PSI puts tax justice for local and urban communities into the public debate at Habitat III PrepCom3

06 August 2016
PSI and ICRICT side event on tax justice for local communities

Over 80 people participated in a side event organized by PSI in collaboration with the Independent Commission for the Reform of International Corporate Taxation (ICRICT) and with the Public Services International Research Unit (PSIRU) of the University of Greenwich, UK, on the theme “Financing and investing in urban public services: the key to inclusive cities”.  The event was held on 26 July 2016 in Surabaya, Indonesia, within the framework of the Third Preparatory Committee (PrepCom3) of Habitat III (25-27 July 2016), where a delegation of PSI Municipal affiliates from the Asia-Pacific region headed by General Secretary Rosa Pavanelli took an active part.

Why tax justice matters for local government and is key to an inclusive New Urban Agenda

One of the key advocacy points PSI has pushed for within Habitat III is that there cannot be sustainable financing for the New Urban Agenda without tax justice. Point 8 of the PSI Position on Habitat III approved by the PSI Executive Body in May 2016 states that “sustainable, inclusive urban policies require reliable public financing that encompasses the payment of a fair share of taxes by the private sector - including multinational corporations (MNCs) operating or sourcing within the jurisdiction of competent local and regional governments - who must pay taxes to the communities where they operate and generate profits” and demands that local government authorities be involved in tax policy, “so that they can ensure balanced agreements with domestic and global business and investors and have the right to a direct say on setting fair returns for local communities in terms of tax revenues, local decent work creation, clean technology transfer, profit reinvestment, fair pricing for commodities, non-abusive dispute settlement clauses and protection of public services to the population”. PSI and ICRICT side event on tax justice for local communities

This side event illustrated why equitable access to essential local public services is inextricably linked to social urban inclusion and to the enjoyment of human right, and explained how systematic corporate and private wealth tax avoidance, inter-local tax competition and tax havens - some of which city-based - deprive central and local governments of the resources they need to provide essential services to urban dwellers.  Many national and local governments are still turning to public-private partnerships (PPPs) to finance public infrastructures and provide local public services despite extensive evidence outlining their worrying track of failures in essential public services provision. Public financing options such as public-public partnerships, remunicipalization and inter-municipal cooperation work and should be mentioned and promoted as viable options in the implementation text of the New Urban Agenda as they answer to public – not private – interest criteria, and are therefore more suitable to pursue non-profit goals such as social, environmental, health and development objectives.  

Habitat III discussions have largely omitted the impact of global and corporate tax avoidance on the ability of local governments to sustainably finance and provide public services.Speakers a the high-level panel

Panel speakers included (from left to right): Rosa Pavanelli, General Secretary, Public Services International (PSI); Dr. Govinda Rao, Commissioner, ICRICT; Dr. Jane Lethbridge, Director, PSI Research Unit, University of Greenwich; Abigail Almeria, General Secretary, AGWWAS (PSI affiliated union in the water sector in the Philippines) and Teguh Handoyo, SP PJB (PSI affiliated union in the electricity sector of Indonesia). Edmundo Werna, Head of Unit, Sectoral Policies Dept., International Labour Organization (ILO), delivered closing remarks.

Takeaways and quotes from the high level panel

Rosa Pavanelli, General Secretary, Public Services International (PSI)

PPPs and privatization are not the best way to deliver essential urban public services and pursue social, environmental and development objectives: public investment can be much better suited for these purposes as it does not answer to private interest logics.  

Rosa Pavanelli at PrepCom3When it comes to essential public services and development, PPPs often are trojan horses, used to hide public debt, to promote private gain from public service operations and to publicize private debt. Very little has been said about the social and environmental consequences of PPPs and privatization and on whether they are appropriate tools to pursue public interest and development objectives.

Energy privatisation, for example, has resulted into energy poverty for the most economically vulnerable urban dwellers, (e.g. in the UK and Spain), while private electricity companies will not have an economic interest to electrify small villages in peri-urban and rural areas. In the case of public health, the Ebola crisis has clearly shown how where public health services are privatized such as in the case of Sierra Leone, the crisis could not be contained and beaten, such as in the case of Congo and Nigeria, where – thanks to their public health system – health workers were appropriately equipped and trained to react to Ebola without private cost efficiency considerations limiting. Lately, the IMF, UNDESA and the UNDP have started to raise some of these questions about PPPs and privatization. Public investment in essential urban public services can be more appropriate as it answers to public – not private – interest criteria. PSI has long known and shown PPPs contradictions and pitfalls.

