This document has been made available in electronic format by the International Co-operative Alliance (ICA)

March, 1998
(Source: ICA Review, Vol. 91 No. 1, 1998, pp.64-72)

Privatization of Services - what can co-operatives offer? by Gabriele Ullrich*
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Rethinking the State's Role --------------------------------- Since over a decade a process of rethinking the role of the State has started and not yet ended, as was latest manifested in the World Development Report 1997 of the World Bank on the " State in a Changing World ". The process of the changing role of the State has taken different orientations over the years: After the expansion rate of the state structures and functions slowed down in the 1980's due to budgetary constraints, structural adjustment programmes and transition of centrally planned to market economies, today's concern is with down-sizing government budgets and activities. Services before delivered by public institutions, are being privatized or simply abolished. The pattern of the "lean State" has emerged. This led to the opinion that the State should be reduced to a minimum with all its consequences regarding delivery of public services, employment and public budgets.

Facing the dimension of this trend and the social and economic consequences of radically cutting public services and functions, the World Bank felt it necessary to give a more balanced picture of the State's role in social and economic development by specifying that: "An effective state is vital for the provision of goods and services - and rules and institutions - that allow markets to flourish and people to lead healthier and happier lives."1 In order to arrive at such an effective State, the World Bank puts emphasis on a two-part strategy which makes ".. every state a more credible, effective partner in its country's development: matching the state's role to its capability...and raising state capability by reinvigorating public institutions". The World Bank underlines that the State is central to economic and social development, not as a direct provider of growth but as a partner, catalyst and facilitator2 . The effectiveness of the State is also dependent on the voice and the participation of the civil society. The World Bank sees three ways in which this can be achieved:

- through the civil society expressing their opinion and pressuring for their implementation, the State may acquire credibility which it needs to govern well;

- in the absence of markets, civil society can give information and feedback to the public providers which is needed to improve the services;

- the public providers can possibly not foresee all services needed and alternative providers from the civil society can help to meet these gaps3.

The need for certain basic and essential services "of general interest" does not necessarily disappear if the State abandons them. Therefore, the question arises: who is willing to provide these services and who is capable of doing so?

Services of General Interest --------------------------------- In the context of rethinking the role of the State, restructuring, adjusting and down-sizing of public budgets, the communities at local, national, regional and international level are looking for new models to finance and provide services of general interest.4 In Europe, for example, such services strive to serve the public while protecting the environment, enhancing economic and social cohesion, and the promotion of consumers interests. Basic operating principles of such services are: continuity, equal access and universality.

There are various ways of organizing the delivery of these services, reflecting different geographical, and technical circumstances, political and administrative settings, cultural and social traditions. The services can be provided by both public and private operators, in either competitive and monopolistic situations. The Commission of European Communities lists among the providers private companies, public bodies, and joint public- private partnerships. These different organizational set-ups make it necessary to speak of services of general interest rather than of public services. The provision of these services is regulated by public authorities to various degrees, depending on the sector5.

Forms of Privatization --------------------------- The withdrawal of the State from the provision of services of general interest is often termed under the simplified and shortened heading "Privatization". Action to implement privatization is taken in industrialized and developing countries as well as in economies in transition. It refers to introducing private-type management in the provision and finance of services of general interest, to contracting out of such services to the private sector, and to selling the facilities and licensing the provision of the services to the private sector. A systematic overview on types of privatization was recently given by Public Services International (PSI)6 which appears quite helpful for the purpose of this paper:

* Privatization of responsibility which includes formal transfer to private organizations, transfer to users by abolition or reduction of service, liquidation of state-owned enterprise, liberalization and deregulation of the sector;

* privatization of ownership which includes the total or parts of the assets, voucher privatization, transfer to or buy-out by management and employees;

* privatization of provision which includes contracting-out, lease, operating concession, management contracting and purchasing;

* privatization of financing which includes private finance for public infrastructure, private investment in public enterprises, joint ventures, new or higher user charges;

* commercialization which includes competitive tendering between inside and outside contractors, creating internal markets, introducing commercial goals and management techniques. A critical particularity in privatizing services of general interest is that deregulation can only take place to a limited extent. The public authorities have to make certain that essential and basic services are accessible to everyone and a certain quality standard is maintained. For example, in the context of general interest services (specifically for postal and telecommunication services), the Commission of European Communities has asked the Member States to impose "universal service obligations" on the providers. They should make sure that the services have to allow "affordable access to everyone, including the socially, medically and economically disadvantaged".7

