World Order, Failed States and Terrorism

Henry C K Liu

PART 1: The failed-state cancer

PART 2: The Privatization Wave

This article appeared in AToL on February 12, 2005

The US Declaration of Independence issued on July 4, 1776, states that to secure "inalienable rights", among which are life, liberty and the pursuit of happiness, "governments are instituted among men". It goes on to accuse King George III of England of having "abdicated Government here, by declaring us out of his Protection". The declaration characterizes England as a failed state and justifies the separation of the American colonies from it to institute a new government. Yet privatization, a movement to abdicate government by declaring the people out of the government's protection and placing them at the mercy of the market, has since gathered much ideological support in the name of liberty.

In the shadow of the Great Depression and chastened by the horror of global modern war, Western societies sought to redefine social provision and the notion of public good. There was renewed concern with the rights of citizenship and entitlement to basic services (health care, education, public housing, subsidized mass transport and unemployment insurance) as part of a "social wage". These programs were purposely removed from the pressure of the market, to be funded by general taxation at progressive rates for the benefit of all. The strength of the welfare state varied from one country to another. It had its weakest foothold in the United States. But the rationale was the same: social cohesion and economic progress were furthered by a shared sense of community. Forty years later ideology took an about-face. The welfare state was under attack, and nowhere more so than in Britain, one of the countries where it was most advanced. Margaret Thatcher as prime minister privatized British Telecom (1984), bus transport (1985), gas (1986), British Airways and the Airports Authority (1987), water and electricity (1990) and, eventually, the coal industry and the railways. In the US, president Ronald Reagan viewed government as an enemy of the people. Instead of allowing government to protect the weak from the strong, Reagan wanted to protect the strong from government.

The meaning of privatization
The term "privatization" is generally defined as any process aimed at shifting government functions and responsibilities, in whole or in part, to the profit-driven private sector. Privatization of government responsibilities is touted by conservatives as the remedy for government inefficiency and corruption. Yet the record shows that both public and private sectors, given the opportunity, have shown equally high propensity to become corrupt and unethical. In recent years, corporate fraud and illegal machination have been making headlines, with names such as Enron, WorldCom, Tyco, Marsh & McLennan and Parmalat becoming glaring symbols of corporate malfeasance. New York state Attorney General Eliot Spitzer describes the 1990-era Wall Street business model of narrow institution interests in conflict with the best interest of its trusting clients, in which stock analysts worked hand in glove with investment banking operations of brokerage houses to defraud the investing public, as not only "fundamentally corrupt but in fact fraudulent". Yet few in the mainstream draw attention to the fact that such corruption and fraud are structurally traceable to the gradual easing and eventually repeal in 1999 of the Glass-Steagall Act of 1933 that, to prevent a repeat of the 1929 crash and to protect the investing public from fraudulent sales pitches, prohibited commercial banks (lenders to companies) from owning full-service brokerage firms (marketers of same company shares) and from operating investment-banking activities (creators of same company shares) because of inherent conflict of interest against their retail customers.

Spitzer's investigation on corrupt Wall Street practices led to a historic US$1.4 billion "global settlement" between regulators and 10 major Wall Street firms. The giant insurance brokerage Marsh & McLennan reached a $850 million settlement of civil fraud with the New York attorney general and the state insurance department as restitution for clients who were cheated when the company rigged bids for insurance contracts and steered business to insurers who paid Marsh special contingent fees. Enron not only committed fraud against its investors, but it also manipulated the electricity market to defraud the consumer public in the California market by manipulating electricity rates that resulted in statewide supply and fiscal crises (see Capitalism's bad apples: It's the barrel that's rotten, August 1, 2002).

"Privatization" is an expansive term covering virtually any action that involves exposing the operations of government to market pressures, ranging from contracting out janitorial services at government facilities to selling off the Naval Petroleum Reserve. The broader definition of "privatization" also includes a wide range of public-private partnerships, such as voucher systems to purchase public services from private companies. The military-industrial complex is a form of creeping privatization. The creation of public corporations, quasi-government organizations and government-sponsored enterprises falls under the general category of privatization through corporatization. In such organizations, it is often difficult to tell the difference between government service and private enterprise, since the motivation shifts from a commitment to public service to the corporate objective of earning a profit. Even non-profit corporations aim to make profits, albeit their profits are not distributed to private shareholders. "Not-for-profit" is not to be confused with unprofitability, particularly to the people running non-profit entities whose pay and benefits are tied to profitability. Activities that are governed by profit incentives inevitably place public service as a necessary evil. It is aptly described by the Chinese proverb qui di yang zu (kneeling to the ground to raise pigs), meaning to kneel not out of respect for pigs, but for the profit from such demeaning activities. Privatization is in essence the selling of failed government.

Government frequently allows or permits or even depends on the private sector to finance, build and operate public infrastructure such as roads, rail systems, container ports and airports, recovering costs and profitable returns on investment through user charges. Techniques commonly used for privately built and operated infrastructure include build-operate-transfer (BOT) arrangements in which a private entity designs, finances, builds and operates the facility over the life of the contract. At the end of the contract period, usually when private investment has been amply rewarded and totally amortized, ownership reverts to government. Often at the time of reversion, new investment will be needed to upgrade the facilities, leaving government with an asset of negative worth. Another variation is the build-transfer-operate (BTO) model, under which title transfers to the government at the time construction is completed at a value that includes the private entity's profit and is then operated by the private entity for further profit. Finally, with build-own-operate (BOO) arrangements, the private sector retains permanent ownership and operates the facility for profit as of right.

Under pressure
Governments at all levels in the US and around the world own enterprises that are under neo-liberal ideological pressure to commercialize, in such fields as electricity, water and waste management and disposal, parking facilities, insurance, tourist hotels and convention centers, postal service, hospitals, shipping companies, airlines, ports, airports, marinas, etc. Interest by public officials in privatizing such enterprises is growing as a way of relieving government performance accountability.

At the federal level in the US, one major divestiture was the sale of Conrail in 1987 for $1.65 billion via a public stock offering. The private rail sector, unable to compete with a heavily subsidized highway system, had lobbied for nationalization of the decrepit rail system earlier. Ironically, 19th-century rail barons had insisted on being private while demanding heavy government subsidy. When profitability evaporated for the rail industry as a result of the automobile age, it was time to demand nationalization to bail out private investment. When profitability returned as a result of auto-traffic congestion, it was time to privatize again. Privatization and deregulation have totally wrecked the air-transportation sector.

In 1995-96, the US Congress approved the sale of the Alaska Power Marketing Administration, the helium and naval petroleum reserves, the US Enrichment Corp (USEC), as well as auctions of the electromagnetic spectrum. Legislation was also introduced to sell Amtrak, the other four Power Marketing Administrations (PMAs), the air-traffic-control system, the US Postal Service, and the Tennessee Valley Authority (TVA).

The federal government produces 8% of the electricity consumed in the US and sells it through the TVA and the five PMAs of the Department of Energy. Two federal agencies, the Bureau of Reclamation and the Army Corps of Engineers, construct and operate the facilities that produce most of the power that the PMAs sell. About 60% of the government-owned generating capacity and all of the Reclamation and Corps capacity is hydroelectric. Private utilities and consumer-owned cooperatives dominate the United States' electric-power industry, supplying more than 80% of the nation's power needs.

Neo-liberal policymakers argue that the government should not be in the business of producing and marketing electric power because the private sector could handle those commercializable functions more efficiently, notwithstanding that this myth has been definitively disproved by the Enron smoke-and-mirrors accounting fraud and its unscrupulous manipulation of the California electricity market. Selling federal power assets would cut the size of government, which is the ideological fixation of neo-liberals. The claim that if the price was right privatization would ease the task of managing government fiscal deficits is pure bunk.

