Schools are privatized

Schools are privatized

Shortly after the federal elections, the disasters of the privatization of the A 1 and A 8 autobahns via public-private partnerships (PPP) became known. In both cases, the private operating companies threaten the state "partner" with three-digit million lawsuits. Instead of making this publicly known, such "partnerships" were established at the 1. and 2. June 2017 also hoisted into the Basic Law, paving the way for further and expensive privatizations.

Currently, all parties involved in the "exploratory talks" for a new coalition in the federal government agree on "the black zero". All parties involved admit that there is a huge need to catch up on the state infrastructure, but completely ignore its financing. At least three of the four negotiating parties stand for the policy of privatizing public goods. And where PPP is politically rejected as an expensive and anti-democratic financial product, attempts are made to manage the rehabilitation of public assets such as schools, roads and bridges via shadow budgets.

The brand new example is Berlin. There, as elsewhere, the red-red-green state government must contend with the legacy of neglected school buildings, the threat of a ban on borrowing ("debt brake"), and the result of a policy of staff cuts that has lasted for years. But now, instead of taking up the nonsense of the borrowing ban ("debt brake") and at least trying to modify it, they are trying to shift these loans into shadow budgets. These arise when state-owned companies such as housing associations, which operate on the private (housing) market, do what the state should actually be doing, namely building, refurbishing and expanding schools, and take out loans for this purpose that are not initially attributed to the state, but which it ultimately has to secure if something goes wrong.

This is another form of privatization that, once initiated, is difficult to reverse. Why?

In Berlin's case, state-owned school properties are to be transferred to a private housing corporation. This is state-owned, but in private legal form and operates in the private market. It takes over (in addition to its core business) the planning, construction, refurbishment, management and financing of eligible schools for 25 years. After that, they should "revert" back to the property of the state. How "falling behind" works can soon be seen in the district of Offenbach: Its PPP megaproject with 120 schools will soon "fall back" to the district, where already after then only 15 years (!) there are hardly any staff and resources left to manage the "falling back". A "gutted" state or a "gutted" municipality cannot reinstall competence that has been dismantled overnight. In this way, the state and municipalities are to be driven into the hands of private companies.

But the problem of a lack of skilled personnel is used not only at the end, but already at the beginning of reorganization and construction programs to switch to privatization or shadow budgets. It is true that most municipalities as well as the state suffer from absolutely insufficient financial resources. But even where and when this is the case, one encounters the problem of needing personnel who are oriented toward the common good, who plan the financial resources, award contracts, monitor and manage the investments . But personnel expenditures have been and continue to be assigned the negatively connoted term "consumptive expenditures" and placed in contrast to "investment expenditures," where they do not belong. And the ideology of the privatizers gets stuck in people's heads through constant repetition. It belongs in the trash can.

The fact that the provision of funds for the investment part is not enough to implement building projects has been proven for Frankfurt (FLZ, newspaper of the GEW district association Frankfurt Nr.3/17 – see the district association's homepage). For several years, financial resources approved in the budgets can no longer be called up because the (downsized) specialist staff is missing and cannot be rebuilt quickly enough. The city of Frankfurt's disbursements for construction measures used up only about 19 percent of planned appropriations and budget carryovers in 2016, according to the 2016 year-end report. There are similar figures for Berlin. There, the districts had to cut staff over 20 years ("save until it squeaks" – Wowereit and Sarrazin). Only there, where the districts have refused to reduce staff, things look better. From the early 1990s to 2016, the number of public-sector employees in Berlin was cut nearly in half, with a 40 percent reduction in construction administrations.

However, not only the state and municipalities have the problem of a lack of expertise. This problem would also be faced by a state-owned housing company like Berlin's HOWOGE, whose core business is not exactly schools and which itself has only a small-scale construction department. The head of the construction industry department at the Technical University of Berlin, Prof. Matthias Sundermeier estimates that a total of 900 planners would be needed, calling staff shortages and demand surge "the central problem of our industry" (Berliner Zeitung). Also in this respect, ooP by transferring schools to housing societies is not a way out. Even the "Deutsche Einheit Fernstrabenplanungs- und -bau GmbH" (Deges) is no longer able to keep up, writes the Berliner Zeitung from 4.11.2017. Projects are piling up and the volume of orders is now sufficient for the next 18 years.

Private financial investors only want a financial product that pays high interest for decades and is tradable

Even private construction companies have this personnel problem. In this respect, the claim that privatization or private "partners" can solve the problem is misleading the public. What private construction companies in PPPs are really about is getting the contract for as large a financial volume as possible, not actually completing it in a timely manner. Once the contract is obtained, it can be traded on the financial markets. That is the real goal. The ones who suffer are the schools and the taxpayers: Because the districts as school authorities would completely lose the power of disposal over their schools and would have to pay high rents for decades, which include the higher interest to the financial investors and the companies involved.