Specific Sector Services and Privatization ------------------------------------------------- The services which are considered to be of general interest vary in each country according to the cultural and traditional context, the political and economic orientation and other factors in the civil society. They may include utilities (e.g. gas, electricity and water), infrastructure and communication (e.g. transport, postal and telecommunication, information and audiovisual technologies and ), community and social services (e.g. education, care of children and elderly, leisure and sports), medical and health services.8

The efforts to privatize the services in these sectors show different results depending on:

* the sector: utilities require long-term investment and quality standards; educational, medical and health services require licensed personnel; audiovisual technologies have to be safeguarded in view of values, ethics and dominating market position;

* the form of privatization: the method of acquiring ownership may play a role; however, more significant appears to be the market position (monopoly or competition), the capacity to deal with universal services, the capacity for social dialogue (see below);

* the region: the level of development and the possibilities of cross country networking play a role;

* the country: traditional cultural and social patterns are of relevance, particularly in social and health services;

* the type of social dialogue: the dialogue refers to the employees of the service providers as well as to the clients and consumers.

Co-op Solutions to Privatization -------------------------------------- What can co-operatives offer to the community when services of general interest are being "privatized"? The organizational form of co-operatives gives the possibility to mobilize finance in the community through joint efforts, incur expenditure in a social and non-profit way, control and monitor the spending jointly and regularly, create joint responsibility and solidarity in the community.

Once the privatization and restructuring processes have started, research and analysis of practical experience is required.9 The development of long- standing co-operative experiences in the area of utilities, insurance and medical services as well as innovative approaches in social and health care give much reason to see co-operatives as playing a significant role in the provision of services of general interest.

For the purpose of analysis, it is necessary to distinguish between co-operatives which are established by consumers and those by the providers. Co-operatives of the consumers have emerged predominantly when the services of other providers have been geographically or financially not accessible, or where no offer of the service is available. The best known cases are the electricity co-operatives in the USA, Argentina, Brazil, Bolivia and Chile. In Argentina, over 500 co-operatives distribute about 10% of the country's electrical energy and are reaching 15% of all consumers. In the rural areas they provide almost 100% of the electricity.10 These co-operatives diversified also into other utilities, like water and telecommunication. The economic and social advantages of such co-operatives lie mostly in contribution to local employment creation, to local economic development and to decentralization. Furthermore, they provide the consumers with a direct voice in the quality and the delivery of the services and open also the opportunity for diversifying the services.11 Co-operatives of consumers exist also in the areas of health care (e.g. in Japan and USA) and insurance (e.g. in France as mutualities).

Co-operatives of the providers are today frequently the result of employees' buy-outs or of persons without wage employment who have discovered niches in the supply of services of general interest. However, they have also older traditions like the medical provider co-operatives in Brazil (UNIMED). They can be found in areas like transport12 , insurance, health and social services.13 In countries which have a tradition or new laws on the decentralization of public authority to local units (like Italy and UK) provide a particular ground for such co-operatives. The local authorities contract out or purchase services from such co-operatives, like for example the worker co-operative which won the contract to run leisure services in Bristol, UK.14 Worker co-operatives for the provision of services of general interest exist in various sizes. There are small co-operative businesses with under 10 members, medium size like the above mentioned worker co-operative in Bristol with 320 members and very large co-operative federations like UNIMED in Brazil with over 60,000 members.

There are also attempts to combine private and public interests and those of the consumers and providers in so called "multi-stakeholder co-operatives. The Italian Act of 1991 provides, for example, for social co-operative societies with membership of different stakeholder groups which may even include local governments. Experience with such organizational forms is, however, still at the beginning and only practice can show their feasibility and replicability.15

The examples of successful co-operatives providing services of general interest are manifold. In the context of the World Bank Report 1997, they can give an opportunity to the citizenry to make their voice heard and they can bring more competitiveness into an area which is mostly dominated by public or private monopolies. Where are the shortfalls of co-operatives to provide services of general interest?

Co-op Shortfalls in Privatization -------------------------------------- For the analysis of the shortfalls of co-operatives as providers of general interest services, it is necessary to distinguish between co-operatives of the consumers of such services and those of the providers. The problems have to be analysed on a case by case basis taking account of the situation in which the privatization takes place and how the co-operative services are organized. Therefore, the following paragraphs will raise the related questions to be analysed rather than to make general conclusions.