Selling government power assets is opposed by recipients of government-produced power, who get it at below-market rates and do not like the idea of losing the subsidy. Moreover, most government-owned facilities produce power as a by-product of other services: flood control, diverting and storing water for farms and cities, providing recreational parks and lakes, and protecting the environment. Some policymakers believe that government ownership is needed to make sure that those other functions do not suffer. There is little logic, other things such as good planning and management being equal, to the supposition that the private sector can deliver electricity to the public at a lower cost, given that private financing is generally more costly than government financing and private profit must be reflected in user rates. Private companies always aim to push rates up and rate wars among competitors cause financial distress in any industry, as has been evident in telecommunication and air travel.

Power plays
The Alaska Power Administration Asset Sales and Termination Act of 1995 authorized the sale of the Alaska Power Administration, the smallest PMA. Assets to be sold include two hydropower projects with their generating equipment, transmission lines, and administrative and maintenance facilities in small river basins that do not involve irrigation, navigation, or significant environmental considerations. Sales of other federal power facilities have been discussed, but these serve other purposes beyond generating electricity, such as providing water for irrigation which might be dealt with on a private, commercial basis, but flood control and some of the recreational and environmental functions are more difficult to deal with commercially.

During the Cold War, the government built up a huge variety of reserve stocks of various commodities. One of the oldest of those is the Naval Petroleum Reserve, at two sites in California and Wyoming. Those stocks of oil no longer have strategic value, and the oil is, in fact, sold into the commercial market today. Congress approved the sale of the California reserve in 1996. Another strategic reserve is the Federal Helium Reserve, which accounts for 90% of the United State' helium sales. That reserve has a market value of between $1 billion and $1.5 billion. Its borrowings from the Treasury, plus accumulated interest, total $1.4 billion, making net proceeds from the sale a wash. But the sale would provide a ready way of paying off the reserve's debt. In addition to oil and helium, the Defense Department acquired immense stockpiles of other strategic commodities during the Cold War. Privatization proponents warn that such stocks should be sold off gradually over a period of years so as not to depress sharply the market price of each commodity, making life difficult for commodity producers and speculators. Apparently, the aim of privatization is to keep prices high for the producers, not prices low for consumers. Such sales would remove the government's ability to help stabilize commodity prices to maximize consumer benefit.

The oil embargoes of the 1960s and 1970s led the US to create a huge civilian reserve stock of petroleum. Privatization proponents argue that while the reserve could prove valuable in a future situation of unexpected supply shortages, it is the existence of the Strategic Petroleum Reserve (SPR), rather than its ownership, that is critical. Private investors could buy out the operation of the reserve, and the release of stocks from the reserve in response to market price increases would be less subject to constraints than would releases under the current political management. If the objective is speculative private profit, why would a privately owned SPR have any incentive to keep oil prices from rising instead of maximizing speculative profit? The Congressional Budget Office estimated the market value of the SPR at $13 billion in a recent paper on its possible privatization. Fiduciary constraints within the rules of corporate governance would compel the directors of a privatized SPR to protect the interest of its shareholders by taking measures to raise the value of assets beyond its current market value.

The USEC saga
The notion that the private sector can run everything more efficiently and effectively than government was creeping into even the national-security arena. Joseph Stiglitz, former chairman of the Council of Economic Advisers in the administration of US president Bill Clinton, explains the trend only half-jokingly: "Why not privatize the making of atomic bombs - or at least the processing of the uranium that goes into atomic bombs?"

USEC Inc, a global energy company, is the world's leading supplier of enriched uranium fuel for commercial nuclear power plants. Revenues in 2003 totaled $1.4 billion. USEC operates the only uranium-enrichment facility in the US: a gaseous diffusion plant in Paducah, Kentucky. Uranium enrichment is a key step in the production of nuclear fuel, used by nuclear power plants around the world to generate electricity.

USEC is also the US government's executive agent for the Megatons to Megawatts Program, a 20-year, $8 billion, commercially funded nuclear-non-proliferation initiative of the US and Russian governments. The historic 1993 US-Russia non-proliferation agreement converts highly enriched uranium (HEU) taken from dismantled Russian nuclear warheads into low-enriched uranium (LEU) fuel. As US executive agent for this program, USEC purchases this fuel from Russian sources for its customers' nuclear power plants. This unique program aims to recycle 500 tonnes of weapons-grade uranium taken from dismantled redundant Russian nuclear warheads (the equivalent of 20,000 warheads) into uranium fuel used by USEC customers to generate electricity. The program, by providing funding to keep former Soviet nuclear specialists gainfully employed in recycling bomb material for peaceful uses, is expected to reduce greatly the prospect of Russian nuclear-arms technology falling into the hands of parties hostile to the US or terrorists of all colors.

Uranium enrichment for commercial nuclear reactors began in the 1960s, when the US government shifted some of its enrichment capacity from military to civilian use. In the early 1990s, USEC was created as a government corporation to restructure the government's uranium-enrichment operation and prepare it for sale to the private sector. USEC was privatized on July 28, 1998, and thereby global nuclear arms-control implementation was put on a commercial basis, held hostage to private profits.

The US government was encumbered by federal procurement rules that made the government-owned uranium-processing corporation vulnerable to foreign competition. By the 1980s, the US world market share had declined precipitously from the near 100% of its heyday to less than 50%. This downturn was of particular concern to two powerful Republican legislators. Senator Wendell Ford of Kentucky feared that it might lead to pay cuts or even layoffs at the large uranium-processing plant the government operates in his home state; New Mexico Senator Pete Domenici worried that as more and more uranium production moved overseas, the large number of uranium mines in his state would suffer. Ford and Domenici concluded that the solution was to make the government's uranium business more competitive by handing it over to private owners with simplified procurement rules. And as high-ranking members of the Senate Energy and Natural Resources Committee, they were in a position to put their views into action.

In the 1992 Energy Policy Act, passed less than two months after the United States and Russia had reached their preliminary agreement on the weapons-into-peaceful fuel deal, the US Congress directed the Department of Energy to transfer its uranium production activities to a newly created governmental corporation, dubbed the United States Enrichment Corp, or USEC, which would be charged with preparing itself for full privatization. The president would have the power to hire and fire USEC directors. However, in every other respect, company management would be autonomous from the government. As a further step toward privatization, USEC was also freed from many of the obligations that had been hampering the government's program. Corporatization shifted the mandate from serving national security needs to regaining market share in uranium enrichment. By September 1994, USEC was able to boast of achieving an all-time enrichment production record at both of its processing plants.

Even if a privatized USEC became financially more efficient, savings may not have filtered down to US nuclear power consumers. With an almost total monopoly on nuclear-fuel production in the US, USEC would have little incentive to lower its prices. So even on narrow economic merits, USEC was hardly a paragon nominee for privatization.

But even worse, USEC privatization could have dealt a devastating blow to the vital weapons-into-peaceful-fuel agreement with Russia. The whole idea behind the nuclear-dismantlement deal was to make it "budget neutral" by reselling the processed uranium purchased from the Russians to commercial nuclear-power companies. And since USEC inherited the government's long-term contracts with nearly all US and more than one-third of the world's power plants, it would be difficult for the Russian deal to be implemented unless USEC were charged with carrying it out. Thus even before it was officially created, USEC was envisaged by the administration of president George H W Bush as the deal's exclusive executor. But whereas the government's chief objective was to get as much bomb-grade uranium as possible out of Russia without losing money, as a private corporation, USEC's interest, in fact its fiduciary obligation to its shareholders, was to maximize its profits. The billion-dollar question, then, was whether USEC would be able to do so while still fulfilling the national-security goals of the weapons-into-peaceful fuel deal. Or, to put it more starkly, would US national security interests be held hostage by USEC profit motives?

