOEs without massive privatization', with the added advantage of preparing for 'eventual privatization' (Aivazian et al. 2005: 791). The Organisation for Economic Co-operation and Development's definition reinforces this commercialization trajectory, arguing that standalone SOEs should not 'contradict or discourage countries from undertaking any privatisation policies or programmes' (OECD 2005: 9). In other words, corporatization may be 'public' in name, but not necessarily in character, raising questions about the substance and nature of state ownership of essential services, and how it differs from the marketization objectives of more direct forms of private sector participation.
Not all corporatizations have been carried out with this commercial imperative in mind, however. The analogous administrative structure of corporatized entities belies more diverse material and philosophical undercurrents, from proto-privatization to distributive welfarism to contemporary models of socialism, some of which have been remarkably progressive. In this regard corporatization is little more than an empty institutional vessel into which very different ideological fluids can be poured.
One of the objectives of this book is to better understand the ideological diversities of corporatization, and what might make for a more progressive and equity-oriented form of public service delivery. Our focus is on water and electricity services in countries in the South, but the lessons have broader geographic and sectoral relevance and will hopefully contribute to a wider discussion of this important international trend. The book is also an attempt to deepen the empirical record on corporatization in Africa, Asia and Latin America. Comparatively little critical literature on the topic exists in these regions, and what has been undertaken tends to be inconsistent in its conceptual and methodological underpinnings, making it difficult to compare findings across place and sector.
The timing of the research is also significant given that corporatized entities are expanding throughout the South, at all levels of government, and across sectors. It is most prevalent in market economies (the focus of this book) but contemporary socialist states such as Cuba and Venezuela have created stand-alone public enterprises as well (Alvarez 2006; Benzing 2005; Bremmer 2009; Chavez and Goldfrank 2004). China is arguably the most active on the corporatization front, converting thousands of its state-owned enterprises into arm's-length agencies (Aivazian et al. 2005; Ocko and Campo 1994; Ramesh and Araral 2010), although for logistical reasons the experience of corporatization in that country was not included in our empirical study.
We are also interested in corporatization because it is seen by many as an 'alternative to privatization'. This is particularly true in countries in the South where private sector investment in essential services has not materialized as expected, and where resistance to privatization has been strong (Hall et al. 2005; Mansfield 2007; Spronk 2007). Private sector participation in services in Africa, Asia and Latin America has not disappeared, but governments and policy advisers such as the World Bank have become less bullish about the potential for private sector management and investment in core services, especially in lower-income countries where the investment risks are high (Bakker 2007;Bayliss 2002; Roland 2008). As Ramesh and Araral (2010: 1) note: 'States are back, hesitatingly, even unwillingly, and it is widely accepted that they have no option but to rescue the market from itself.'
Corporatization has not been the only response to this market failure but it is widespread and could become the dominant form of service delivery in countries in the South in the near future, if it is not already. Corporatized entities currently 'make up the bulk of the public sphere in many Western European countries', making it essential to better understand 'the governance of this increasingly important class of hybrid organizations' (Kickert 2001: 135; see also Bach et al. 2012; Dan et al. 2012; Florio 2013; Pollitt and Talbot 2004).
Teasing out what is local and what is global in this trend is another important challenge. There is much that is universal about corporatization – particularly its neoliberal variant – but differing social, political and economic contexts can result in diverse operational realities. There is no singular form of corporatization and no simple mode of analysis for explaining how it works (or not). What counts as a success or failure in one place or sector may be seen very differently in another. This is not to abandon any notion of shared norms or objectives, but simply to acknowledge the complexity and ambiguity around corporatization in practice. More than any other public service model, corporatization raises conflicting and complex questions about the meaning of 'public' and the nature of the state in the delivery of essential services in countries of the South.
State of the debate
Central to our inquiry is the question of whether corporatization should be seen as a progressive form of public service delivery or, by contrast, as a precursor to deeper forms of commercialization. The literature is divided on this question. Writings in favour of corporatization tend to celebrate market-based management as an effective way to depoliticize public services and improve efficiency through marketization (Hood 1991; OECD 2005; Osborne and Gaebler 1992; Preker and Harding 2003; Shirley 1999). Those opposed tend to see corporatization as the proverbial wolf in sheep's clothing, offering a façade of public ownership while propagating market ideology and advancing corporate accumulation; a form of privatization without the political and financial risks associated with direct private sector participation (Blum and Ullman 2012; Gentle 2009; Magdahl 2012; Van Rooyen and Hall 2007).
Much of the debate has focused on countries in the North, but the literature on corporatization in the South is equally bifurcated. The World Bank is arguably the most prolific and influential pro-corporatization advocate in this regard, offering up textbook rationales for why it should be done, along with pecuniary incentives for corporatized reforms throughout Africa, Asia and Latin America (Andres et al. 2011; Kessides 2012; Marin et al. 2010; Preker and Harding 2003; Shirley 1999; World Bank 2006).
Opponents, meanwhile, point to the especially pernicious effects of corporatization in low-income countries, where publicly owned service providers can prove to be even more commercially oriented than their private sector counterparts, cutting off services to poor households, building multi-tiered service systems, aggressively pursuing private sector contracts outside their home country, and valorizing new moral codes of conduct around the 'responsibility to pay' for market-oriented services (Blum and Ullman 2012; Gentle 2009; Magdahl 2012; Van Rooyen and Hall 2007). These experiences have persuaded many that corporatization is little more than a ruse for commercializing service delivery in the South while deceiving people into thinking that the crisis of privatization has been averted.
