Conversion to Worker-Owned or Cooperative Businesses Through Privatization: International Experience and the Case of Puerto Rico

Karen May

January 1998

New Hampshire College Graduate School of Business

Master of Science in Community Economic Development

Independent Study

Perspectives in International Development, Dr. David Miller

Development of Cooperatives, Dr. Chris Clamp

    TABLE OF CONTENTS

          Introduction 2   Policy Motivations 2   International Experiences 4 Jamaica Argentina Nicaragua Russia Hungary China   Employee Ownership and Privatization in Puerto Rico 8   THE INDUSTRIES: 10 Health Care 10 Prison Management 13 Waste Management and Recycling 14 Telecommunications 16   Conclusion 18   References 21  

Introduction

On October 1, 1997, the island of Puerto Rico came to a standstill. Tens of thousands of workers, union members, and “Independentistas” announced a general strike and converged on the Capitolio in San Juan to express their staunch resistance to the impending sale of the public telephone company, and to the general privatization strategy of Governor Pedro RosellÙ . The “Telefonica,” as the Puerto Rican Telephone Company is known, became a focal point for reactions to privatization initiatives in three industries—telecommunications, health care, and prison management. (The Solid Waste Authority has also contracted out some of their services, though this has not been seen as controversial.) Bumper stickers flooded the streets and parking lots, decrying “NO a la venta de la Telefonica,” “Puerto Rico No Se Vende,” and “No a la PrivatizaciÙ n.” A week after the general strike, students were beaten and arrested at a spontaneous protest at the University of Puerto Rico where Secretary of State Norma Burgos tried subtly to promote her government’s policies. Sporadic picket lines continue.

Even while the Telefonica is renowned for its terrible service, opponents of the sale describe the company and other public assets as part of the “patrimÙ nio” – an integral part of Puerto Rico’s heritage, like the ancient and monumental “El Morro” fort. The public debate has raised questions that have no easy answers. What does public property mean? Who must be involved in policy decisions regarding the future of that property? Should an industry have the same status as a national monument? Is the government the best steward of necessary services? Who is the “public” in “public good?” Would a narrower definition like “community” be more appropriate to ensure that stakeholders protect the “public good” regarding such services? And what is the government’s role in ensuring a public voice in privatized services?

Answers to these questions differ depending on political affiliations. As is characteristic in Puerto Rico, positions are etched in stone by each of the three dominant parties, often obscuring some creative solutions which may be agreeable to all. An example of such a solution is the “third” option to the question of privatization – that of conversion from public companies to employee owned or cooperative businesses. Worker, consumer, and community ownership redefines the notion of public property, shifting the locus of control from the state and centralized power to local or regional communities where constituents have a more direct impact over the enterprise. Puerto Rico has dabbled with this strategy, and where the players have been receptive, the effort shows great promise for a broad range of industries and projects. But where ideology and loyalty predetermine stakeholder positions, as in the case of the telephone company, historic yet fleeting opportunities for greater community control are lost.

Policy rationale for incorporating employee ownership into privatization

Puerto Rico is not alone in its struggle to deal with the opportunities and threats of privatization. Developing and industrialized countries, individual states and municipalities alike are grappling with shrinking budgets and increasing debt burdens, draining cash reserves, and jeopardizing the credit-worthiness of public entities. Particularly in developing countries, structural adjustment programs mandated by the World Bank have coerced governments to institute austerity programs and liquidate their assets with threats of cutting off a constant stream of loans. David Korten describes this as a symptom of the growth-centered model of development. (Korten, 1990, p. 40) While this model makes a logical leap to claim that benefits will trickle down to the poor, the theory argues that various market-oriented adjustments are required to bring in the foreign currency needed to repay loans, spur productive investment and therefore increase the GNP—that whats good for the GNP is good for everybody.Strategies include increasing exports, caps on wage levels, trade liberalization, reductions in government spending, and cash-generating sales of public assets. The latter two form the basis for privatizing government services and selling publicly owned properties.

Proponents of the “growth-centered” model of development often cite the export-led growth of the Asian economies as an example of success. In his book Getting to the 21^st Century, David Korten provides illuminating case studies revealing that asset redistribution is a necessary precondition for successful export-led development, contrasting the Asian experience with that of Brazil. (Korten, 1990, p. 55) He also cites evidence suggesting that growth in GNP actually exacerbates the problem of dual economies, increasing the divide between rich and poor by focusing only on those sectors oriented toward foreign interests--a holdover from the colonial enclave economy. (Korten, 1990, p.49-50) This pitfall could be avoided, however, if local employee ownership were a required condition of privatization, which would serve the triple purpose of asset redistribution, an orientation towards the domestic economy, as well as generating a measure of liquidity for the government.