The situation is similar with the planned Berlin-style ooP model. There, too, financial investors would be attracted, this time via a state housing company and its sub-society. The optimism expressed by the politicians promoting it is not justified by anything. And after a financial disaster in decades, the "responsible" politicians do not have to justify themselves either.

Therefore, the proposal of "Gemeingut in BurgerInnenhand" and others is the only sensible way out: permanent increase of skilled personnel at the state and municipalities, recruitment and training, lateral entry programs like for teachers, as well as increase of salary to avoid competitive disadvantages in pay. To supplement and increase a halfway functioning administration with the necessary know-how.

Why ooP is also a gateway to privatization?

The Berlin project was accompanied in leftist circles by a contribution of the "Rosa Luxemburg Foundation", hereafter called 'RLS contribution'. In this contribution, members of the government of Thuringia promote such an ooP-model: Fischer, Hoff und Keller: "Zukunftsinvestitionen – Pladoyer fur eine aktive Infrastrukturpolitik und nachhaltige Finanzwirtschaft" (Investment in the future – plea for an active infrastructure policy and sustainable finance).

Since Hamburg has already gone ahead with a similar PPP model, it will be discussed first. The criticism levelled at these models up to 2010 is that efficiency considerations were given priority, but these proved untenable due to a lack of economic efficiency tests and as a result of schedule overruns. Likewise, the Hamburg State Audit Office is quoted as complaining about "a lack of budget transparency vis-A-vis the Burgerschaft" and an "undermining of the budget law of the parliament". There was also talk of a "deception of the public".

Successor models in Hamburg would also have further sharpened the "savings logic" by using "property-based" ratios for school building rents. The consequence has been that lucrative school properties have been taken away from their original purpose. The conclusion of the RLS contribution already dampens expectations for a "progressive" ooP model:

"The narrative analysis of Hamburg's ooP practice undertaken here, which spans ten years and four different senate constellations, first cautions us not to overstretch the horizon of expectations regarding the added political value of using a ooP model."

A number of conditions for an "ooP arrangement from a progressive perspective" are then set out below, including:

  • "Corruption risks in public subsidiaries" would have to be "taken into account", efficiency targets should not be "misused to economize the public performance of tasks"
  • "An effective public control by the public authorities"
  • Preventing the privatization of public assets outsourced in PPPs.

The Berlin model, which is in the political process, is then tested against these criteria and therefore passes this test, in part because of the following arguments:

  • The roadmap is through a school development plan coordinated with the districts (school boards); economization risks are minimized through transparency and participation of economic professionals, parents, students, the districts as well as state student representatives in all project phases at the state, district and object levels.
  • A brake on privatization is still lacking, but could easily be built in.
  • Conclusion: "This would also remove any basis for the criticism already voiced that it is a step towards school privatization (see Wabmuth 2016)."

The private legal form of state-owned companies is the problem

In my opinion, the central problem is whether and how the proposed limited liability companies (or generally private-law companies owned by the state) can be committed to the public good and removed from the logic of profit. And then there is the question of whether and how these companies can be controlled and influenced in a reasonably "democratic" manner. Previous experience with privately owned companies under state law should be used to assess these issues. These can be companies that "only" differ from other capitalist companies by their ownership structure, such as Frankfurt's FRAPORT AG (majority owned by the state of Hesse and the city of Frankfurt), Deutsche Bahn AG or VW AG. They can also be those that pursue more of a public service purpose.

A glance at the number and complexity of the companies shows how difficult it is to speak of "democratic" control. Just because these companies are owned by the state does not mean that governments, or even parliaments, have any influence on company policy. In 2015, the city of Frankfurt alone held stakes in 542 companies, of which 215 had stakes of at least 20 percent and 43 had majority stakes.

It is well known that the private legal form is fundamentally problematic in terms of control by elected representatives. The restrictions are based on the relevant laws of corporate law, such as the Stock Corporation Act and the Limited Liability Company Act. These obligate the owners to the welfare of the company, obligate them to maintain confidentiality or secrecy with regard to company documents. Finally, it is difficult to find sufficient professional personnel for the management and control (supervisory bodies) of such companies who embrace the objective of the common good and represent it even in the face of opposition.

