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Public Finance

We are constantly told that there is not enough money for badly needed public services for the one to two billion people who lack access to water and sanitation, electricity and health care today. Thirty years of neoliberal restructuring have side-lined alternative financing practices, and propagated myths about the necessary role of private capital for development.

Instead, the MSP argues that public financing remains a crucial part of progressive, sustainable and democratic strategies for investments in long-term public services and infrastructure in the global South.

We have, for example, explored the potential to revive – and improve – state-owned banking as a viable option for financing public services, looking at the examples of Brazil, China, Costa Rica, India, South Africa, Turkey and Venezuela.

Large pools of public monies from public pension funds (PPFs) and sovereign wealth funds (SWFs) also present ample evidence that investment could be reoriented toward public infrastructure development.

What role for public banks?

In State-owned banks and development: Dispelling mainstream myths, we debunk neoliberal claims against public banking.

As far back as ancient Babylon public authorities have had a hand in finance provisioning, and in mediating the excesses of private lending. The pinnacle of state banking for development and public infrastructure came in the post-war and post-colonial period, however, as public authorities from Beijing to Washington to Cairo stepped in where private finance failed, operating effective and sustainable lending institutions. It is estimated that by the 1970s state-owned banks (SOBs) controlled 40% of combined banking assets in developed countries, and 65% of assets in developing economies.

The subsequent rise of neoliberal orthodoxies challenged this growth, asserting that SOBs are bad for development, leading to their restructuring along market lines or their ultimate demise; but both neoliberal theory and evidence are found wanting, rooted more in ideological presumptions than in substantiated case study experiences.

Significant SOB assets remain today with state authorities controlling an estimated 22% of banking assets in emerging economies and 8% in advanced economies.

Many SOBs have undergone neoliberal restructuring processes such as corporatization in ways that challenge their status as ‘public’ banks. Nevertheless, insofar as SOBs need not be driven exclusively by profit imperatives many remain capable of financing public infrastructure, services and fiscal policy alongside key economic sectors such as agriculture, small trades and cooperatives.

They also offer distinct advantages, as illustrated in our case study of Turkey’s experience. Reclaiming Turkey's state-owned banks  shows how these institutions have been at the centre of national developmental strategies and public infrastructure building since the early 20th century, collecting people’s savings and using them for domestic loans to fund government projects. Despite neoliberal restructuring, three large state-owned commercial banks and three small development banks continue to offer alternative sources of financing for Turkey’s development today.

Drawing on extensive interviews with more than 50 key actors in this sector, the authors conclude that the public banking model can allow these institutions to diverge from private, profit-maximizing imperatives with clear advantages:

  • focus on extra-market financial coordination
  • support in times of financial crisis
  • access to finance
  • provision of a safe haven for savers
  • improved efficiency

However, the public banking model is clearly under threat and there is an urgent need to develop and discuss popular and political strategies that aim not simply to defend Turkey’s SOBs but to reclaim their most progressive mandates and to innovate well beyond their present limitations.

Socially responsible investments in the global South

In The Cupboard is Full: Public Finance for Public Services in the Global South, we estimated that bridging the global public services gap, including annual capital costs and operation and maintenance, would cost US$75 billion per year. In comparison, SWFs and PPFs collectively manage as much as US$10 trillion in assets, and are expected to grow substantially over the next decade.

PPFs are made up of regular contributions from public employers and employees, offering fixed pensions to members upon retirement. SWFs have been created by governments to collect and invest revenues from natural resources (mostly oil and minerals), budget and trade surpluses, and other state income.

Following the financial crisis, funds have sought more stable returns by putting capital into privately owned water and electricity companies, infrastructure operators and private health care firms. The Ontario Teachers’ Pension Plan, for example, owns three privatized Chilean water utilities, each of which provides more than 10% return on investment (due in part to government guarantees), despite highly contested debates around whether these companies have managed to meet social goals and extend coverage to the neediest.

Thus there has been mounting public pressure to change fund investment strategies, in line with more general trends toward social responsibility. In reaction, a growing number of PPFs and SWFs have adopted policies and investment programs that pay attention to their broader impacts.

Attention to broad social needs can be a ‘win-win’ strategy. Even though investment in public services generally offers lower returns than private equity in the near to medium-term (1-3 years), it represents a more reliable source of income growth and could actually realize greater returns in the long run. The authors calculate that such public infrastructure investments could meet a return benchmark of 5% over the longer term, comparable to 10-year returns from higher risk investments such as equity and real estate, allowing funds to meet their fiduciary objectives. Such a strategy could also avoid the politically controversial and contradictory practice of using public sector funds to support privatization.

If PPFs and SWFs were willing to invest as little as 1% of their assets in publicly owned and operated infrastructure it could create an initial capitalization pool of up to $100 billion, a sufficiently large sum to make an immediate difference in the scale and quality of services in the global South, and to leverage additional contributions from governments and development agencies.

Financing could be channeled through a public or non-governmental infrastructure development fund or bank. Such an independent bank financed by fund deposits and fund-owned equity could offer loans for closely monitored projects, following explicit principles of equity, access and non-commodification of public services. It could also provide long-term, low-interest financing, with the specific rate dependent on the income level of the public agency to be supported.

Fund holders need to be informed of the current investments and strategies of PPFs and SWFs. If a strong financial and ethical case for funds to champion socially responsible investment in public services is built, it could galvanize a global coalition to pressure funds, governments, the UN and international financial institutions to commit to closing the financing gap and to allocate public funds for public services.