Jeffrey Gates further dissects the financial processes of development, advocating employee ownership for the following reasons:

This is a particularly relevant assertion in terms of Puerto Rico, where an explosion of consumer debt--not correlated to varying income levels—has caused a parallel reduction in savings, weakening the very financial fabric of the island. (King, 1991, p.12).

Adding to the list of benefits, employee ownership mitigates the inherent contradictions between labor and capital, which often plague developing countries. In efforts to generate political support for structural adjustment, politicians have cloaked privatization programs in free market clichés like efficiency and competition, promising that the “benefits” of trickle-down economics will reach the lowest economic strata. But while efficiency may be an admirable goal, privatization is not necessarily the best way to achieve it; the effects are often disastrous, and workers are now wise to the ruse. Thousands may lose their jobs, and those that stay face reduced wages and benefits. Workers world-wide have learned that these reductions are the likely outcomes of privatization, and have therefore been increasingly resistant to such programs, making life difficult for the politicians trying to institute them. Advocates of employee ownership now cite these political motivations as reason enough to sell shares of the privatized company to its workers. American Capital Strategies summarizes many of these policy justifications in their “ESOP Privatization: a Roadmap to Success:”

• ESOP privatization maintains quality and continued professionalism of Government Services

• at lower cost to the government
• while putting the least number of jobs at risk

• ESOP privatization quickly and effectively moves government operations into the private sector, promoting efficiency. (ACS, online, 1997)

Essentially an advertisement for their consulting services, this quote from the American Capital Strategies website illustrates arguments one might make to a head of state concerned with traditional economic development goals. Directing advocacy toward the majority populations of countries considering employee ownership in their development strategies, however, issues such as local control over assets and broader distribution of wealth become more important. These are the issues that David Korten emphasizes when discussing the alternative to the “growth-centered” development model. He characterizes this option as “people-centered,” and led by structural changes in asset ownership, or “equity-led.” Korten mentions employee ownership among his “policy preferences:”

As we see in the following section, employee ownership offers opportunities for unique partnerships among constituencies with historically different interests, whether those interests are focused on people and long-term sustainability, or conventional growth in gross national product. If its potential for this ideological crossover is fully utilized, employee ownership can provide a common platform for equity-led development on a scale rarely seen by community economic development practitioners.

International experiences

Given the numerous logical reasons for involving workers in privatization strategies, it is hardly surprising that “employee ownership now forms a component of privatization or economic development strategies in more than 100 countries” (Gates, 1995, p. 3), including Puerto Rico. In his article, “Global Applications of Employee Ownership,” Jeffrey Gates argues that “government incentives have indisputably advanced privatization in countries such as Jamaica, Chile, Poland, Hungary, and Russia.” (Gates, p. 4) But while Gates bundles their varying rationales together, each country has its own legal and political context, demanding different structures and public positioning. Economies in transition from centralized state ownership must contend with different issues than those of conventional capitalist economies, and within those categories fall uneven degrees of understanding regarding individual property rights versus collectively owned assets, and cooperatives versus employee “share” ownership. These transitions often require entirely new legislation, as was the case in Puerto Rico (discussed in the following section). The Committee for the Advancement of Cooperatives recently made a United Nations paper available online, which discusses this new legal, and political, status:

Among the vast international experience with privatization and employee ownership, two trends in policy orientation emerge--policies oriented toward free market, growth-centered economics, and those more concerned with asset redistribution and a community stake in economic development. Under the rubric of conventional capitalist reasoning, one finds an absence of other buyers (as in Hungary’s case), creating political support, alleviating labor concerns about job losses, giving employees an incentive to assist the process of “marketization,” and attracting foreign investment by reducing risk that a privatized entity would be renationalized. The more “people-centered” and “equity-led” development goals include the following: anchoring productive assets from multinational corporations, explicit asset redistribution (as in Pakistan), providing workers a stake in economic development, and decentralized economic power. Chile, for example, wanted to ensure that privatization did not foster a concentration of wealth. This second category of explicit policy goals corresponds to Korten’s equity-led sustainable growth strategy—development which values local sovereignty and economic democracy, and strives to break down the structures of dualism. (Korten, 1990)

While many nations have seen examples of employee ownership in sporadic cases, several countries with more systematic approaches merit further examination, especially in the instruction they can provide for the infant program in Puerto Rico. The degree of employee ownership allowed in privatization programs sometimes correlates to the ideological orientation of their economies, but not in every case. The idea of combining elements of socialism and capitalism is new enough that political parties have not yet sorted out their positions. The following descriptions begin with relatively small, mostly capitalist countries in the Western Hemisphere, and then proceed to some interesting cases in the transitional economies of Eastern Europe, and finally to China. These examples were chosen because of their relevance to the developing Puerto Rican economy, and lessons they can provide in terms of community economic development policies.