Finally, in view of these difficulties and the plethora of companies and subcontractors, it should be almost impossible for parliamentarians and even more so for the interested or affected public to avoid the disadvantages of PPPs and to establish transparency and control. As long as such legal forms offer politicians nice additional posts (especially on the municipal level), this is of course not addressed.

For experience with state-owned or municipal companies in private legal form that could be evaluated in Hesse, for example, the following companies would come into question: FRAPORT AG, ABG FRANKFURT HOLDING, Wohnungsbau- und Beteiligungsgesellschaft mbH, in the Offenbach district the PPP project companies HOCHTIEF PPP Schulpartner GmbH& Co. KG and SKE Schul Facility Management GmbH, in which the district is currently still a minority owner, but which will be wholly owned by the district in 2019. In any case, what is known so far from these areas does not encourage the assumption that the conditions set by the authors of the RLS contribution can be met.

The investment brake and the idolized "black zero" as a slide into privatization

The ban on borrowing via the "debt brake" and the idolized "black zero" act like a "sheep gate" or a "slippery slope" to steer government tasks quasi inevitably to private parties. The public sector's investment backlog is estimated at 136 billion euros, with 34 billion for schools (KfW). At the same time, several hundred trillion euros of monetary capital are circulating, looking for investment opportunities. The ban on borrowing via the "debt brake" and the privatization of old-age provision through funded insurance (Patrick Schreiner, Kai Eicker-Wolf, Mit Tempo in die Privatisierung) are driving this capital – but only in return for an "adequate interest rate" of, say, 7 percent – into the money investment strategies of PPP. And unfortunately ooP is not immune to this either. This is not speculation, but can already be shown now. The Berliner Zeitung from 4.11.Reported in 2017:

"While Berlin's Finance Senator Kollatz-Ahnen (SPD) assumes that under ooP, HOWOGE's loans are only 0.2 percent more expensive than state loans, the housing association's loans in recent years have actually been on average about 2 percent higher than those of the state. So ten times as much as now the senator estimates for school construction. In Hamburg, too, average interest rates for school-operated housing associations were three to five percentage points higher than loan rates for other state-owned operations."

There are alternatives

An alternative plan is available: In the "Fratzscher Commission," which reviewed the PPP proposals in the major legislative package of 1./2.July 2017 prepared, the unions involved made an alternative proposal in 2015 via a minority vote, which can be summarized as follows:

  • The massive investment backlog in Germany has its causes, on the one hand, in the tax cuts of recent years, as a result of which the federal, state and local governments have lost 45 billion euros a year in revenue, and, on the other hand, in the "consolidation policy" in the wake of the "debt brake": "The debt brake was followed by a de facto brake on investment."
  • A "Pact for Equitable Financing and Implementation of Public Investments" is proposed, with the following prioritization:
  • Public investments must be financed primarily from tax revenues. Therefore, the previous tax privileges must be reversed.
  • Additionally, (given 0.2 percent interest rates on long-term federal debt), loan financing for infrastructure modernization is a possibility. The leeway still available under the "debt brake" (13 billion euros in 2017) can be used for this purpose.
  • According to the Council of Economic Experts' proposal, public investment in infrastructure should be exempt from the debt brake.
  • "In addition, and only after all these financing options have been exhausted," new financing instruments such as a public infrastructure fund for municipalities or a citizens' fund are to be examined. Terms:
  • "Private financing must not be significantly more expensive than direct borrowing by the state."
  • Infrastructure funds or citizens' funds should remain fully in public ownership and be equipped with sufficient equity, a state guarantee and their own revenues. The fund issues bonds that institutional investors and private individuals can subscribe to.
  • Examine the establishment of a budgetary commitment to public investment at a certain level that at least compensates for the depreciation of public assets. This self-commitment must not be at the expense of employees or sovereign tasks.
  • Independently of the formation of infrastructure companies, the personnel and institutional capacities of the municipalities must be strengthened again, "so that advance planning, building owner functions and project control can be performed locally, and this with the involvement of the local crafts, construction and financing trades". "This would be a paradigm shift from the depletion of expertise and staff at the municipal level that has persisted for years."
  • The decision-making and implementation powers must remain in the immediate municipal administrative and political context. "This is already required by the precept of local self-government as a basic principle of democracy, which is guaranteed by the guarantee of self-government in Art. 28 para. 2 GG has constitutional rank."
    If infrastructure companies, then public-law companies.

It is time to take note of alternatives!

The above article first appeared on 18. November at "rubikon": schools are privatized and is licensed under a Creative Commons license (Attribution-NonCommercial-NoDerivatives 4.0 International) licensed. You may distribute and reproduce the text provided that you comply with the license conditions.

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