One month after Clinton took office, the US and Russian governments officially signed off on the weapons-into-peaceful-fuel non-proliferation deal. Over the course of the next five years the US would purchase the diluted uranium from 10 tonnes' worth of bomb-grade Russian material a year. For the next 15 years after that, the United States would buy at least 30 tonnes a year. However, it was left to the USEC management team to work out the details with the Russians, including the price to be paid for Russian uranium. By January 1994, USEC completed those negotiations, and the company's chief executive officer, William Timbers, traveled to Moscow for an official contract-signing ceremony with Russia's minister of atomic energy, Viktor Mikhailov.

The new agreement was hailed as a historic achievement and promisingly titled the "Megatons to Megawatts contract". But in reality, the Russians, new to the workings of a market economy, had proved woefully inadequate in business negotiations. One American familiar with the negotiations said: "We snookered them."

As Harvard professor and nuclear-security specialist Richard Falkenrath notes in a comprehensive study, the Megatons to Megawatts contract contained three potentially problematic provisions. First, while USEC was given the option of buying Russian uranium, the contract did not actually obligate it to do so. Second, the contract established an initial price but stipulated that it was to be renegotiated each October. The Russians had wrongly assumed that the price would rise over time, while USEC took advantage of the annual price flexibility to push it down. Finally, whereas USEC would pay the Russians upon delivery for diluting the bomb-grade uranium themselves, it would not immediately compensate them for one of the key ingredients the Russians would have to use in the dilution process, namely the $4 billion worth of natural uranium needed to blend down the bomb-grade uranium into the lesser-enriched kind used for nuclear fuel. USEC would pay for the natural uranium that had been added in only after the company was able to sell or use an equivalent amount from its own reserves.

The Megatons to Megawatt provisions would have made perfect sense if the contract had strictly been a pact between the US and Russia as two sovereign states, since both had a common interest in preventing non-proliferation. Given Washington's strong interest in ensuring the success of the weapons-into-peaceful-fuel deal, it would have been counterproductive to take advantage of the contract's flexibility to try to fleece the Russians. In fact the price flexibility was intended to give the Russians continually reinforced financial incentives to stay with the deal for the long term. National security is an achievement worthy of spending money on, not to compromise in order to make small change in profit. Conversely, the priority of USEC was to make itself financially as attractive as possible to potential private buyers; and the leeway afforded USEC in the contract was a financial advantage it was obligated to exploit as a matter of fiduciary duty to potential private investors. USEC was saddled with a privatization mission that competed with US national-security objectives.

The conflict of interest surfaced at the very first annual price renegotiating session in October 1994. USEC claimed that, while not a money-losing proposition, buying uranium from the Russians at the initial agreed price was not nearly as profitable as producing it in the US. Thus USEC sought to slash the Russian price by nearly 20% to keep its profit constant. Non-proliferation, while a plus for US national security, was not a tangible asset to a private corporation. To make matters worse, USEC announced that, since US trade restrictions prevented it from immediately selling an equivalent portion of the natural uranium ingredient in the diluted uranium purchased from the Russians, and since the company also deemed it unprofitable to use that equivalent portion of natural uranium in its own processing activities, USEC would be unable to pay Russia for the natural-uranium ingredient until at least 2003, a decade later. The Russians were furious. "This is robbery in broad daylight!" fumed Mikhailov, who threatened to sell uranium to Iran instead.

As a profit-driven private corporation, USEC was within its commercial right to squeeze the Russians for every last financial advantage, even causing a breakdown in the non-proliferation schedule that dangerously delayed the removal of tonnes of bomb-grade material from unsafe Russian storage sites, leaving Russian specialists unpaid and exposing them to black-market beckoning from dangerous elements. By February 1995, the talks between USEC and the Russians remained at an impasse over money. From a financial point of view, the delay posed no loss to USEC, so the company felt no pressure to compromise. However, US national-security interests were clearly being compromised. By mid-1995, outside critics had begun to take notice of the near year-long delay. "The agreement's imminent breakdown, clearly Washington's fault, is a huge national-security blunder," wrote foreign-policy analyst Jessica Mathews in a Washington Post op-ed. The blunder was allowing national security to be endangered by private profit.

After months of stalemate, Senator Domenici began to question the wisdom of letting USEC implement the swords-into-plowshares deal. He devised a solution through which USEC would compensate the Russians with natural uranium from its own reserves rather than paying the Russians in cash, and US trade restrictions would be modified by the Senate so that the Russians could sell that uranium to prospective consumers for delivery at a future date. Domenici's scheme was set forth in the 1996 USEC Privatization Act, which also gave congressional approval for USEC privatization and requested that Clinton make a final determination on the matter on national security grounds. All that was needed was a nod from Clinton, and USEC could be put up for sale.

An interagency group of representatives of the National Security Council, the State Department, the Department of Energy, the National Economic Council and the Council of Economic Advisers was convened to decide whether and when Clinton should sign off on USEC privatization. Given the key role USEC played in the Megatons to Megawatts program, and its failure to prioritize national-security goals over corporate profit while still a governmental corporation, the national-security community might have been expected to be dead set against turning the public corporation over to private ownership. Instead, USEC privatization appears to have been regarded as inevitable. The only issue seriously considered by all the seasoned bureaucrats was how to limit its negative impact. "People tried to deal in the art of the possible," explained one official.

Complicating the picture, by this point anyone contemplating a halt to the privatization plan would have had to contend with an uncomfortable budgetary conundrum. The 1996 USEC Privatization Act was lumped into a larger appropriations bill called the "Down Payment Towards a Balanced Budget Act", in which the impending sale of USEC was counted as a $1.3 billion gain in revenues for the federal government. This was actually merely an accounting gimmick - at most the government would simply be getting cash up front in an amount equivalent to the value of the revenues USEC would have brought in over the years were it not privatized. In fact, for just this reason, in 1987 Congress passed a budgetary law prohibiting one-time sales of government assets from being counted as revenues. But in 1995, Congress changed its budget accounting rules such that USEC could be tallied in. As a result, a ruling against USEC privatization would have created a $1.3 billion gap in the budget, something many administration officials would be understandably loath to do. Domestic politics over bogus fiscal discipline was allowed to hamper national-security concerns and jeopardize world peace.

Yet the economists at the Council of Economic Advisers led by Stiglitz raised the possibility of vetoing USEC's privatization. The more the Stiglitz team analyzed the situation, the more convinced they became that privatizing USEC was folly. "You don't have to use a lot of imagination to see that the economic incentives are not there for USEC to import Russian uranium. So you're putting something that's in our national-security interests in direct conflict with USEC's private-property interests."

The more USEC became enmeshed in contracts with the Russians, the more impractical it would be for the US government to yank it out of the deal. Thus the threat of losing its status as executor of the Russian deal was hardly a powerful deterrent. Furthermore, once USEC was privatized, it would be difficult to monitor its internal communication and deliberation. Thus, noted Stiglitz, the company might be quietly sabotaging the uranium deal without even the government's knowledge.

As if on cue, even while still a government corporation, USEC provided Stiglitz with a perfect illustration of just this scenario. At a meeting in Moscow in January 1996, the Russians offered to sell USEC nuclear fuel from six more tonnes of bomb-grade uranium than the 12 tonnes USEC had already agreed to purchase in 1997. From a US national-security standpoint this was great news - those six tonnes were enough to obliterate about 300 Hiroshimas. Had the Russians been making their offer directly to the US government, the United States would have jumped at the opportunity. However, it was not in USEC's commercial interests to buy the extra uranium, so it declined.