Taxation is one of the three key levers we have to beat inequality, along with the creation of decent employment opportunities through proactive labour market policies; collective bargaining with trade unions and access to essential public services. However, the amount of global tax evasion and tax avoidance is mind-bogging: 10 trillion USD, the largest share of which is in the Least Developed Countries, which are the most adversely affected countries.

Through fair, progressive taxation systems, everyone – including business - is called to contribute to the fulfilment of essential societal needs in the communities where they live and operate. Through taxation, central and local governments can raise the resources they need to invest in essential public services for the population. It is in cities that people see the most the direct impact of public services and progressive tax policies or the ravages of failed privatization and PPPs on their lives, and it is in cities where they can, as voters, through democratic processes –not through private deals and international loan conditionalities - decide whether their essential services should stay public or not. This is a critical discussion that should be at the heart of the HIII debate.

US-based MNEs shift every year between 500-700 billion USD profit to tax heavens or corporate tax-friendly countries to systematically avoid the payment of tax dues to the countries and local communities where they operate from which they source raw materials, labour and whose public services they benefit. This amount of lost tax corresponds to e.g. 200,000 municipal workers employed in services of public utility, or to 80,000 nurses for public hospitals, or to 80,000 social workers, so desperately needed for displaced populations, war and climate refugees and migrants and to avoid the mounting of social tensions.

“Public investment in public services such as health, water, electricity, sanitation, transportation etc. must not be seen as a cost, but a strategic investment for the community. One US dollar invested in public water and sanitation brings back seven US dollars in superior health outcomes.”

“With 10 trillion USD of lost tax per year, least developed countries are the most directly affected and penalised by systematic corporate tax evasion and tax avoidance. The tax dues lost to Africa every year are bigger than the aid Africa receives: it is clear that we have a huge problem here.”

Dr. Govinda Rao, Commissioner, ICRICTDr. Govinda Rao, Commissioner, ICRICT

Cities and urban areas are the engines of global growth and development, but in order to fully unleash their economic and social inclusion potential they need sufficient resources to finance and invest in their urban and local public services. Central government has a responsibility to ensure that this happens, and to secure that corporate and private wealth – especially MNEs – do not free ride on local communities and pay their fair share of tax, as local government cannot deal with a mobile tax basis.

Globally competitive cities should provide a wide range of services to attract human capital: transportation, water, sewers garbage collection and disposal, police, fire protection, parks, recreation and culture, affordable housing and social assistance. All these require significant resources: raising resources to finance these urban services holds the key to making urban centres a leading edge of economic dynamism. However, most developing countries suffer from acute infrastructure and services deficit in urban areas.

This is also because corporate systematic tax avoidance is a major problem for local government, which is traditionally bound to immobile tax basis such as land, property and user charges. In the current globalizing era we face a major paradox: on the one hand local government that is where economic growth takes place and socio-economic inclusion should happen, yet local government has no means by itself to capture a fair share of the value that is generated within its territory as it only has jurisdiction over immobile tax basis, whereas the bulk of its eligible tax base is mobile. This is because business and MNEs can shift it around while still benefitting from public and local subsidies and incentive for their local activities. Besides, traditional local tax-based revenues for local government have become difficult to collect or unfair on taxpayers, compared to their revenue – such as in the case of user charges -, whereas emerging alternatives like municipal bond markets are yet not very developed and suffer from city-based tax competition that distorts the market.

Quotes:

“Cities and urban areas are the engines of global growth and development, but in order to fully unleash their economic and social inclusion potential they need sufficient resources to finance and invest in their urban and local public services and infrastructures. Central government has a responsibility to ensure that this happens, and to secure that corporate and private wealth – especially MNEs – do not free ride on local communities and pay their fair share of tax, as local government cannot deal with a mobile tax basis”.

“The use of transfer pricing and profit shifting options to tax heavens by private wealth and MNEs starves central and local government of the much needed resources it requires to operate and provide essential services to people and cities. While these corporations use public services intensively to make large profits, they do not make commensurate payments in terms of user charges, property taxes and even the income taxes by creating branches in low tax jurisdictions and evading the tax.”

