Public Services International Research Unit (PSIRU)

Services of General Interest in Europe

- an evidence-based approach
Written submission to European Parliament Committee on Economic and Monetary Affairs

28 February 2001

by
David Hall, Senior Research Fellow, PSIRU, University of Greenwich

February 2001

Public Services International Research Unit (PSIRU)

School of Computing and Mathematical Sciences, University of Greenwich
30 Park Row London SE10 9LS U.K.
Email: psiru@psiru.org Tel: +44-(0)208-331-9933 Fax: +44 (0)208-331-7781 www.psiru.org

Director: David Hall Researchers: Kate Bayliss, Steve Davies, Emanuele Lobina, Sam Weinstein

The PSIRU was set up in 1998 to carry out empirical research into privatisation, public services,
and globalisation. It is part of the School of Computing and Mathematics in the University of
Greenwich, London. PSIRU’s research is centered around the maintenance of an extensive and
regularly updated database of information on the economic, political, financial, social and
technical experience with privatisation and restructuring of public services worldwide.

This core database is finananced by Public Services International (PSI), the worldwide
confederation of public service trade unions. www.world-psi.org

© Unless otherwise stated, this report is the copyright of the PSIRU and the organisations which
commissioned and/or financed it
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A. Introduction .................................................................................................................................................................. 3

B. Effects of liberalisation on service delivery................................................................................................................ 3

B.1 Security of supply .................................................................................................................................................... 3
 Energy ............................................................................................................................................................... 3
 Water ................................................................................................................................................................. 3
 Railways ............................................................................................................................................................ 3
B.2 Costs......................................................................................................................................................................... 3
 Energy ............................................................................................................................................................... 3
 Water ................................................................................................................................................................. 4

C. Impact of EU policies on service structures............................................................................................................... 5

D. Effects of competition arrangements on public service structures.......................................................................... 5

D.1 Limited competition ................................................................................................................................................ 5
D.2 Health and the private finance initiative (PFI) in the UK ....................................................................................... 6
D.3 The public sector option .......................................................................................................................................... 6

E. Economic and technological change ........................................................................................................................... 6

F. Impact on economic development ............................................................................................................................... 7

G. Examples from experiences with liberalisation......................................................................................................... 7

G.1 California and LADWP ........................................................................................................................................... 8
G.2 Grenoble Water........................................................................................................................................................ 8
G.3 Erin Brockovich ....................................................................................................................................................... 8

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A. Introduction
This submission addresses directly some of the questions raised in respect of the services of general interest.
The contributions are set out under the relevant question, and draw on PSIRU’s accumulated database on
privatisation, liberalisation and restructuring of public services built up over the years.

B. Effects of liberalisation on service delivery

1. How do you assess the liberalisation so far of various services of general interest in the EU in terms of
security of supply, technical progress and the evolution of costs to the general public and in regard to
employees of former and existing undertakings in the relevant market segment?

B.1 Security of supply

 Energy
In energy, markets have so far played a relatively small role in supplying electricity – only 25% even in the
longest liberalised area, the Nordpool.1 Supply has been secured largely through the medium of long-term
contracts between generators and distributors or customers – in Germany this was accelerated by the
prospect of the electricity directive itself - and also by vertical mergers between generators and distributors –
in Scandinavia, for example, where Vattenfall and IVO bought a number of distribution companies 2.

In view of what has happened in California 3 (and in the mid-west USA a year earlier), where the liberalised
market is the dominant source of supply for the distributors, these non-market mechanisms may be seen as
invaluable precautions. In effect supply has been secured by mechanisms which bypass the markets created
by liberalisation, or recreate the vertical integration which restructuring had unbundled.

 Water
There is some experience with the impact of privatisation on water supply in the UK. The drought of 1995
led to much longer and greater losses of supply than previous droughts, e.g. in 1976. OFWAT suggested in
that Yorkshire Water PLC’s failures to ensure a reliable and continuous supply, as well as to control leakage
and flooding from sewers, had to be related to the company’s dividend policy. 4 The company also failed to
mobilise public support behind conservation measures. In the previous drought in Britain, in 1976, when the
publicly owned water authorities appealed for restraint in the use of water, consumption fell by about 25%
as the public responded. In 1996 similar appeals in Yorkshire produced almost no reduction at all in
consumption.5

 Railways
Similarly, the experience of the privatisation of railway services in the UK is that the supply of passenger
trains has become significantly less reliable, with both an increase in accidents, a reduction in maintenance,
and a fall in the reliability of the supply of passenger train services.