The Russian offer and USEC's refusal were reported in diplomatic cables written by US Embassy officials who were present at the meeting, but key officials in the Department of Energy and the National Security Council were somehow not informed of both the Russian offer and USEC's refusal. The Russians mentioned their frustration to a group of visiting US nuclear-weapons experts who reported the exchange in their cables back to the US. Senator Domenici, upon learning of the outrageous incident, became incensed at the company's selfish behavior, despite being an advocate of USEC privatization. Domenici fired off an angry letter to deputy secretary of energy Charles Curtis, subsequently "leaked" to Peter Passell of the New York Times, in which the senator expressed his conviction that "USEC is acting directly contrary to the national-security interests of the United States". USEC, said Domenici, should "be immediately replaced as executive agent" of the Megatons to Megawatts program, which by that time was easier said than done.

Some Clinton administration officials also felt they had been deliberately kept in the dark by USEC. "You find out that when you went to a meeting where you were supposed to be discussing whether to privatize USEC, and you were weighing these incentive issues, at least half the people at the meeting don't even know" that USEC had refused to buy additional uranium, explained Stiglitz. At this point, Curtis urged USEC to buy the extra six tonnes. USEC quickly agreed and, not long after, negotiated a five-year contract with the Russians that locked in a price and increased the yearly amount of uranium that USEC would buy.

Despite USEC's bowing to national-security pressures, the danger of privatizing it was still considerable. What would happen once the five-year contract was up? And how well would the interagency group be able to monitor USEC once it was in private hands and protected by privacy laws? But the revelations about USEC behavior did not cause the privatization advocates in and outside of the Clinton administration to reconsider their position. The administration, as part of its ideological Third Way neo-liberalism, was clearly satisfied that enough safeguards had been put in place to justify continuing USEC's role in the Russian uranium deal, and to allow privatization to go forward. Assistant to the president for economic affairs Dan Tarullo and national security adviser Sandy Berger signed a joint memo recommending USEC privatization. Soon afterward, the president gave his okay and signed the privatization bill in April 1996.

As of December 31, 2004, the US-Russian Megatons to Megawatts program of recycling nuclear warheads into electricity had recycled 231.5 tonnes of bomb-grade HEU into 6,823.8 tonnes of LEU power-plant fuel, equivalent to 9,261 nuclear warheads eliminated.

KBR: Food for thought
The US military has also privatized the feeding and housing of its frontline troops, with disastrous results. NBC News reported last December 12 that the Pentagon repeatedly warned contractor Halliburton-KBR that the food it served to US troops in Iraq was dirty, as were as the kitchens it was served in. The report came as President George W Bush fended off Pentagon reports that Halliburton-KBR overcharged $61 million for gasoline it sold the US military in Iraq without competitive bids. Dick Cheney ran Halliburton for five years until becoming vice president of the United States. The company feeds 110,000 US and coalition troops daily at a cost of $28 per soldier per day. This adds up to "a company that arrogantly is overcharging when they can get away with it and not providing the quality of service that they agreed to do", Representative Henry Waxman, a California Democrat, told NBC.

The Defense Contract Audit Agency (DCAA) recommended that the Pentagon suspend a payment to Halliburton of nearly $160 million for allegedly overcharging for meals in Iraq in 2003. The company's subsidiary Kellogg, Brown & Root (KBR) supplied the meals to the military. Halliburton, which has been awarded more business in dollars than any other firm working in Iraq since the March 2003 US-led invasion and subsequent occupation, faces a number of investigations in the United States.

The New York Times reported that against the advice of its own auditors, the US Army said on February 5 that it would not hold back tens of millions of dollars each month from Halliburton until the company justifies bills for past work in Iraq. Under a logistics contract that could total more than $10 billion over time, the Halliburton subsidiary KBR provides meals, housing, fuel and other logistic services to the military in Iraq. In the rush that followed the US invasion of 2003, KBR started work without the detailed agreements on scope and reasonable costs that are normally required, and it handed in nearly $2 billion in invoices that Pentagon auditors said lacked proper backup.

Under federal rules, the government usually protects its interest in such cases by paying no more than 85% of invoices until costs are fully accounted for. But after months of public debate and disagreements within the Pentagon, the Army Field Support Command, which oversees the logistics project, said it would not automatically withhold money from payments to KBR. A spokesman for the command said it was concerned about disrupting vital services to troops in the field. Such concerns are the reason privatization is inappropriate for vital government services.

A citizen group that includes Global Exchange, CorpWatch and the Institute for Southern Studies released a report that calls Halliburton the "most unpatriotic corporation in America". It says the firm used high-level political connections and campaign contributions to win contracts that allow it to profit from the "war on terrorism" in Iraq, Afghanistan, Guantanamo Bay and elsewhere.

Texas-based Halliburton is one of the 10 largest contractors to the US military, with several lucrative guaranteed-profit deals in Iraq. It earned $3.9 billion from the armed forces in 2003, a whopping 680% more than in prewar 2002. Halliburton's business in Iraq is three times as much as that of Bechtel, its nearest competitor, based in California. The citizen group's report, "Houston: We Have a Problem", also provides numerous case studies of Halliburton's business dealings with governments that have been categorized by the US as failed states or rogue states, including Iran, Libya, Myanmar, Nigeria and Kazakhstan, and with the former Iraqi tyrant Saddam Hussein. "Many of these business deals were subsidized with corporate welfare checks from the World Bank and the US Export-Import Bank (ExIm Bank)," says the report. According to the document, since 1992, the World Bank has approved more than $2.5 billion in financing for 13 Halliburton projects. ExIm Bank is an even more significant financier of the company's global expansion: its board has approved more than $4.2 billion for 20 Halliburton projects since 1992, adds the report. The report also calls on Congress to investigate and penalize war profiteering and to adopt the War Profiteering Prevention Act of 2003, which would prohibit profiteering and fraud relating to military action, relief and reconstruction efforts in Iraq.

Privatization payoff check is in the mail
The United States Postal Service (USPS) is an independent establishment of the executive branch of the US government. It operates in a businesslike way through corporatization, which is the main cause of its problems. A national postal service, similar to a national transportation network, should aim to support the balanced development of the whole nation. Corporatization or privatization of such services under a deregulated regime favors population centers while neglecting the needs of small communities and remote locations, as a natural result of economy of scale and location. Privatization of the USPS has been proposed as a way to improve the organization's ability to survive and thrive in a rapidly changing market by allowing it to reduce unprofitable services to remote locations, thus rendering them more inaccessible and less profitable to service in a downward spiral. The unspoken penalty of uneven national economic development remains unaddressed.

Because its monopoly status lets the USPS subsidize new services with profits from monopoly functions, competitors object to any proposed new ventures by the postal service. Critics point out that the corporate culture of the USPS is still that of its predecessor government agency, as if public service and support for balanced economic development were undesirable objectives that yield no economic value. They claim that lacking shareholders who can hold management accountable for maximum commercial performance, and being constrained by its procedural rules and red tape, the USPS is simply unable to operate like a real business, ie, serving only those who can pay and discontinuing operations that are not profitable, externalizing all social costs, notwithstanding that such is not the mandate of the USPS. This attitude is not limited to the US. Sweden and the Netherlands have already privatized and deregulated their postal services; Argentina, Germany and Malaysia are planning to do so; and the United Kingdom and Canada are considering the idea.

Privatizers argue that the best way to address the concerns of postal workers and management over privatization is to give them partial ownership of the privatized firm. Earmarking for workers and managers a meaningful fraction (10% or more) of the shares in a firm being privatized has become routine around the world, especially for large, labor-intensive firms. Turning workers and managers into shareholders is sold as one of the best-known ways to change the institutional culture of a bureaucratic enterprise, giving every individual a tangible stake in its success as a profitable private enterprise. But in reality, minority employee ownership translates into self-imposed low-wage trade-offs for meager portions of corporate earnings. The pension funds of US workers have not been able to use their investing power to keep workers from losing their jobs to outsourcing to lower-wage economies.