“It is absolutely necessary that the discussion on a fair, equitable, transparent taxation system as proposed by ICRICT and on the tax policy responsibility of central governments vis-à-vis local government should be very seriously tabled in the HIII debate. MNEs must file country by country reports on the businesses and advance pricing agreements they make for the sake of greater transparency and equity”.

Dr. Jane Lethbridge, Director, PSI Research Unit, University of Greenwich

Highly effective, viable and democratically accountable public options for investing in essential urban public services and infrastructures instead of privatization and PPPs exist and need to be disseminated and fully included in the toolkit of the New Urban Agenda: these are re-municipalization, public-public partnerships and inter-municipal cooperation.

It has been forgotten that in the 19th and 20th centuries, public funding and delivery of services played key role in urban development, especially following failures of private provision. Besides, there is a clear lack of evidence to show that private provision is more effective and efficient than public provision in health, social care, and education, water and waste management services in both developed and in developing economies. Among the many advantages of the public provision of essential services, are inequalities reduction; the creation of decent employment opportunities; a direct contribution to improved rates of economic growth; and better health outcomes, e.g. reduction of infant mortality.

There is a global trend of re-municipalization of public services, in some cases triggered by popular discontent, especially in water but not only, that is ongoing worldwide and that is bringing back into public control formerly privatized or PPP-operated essential services. Triggers for remunicipalization include public providers' failure in terms of service quality, cost efficiency, high – often abusive – user costs; corruption; lack of transparency; elections and political willingness; or the need for new, innovative forms of service delivery that are of no interest for the private sector but are in the public interest.

Inter-municipal cooperation involves contracts or joint production with other local governments as a means to gain economies of scale, improve service quality, and promote regional service coordination – within or between countries. For instance an inter-municipal partnership between the Belgian town of Edegem (22,000 pop.) and the Peruvian municipality of San Jeronimo (pop.32,000) has successfully launched a project that composts organic waste and uses it for agriculture, effectively resolving a public service issue with a positive environmental outcome without private gains involved.

Similarly, Public-Public Partnerships (PuPs) involve the collaboration between two or more public authorities or organisations, based on solidarity, to improve the capacity and effectiveness of one partner to provide public services. These relationships are forged around common values/interests and objectives but which exclude profit-seeking allowing public partners to reinvest resources into local capacity, to build a mutual trust which translates into long term capacity gains with low transaction costs. For example, a network of international PUPs enabled the city of Phnom Penh, Cambodia to increase water supply coverage from 20% in 1993 to 90% in 2007. Today, its public utility PPWSA expanded access to water supply in Phnom Penh faster than in PPPs anywhere in the world.

Energy privatisation has in many cases clearly resulted into energy poverty for the most economically vulnerable urban dwellers, (e.g. in the UK and Spain), while private electricity companies do not have an economic interest to electrify small villages in peri-urban and rural areas”.

Abigail Almeria, General Secretary, AGWWASAbigail Almeria, General Secretary, AGWWAS (PSI affiliated union in the water sector in the Philippines)

“As water services in Manila were privatized the cost for the user has gone up dramatically. We, the workers and our union, know how to operate these services efficiently. There is no need to pay external consultant companies to improve water services for our people. What we need is a better collaboration among government and unions in the public interest, taking private and corporate gains out of the equation”.

Teguh Handoyo, SP PJBTeguh Handoyo, SP PJB (PSI affiliated union in the electricity sector of Indonesia)

As it continues to boost its economic growth and middle income population demand, Indonesia needs lots of electricity. We, the public electricity workers and union, have developed a great deal of knowledge and expertise to meet those objectives and we are eager to do so. However, we are worried about our future.”

Edmundo Werna, ILOClosing remarks: Edmundo Werna, Head of Unit, Sectoral Policies Dept., International Labour Organization (ILO)

“Decent work, workers and especially public sector workers, and active labour market policies are critical to the success of the New Urban Agenda but have been largely omitted in the HIII discussions and texts. This is a gap that needs to be urgently redressed and emphasized. Local government is not an abstract entity, it is made of people, public sector workers who need themselves decent employment and decent working conditions to best serve their communities and successfully meet the challenges posed by rapid urbanization”.


Presentations from the event


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