And yet, research also reveals positive examples of corporatized service providers in the South where equity, accountability, sustainability and other progressive indicators of 'publicness' are taken seriously, suggesting that not every corporatization is created equal. Preliminary investigations for the case studies in this book, for example, found corporatized utilities that appeared to have bucked the neoliberal trend to varying degrees, openly resisting marketized forms of public management. The selected cases are not the only such examples in the world today, but they offer detailed, comparative insights into how and why some corporatized utilities in countries of the South have managed to retain an equity-oriented, and less commercialized, public ethos.
In this regard, the cases in this book demonstrate the need to move beyond the dualistic opposition that plagues much of the debate on contemporary public sector reform, labelling models as either 'empowering the public' or 'just another means of strengthening neoliberal rule'. Following Newman and Clarke (2009: 132), we attempt to offer a more nuanced reading of what is actually happening on the ground, 'suggesting a number of ways in which publicness is being disassembled and reassembled'.
Having said that, we cannot ignore the ongoing – and shape-shifting – influence of the market, particularly in countries of the South where the power of international financial institutions and multinational corporations remains disproportionately strong in policymaking circles. The ability of local politicians, workers, community organizations and other anti-commodification groups to resist neoliberal reforms exists – and is remarkably strong in some places – but even the most robust examples of progressive corporatization in this book reveal just how fragile these alternative ideologies and practices can be, haunted by forces of marketization from within and without. Theorizing these neoliberal pressures, without abandoning context and agency, is critical to understanding the potentials and limitations of corporatization on the ground.
Added impetus for our research came from the need for more explicit and consistent research methodologies on corporatization in the South. Pro-corporatization literature tends to rely on a narrow set of financially oriented performance criteria that pay little attention to questions of equity and affordability. Anti-corporatization research tends to be critical of these restrictive financial criteria but does not always specify what the alternatives might look like or how they might be evaluated. We do not claim to resolve these methodological challenges here, but our case studies do benefit from a more explicit set of analytical tools than have been employed in the comparative critical research on corporatization to date (more on this below).
Corporatization in historical perspective
In some respects, the concept and practice of corporatization are as old as the state itself. The Achaemenid Empire of Persia, for example, was dominated by state enterprises with some autonomy from political rulers, run as 'professional' entities and renowned for their 'efficiencies' (Farazmand 1996: 2–3). Similar patterns can be seen in other ancient and medieval regimes, with varying degrees of success. Sweden began to 'structurally disaggregate the provision and production of public services' as early as the seventeenth century, for example, and has employed modified versions of this arrangement ever since (Moynihan 2006: 1034).
So too did the Soviets experiment with the corporatization model, creating some 750,000 arm's-length public enterprises while in power. Communist China has established more than one million. Many of these entities have since been sold or outsourced but some of the largest and most strategic remain as stand-alone public agencies in both countries (Farazmand 1996; Painter and Mok 2010). Widespread experiments in 'municipal socialism' from the late 1800s to the 1940s in Europe and the United States also saw extensive corporatization, as local authorities took over fragmented private services and/or created new public utilities as autonomous corporations. Everything from gas works to restaurants to hospitals was run as a corporatized public entity (Booth 1985; Graicer 1989; Radford 2003).
Even fascist states employed the corporatization model. In Italy, Mussolini created the Istituto per la Ricostruzione Industriale (Institute for Industrial Reconstruction), which, 'as of the late 1930s ... led to the Italian state owning a bigger share in the economy than in any other country except the USSR' (Baker 2006: 229). Hitler undertook similar initiatives in Germany, building an expanded range of new state-run public services intended to improve 'the folk' and boost public welfare (at least for those deemed sufficiently 'Germanic'). The state was argued to be the best institution to oversee the moral obligations of public service, regarded as essential to the generation and protection of a disciplined and good society (although the Nazis were then among the first to privatize such public entities, starting in the late 1930s) (Bel 2009; Guérin 1938; Schweitzer 1946).
In other words, the creation of arm's-length, state-owned entities is neither historically specific nor ideologically predetermined, with the rationale for public enterprises having differed dramatically across place and time. The one common feature is their quasi-independent cadre of professional bureaucrats tasked with managing a delineated set of activities, buffered to some degree from direct political intervention. Whether the aim is to sustain a monarchial elite, advance a racist agenda, build a socialist society, or promote market ideologies, the creation of arm's-length public enterprises can lend itself to radically different political objectives.
Even within market economies there are differing motives at play. As noted earlier, some policy-makers see corporatization as a first step towards privatization. Some see it as an opportunity to commercialize services without the political and economic risks of direct private sector participation. Others are committed to Keynesian forms of welfarism, while others still see corporatization as a form of state capitalism.
The cases in this book are illustrative of these eclectic market rationales and motivations. The creation of the Instituto Costarricense de Electricidad (the electricity utility in Costa Rica) in 1949 grew out of the import-substitution model popular in Latin America at the time, and has reformed along with the social democratic policies of the Costa Rican state. Tunisia's electricity provider – Société Tunisienne de l'Électricité et du Gaz – was a product of post-independence nationalization, followed by tight public management under the authoritarian regime of Zine El Abidine Ben Ali; it is now grappling with the rapid changes of the so-called Arab Spring. In Malaysia, the Tenaga Nasional Berhad dates back to the creation of the Central Electricity Board (CEB) by British colonial managers, also in 1949, and is part and parcel of a post-war economic recovery effort to counter communist insurgency in rural areas, modified again in the 1980s and 1990s in response to changing post-independence politics.
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