Under neo-liberal pressure, federal, state and local governments in the US and around the world have considered or proposed the sale of state-owned airports, insurance funds, toll roads and water systems, power plants, waste collection and treatment plants, hospitals and parking facilities.

Recent sales at the state level in the US include the trade sale of the Michigan Accident Fund, which was privatized on June 14, 1994. A wholly owned subsidiary of Blue Cross/Blue Shield of Michigan (BCBSM), the Accident Fund Co is the largest workers-compensation insurance company in the state, with a market share of about 13%. It was at the time the largest privatization of a public agency, state or local, in US history. BCBSM paid Michigan $255 million to acquire the Fund.

Started in 1912, the Accident Fund of Michigan was far from being a costly social-welfare program. Rather, it was so successful that, during its last year of operation, it produced a $36 million surplus providing workers-compensation insurance to the nation's most industrialized state, the home of the US auto industry. It had become a model for other states workers-compensation systems. But the Fund's success rankled its commercial competitors in the insurance industry, who complained that the Fund enjoyed an unfair tax advantage. In response, Michigan in 1990 set in motion a plan to use a portion of the Accident Fund's surplus, equal to the amount that would have gone toward federal taxes had the fund been privately run, to support injured workers whose employers had no insurance, and to pay for workplace safety programs. However, the insurance industry continued to call for the sale of the Accident Fund. Meanwhile, between 1990 and 1994, statewide denials of workers-compensation claims jumped from 29% to 36%. According to a study of appellate decisions, workers were losing 65% of the time to private insurance companies in claim disputes, a rate considerably higher than that in a state-owned fund.

Profiting from tragedy
The Port Authority of New York and New Jersey, owner of the 6.5-hectare site on which the terrorist-destroyed World Trade Center (WTC) twin towers once stood, is a public body. Its revenue comes mostly from the tolls collected from the public on bridges and tunnels financed by agency revenue bonds, and from fees from the operation of the region's airports and ports. As of June 30, 2002, it had assets of $6.8 billion with a net of $5.6 billion after liabilities, mostly in the form of outstanding bonds. The mission of the Port Authority is to serve the public interest by providing transportation infrastructure and operating transportation facilities while staying within the bounds of sound public finance. This mission has become murky in recent decades, as is natural with long-standing public agencies. When the WTC was being planned in the 1960s, critics argued that the authority should reduce the tolls on bridges and tunnels that had long since been fully amortized, instead of investing in further institutional empire-building, such as venturing into development of commercial office space for profit.

Much of the land under the WTC, occupied mostly by discount electronics retail tenants with leases from small landlords, was condemned under eminent domain and assembled through street closings into a superblock by the city of New York and turned over to the Port Authority for the controversial project. Eminent domain is a well-established sovereign right to take private property for public use, with appropriate compensation, by virtue of the superior dominion of the sovereign power over all lands within its jurisdiction.

Yielding to neo-liberal pressure to privatize, the Port Authority in July 2001 granted developer Larry Silverstein and Westfield Holdings Ltd a 99-year lease on the WTC's 1 million square meters of office space and 42,000 square meters of retail space, at a total price of $3.2 billion. Some have suggested that this was a sweetheart deal for a politically well-connected developer, as the true worth of the 99-year lease was estimated to be more than $8 billion. Since the land was condemned, the $4.8 billion discount to Silverstein was actually money that could have been returned to the original small landlords. The lease gives the private leaseholders the legal standing to protect their private property rights should the public interest interfere with potential private profits over the 99-year period of the lease.

Some have suggested that the Port Authority should buy back the controversial lease from the Silverstein-Westfield team, which was merely two months old at the time of the September 11, 2001, attacks, so that the Port Authority can fulfill its public-interest mission as a public agency unencumbered by conflicting private profit interests. Silverstein has answered in a terse letter to the New York Times that the lease is "not for sale" - understandably, for if he should win his lawsuit against the insurance companies, he stands to collect $7.5 billion in claims, doubling the value of his lease, not to mention the 99-year stream of future profit from maximum development rights (see The towering challenge of the WTC project, February 12, 2003).

The tax-exempt World Trade Center Memorial Foundation is about to start on a $500 million fundraising effort. The events of September 11 were a national catastrophe, not a private tragedy. It is hard to understand why such a national memorial is to be financed by private donations. Similarly, the heavy dependence on private donation to fund relief efforts for the December 2004 tsunami is part of the global failed-state syndrome.

Social insecurity
Social Security privatization is currently the big controversy in the United States. Proponents hold out the promise of higher returns, but play down the commensurate higher risk. Congress may succumb to the urge to shift that risk to taxpayers rather than keep risk linked to return in the event of a market crash. Some recent projections indicate that expenditures on Social Security retirement benefits will begin to exceed payroll-tax revenues and trust-fund earnings before the year 2020, and the Old Age, Survivors and Disability Insurance (OASDI) trust fund will be depleted within roughly 10 years of that date. If substantial changes are not made in the Social Security system, then expenditures are projected to exceed revenues by more than 5% of the payroll covered by the Social Security tax.

Numerous analysts, commissions, business groups and labor organizations have studied this situation and made recommendations for changes in the system. One proposal is for changes in the investment strategy of the OASDI trust fund. At present, tax receipts beyond current outlays are placed into the trust fund, which is permitted to invest only in special-issue US Treasury "bonds", which are in essence accounting entries in the budget of the US government. Neo-liberal reformers favor some type of private investment of Social Security funds. Proposals include (1) retaining the current structure of Social Security benefits but investing part of the existing trust fund in private equities and corporate bonds, (2) establishing small individual accounts that would be centrally managed with some or all of the funds being invested in private securities, and (3) directing most of an individual's Social Security taxes into private accounts that would have a wide range of private investment opportunities. All these proposals have one thing in common: they all try to change social security into social risk. The only party to benefit will be the financial-services industry that provides the investment advice and trades.

Proponents of investing a portion of Social Security funds in corporate securities, or allowing workers to invest part of their Social Security taxes in corporate securities, point to the higher expected returns compared with current investment practices of investing in ultra-safe government bonds. If the funds were invested in the equity or liabilities of private corporations and if they earned returns similar to the average returns over the past 50 years, then Social Security recipients could enjoy greater retirement benefits at the same cost, or the same benefits with a lower tax burden, or some combination of the two. Depending on the proposal and the investment strategy, such a change in investment practice could partially alleviate the system's long-run financing problems.

Opponents of investing a portion of Social Security funds in private assets highlight the greater risk associated with private securities relative to federal debt. Those risks include greater variation in year-to-year returns, possibilities of large capital losses, and the risk of fraud and malfeasance in the management of the funds specifically and in financial markets more generally. Inevitably, with private investments some retirees may have lower pension benefits than they would have had if all funds had been invested in government bonds, whereas other retirees will have higher benefits, mostly the rich, who are more informed about market investing. Furthermore, while the long-term performance of the security markets historically rises, there have been down cycles nearly regularly every seven years or so. After March 2000, when the stock markets last peaked, investors saw $7 trillion vanished from their portfolios by July 2002. That was 70% of the gross domestic product of the United States. Bear markets have been known to last for several years and sometime take decades to return to their peaks, which would leave most retirees in dire straits over the short term. The idea of providing "social security" by exposing retirees to the volatility of the market is simply a risky gamble.