• Jamaica: Jamaica’s employee ownership system provides more instruction for Puerto Rico than perhaps any other nation. While Jamaica is still a “poorer” country than Puerto Rico, their Caribbean island economies are very similar. Informal and rural economic activity still comprise a significant portion of both. Jamaica recently enacted legislation similar to U.S. ESOP laws, with a goal of over five percent participation in employee ownership within the next several years. The law and its incentives are targeted toward conversions in private enterprises, but privatization is an explicit component as well. The process of implementing the program will give economic development practitioners a chance to familiarize themselves with the process of large conversions before attempting the relatively complex task of privatizing public entities with ESOPs. The program incorporates some interesting features to facilitate the democratic management of the newly converted companies, including accelerated tax write-offs for the principle of ESOP loans where the workers elect representatives to the board. In addition, ESOP trustees must vote the shares according to the employees’ instructions. Workers also receive subsidies for the purchase of their shares in various ways. The National Center for Employee Ownership goes on to describe one of the most unique provisions of the Jamaican ESOP system:

• Argentina: While only 10% of the shares in companies being privatized are reserved for purchase by employees in Argentina, the number of workers participating in this program is very significant, with 7% of the country’s economy going through privatization. The government also made provisions for workers to vote a representative on the company’s board of directors. “The program is called “Programa de Propiedad Participada” (Shared Ownership Program), or PPP.” (NCEO, 1996, online) Workers buy shares at market price, but they are eligible to receive special grants from the government that cover up to 50% of the cost. Particularly of interest to Puerto Rico and the case of the public telephone company there, Argentina privatized Edenor and Edesur, the electrical distribution networks serving the province of Buenos Aires, with the PPP program, as well as the Argentine National Gas Company. (ACS, 1997, online)

• Nicaragua: While the Chamorro government stated intentions to incorporate employee ownership into their slow privatization program, only one company, the local Pepsi factory, has been converted in this way as of yet, and seemingly at the insistence of a new, democratic union at the plant aligned with the Sandanistas. The workers now own 25% of the company’s stock, out of 45% that was originally state owned. Interestingly, the Sandanistas originally owned the other 55%, so depending on the degree of democracy practiced within the Sandanista organization, the workers have significant control over the company. (NCEO, 1996, online) This case holds interesting lessons for Puerto Rico, where the various political parties are vying for control over the privatization process. Given such intense political conflict, it is no surprise that the Chamorro government did not implement further examples of worker ownership, and it remains to be seen what the Sandanistas will be able to achieve when the power relationships are reversed.

• Russia: Russia holds lessons for Puerto Rico in terms of the speed and scale of its privatization through employee ownership; the country was able to convert over 7,000 medium and large enterprises in less than two years through a variety of purchase incentives. At the same time, however, one must acknowledge the opportunity cost to the permanence and democracy of the converted companies. Russia’s policy motivation clearly falls under the free-market umbrella, as there is little attempt to ensure democratic management of the firms, and government agencies have explicit goals to move towards a more conventional ownership structure as employees sell their shares. (NCEO, 1996, online)

• Hungary: In contrast to Russia and the other Eastern Bloc countries, Hungary’s privatization program seems genuinely concerned with the ideal of meaningful employee participation in the new market economy. Their legislation, similar again to the U.S. ESOP, includes provisions for permanent employee ownership. Also unique in Eastern Europe, the conversion mechanism contains no cap on the percentage of stock that employees are allowed to purchase. So far, almost 300 of the 404 privatized companies include a measure of employee ownership. (NCEO, 1996, online)