B.2 Costs

 Energy
The general effect of liberalisation of electricity is to create lower prices for large industrial and commercial
consumers, but relatively higher prices for small domestic consumers: this has been observed since the
earliest liberalisation in Scandinavia for example.6 It results from a reversal of the traditional cross-subsidy
(from business users to domestic users) and from competition for customers, which means that the best and
lowest prices are offered to the most valued customers and not to those with the highest overheads (the
smallest consumers). These effects are basically redistributive, the gains to business are financed by the loss
to poorer households.

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This is an especially sharp problem in the accession countries of central and eastern Europe. In Hungary, for
example where energy was restructured in 1995, there has been a constant conflict between the operators’
requirements to increase prices and the social pressures to contain such significant expenses. The country’s
six electricity distribution companies (EDCs) which are majority owned by E.on and RWE of Germany and
EdF of France, have threatened legal action over the government’s decision to limit price rises to 6 per cent
when inflation is running at 10%. 7

It remains unclear that there are any general efficiency gains in liberalisation of electricity. A global study by
Pollitt 8 concluded that there was no efficiency differences between public and private utilities. A detailed
analysis of the effects of the UK restructuring indicates that although prices fell, the fall in costs was more
than offset by profits of the newly private companies, so there was a net upward pressures on prices as a
result of restructuring and privatisation 9; a more general analysis of the UK privatisation came to the same
conclusion, of a net upward effect on privatisation. 10

 Water
In France, where some water is managed by municipalities, and some by private companies (or joint venture
PPPs), figures show a consistent picture of the private or PPP concessions charging higher prices – 13%
higher in 1999. This data is important, (as is other evidence from France – see later sections) as the French
model is used as the paradigm system for liberalisation.

• Table: Water prices under municipal provision, delegated management and public-private joint
ventures in France, 1994-1999 (average prices for yearly consumption of 120 cm in FF, water supply
and sanitation)
Management 1994 1995 1996 1997 1998 1999
Municipal/Régies 1,489 1,621 1,716 1,803 1,848 1,841
Delegated/Private 1,784 1,908 1,993 2,050 2,100 2,100
Public-Private 1,734 1,812 1,963 2,014 2,076 2,101
Joint Venture
Average all modes 1,689 1,799 1,910 1,974 2,015 2,049
Source: DGCCRF (Direction générale de la consommation, de la concurrence et de la répression des fraudes); published in “la
Réforme de la politique de l’eau” Conseil Economique et Social ; Journal officiel de la République Française 2000 No. 14 ;
November 2000

Other international evidence suggest that privatised water monopolies in the UK are far more costly for their
users than municipal monopolies in Sweden (or Scotland). This evidence again suggests that it may be more
effective to control the costs of water monopolies through public ownership.

• Table: Water costs comparison between Swedish and English cities, 1995
Cost per cubic metre of water delivered, purchasing power parities, US$.
Water company Ownership Cost to Cost of Capital Return on
customer operation maintenance capital
Stockholm M 0.28 0.17 0.03 0.09
Manchester P 0.91 0.40 0.20 0.31
Bristol P 0.83 0.48 0.19 0.15
Gothenburg M 0.38 0.11 0.05 0.21
Kirklees P 0.99 0.52 0.31 0.15
Hartlepool P 0.73 0.35 0.08 0.29
Helsingborg M 0.42 0.42 0.05 -0.05
Waverley P 0.82 0.48 0.22 0.12
Wrexham P 1.25 0.57 0.35 0.32

Swedish average 0.36 0.23 0.04 0.08

British average 0.93 0.48 0.20 0.23
Source: ITT, presented in Hall 1998. M = municipally owned; P = privately owned

• Table: Water costs comparison between Scotland (public) and England & Wales (private)
Average annual water and sewerage bills, £ real
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1994/95 1995/96 1996/97 1997/98

East Scotland - - 125 118
North Scotland - - 129 134
West Scotland - - 110 112
Scotland 110 113 - -
England and Wales 223 228 233 234
Sources: CIPFA The UK Water Industry Charges for Water Services various years

C. Impact of EU policies on service structures

2. To what extent are structures and institutions providing services of general interest affected by EU
verification of subsidies and by the imminent further liberalisation projects at EU level (e.g. water, railways,
postal services, gas and electricity, social services such as health, education, services for the elderly)?

