Privatisation of Public Services has Hurt the Poor, Created Inequality

January 03, 2017

Efforts to privatise public goods and services have helped fuel an increasingly unequal society, says a new report by a US-based research and policy centre.

The report, “How privatization increases inequality,” examines the ways in which the insertion of private interests into the provision of public goods and services hurts poor individuals and families, and people of colour in the United States, a model that is fast spreading across the world, including in developing countries, such as India.

As India embarks on pushing direct benefits transfer (DBT) in a bid to plug leakages in the distribution of government benefits, such as cooking gas, pensions, rural wages, scholarships etc, the report, brought out by In The Public Interest, a US-based research and policy centre, cites the American experiment with electronic benefit transfer (EBT) in the 1990s.

EBT used cards to dispense benefits and by the 2000s, all states and US territories were utilising EBT cards through which each participant with an account was electronically delivered food assistance benefits each month.

The report points out that while EBT cards have eliminated traditional paper coupons that could be lost or stolen, and may help prevent fraud, they have also been a business opportunity for financial corporations that contract with states to administer the cards that are also being used for transferring monetary benefits for other social service programmes.

Companies, banks profit

The three major companies providing EBT services in the US are J.P Morgan Electronic Financial Services, Xerox, and Fidelity National Information Services (FIS eFunds). Apart form these companies, it is the banking industry that has “greatly profited” off these programmes, says the report.

“For example, J.P. Morgan Chase, which in 2012 controlled EBT contracts in 21 states, made more than half a billion dollars between 2004 and 2012 providing public assistance benefits. During that time, its seven-year contract with the state of New York was worth $126,394,917.44,” says the report.

End user fee

So how do these companies make profits? While the exact terms of these contracts vary state to state, most companies follow a similar structure with fees often aimed at the end users of the card— those on public assistance who already have financial hardships.

The state typically pays the contractor a specified amount per card per month and a monthly rental charge for Point of Sale machines that each authorised retailer uses to process and track EBT card purchases.

Other fees outlined in the contract are directly charged to the programme participant, such as ATM fees, the number of cash withdrawals per month if the ATM machine is within the company’s network, card replacement fee, customer service calls and insufficient funds fee. For example, in New York’s previous contract with J.P. Morgan, users paid $0.50 each time their cards were declined for insufficient funds.

While all this may sound easy for the better off, such charges affect the poor card users, especially in high crime areas, who may not want to withdraw large amounts of money out of their account in a single setting, says the report.

Also, this line of business is immune from some normal economic business risks.

As the magazine, The American Prospect, explains: “Banks make money distributing government benefits if the economy is bad, because more people sign up for assistance; they make money if the economy is good, because rising interest rates mean more profit on the money they hold to distribute to beneficiaries.”

“In essence, banks are allowed to siphon off a portion of a recipient’s public benefit to take as corporate revenues, as they provide financial services to a captured market that has no other choice but to use the bank’s card and comply with the bank’s terms to receive public assistance,’ says the report.

Tech glitches

That’s not all. Numerous problems have occurred with cards and underlying computer systems that have prevented thousands of poor individuals and families from accessing the benefits they need when they need it.

“In 2013, 37,000 food assistance recipients in 17 California counties were unable to purchase groceries as their cards essentially cancelled their SNAP (Supplementary Nutrition Assistance Program) balances due to technological errors. While Xerox and another contractor, Hewlett Packard, scrambled to fix the system and reactivate the cards, these families were unable to purchase food for several days,” says the report.

The report concludes that privatisation weakens democratic control over public goods and services and increases economic, political, and racial inequality.