• China: Highly resistant to foreign involvement in their economy, China is moving toward internal investment that will retain the trappings of “Chinese Socialism.” Gao Shangquan, vice-minister of the State Commission for Restructuring the Economy has recently indicated that employee ownership will be the vehicle for privatizing (or “transforming” as the Chinese prefer to say) most of its economy, which is now primarily owned by village governments. 80% of workers in China are employed in “small and medium sized enterprises” which Gao says should be sold to the employees through a system of worker collectives, similar to Western-style worker cooperatives. He holds up Shandong Province as a model, where 250 companies have been sold to these collectives, which have proven to be extremely successful. The remaining 20% of non-farm employees work in enormous state-owned industries, which are also up for partial privatization. While the ultra-leftist parties are resisting these moves, “Gao argues that transforming enterprises through worker collectives is really not abandoning socialism, but rather changing the nature of public ownership from the workers owning a share in the entire economy into workers owning their own companies.” (NCEO, online, 1997)

Employee Ownership and Privatization in Puerto Rico

The question of controversy within and among political parties provides an apt transition to the discussion of Puerto Rico’s efforts to include cooperative, worker, and community ownership into their privatization efforts, elucidating their lack of successful examples. Rigid political divisions often paralyze economic development. The riots against the telephone company privatization this year echo demonstrations in 1990, which were indeed successful at stalling the sale. Nevertheless, Governor RosellÙ seems determined to push the deal through during his term, and appears undaunted by the small picket lines that have been following him around to many of his speaking engagements. Recently at a conference to discuss business climate improvements through joint activities between government, private business, and educational institutions, RosellÙ was introduced with gratitude for promoting “a pragmatic, philosophical revolution, and culture of work revolution.” Meanwhile, telephone workers scuffled with police outside the doors to the luxurious hotel where the gathering was held. When asked about the protest, the Governor said, “We want to put an asset of the people of Puerto Rico to a better use.” The union’s spin: “They want to sell it because they’re short on cash.” Both statements may be true, but the conflicting value judgements exemplify the discord that often plagues political decision-making. Ever the shrewd politician, RosellÙ attributed the picket to the “same small group of people that protest whatever I do,” and that “they don’t represent the mandate the votes gave him last election.” (Diaz, 1997, p. B40) He failed to recount the survey indicating that 54.3 percent of 1,300 people interviewed opposed the sale of the telephone company, while only 30.8 percent supported it. (Sacchetti, 1997, p. 12)

RosellÙ has a talent for appearing more community-oriented than his corporate, growth-centered policies often prove; he may support a position in word, while his actions, or lack thereof, point to the contrary. This seems to be the case with the enforcement of community economic development policies, one of which centers on a new form of worker-owned corporation expressly designed to facilitate privatization.

The legislation for the CorporaciÙ n Especial Propiedad de Trabajadores (CEPT), or Special Worker-Owned Corporation, was passed in 1990 (and amended in 1992) after community development practitioners recognized the need for alternatives to the conventional industrial attraction and structural adjustment programs that left many Puerto Ricans disenfranchised and excluded from mainstream economic activity. They studied the Mondragon cooperatives in northern Spain and U.S. Employee Stock Ownership Plans (ESOPs), carefully positioning the law as a chapter of conventional corporation law to be more palatable to traditional business and economic development interests, while maintaining minimum standards of worker democracy and community benefits within the regulations themselves. Workers must own the majority (55%) of the voting shares of stock to receive the full benefit of the tax credits, and the ratio of the highest paid to the lowest paid members’ salaries must be 6 to 1, or less. The law exemplifies a people-centered, equity-led approach to development; its advocates have utilized its potential for ideological crossover in an effort to “scale-up” the development process.

According to the CEPT law, profits and losses are allocated across three internal funds. The “reserve fund” comprises a minimum of 20%, and is used for reinvestment in the company. The “social fund,” must receive at least 10%, and can be used for projects with a defined “social benefit,” such as low-income housing development, scholarships, or community education projects. The members’ dividends account constitutes a maximum of 70% of total net income (or loss), and is further allocated to each worker-owner’s internal capital account, which increases in value, as the company becomes more profitable.

Designed to stimulate economic activity among underemployed populations, the CEPT law contains incentives and tax breaks to mitigate the effects long-term economic inertia. CEPT companies can receive tax-deductible donations, and bank income from interest on loans made to CEPTs is tax-exempt. 90% of income from renting to a CEPT (property, plant, and/or equipment) is also tax-exempt, and the worker-owned businesses themselves are exempt from payroll, property, and most municipal taxes.

Significantly for this discussion, additional state and municipal exemptions are available for CEPTs that emerge from conversions because of privatization or companies in danger of closing. Unfortunately, this last category of benefits has not yet been tested. Approximately 35 CEPT businesses are now operating successfully, but none of them represent true privatization or conversion projects. While the law was passed as an important economic development tool, politicians and government agencies have not utilized the CEPT law as it was designed, in effect ignoring the opportunities to implement a more successful privatization strategy. Puerto Rico would be well advised to learn from the policies of Jamaica, which has put the full weight of the government behind efforts to bring workers into financial markets as a pure growth tool. International experience has also taught us that a focused effort to include workers in ownership structures actually facilitates privatization, making the process smoother and faster.

