How can we improve the public accounts and create jobs at the same time?

If you want something to function, it’s easy, turn it into a business!

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In a previous post, I concluded how the best way to put this crisis to an end was to prove that the national debt is viable by achieving the following multiple objectives:

(a) Increase public revenue
(b) Launch the economic cycle (motivating capital investment, consumption, job creation and tax revenue)
(c) Reduce public expenditure
(d) Guarantee, keep and develop the common interest (social advancement).

This is a very ambitious objective. So ambitious, that many experts would argue it’s not achievable with one only strategy. Let’s take a small trip in time and we will quickly realize that there is a lot of room for hope.

In the year 2000, the telecommunications sector welcomed the new 3G wireless technology (UMTS). It was necessary to appoint operators and to set up the network infrastructure.  The process of allocating licenses to operate in this new technology in Europe was a great study case that allows us to draw conclusions on the effects of public auctions and so-called beauty contests¹. It is shocking that while countries like Germany and the UK managed to collect approximately a 2.4% of their GDP by auctioning licenses, other countries like Spain, Portugal and Belgium got ridiculous revenues below 0.3% of GDP. 

Many countries favoured the beauty contest option (where companies are selected based on the government’s assessment of who is most fit) for different reasons. Some defended that if the companies spent a lot of money acquiring the license, the company will need to delay the infrastructure investment (i.e. Finland). In France, the government used the beauty contest as a way to protect the interest of French companies. In the English case for example, even if the auction was one of the highest public revenue generators, analysts have concluded that the companies that got a license did not overpay when analysing the expected profits versus the infrastructure cost. One of the conclusions of this process is that the auctions which design encouraged the entrance of new competitors, improved the efficiency and increased the public revenue (Jehiel & Moldovanu, 2001).

This would be a perfect example on how the organisation of a new market was profitable for the government (it cashed in about 2.4% of GDP) while encouraged capital investment (creating jobs and helping the economic cycle). For the non-familiarized reader with the current crisis, I must highlight that if a country were to cash in 2.4% of its GDP without increasing its costs and without sacrificing the economic cycle, it would constitute and important advance towards fiscal consolidation. In other words, a great advance towards the end of this crisis.

With this license granting process we can see that when there is a true business opportunity, the private sector quickly organises the funding and infrastructure to set up the market’s launch without delay. If we were to travel even further back in time, we would see that the first telephone landlines were set up by public companies. By contrast, the 3G wireless license granting process equipped European countries with the latest technology, provided a new service to their population, and generated public revenue (instead of costs). In principle, we can say that this process satisfies objectives (a) and (b) of our mission as it generated public revenue and encouraged investment. It also saved costs for the State (c) as the population enjoyed an infrastructure without paying for it in advance and it created jobs. Clearly, the new technology brought social advance (d) by setting a revolution in the way we communicate.

Having said that, the licence granting process itself did not achieve the four objectives. The innovation and interest in the new wireless technology provided part of the achievements in points (c) and (d).We could only consider the 3G network setup as a money-saver if we considered that the State would have been forced by its electorate to make that investment anyhow. Equally, the social advancement is brought exclusively by the features of the new technology that were capable of changing our social habits.

Hence, to satisfactory accomplish the last two objectives; a real product or service that brings social innovation is required. This social innovation must be such that the population will desire to consume it giving consistency to the business opportunity. The business is what attracts the private sector and assigns this cost outside the public accounts.

Telephone landlines were implemented by public companies until there was sufficient penetration among the population. The 3G wireless technology, which forever changed the telephone service, did not need public capital. On the contrary, it generated public revenue, private investment and employment. Taking this example into consideration, can we find among the current public services which ones could use some revolution to create a business opportunity for the private sector while generating revenue for the public accounts?

In a previous post, I mentioned garbage collection as a pretty illustrative example, but this interpretation only shows a glimpse of the social advancement that this new attitude in the management of public affairs could generate. There are many more. A more powerful example would be the case of customer service. States have created an infrastructure to ensure that private companies comply with local regulation when they offer their services and products to the public. Even so, consumers frequently find themselves in situations where ii is onerous to defend their rights. Retail sectors with few competitors are a perfect example of this. When a consumer is not served as promised, how many efficient channels of recourse does he have available? To sue someone is economically inefficient for the consumer and for the government institutions. Could we create a market that turns customer service into a business so private companies can set up an infrastructure that assesses and corrects in real time other companies’ failures to assist their customers?

With this new market, we would encourage investment, create jobs, reduce public expenditure and promote competition in asymmetric markets. This market would compile objective data on each company’s behaviour that could be turned into a very powerful tool at the citizens’ service. How much social advancement would be generated if companies that do a better job see their business outlook improved? How much work could we take off the public administration?

How would it work? Imagine a consumer had the option to go to their current service provider’s customer service department or to a different private operator that will guarantee the service. The private operator would attend the consumer’s request but would invoice the cost derived from that service to the service provider that did not attend its customer in a satisfactory manner. The payment of these invoices would be enforced by this new market’s regulating law. If a company does not agree with the invoices received from the Customer Service operator it will always have the right to dispute them legally. This design would reduce the number of claims that the State has to deal with favouring bilateral negotiation. The improvement in the incidents’ and claims management process would be enormous. Moreover, the system would have a more virtuous design as it liberates the consumer from the dispute process decreasing the public institutions’ participation. A lone consumer, David, will no longer need to confront a massive company, Goliath, to make sure that his rights are respected.

Many companies consider that customer service is an additional cost. Once the sale has already been done, customer service becomes the additional cost of incidents. Wouldn’t you prefer that the management of incidents receive the same attention as when you buy something? How many of us would use a service like that one? How many companies would improve their processes generating investment and employment? How much work would we take off the public administrations? How much could we cash in selling a license for such a demanded service?

If you have the opinion that this market is unfair, you only have to do one thing: buy the stock of one of this new customer service operating companies. If you have doubts about the fact that a social objective could be guaranteed by a private operator, I only have one last question for you:

If you could only keep one of the telephone services you ever had, which one would it be? Would you keep the landline service that your government guaranteed under a non competitive market or would you keep the wireless service that the private initiative guaranteed under a competitive market?

Why should the State be the only provider of telephone services or the only defender of our consumer rights? If we don’t want Capitalism to die and take our society with it, we must continue its evolution into a more functional system.

Use this link to purchase the book were theconceptual grounds of Functional Capitalism are set.

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1. Philippe Jehiel & Benny Moldovanu; “TheEuropean UMTS/IMT-2000 License Auctions”; Jehiel: CERAS-ENPC, Paris and Departament of Economics, University College London. Moldovanu: Departament of Economics, University of Mannheim, Seminargebaude A5, 68131 Mannheim.