The Commissions current policies on subsidies have the effect of limiting the contestability of public
service provision in favour of the private, by imposing one-sided restrictions on the public sector’s ability to
compete.11 These restrictions affect the viability of municipal enterprises.

Municipal enterprises are a core part of public service provision in a number of European countries. They
have evolved dynamically and flexibly over a number of years, with constitutional forms ranging from
internal régies to PLCs wholly owned by municipalities 12, and in respect of their operating and contractual
relationships. For example the Dutch municipal companies are constantly adjusting their boundaries of
operation by changing their pattern of ownership amongst different authorities, contracting between
themselves to achieve optimal mix of service efficiency and accountability, while at the same time
maintaining a high level of efficiency and accountability to their owners.13

The private companies in these sectors see the municipal enterprises simply as competitors, and quite
naturally seek to use legal and economic measures to limit their capacity to compete. In Italy for example the
attempted expansion of the Genoese municipal enterprise AMGA was opposed by Vivendi and others,
through court cases arguing that AMGA could not operate beyond Genoa, or would have to set up ring-
fenced subsidiaries to do so.14 Neither of these limitations apply to private sector operators.

The Commission has now adopted the private companies’ positions into EU policy through the
Transparency Directive, which imposes on public sector enterprises requirements of transparency and ring-
fencing which are not imposed on private sector operators. Again, this achieves the paradoxical effect of
weakening competition.

D. Effects of competition arrangements on public service structures

3. How do you assess the practice of the European Commission in implementing the EU's competition
arrangements in terms of aspects relating to the public interest and of the structuring of services of general
interest by the Member States and subordinate institutions of the EU?

D.1 Limited competition

One of the major problems with the Commission’s practice is that it assumes that liberalisation of markets in
these services creates competition. This is demonstrably untrue. In major public services – water, waste
management, energy – the markets are dominated by a small group of multinational companies.

In water the market in the EU and in the rest of the world is overwhelmingly dominated by two companies –
Suez-Lyonnaise and Vivendi – with only four or five other companies as any kind of competition (SAUR,
Anglian Water, Thames Water/RWE, International Water). Most of these companies, including Suez-
Lyonnaise and Vivendi themselves, frequently form joint ventures with each other, as the attached diagram
of relationships around the Budapest and Berlin concessions demonstrates.

This is well known: a French report on water in 1997 noted bluntly that the sector even in France suffered
from “lack of competition” and was “Dominated by a few big French multinationals, which often make
agreements amongst themselves” (“dominé par quelques grands groupes français de taille internationale ;

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des accords sont parfois passés entre eux”).15 The fact should be centrally borne in mind in all
consideration of these services.

In waste management the European (and world) markets are dominated by Sita and Onyx - the waste
divisions of Suez-Lyonnaise and Vivendi – and by RWE and Rethmann. Other companies which were major
competitors only 5 years ago – Fabricom, FCC, WMI, BFI – have now been absorbed, largely by Sita and
Onyx, though there remain smaller competitors at national level in some countries.

In energy, there is a widespread view that the result of the Electricity Directive will be to create no more
than 6 or 8 big European energy companies dominating the entire continent. (One of these will be Tractebel,
also part of Suez-Lyonnaise; another of which will be EdF’s international activities which are now partly
owned by Vivendi; and another of which will be RWE)

There is also a naïve assumption made in many statements that choice by users is an important or
meaningful concept in these areas, and somehow liberalisation enhances this ‘choice’. In both water and
refuse collection, there are no choices of suppliers made by users – there is a single choice of monopoly
concessionaire made by a public authority. In energy, there is every evidence that the great majority of
consumers do not seek to make such choices, even where they are available.

D.2 Health and the private finance initiative (PFI) in the UK

There is also an underlying assumption that liberalisation, competition and privatisation bring efficiency
gains to a service. Again, there is empirical evidence that this is incorrect.

The UK’s private finance initiative (PFI) is an often-cited example of a liberalisation process which finances
the building of new hospitals through long-term support services concessions to private sector consortiums.
This is expected to be more efficient and cheaper than the traditional form of financing building through
public sector borrowing.

This has been comprehensively challenged, notably by a series of reports in the British Medical Journal,16
which laid out extensive evidence and argument that the PFI was more expensive, reduced resources
available for health care, and is an inequitable system of resource allocation.