It is difficult to determine how much the resistance to large-scale implementation of the law and its privatization corollary is due to unfamiliarity with the concepts, and/or a lack of political will on the part of the administration, but both elements are certainly present. Neither the Governor nor Secretary of State has ever publicly raised the possibility of incorporating worker ownership into privatization, although the issue has been discussed in newspaper editorials. (Marino, 1997, p. B41) Certain agencies that deal with the CEPTs are learning about the legal structure, but still discriminate against the community businesses in terms of access to crucial public services, like utility and infrastructure improvements, which traditional businesses easily accomplish. (Reyes, interview, 1997) The large government development banks have not yet allowed the CEPTs access to vital financing tools, and tax collection agencies often impede CEPT attempts to take advantage of the benefits that they legally have rights to.

The development practitioners that catalyzed the CEPT law, now members of the development non-profit Fomento de Corporaciones Especiales Propiedad de Trabajadores (FCPT), have made numerous overtures to various government bodies in an attempt to redirect economic development energies, but with little result. Now, limited resources have required that FCPT focus more on ensuring successful performance among the community businesses they helped to create. If the Governor were to get behind the worker ownership law as part of an overall economic development and privatization strategy, the picture would be entirely different. As in the Jamaican experience, conversions from private companies could offer a learning experience before applying the CEPT structure to public entities. In such a politically charged environment, however, logic does not always rein.

Politicians may be more willing to take a risk on employee ownership if they were sure that the voters would support them, but again, there are no guarantees, and the internal contradictions of party politics in Puerto Rico create a “Catch-22” situation. As Korten suggests, institutional change can only occur where there is the political will to achieve it (Korten, 1990, p. 83), and in Puerto Rico, that will has not yet reached a critical mass. In order to generate support for employee ownership as part of an overall “people-centered” strategy, practitioners and the worker owners themselves want to support other members of the “social economy” by signing on to the anti-privatization campaign sponsored by the telephone worker unions. On the other hand, worker-owners could benefit from further privatization efforts, a fact that they struggle with daily.

Now that some of the successful CEPTs have organized into an association, there may be hope that political organizing can help to stimulate policy changes at the Commonwealth level. This new association, the Asociacion de Corporaciones Especiales Propiedad de Trabajadores (ACEPT), holds the seeds of an effective “people’s movement,” or “fourth generation development organization” (Korten, 1990, p. 127). Yet worker owners are still reluctant to express a public position that would challenge the authority of the labor movement in the matter, and the telephone unions have repeatedly rejected offers to present a proposal for a worker-owned restructuring of the company. They simply want it to remain publicly owned, and will not deviate an inch, even if they know that their campaign may conclude unsuccessfully. If they do finally support a worker-owned restructuring, it will most likely be too late to implement a successful plan.

Not all of the unions are so resistant, however. One of the most encouraging developments occurred as a result of a dialogue among different sectors of the “social economy,” which in Puerto Rico, is defined as the unions, non-profits, cooperatives (mostly credit unions), community enterprises, and the worker-owned CEPTs. Jose Cabezudo, a worker-owner and a leader in the CEPT movement, was recently approached by a group of union representatives who asked him to present a workshop on CEPTs as an alternative to factory closures. (Cabezudo, 1997, interview) Scattered interest among other progressive unions indicates that the labor movement might yet be persuaded to devote some attention to the worker ownership issue, especially in cases where privatization seems inevitable. One of the health care unions did submit a bid to restructure a transitional hospital to include elements of cooperative ownership, as described below.

THE INDUSTRIES

Four industries in Puerto Rico have received public attention regarding their privatization, and problems that have been created because of it. Each of the four—health care, prison management, waste management/recycling, and telecommunications—presents opportunities to incorporate worker ownership in the industry restructuring.