If the provision and finance are to be organized by co-operatives of the consumers or clients, a main question to be raised should be: Are the general interest services still accessible to everyone? Who is in need of the services? And do the public authorities still have to supply services to those who are not members of the co-operative? In specific areas, like in insurance, it is also of relevance that the financial risk pool is open to wide population groups in order to lower the costs for the potentially more disadvantaged groups.16 For essential and basic services which are considered to be of general interest, universal accessibility is necessary from the political and social point of view. In many developing countries, co-operative solutions have been used when the quality of the public services became too poor or when they were not accessible in certain geographical locations. Co-operatives have to make sure that everybody can join the co-operative and afford to join (e.g. by accumulating shares through various mechanisms). If there are other, public or private, providers in the market, the co-operatives are not obliged to cover the whole country.

Other shortfalls of co-operatives may lie in the following areas which have to be carefully analysed:

* Finance: particularly in the area of utilities, large and long-term investments are required which often go beyond the financial capacity of co-operatives; either they can build up their capital over many years (like in the case of the electricity co-operatives in Argentina which where founded in 1920) or they have to secure outside loans and credits. In other cases, the co-operative might try to seek other organizational forms for finance mobilization, however, therewith they may weaken the co-operative identity.

* Qualified personnel (technical staff and management): in large co-operative enterprises which have to rely on modern technologies it is critical to attract and retain highly qualified paid personnel. The co-operative might not be able to mobilize the necessary finance to do so. Also other categories of staff would have to be hired under standard employment and working conditions. The question of workers' co-determination or labour management relations remains in many countries very complex due to the specific ownership of co-operatives.17 In this respect co-operatives have no cost advantage over other enterprises. Their advantage may rather lie in the close relationship to the consumers.

* Co-operative identity: If the services are accessible to everybody, co-operatives may loose their specific characteristics which lie in the social and economic promotion of their members. In the case of the above mentioned electricity co-operatives and in certain mutual insurances, the members are frequently no longer aware that they are members of a co-operative. Therefore, it has to be analysed whether it makes a difference (financially or otherwise) for the general public to be a member of the co-operative or not. Co-operative identity might also be in jeopardy when the close relationship to local authorities turns into "officialization" with all its well-known consequences for the economic survival of co-operatives.

Co-operatives of the providers, possibly even of the employees of the former public provider, can also be an alternative for the provision of services in the public interest. What would be the implications here?

* Working conditions: In some countries and in some respect, the members of a worker co-operative may be considered as self employed. Regulations of labour law which govern the wage employment situation might not be applicable to members of a worker co-operative.18 It has to be very carefully analysed whether the conditions in worker co-operatives or labour co-operatives come close to conditions in contract labour19 which may provide flexibility in work arrangements at the cost and risk of the workers.

* Professional Management: Particularly in small and medium-size co-operatives it is difficult to hire and retain professional management which has to have specific skills in co-operative-based management.

* Decision making processes in co-operative management: The structures and processes may create difficulties for the co-operative to go for tender when general interest services are contracted out. Thus, the workplaces may be in frequent jeopardy.

* Size of the co-operative enterprise: Small and medium size co-operatives may be closer to the voice of the clients and the members working in the co-operative enterprise; however, they may be strongly affected by the above-described financial and management problems.

* Quality of services: Particularly small and medium-size co-operatives may have problems to guarantee the quality of the services. This situation has to be specifically examined for providers of health services. It has to be evaluated whether the provision of the services is satisfactory as to the quality standards and to the clients. Relevant also is the question who would monitor and control the delivery of the services.

The list of shortfalls would have to be further studied and also the ways for overcoming them based on practical experience and an analysis of historical cases.

Conclusions --------------- This paper has examined the advantages and shortfalls of co-operative solutions to privatization. Past experiences have given evidence that co-operatives can provide part and/or all services of general interest. They cannot, however, due to their structure and mandate to promote the interests of their members, be held responsible to cover the overall national sector of the service.

They can be an interesting supplement in the delivery market but they cannot and should not gain an exclusive right for delivery. They also underlie public regulations of general interest services and cannot be expected to produce at costs lower than other providers. Nevertheless, they can serve to open the delivery market to more competition.

Before entering the market of services of general interest the co-operatives should examine in detail questions such as:

* Can open and affordable access to the service be guaranteed?