The system nevertheless flourishes because it has the key attraction of reducing the government borrowing
requirement. A publicly financed alternative which would be very likely to be cheaper is in practice not
available because not constructed by the government. The PFI becomes the dominant way of financing
hospitals by default, in the absence of any public sector option. The process is the opposite of competitive.

D.3 The public sector option

The Commission’s vision of competition does not extend it seems to ensuring any competitive evaluation of
the private sector against a public sector option. This seems perverse. Historically, there was a widespread
European movement to remove these services of public interest from the private sector and run them instead
by public authorities, for reasons of efficiency and accountability. 17 (The water companies which now
dominate privatised public services in water across the world, Vivendi and Suez-Lyonnaise, are historically
the odd isolated survivors of that process, dinosaurs of a species that was eradicated elsewhere: it is unwise
to ignore the majority experience. Even if the concern is to create the cutting edge of competition, in these
sectors the competitor most feared by the private companies is the public sector: while it is understandable
that the companies should be pleased if there is no consideration of a public sector provision, it is more
remarkable that the Commission should appear indifferent to the routine exclusion of any public sector
option.

E. Economic and technological change

10. What additional developments, problems and opportunities do you see as a result of economic and
technological change in recent years that are not analysed and dealt with in the Commission
communication?

There are two trends worth noting, amongst many others, in considering public services.
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Firstly, globalisation, neo-liberal economic policies and the concentration of financial and technical capacity
have all strengthened the economic and political power of transnational corporations in relation to public
authorities at all levels. This was observed, and emphatically identified as a problem, by the French Cour
des Comptes in its report on water in France in 1997, where it contrasted the helplessness of small
municipalities with the power of the multinational companies with whom they had to deal.18

It cannot be simply assumed that relations between these multinationals and political institutions will be
conducted on a basis of equality and lead to a balanced outcome. The recent record of corruption in Europe,
involving politicians and officials at all levels from municipalities to the Commission itself, all too
frequently involves bribery by private companies motivated by the potential profit from public service
concessions. The problem posed by the Cour des Comptes must be faced throughout Europe: at all levels,
from municipalities to the Commission, Europe needs to take positive steps to ensure that political
authorities are capable of representing public interests in these services even if this conflicts with the interest
of the companies.

The second trend is the rapid obsolescence of fashionable models in these services. One such example can
be seen in the UK, where the water companies privatised by the Thatcher government just 11 years ago are
now, in a number of cases, voluntarily splitting themselves up and transferring the water systems to the
ownership of not-for-profit associations of consumers or residents. This is a remarkable collapse of a system
in such a short time. Another example is the extent to which, throughout Europe, companies are now
recombining vertically the distribution and generating companies whose separation was regarded as so
crucial to restructuring and liberalisation only 5 years ago.

The rapidity of these changes makes it dangerous to plan on the basis of a single socio-economic model. It
is unwise to assume for example that the concession model will last for ever. The Commission should be
explicitly open about a number of possible futures, and different dynamic models – for example, the
internet, which was created as a policy decision and a collective action by public authorities, and, once it
was established, used and developed by the private sector. This may be a more appropriate model for
developing international networks.

F. Impact on economic development

11. What impact do in your opinion the rules governing services of general interest in Europe and
liberalisation decisions have on future economic developments and the internal and external stability of the
euro?
The pursuit of liberalisation in these sectors holds particular dangers for accession countries in central and
eastern Europe. In electricity, the model being promoted in all countries in the region is to unbundled and
privatise the previously integrated state systems. This is bound to result in privatisation, with the sectors of
all countries being effectively dominated by multinationals (as is already the experience in Hungary).

If instead the countries were allowed to adopt a model more suited to a European perspective, even a
subregional perspective, then retaining large integrated companies is a more appropriate basis, allowing the
possibility of such companies surviving as large operators in a regional market. This is after all the historical
course taken by the EU dominant companies, such as Tractebel, RWE, Eon, or more obviously the state-
owned EdF, Enel, Vattenfall, which are based on de facto or de jure monopolies stretching back decades.
Insisting on a form of liberalisation that means takeover by one of the old west European monopolies can be
seen as a colonial model, rather than a development model.

G. Examples from experiences with liberalisation

14. What experience with liberalisation affecting services of general interest (not only in the EU but also in
third countries) could in your view serve as an example for the EU and the Member States?

Varying forms of liberalisation and privatisation of public services have taken place in a number of countries
around the world in the last decade. Reviewing these experiences generates a number of lessons about the
impact on services, concerning costs, risks, reliability of service, and the relationships between public
authorities and private companies. Many of these cases are covered in a series of PSIRU reports, available
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at www.psiru.org . For this question, I would draw attention to just three recent cases of relevance and
interest .