Health care

As in the rest of North America, the health care industry in Puerto Rico is undergoing major restructuring. Public hospitals and clinics have long suffered from underfunding, making for less-than-desirable consumer conditions. In his campaign for Governor of Puerto Rico, Pedro RosellÙ promised to improve these conditions by reforming the public health care system. The first step was to privatize access to health insurance by issuing the “Tarjetita,” or “little card,” in several test areas, which would give low-income residents the ability to access private providers through a complex reimbursement system. Step two involved contracting out the management of the public clinics to private management firms. The last phase of the reform, according to the blueprint, was to close or sell redundant facilities, and let the market work its magic—the idea being that assets from the sale of facilities would purchase insurance coverage for the island’s poor. (Van Anda, interview, 1997)

While admittedly many have embraced the targetita, events have not exactly gone according to plan. Neither the regional divisions nor the sequencing of the reforms proved tenable. Differences in the regional reimbursement schemes meant that some paying patients were automatically being switched from the private insurance carrier of their choice, resulting in broad dissatisfaction, and a loss in revenue for the new private owners of the health clinics. Several privatized facilities have reverted back to the Health Department because the economics were so unworkable. (San Juan Star, 1997, p. 7) In addition, reimbursements are not covering all of the patients participating in the reform, which inadvertently created a reduction in patient care, because providers have had to dramatically increase the volume of patients in order to breakeven. The structural problems with the reform don’t even touch the accusations of corruption and patronage in awarding the management contracts. Criticism has come from all corners—patients, community residents, private companies, frustrated physicians, and certainly the unions, who have made valiant efforts to organize coalitions of stakeholders in the health care industry. Several positive initiatives to involve workers and local bodies in the new ownership structures have been led by a union now affiliated with the Service Employees International Union, called UNTS, or the UniÙ n Nacional de Trabajadores de la Salud.

In one case, the union had recently won a representation election at the Regional Hospital of Fajardo, on the eastern coast of Puerto Rico, when it was announced that the region would become a “guinea pig” to test the reform strategy. Management was contracted out to a local clinic, which experienced all of the structural economic problems of the reform, as well as gross mismanagement of funds. Accounts were being mixed with clinics on the other side of the island, and the facilities experienced shortages of equipment, medicine, and crucial resources. At the same time, resources within the hospital itself were underutilized because the “Tarjetita” patients were being moved to clinics under the new reimbursement system. When the government announced it would shut down the hospital, the community turned out in force to protest. Closing the hospital would not only be a blow to the hundreds of employees and local community economy, it would mean that residents in certain areas would have to travel up to an hour to receive urgent medical care. UNTS led a coalition of community members, local business owners, workers and professionals to seek alternatives to the closure. While their primary goal is to stop the shutdown, they also recognize the need for restructuring, so have worked hard to ensure that the community and workers are included in the political processes that will ultimately determine the fate of the Fajardo facilities. (Rodriguez, interview, 1997)

In Arecibo, the union’s proposal to mitigate the effects of privatization involved a more concrete model for democratic ownership. When the government announced it would close this hospital, UNTS immediately went to work on organizing a coalition which put forward a bid to manage the facility under a cooperative ownership structure involving workers, administrative personnel, and doctors. The proposal included financing by the well-established Arecibo credit union, one of the most progressive on the island in terms of its participation in community economic development. The proposal was developed within the framework of the cooperative laws in Puerto Rico, versus the CEPT worker ownership law, and was ultimately rejected by the Health Department due to more competitive financing and “management experience.” (Rodriguez, interview, 1997.) Perhaps if the proposal had included the incentives of a CEPT organization, the economics would have been more attractive. In any case, the current management has displayed the same incompetence that has plagued facilities like the Fajardo clinic, so the government may not be able to count on the same arguments in the future.

It has become clear that health care privatization as the government has conceived it has not been effective, but there are several models of cooperative and worker ownership in the health care industry that may offer interesting possibilities for Puerto Rico. While the unions have focused their energies mostly on stopping hospital closures, they are open to exploring viable alternatives involving worker and consumer ownership, and have the political weight and public respect to raise the issue effectively. UNTS President Jose Rodriguez Baez has, in fact, alluded to such endeavors on several radio talk shows.

Canada has been a global leader in cooperative development, and their initiatives in the field of health care are no exception. The Canadian Cooperative Association (CCA) publishes promotional material that outlines several models with their respective examples, all of which stress the goals of maintaining the affordability, accessibility, and accountability of health service delivery—objectives which Governor RosellÙ campaigned on. The first model involves shared services and purchasing coops; the three examples of cooperative resource-sharing in Canada prove that cost-savings are significant (between $275,000 and $500,000 per facility), and that purchasing groups can involve other community institutions such as schools and municipalities, building a sense of community ownership.