* Can financial resources for long-term delivery of the services be mobilized?

* Can delivery be managed in a professional way?

* Can delivery contribute to reducing public budgets?

* Can quality standards of the services be maintained and monitored?

* Can workers be given comparable working and employment conditions?

* Can workers participate in the decision making and implementation processes?

* Can consumers voice their expectations and judgement?

It appears that much practical experience has been acquired recently, however, more action oriented research seems to be required from the side of co-operatives and also from the side of the promoters of privatization of services of general interest such as the World Bank and the Commission of European Communities. It would be desirable to strive for guidelines for best practice to draw a realistic picture of the potential and the shortfalls of co-operative solutions to privatization.

References -------------- 1 The World Bank, World Development Report 1997, "The state in a changing world", Oxford University Press, 1997, p1.

2 The World Bank, op.cit., p3.

3 The World Bank, op.cit., p116.

4 The terms for this type of services vary in political statements and research definitions. The Commission of European Communities gave some practical definitions which will be used for the purpose of this paper: "Services of general interest cover market and non market services which the public authorities class as being of general interest and subject to specific public service obligations". The term "universal services" wants to make sure that everyone has access to certain essential services of high quality and at prices that they can afford." , Commission of European Communities, Communication of the Commission "Services of General Interest in Europe", COM (96)443, Brussels, 11.9.96, p2.

5 Commission of European Communities, op.cit. p3.

6 PSI, Public services and private interests, Briefing notes for current debates on public sector issues, Ferney-Voltaire, 1997, p8.

7 Commission of European Communities, op.cit, p8.

8 These services may be distinguished as economical and non- economical services, Commission of European Communities, p12; the responsibility for non-economical services remains in the EU at national level p14.

9 See e.g. Schneider, H./Dante Cracogna, Co-operatives for Public Services in Latin America, in: Dulfer,E. et.al. Handbook of Co-operative Organizations, Gottingen 1994, p750-754; Spear,R. et.al. Third Sector Care, Co-op research Unit, Open University, Milton Keynes, 1994; Gaskin,K./Vincent,J., Co-operating for Health, Loughborough University 1996, UN, Co-operative Enterprise in the Health and Social Care Sectors - A Global Review and Proposals for Policy Coordination, 1996

10 Schneider,H./Dante Cracogna, op.cit., p751-752.

11 Schneider,H./Dante Cracogna, op.cit, p753.

12 Transport co-operatives exist in navigation and road transport as service or worker co-operatives. Schuhmacher,U. Transport Co-operatives, in: Dulfer, E. Handbook of Co-operative Organizations, op.cit. p895-897. Examples can also be found in developing countries, e.g. in Costa Rica and Honduras. Schneider,H./Dante Cracogna, op.cit, p752

13 Details of a number of European examples described in: Spear,R. et al., Third Sector Care, op.cit.

14 Co-operative News (UK), 10 June 1997, p3.

15 Borzaga, C. and Santuari, A., Co-operatives and the new social services market, Review of International Co-operation, Vol.90, No.1, 1997, p11-17; see also Pesthoff, V. , Empowering citizens as co-producers of social services, the case of day care in Sweden, Paper presented at the International Research Conference of the ICA in Bertinoro 1997.

16 The Chilean experience in privatizing health services and insurance showed that it led to the exclusion of population groups which had still to be covered by the public system. It appears that the costs involved were higher than in the case of the entire public system. ILO study on Restructuring and Privatization of health care services, Cases in the Americas, by S. Polaski, to be published in 1998.

17 See e.g. Staehle, W.H., Co-determination in Germany, in: Dulfer,E. et.al., op.cit., p106-110.

18 ILO, Labour Law and Co-operatives-Experiences from Argentina, Costa Rica, France, Israel, Italy, Peru, Spain and Turkey, Geneva 1995 and ILO, Meeting of Experts on Co-operative Law, Final Report, Geneva 1995. Spear, R. et.al. recommend to relate to locally used employment contracts and pay, op.cit.p48, 61.

19 For the discussion of contract labour see particularly International Labour Conference, 85th Session, Geneva 1997, Report VI (1,2) Contract Labour. G. Ullrich, Privatization of services of general interest ICA Bertinoro, October 1997, p 8.

------------------------ *Dr. Ullrich is a senior official in the ILO Salaried Employees and Professional Workers Branch. She is also Vice-Chair of the ICA Global HRD Committee.