The market is reflective of the structural soundness of the economy. The US economy will be impacted adversely by demographics. The number of Social Security beneficiaries is growing faster than the number of workers paying taxes to support them. The number of elderly between now and 2050 will increase 100% while the number of workers will only increase by 22%. People are living longer and collecting more Social Security benefits. In 1940, life expectancy in the US was 61.4 years for men and 65.7 for women. By 2000, life expectancy was 74.2 for men and 79.5 for women; by 2050, life expectancy is expected be 79.2 for men and 83.4 for women. Families are having fewer children as the cost of bringing up children rises and government subsidy falls. For each generation to be the same size as the one before (the replacement rate), each women must have 2.1 children. In 1940, the US fertility rate was 2.23. Today, the rate is 2.07 and by 2050 it is expected to trend downward to 1.95. In 1940, there were 42 US workers per retiree. Today the ratio is 3:1; by 2050 it will be 2:1.

Social Security was originally structured as an inter-generational cash-flow scheme, notwithstanding that politicians have been telling the public that Social Security tax payments are taxpayers' own money. The reality is that the current taxpayers pay for the current retirees, and the future retirement benefits of current workers will in turn be paid for by future workers. Thus when demographics change, the Social Security system gets into trouble. But privatizing Social Security will not solve the problem. For increased returns on investment to neutralize the shortfall in demographics, the returns would have to be astronomical, at a level not achieved by even the most risky hedge funds. It is self-deceiving to expect the market to outperform a structural demographic imbalance between the number of workers and the number of retirees. An economy with a shrinking working population reluctant to support a rising retired population is not a sound economy and it will not produce a rising market. Furthermore, consumption by an expanding retired population is of critical importance to prevent shrinkage in aggregate demand in the economy. Thus cutting Social Security benefits will only add to the US economy's already serious problem of demand management.

Blue gold
On October 16, 2002, the largest proposed municipal water privatization in the United States was rejected by the New Orleans Water and Sewerage Board. Private corporations trying to privatize water supply in the US were counting on New Orleans to serve as a model and pave the way for other privatization efforts from coast to coast. New Orleans citizens and officials rightly determined that the public's water should be kept in public hands.

In 1990, about 51 million people around the world got their water from private companies. Now, 15 years later, the number has grown to more than 300 million. Suez Lyonnaise, a French corporation and the world's largest water and wastewater business, operates in about 130 countries and serves 125 million people, 25 million of whom are in the Asia-Pacific region. Vivendi Environment of France operates in about 100 countries through 3,371 companies with a 110-million customer base. Thames Water, a British concern now owned by the German conglomerate RWE, has operated in the People's Republic of China since 1989 and has been operating in Hong Kong for decades since colonial days. As one of China's leading private water companies, it has built a customer base of 6.5 million. In 1995, the company won the contract for China's first privately funded water-treatment project in Dachang, Shanghai, and construction of the major water-treatment works for the city was completed in 1998, with Thames Water running the new plant. In July 2002, Thames Water acquired the largest single shareholding in the China Water Co, which has 4 million customers in China. Thames Water's involvement in Hong Kong includes the building of a major water-treatment plant for the new international airport. The company has also signed a memorandum of understanding with the Ministry of Water Resources in Beijing to perform integrated water-resource management activities across China.

Vivendi secured in March 2001 a 20-year contract to operate and renovate a water plant in Tianjin, China. In 2002, both Suez and Vivendi signed long-term deals, some for up to 50 years, to manage municipal water systems in China, which face huge water shortages.

In March 2002, ONDEO, Suez's water division, was given a 50-year contract worth 600 million euros ($769 million in today's dollars) to design, finance and manage water-treatment installations and services for the Shanghai Industrial Park's industrial wastes. Vivendi's Generale des Eaux and Marubeni Waterworks Co Ltd are involved in bulk water schemes in Chengdu, China, with "take or pay" contracts, which ensure profits by requiring consumption regardless of need. Saur, a French group serving 55 million people throughout the world, has been operating a drinking-water production plant in Harbin, China (225,000 cubic meters per day) since 1995 that serves 2.8 million people. The BOT project is a partnership between Saur and the Harbin Water Co for a contract term of 28 years. Since January 2001, SFSW (Shanghai Fengxian Saur Water), a Saur subsidiary, has been operating the Shanghai Fengxian drinking-water plant, which serves 700,000 inhabitants (southwest district of Shanghai), with a contract term of 28 years.

New Delhi's water supply is being privatized to Vivendi, which secured a $7.2 million drinking-water management in the state of West Bengal. Degremont, a subsidiary of Suez, is undertaking a 50-million-euro design-build-and-operate drinking-water production in Sonia Vihar, New Delhi, for 3 million people with water from Tehri Dam. Vivendi's Onyx, which specializes in waste management, was awarded the contract to manage garbage and street litter in Chennai, a major port city in southern India. The company is paid $13,700 a day to collect and dispose of garbage in three key areas in the city. Its sister organization, Vivendi Water, was given the contract to manage the water services in the city. This is in an economy where many have to live on less than $1 a day.

Thames Water has provided technical advice and assistance in India to improve Indian sewerage systems as part of the Ganga Action Plan. The company also worked on a major consultancy contract in Mumbai, a thickly populated city in India. The 18-month project will assess the operation and management of the water supply in Mumbai and develop a program to raise the technical and managerial capacity of the local company. Other projects in India include leakage control in Chennai and provision of training for senior officials on groundwater issues for India's Department of Rural Development and management of the urban river corridor.

In 2000, Vivendi Water Korea, a subsidiary of Vivendi Environment, was established, acquiring the industrial water-treatment facilities of Hyundai Petrochemicals for $125 billion, located in the Daesan Industrial Complex, South Chungchong province. In March 2001, Vivendi Water Korea established Vivendi Industrial Development by acquiring industrial water and wastewater treatment facilities at Hynix complex in Incheon. The contract with Incheon municipality provided for the construction and 20-year operation of two wastewater-treatment plants in partnership with Samsung Engineering. In the same year, Vivendi secured a contract with the province of Chilgok for the operation of two existing wastewater-treatment plants over a 23-year period and the design, financing and construction of a new plant. This project is in partnership with the Hyundai Construction. Both the Incheon and Chilgok projects were made possible after the introduction of legislation to attract foreign direct investment in the wastewater sector in South Korea. Expected revenues from the two contracts are estimated to be more than 20 million euros annually. In January 2002, ONDEO signed a BOT wastewater contract worth 200 million euros with Yangju, a city near Seoul. In April 2001, the South Korean city of Busan contracted ONDEO to manage its wastewater. There have been reports of worker protests in these projects.

Vivendi, a French transnational conglomerate that filed bankruptcy after defaulting on $7 billion of loans, is not so much a water company as it is an effective business lobby that hunts for overseas companies that it can exploit profitably. In 1998, the International Monetary Fund (IMF) conditionality forced the South Korean government to instruct Hyundai Electronics to sell its water-purification plant that provides water for semiconductors. Vivendi was the buyer. Since then, Vivendi has entered the wastewater-treatment business in a newly built city near Incheon, because it recognizes that it is difficult to drive out an existing company, and it is much easier to establish dominance in a new territory.

In 1997, the World Bank arranged the privatization of the water services in Manila. The contracts were awarded to Maynilad Water Services Inc (MWSI) and Manila Water. MWSI is owned by the wealthy Lopez family's Benpres Holdings, and partly owned by ONDEO, a subsidiary of Suez Lyonnaise des Eaux. Manila Water is owned by the Ayala family, and backed by Bechtel, a US construction conglomerate. French consultants were paid P168 million (about $3.1 million in today's dollars) by ONDEO. Of this amount, P110 million was for consultancy services. These consultants were taxed at a rate of 5% as opposed to the standard rate of 10%.

Similar privatization schemes were undertaken in Indonesia, Malaysia, Bangladesh, Vietnam, Japan, Singapore, Thailand and the United Arab Emirates. The world's private water industry is dominated by just three corporations: Vivendi and Suez, both of France, and Thames Water of England, owned by the German conglomerate RWE.

