Why Privatization Is Doomed to Failure

Services can only deteriorate when sold to private investors. Thus, government-run systems should be truly public, transparent and democratic.

There are those who believe that everything that’s privatized is more efficient and everything run by the government necessarily falls short. Haaretz’s Nehemia Shtrasler champions this approach. I believe that this is a myth, but this doesn’t mean that I support the opposite myth, either. I know that government-run systems are liable to be bureaucratic and ineffective.

My response to this is not to privatize them, however, but to make them truly public, transparent and democratic.

That’s why when I opposed the move by Prime Minister Benjamin Netanyahu to privatize the Israel Lands Administration, I initiated a bill that fought the bureaucracy and corruption there by requiring its activities to be fully transparent and that all the decisions by all its institutions be published online. Rather than eliminating the public aspect, I am working to make it really public.

I’m proud of my struggle to nationalize the Tel Aviv-area light rail project. Just as I’d warned, privatization in that case failed because of an inherent problem: To win the tender, the franchisee had submitted a bid so low it was impossible to sustain.

The problems with privatizing infrastructures are many and varied. When Britain privatized its railways, for example, the result was grim: Service deteriorated, timetables weren’t met and safety was compromised. There, too, the reason was simple: The private investors wanted the highest possible return on a minimal investment. The privatization of rail service in Britain generated another problem – a lack of compatibility between routes operated by the different companies.

Rail privatization in Britain led to a decline in all aspects, except for prices, which rose to the highest in Europe. By contrast, take the French railway, which is publicly owned: It’s the best rail network in Europe. It is the most technologically advanced and its service is excellent.

During the privatization of the British railways it also emerged very quickly that the lines had been sold for much less than their real value. Franchises initially sold for 1.8 billion pounds sterling were resold, only seven months afterward, for 2.7 billion pounds – a significant profit for the original purchasers.

Indeed, in most cases privatization is simply the redivision of assets among those who already have money, lots of money. And that’s the real story: What’s achieved is not higher efficiency, but the transfer of public assets to those who can afford to buy them, usually at fire-sale prices. This is exactly what happened here when natural resources were privatized, from the Dead Sea minerals to mineral water.

When Bank Hapoalim was privatized, the loan taken to buy it was financed from the dividends that the buyers hurried to withdraw from its coffers. When the buyers of privatized assets repay loans from the companies’ profits and from the shares they issue, they are essentially buying assets from the state on credit, without paying for them with their own money. In reality, most privatizations are a redistribution of public assets to the rich, who get richer, while the public as a whole gets poorer. And because owners want to maximize their profits, those who work at privatized companies see their salaries and work conditions deteriorate.

Privatization in Israel has accelerated considerably in recent decades. In the public’s mind privatization is linked with such concepts as decentralization and competitiveness, but the reality is far different: In Israel, the centralization in the economy has simply moved from publicly owned companies to privately owned corporations. The capital concentration is even higher, because a significant portion of these companies are being controlled by a small number of equity groups that constitute the economy’s power centers. The crises of the past year should teach us the degree to which the conduct of the wealthy who control these power centers was deficient, irresponsible and ineffective.

We have suffered particularly serious damage from the privatization of public services. The privatization of health services at schools, for example, has seriously harmed the nurses, the pupils, the preventive health care plan and the educational system. As a study conducted by the Knesset Research and Information Center demonstrated, the privatized services ended up costing the government more.

There is now broader and deeper criticism of privatization in Israel and public consciousness is changing. Reality, I hope, will not lag far behind.

The writer is a Hadash MK.

Eran Wolkowski