The second model goes even further to create an ownership stake in local health care provision by creating a consumer cooperative. Canada has numerous forms of consumer health care cooperatives, the most common being the community health clinic. CCA has this to say:

Puerto Rico does have a few consumer pharmacy cooperatives, but could take the cooperative concept much further to include primary care. Puerto Rican health reform was designed to place more emphasis on community clinics similar to those in Canada, yet it misses the mark when it comes to community, provider, and patient participation in the design of services and administration, as the UNTS proposal would have included.

Worker cooperatives constitute the third model in the Canadian framework. Various permutations include employee-owned providers that emerge to address specific health needs, or privatized services such as maintenance, laundry, or food services. One of the well-known Canadian examples is an employee owned and managed ambulance service coop serving over 70 municipalities on Quebec’s south shore. With the proactive assistance of their labor union, workers were able to purchase eight companies, improve conditions and professional standards, benefiting the community as well as the employee owners. CETAM (La Co-operative des Techniciens Ambulanciers de la Mont¾ r¾ gie) has become a model for several other ambulance service cooperatives, including one in rural Texas. Again, the lessons for Puerto Rico are evident, as UNTS fights ambulance service privatization in addition to that of other health care delivery.

The U.S. boasts another viable example of an employee-owned health care company, which has not only improved conditions for workers by stabilizing hours and benefits for their own members; it has also contributed to industry-wide wage increases, and national replication of the model. Cooperative Home Care Associates, based in the Bronx, New York, has successfully trained low-income women to provide quality home care, while providing career ladders for employees and pressure for industry improvements.

The worker ownership model holds great potential for health care in Puerto Rico, as the industry appears to be evolving. If privatization continues, subcontracting of services will become more common, offering opportunities for laid-off workers to regroup and form service delivery cooperatives to contract back to the hospitals and clinics. Cost-cutting measures may also spur a greater demand for home care; employees could follow the lead of CHCA to provide these services. SEIU researcher Jackie Van Anda warns that these opportunities may not last, however, if Puerto Rico follows the evolutionary pattern of U.S. health care. After a phase of disparate subcontractors, large U.S. health care corporations are again consolidating, bringing integrated services back under one corporate roof. Nonetheless, Puerto Rican employees could benefit at least temporarily from owning and controlling their own service companies, remaining competitive with the added benefits of the CEPT structure.

The last model mentioned in the Canadian brochure involves multiple stakeholders with various combinations of ownership and control. The example given comes from Sweden, where a multi-stakeholder consumer cooperative provides health and home care as well as housing management for seniors. The board includes representatives of the client group, the labor union, the co-op housing authority, the county, and the municipality. “A recent study found that the costs of services provided by the co-op were 10% lower than those of other, similar service providers.” (CCA, pamphlet). The multi-stakeholder approach seems the ideal version of democratically controlled, community driven health care, ensuring accountability and fairness. After discussing this option with UNTS President Rodriguez, he concurred that the multi-stakeholder approach would be one of the best alternatives to the official version of health care privatization in Puerto Rico.

Prison Management

Prison management and its privatization has some interesting similarities to the health care industry in Puerto Rico. Privatization in this case has included many of the same problems in terms of mismanagement, but also provides space for similar worker-owned service subcontractors.

Several violent outbreaks at privatized prisons in 1997 created a great deal of skepticism about the wisdom of privatizing prison management in Puerto Rico. The most notorious incident involved a series of three riots within 48 hours in August, at the “Corrections Corporation of America” privatized prison in the southwestern city of Ponce. One of the 17-year-old inmates was unnecessarily shot, allegedly by a prison guard. (Diaz, 1997, p. 8) The riots seemed to spark further violence at other prisons, leading to accusations that the private companies are not adequately managing the inmates, and real community fear. Several escapes have been successfully attempted at the privatized prison in BayamÙ n, within the San Juan metropolitan area.

The Corrections Authority should examine other models of privatizing prison management, at the very least to involve local community residents who have legitimate concerns about their safety. The multi-stakeholder approach would work well in this industry, as local residents are not exactly the clients, but certainly have a stake in the quality of the management provided. Inmates have also had many complaints, resorting to such measures as prison work stoppages in order to get their concerns heard. An inclusive board could provide oversight at each individual prison, consisting of community representatives, inmate representatives, prison guards, Corrections Authority representatives, prison workers and subcontracted service providers.