For the past decade, these three water companies have been on an explosive growth program. Just a decade earlier, they operated private water utilities in 12 countries. They now provide drinking water for profit in 56 countries, according to a new study by the International Consortium of Investigative Journalists (ICIJ). The water business has gone from a low-return utility to a source of "blue gold". Peter Spillett, a senior executive with Thames Water, has called water the petroleum of the 21st century. "There's huge growth potential," he said. "There will be world wars fought over water in the future. It's a limited, precious resource, so the growth market is always going to be there." Not if the people of the world take back the water that nature has given them.

"What's happening is that water itself is being carved up and will be parceled out according to people who have the ability to pay," said Tony Clarke, author of Blue Gold and a critic of global water privatization. The water companies claim they can deliver water more efficiently, which is far from their record of the past decade. Water is being manipulated as a scarce commodity for the maximization of corporate profit. The US became a rich nation mainly because the control and development of water resources remained under government control throughout its history. The state of New York under the liberal Republican administration of Nelson Rockefeller established a Clean Water Authority to provide its citizens clean water and revitalized rivers and lakes, financed with $1 billion Pure Waters Bond Act of 1965, later supported by the federal Clean Water Act of 1972 that imposed stiff controls on municipal and industrial waste and underwrote waste treatment along rivers and bordering lakes.

David Boys, who works for a federation of public trade unions, says the reason water is profitable is the same reason it shouldn't be a private business. Consumers are captive clients because they cannot survive without water. The ICIJ investigation shows cases where service and access can improve under private management, but that is because private management narrowly defines its responsibilities of serving its customers and often at the expense of the non-customers. Around the world, privatizations have also led to rising costs of clean water, cutoffs for poor people, and companies defaulting on contracts when they fail to make enough profit, leaving the population with a water crisis. Water preservation and purification should be financed by the economy as a whole, in which case the cost is financed by an expanding economy rather than the rich users. Until the recent rise in oil prices, bottled water was selling at a higher price than gasoline in the US. Water issues, its price and the distribution of its cost have provoked heated debates and violent protests in many countries. Though most privatizations so far have been in Asia, Africa and Latin America, top executives of the big three companies told the press that they plan to expand next in China and North America.

Privatization forces the poorest of the world to pay more for clean water. When water is privatized, the enterprises that take over the water supply do not invest in the renewal of the built infrastructure. That worsens the quality of the water supply and pushes up the cost of purification. Critics of the privatization of water observe that Suez and Vivendi form part of the World Water Council (WWC), which, together with international institutions such as the World Bank, has been advocating the privatization and commercialization of water through a worldwide private oligopoly. The international committee that studies the global problem of water is influenced by the companies that eventually would profit from the solutions the committee proposes. The "integrated water-resources management" proposed by the WWC strongly advocates "handling water as just another merchandise, whose just price can only be set by the market".

The World Bank has advocated the increase of water prices to force a reduction of demand, but it would also force the poorest people in the world to pay more for water needed for survival. The rich consumers in rich countries will always have enough money to wash their cars and fill their swimming pools. The World Water Forum defines access to water as a "universal need", not a basic human right, so as not to restrict the freedom of the private institutions involved in water management.

In a communique issued on the celebration of World Water Day, the United Nations Educational, Scientific and Cultural Organization (UNESCO) emphasized that access to water has always been a crucial element of any development strategy. UNESCO said that at any given time, about half the people living in developing countries suffer from water-related illnesses such as diarrhea, parasitic infections, river blindness and malaria. "These diseases kill about 5 million people each year, especially children under the age of five," UNESCO said. Therefore, UNESCO director general Koichiro Matsuura warned that a water crisis is looming, and urged to integrate "scientific, ethical and social sound principles [in the global management of water] to secure a sustainable water world for the generations to come". UNESCO recalled that the global demand for water has increased more than sixfold over the past century - more than doubling the rate of population growth. This disproportionate growth illustrates the water crisis, UNESCO said: "Without sound management of water resources and related ecosystems, two-thirds of humanity will suffer from moderate to severe shortages by the year 2025," which might lead to new inter-state conflicts.

State control over water sources has led to international wars, but states are failing to protect their control of water from privatization without the slightest resistance. Privatization of water is also related to rampant corruption. The long history of collusion between French water-management companies and the country's leading political parties is an example.

Vivendi, a media conglomerate floated on the back of a water utility, led by its CEO and former wunderkind Jean-Marie Messier, a former Lazard Freres investment banker and public official, had bet on emerging synergies among media assets, which would be fueled by the mass acceptance of broadband. The vision was the same as animated the AOL/TimeWarner merger. Messier's biggest deal was the acquisition of Seagram and its Universal media unit in 2001. Vivendi, groaning under the weight of $20 billion in long-term debt (with more off balance sheet) failed to sell assets, particularly its water empire, fast enough to reduce debt and slid into bankruptcy. French regulators are also now investigating Vivendi's financial disclosures. Like WorldCom, Vivendi had retained in recent years the services of Arthur Anderson, the accountancy firm of ill repute implicated in the Enron scandal.

Downward mobility
The heart of class structure is the job market. Generally, one's job determines to a large extent one's lifestyle, one's politics and one's social values. Against this backdrop, the Bush administration announced in 2002 that it planned to privatize up to 850,000 federal jobs, approximately 46% of the federal workforce. Supporters of the plan claim that government privatization is cost-effective. Union leaders of federal workers bitterly denounce the plan as the administration paying back its corporate paymasters and question the legitimacy of the political system that fools ordinary people into supporting policies that will lead to their own economic downward mobility.

After a 30-day public review period, the president can impose new rules of competitive privatization without congressional approval to decide the fate of nearly a million federal workers. The administration's plan to transfer some federal work to private contractors comes during a protracted weak job market. Joblessness translates into low wages, as the demand for work exceeds the supply. It is a buyer's market for employers where job seekers have little market power. Privatization of government jobs in a high-unemployment market is in essence a legalization of scabs. The outsourcing of federal jobs to the private sector pushes down wages across the US job market and reduces wage income and aggregate consumption in an economy plagued with overcapacity, not to mention having adverse effects on workers' benefits and job security.

Government privatization of public jobs is forced on helpless governments of debtor nations by the IMF and the World Bank. In the US, the federal government oppresses its workers all on its own.

The privatization threat has been used repeatedly by the Bush administration, and particularly by Secretary of Defense Donald Rumsfeld, to neutralize congressional opposition to the administration's attempt to deprive federal workers of their collective bargaining and appeal rights, and to replace the federal pay and classification system with one that gives control over pay scales of federal workers to private company management. Rumsfeld has declared repeatedly that if the Defense Department cannot get the "managerial flexibility" over collective bargaining, hiring, firing, discipline and pay that it demands, it will simply outsource or privatize civilian jobs. Thus privatization is being used as an ideological device to weaken the labor movement and its hard-won collective bargaining powers.

The rules governing the privatization of US government jobs give great emphasis to private firms' ability to undercut federal employees on their pay and benefits. Privatization of government jobs has been shown to have a disproportionately negative impact on female and minority workers. Diversity in federal government employment has been a hard-won victory for the US labor movement, and women and minorities not only make up a larger share of the federal workforce than of the workforce at large, they are also more prominently represented in the upper ranks of professional, managerial and technical positions in the public sector than in the private sector. The Bush administration's privatization quotas affecting specific numbers and types of jobs as well as specific numbers and types of competitions have not been shown to produce either cost savings for taxpayers or improvements in the quality of service delivery.

The American Federation of Federal Employees (AFGE) has filed a lawsuit challenging the legality of the Office of Management and Budget's unilateral redefinition of what constitutes an "inherently governmental" job that should not be privatized. In an action that would increase the number and type of federal jobs vulnerable to privatization, OMB has attempted to narrow the definition of "inherently governmental" so that contractors will be able to take over work ranging from tax collection to levying fines to evaluating and adjudicating applications for citizenship to handling classified communications relating to national security to overseeing and administering other government contractors.