G.1 California and LADWP

The recent electricity crisis in California has obviously highlighted the problems of liberalisation of energy
markets. There is within that experience a positive one, and that is the successful operation throughout the
crisis of the energy system of the Los Angeles municipal Department of Water and Power (DWP). While the
liberalised, private system around it has been collapsing, the DWP has continued to supply power without
interruption, and without price increases, through a vertically integrated municipal enterprise.19

G.2 Grenoble Water

The city of Grenoble has just completed a cycle of experience which is of considerable interest to this
debate. In 1989 water supply was privatised to Lyonnaise des Eaux, on the basis of a bribe for which the
then mayor and a company executive were convicted and imprisoned in 1995. After 5 more years of hard
renegotiation and investigation of various aspects of the concession, it was finally terminated and replaced
by a municipal régie, which started operating in January 2001.20

Public authorities at all levels, from municipality to the Commission, should seek to learn from the hard-won
experience of Grenoble, and understand why they have insisted on choosing to have a public service carried
out by a municipal enterprise rather than re-submit it to the liberalisation process which

G.3 Erin Brockovich

The final example of an experience with a liberalised public service is the film ‘Erin Brockovich’. It
concerns a woman who successfully challenged the activities of Pacific Gas and Electric, one of the
privatised companies running California’s electricity system. A crucial part of her successful campaign was
a search in the files of the company for documents relating to the incidents, as all US citizens have the right
to do .

The film is based on a true story, but for European audiences it might as well be completely fictional. There
is not a single country in the whole of Europe where this could have happened. Nowhere in the EU or in any
accession country do citizens have the right to inspect and audit the documents of a private company which
is operating a public service.

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Multinational joint ventures in Berlin and Budapest (1999) 21

Allianz Vivendi RWE Suez-

Lyonnaise
50
10 45 50 EBRD
45

35 30

holding holding holding

35
49.9 25 25

Berlin Budapest Budapest

Wasser Sewerage Water

50.1
75
75

Berlin Budapest
Land city

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1 The Nordic Energy Market PSIRU Dec 2000 Nordic energy

2 Sweden: Frantic scramble for opportunities: Financial Times20 Nov 96
3 The California Electricity Crisis- overview and international lessons. PSIRU Feb 2001 California energy
4 “UK’s Ofwat says Yorkshire Water dividend policy “should not impair” business”, AFX News: 20 Jun 1996).
5 OFWAT
6 Finland links liberalisation and tariffs: Power Europe Oct 96 FT Bus Rep: Energy
7 Financial Times Europe Edition; Financial Times January 9, 2001
8 Ownership and Performance in Electrical Utilities, Michael Pollitt, 1995, Oxford University Press
9 Has Privatisation Reduced the Price of Power in Britain? Steve Thomas, SPRU, University of Sussex November 1999
10 The Restructuring and Privatization of the U.K. Electricity Supply—Was It Worth It? Newbery and Pollitt: World
Bank Public policy for the private sector Note 124 August 1997
11 PSIRU May 2000 Public service concessions held by private companies: subsidies, monopolies and anti-competitive
effects
12 PSIRU Feb 1998 Public Enterprise in Europe Public enterprise
13 Blokland M., Braadbaart O. & Schwartz K. (Ed.) Private Business, Public Owners – Government Shareholdings in
Water Enterprises. Netherlands. 1999
14 PSIRU Feb 1999 Italian Water Industry 1999: A Profile Water Italy
15 Cour des Comptes Janvier 1997 Services locaux de l’eau
16 Gaffney, Pollock, Price and Shaoul: NHS capital expenditure and the private finance initiative- expansion or
contraction? BMJ 1999;319:48-51 ( 3 July ) and three linked features in succeeding issues.
17For an illustration of this point in the case of water see Katko, T.S. 1997. Water! - Evolution of water supply and
sanitation in Finland from the mid-1800s to 2000. FIWA. “
18 Cour des Comptes Janvier 1997 Services locaux de l’eau
19 The California Electricity Crisis- overview and international lessons. PSIRU Feb 2001 California energy
20 PSIRU has prepared a detailed report on this which will be available shortly on the PSIRU website at
www.psiru.org
21 Originally prepared for a conference in Essen on water privatisation October 1999

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