Privatization on the federal level is creating an environment that accelerates the drive for privatization on the state and local level, threatening the reliable and cost-effective delivery of goods and services in the United States. Privatization neither saves money nor improves services. If anything, the experience is the opposite. The risky proposal advocated by the Bush administration to open air-traffic control to privatization ignores the disastrous experiences around the globe, where airline near misses have soared and governments and consumers have had to bail out failing contractors. Many states and localities have ended contracts early: Oklahoma's for highway maintenance and the Connecticut city of Bridgeport's for sewer services, as only two examples, because of contractor failure to complete the work on time and safely and ongoing cost disputes that drain additional public resources. And despite a relentless ideological drive to divert public money into private school vouchers, there has been no improvement in student achievement but public school funding has suffered.

The American Federation of Labor-Congress of Industrial Organizations (AFL-CIO) has joined with its affiliated unions that represent federal employees to work to defeat the pernicious quotas for outsourcing and privatization, and will support any coordinated efforts by public employee unions to defeat this attack on government and the public sector.

In the 388 parks in the US national-parks system, proponents of privatization maintain that by inviting competitive bids (outsourcing) for many of the 20,000 jobs, the best service will be provided in the most cost-effective way. Opponents argue it will actually cost more to privatize services already being provided by dedicated employees, who see not a job but a way of life in the National Parks Service. Cost-benefit analyses show that National Parks Service employees can provide most functions for half the price of what a private contractor could offer. For many National Parks Service employees, working in national parks is more than just a job; it's a calling. Their sense of commitment goes beyond a 9-5 job and a narrow job description.

The Bush administration demanded and won legislation allowing it to revoke the collective bargaining rights of 170,000 government workers as part of the legislation creating the US Department of Homeland Security. The workers, transferred from other agencies, include inspectors and other workers at the Animal and Plant Health Inspection Service, officers at Customs Service and Border Protection (formerly known as Customs Service) and the Bureau of Citizenship and Immigration Services (formerly known as Immigration and Naturalization Service) and emergency workers at the Federal Emergency Management Agency. This month the Bush administration stripped 1,000 workers at the National Imagery and Mapping Agency of their union representation and in January and took away the bargaining rights of 60,000 airport screeners in the Transportation Security Administration (TSA). AFGE is seeking to reverse the order issued by TSA administrator James Loy. In January 2002, Bush issued an executive order revoking the union representation for workers in the Justice Department's US attorney's offices, the Criminal Division, the US National Central Bureau of Interpol, the National Drug Intelligence Center and the Office of Intelligence Policy and Review.

In addition, Bush is pushing for new rules at the Defense Department that would eliminate annual pay raises, step increases, appeal rights and bargaining rights and reduce force protections for all Defense Department employees. The OMB's Office of Federal Procurement Policy is rewriting Circular A-76, the procedure that governs public-private competition, to encourage agencies to put more jobs up for competition and make the process more favorable to private contractors. At present, about $125 billion of federal work is contracted out; often with very little accountability for the contractors. The Bush administration believes that as much as half of all federal work can be contracted out and is working hard to make this a reality. Privatization also risks lowering national labor standards because the contractors are not required to provide the civil-service protection and benefits to private workers.

In Washington, DC, the privatization of the DC General Hospital led immediately to slashing of services for the district's poor and uninsured. Then, because the private contractor went bankrupt, low-income residents had to travel across town to another facility for critical care. In Kentucky, a recent state audit of publicly traded, for-profit ResCare, a company that serves the state's developmentally disabled, found that after ResCare's contract began in 1997, seven of 12 investigated deaths occurred in ResCare settings, two of its employees failed to provide needed medical attention, and ResCare received $8 million in improper Medicaid payments. Profit-driven Edison Schools, which opened its first school in 1995, with 150 public schools under its management nationwide, promised to deliver higher student achievement at lower costs. But so far, Edison management contracts for 40 schools have been terminated for cause. Dallas superintendent of schools Mike Moses terminated his district's contract with Edison after studies showed that students in Edison schools were not doing as well as students at district-run schools, and cost more per pupil, to boot. New Jersey has announced plans to end privatization of the state's Department of Motor Vehicles (DMV) initiated in 1995, citing poor consumer service, fraud and lax security. One of the sniper suspects in the Washington, DC, area registered a car in New Jersey without insurance, and several September 11, 2001, hijackers/terrorists obtained fraudulent New Jersey driver licenses. Under privatization, the number of Communication Workers of America Local 1037 members working at the DMV dropped from 350 to 60, and they waged a long campaign to expose its failures. "New Jersey's DMV is a total repudiation of privatization's false promises," said CWA Local 1037 president Hetty Rosenstein.

On the federal level, one of first post-September 11 actions by the US Congress was to guarantee the safety of the skies by transferring low-paid private contract workers who inspect luggage into the federal workforce, where they earn a living wage and can be expected to perform with more effectiveness. "It's ironic," said AFGE privatization policy analyst Brendan Danaher. "Clearly, [private] contractors couldn't guarantee public safety and make a profit. But rather than applying that lesson today, the Bush administration is rushing to privatize nearly a million government jobs."

Hard lessons
Under the current globalized trade regime, once the door to privatization is open it may be nearly impossible to close it again. Multilateral trade agreements currently in place, such as the North American Free Trade Agreement (NAFTA) and the General Agreement on Trade in Services (GATS), are clearly tilted toward corporate rights. Set in legal language is a set of rules to facilitate corporate takeover of globalized services. This includes basic needs such as water, education, energy, communication and transportation but also fields such as tourism, entertainment, banking and finance, insurance, management, distribution and retail. Services are the fastest-growing sector in international trade. Western economies and Western-based transnational corporations account for about 80% of world service exports. Africa, by comparison, gets about 2%, mostly in tourism and mining. GATS rules relating to "national treatment" and "market access" can make privatization and deregulation in effect irreversible. Because many public services now have private-sector involvement, resistance to privatization can be labeled as "barriers to trade". This in turn could lead to destructive pressures on the public system, opening the doors to foreign firms wanting public services for profit. Privatization then is a key part of a strategy to promote the failed-state syndrome in all nations to install a global neo-liberal regime.

In US public schools today, little is safe from commercialization and privatization. A wide variety of companies and corporations are attempting to take over virtually all of the work traditionally performed by school district employees, from teaching to providing student transportation to cooking meals to cleaning and maintaining school buildings and grounds, and more. The attempted corporate takeover of education has its roots in support services - it is in this area that private contractors have been around the longest, and where contracting out is the most widely practiced. The National Education Association is strongly opposed to privatization because of the threat that it poses to the quality of education, the accountability of public schools to the communities they serve, and to the well-being of children in school.

Unfortunately, some US school districts have been contracting out various education support services for decades. Many of the tasks they perform are often erroneously viewed as "peripheral" services that are detached from the rest of the system of education and thus easily separated from "core" educational functions. There has been no shortage of private companies actively seeking to perform education support functions, particularly in transportation, maintenance, custodial and food services. In colleges and universities, the practice of contracting out is even more widespread. Public education has seen a growth in private-sector involvement with the emergence of an "education industry" composed of private companies that take over administrative and teaching functions for entire schools or even school districts. The steady growth of corporate commercial activities within US public schools, the voucher movement, which threatens to drain resources from public schools to subsidize private schools, combined with support-services contracting, amounts to a takeover of public education by forces driven by profit incentives. One shudders to contemplate what kind of society it will be when the education system is run like a fast-food industry, peddling intellectual obesity for profit.

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