An opinion paper developed by a Kansas privatization task force outlines several of the concerns mentioned above. As they plan for future prison privatization in their state, task force members are designing safeguards to ensure the following:

• Alternative providers if the state is dissatisfied with the current provider
• Careful monitoring of privatized facilities to ensure safety and quality of services
• The welfare of public employees affected in the event that privatization is considered
• Communities will be given consideration and local officials consulted
• Protected of inmates’ constitutional rights
• Resolution of ideological concerns regarding the privatization of correctional facilities

Puerto Rico would have been well advised to plan as Kansas has done, instead of resorting to crisis management after the fact. The Kansas task force also highlights the opportunity to create worker-owned subcontractors:

Additional opportunities for local ownership and community development may include laundry, maintenance, and other services provided on contract to the prison. Discussions of such enterprises have not yet entered the public dialogue, but should be included in the government’s overall privatization and economic development strategy.

Waste Management and Recycling

One third of the CEPT businesses in Puerto Rico work in the recycling industry, and they are quite well organized. Their principals have been environmental and community activists for years, and cultivate a fierce commitment to Puerto Rico and its environment. They are fully aware of social and waste management policy deficiencies, and actively advocate for the expansion of recycling as an environmentally friendly community economic development strategy for Puerto Rico. The rapid growth of these enterprises has been catalyzed by the Solid Waste Authority and two development non-profits, and is now the most promising example of a true community development strategy in Puerto Rico. While the government’s role could not be characterized as privatization through worker ownership quite yet, they have certainly played an important role in promoting the worker-owned recycling collection businesses.

Over the last several years, Puerto Rico has begun to experience a deep crisis in waste management. The U.S. Clean Air Act (which the Commonwealth of Puerto Rico must comply with) tightened regulations for safe and sanitary landfills, resulting in the closure of 32 of the 64 facilities in 1994, and two more in the following years. Of the 28 remaining, most only have a useful life of between five and seven years. With over 16 million tons of waste generated daily in Puerto Rico (the highest per capita figure in the world), clearly an alternative plan was required. (Reyes, 1997, p. 26)

The Autoridad de Desperdicios Solidos (ADS), or the Solid Waste Authority, has periodically commissioned studies of the situation in Puerto Rico, which contain comparative analyses and recommendations for infrastructure development and new waste management systems. The 1995 plan describes a major capital expenditure of over 585 million dollars for a 30-year waste management system, including a combination of new sanitary landfills, transport and compaction stations, incinerators, and recycling processing facilities. (QuiÔ ones, 1995) There will surely be private contractors among the myriad of these potential service providers, creating new opportunities for worker and community owned businesses.

Recycling has become a key component in the government’s plan to reduce the volume of material going into the landfills. Government agencies must now buy paper with a minimum percentage of post-consumer fiber, and in 1995 a law was passed (amending a 1992 statute) requiring that 35% of solid waste generated in Puerto Rico must be recycled by the year 2000. Compliance with this regulation has been painfully slow, however, and enforcement lax. The CEPT recycling businesses have done more to educate industries and businesses about this law than the government, however, and progress is being made. The recently organized recycling trade association on the island has been lobbying for stricter fines to be imposed for non-compliance, and surcharges for landfill usage.

The most notable obstacle to large scale recycling in Puerto Rico and the implementation of an accompanying CEPT development plan is the lack of end markets for the material within Puerto Rico. Secondary markets offshore present extremely low commodity prices due to costs associated with transportation and exporting. While some manufacturers will accept recycled (and processed) plastic and metal, only glass truly completes the full life cycle of the material on the island. A great opportunity exists for the development of cooperative and/or worker owned manufacturing ventures, which would make use of the material collected by the community businesses. The association of CEPTs has recognized this fact, and will be devoting more energy to developing feasibility studies for such enterprises.

Notwithstanding the market barriers to recycling, the government of Puerto Rico has recognized that recycling offers significant savings in landfill usage and maintenance, and has begun to implement systems for residential recycling. Some of these functions can and probably will be privatized, with the potential to be performed by the worker-owned businesses. The Autoridad de Desperdicios Solidos instituted a community drop-off center program with sites in every municipality, in order to stimulate consumer education and awareness of recycling issues. This program requires residents to clean, sort, and transport their material to centers which operate very infrequently, so it is not surprising that participation has been low. An average of approximately 6000 consumers per month participated in the program in 1995, for all of the facilities combined. (Reyes, 1997, p.31)

The “Bolsas Azules” (“Blue Bag”) program is the ADS version of recycling as a method to reduce landfill costs. With this program, residents place all of their recyclable material in a blue plastic bag that is collected with regular garbage. “Blue Bag” recycling requires a lower initial capital investment than other systems that have been proposed, but the ADS decision to implement this strategy was not without controversy. The model favors corporate waste management businesses that have an interest in continued landfill usage; in most cases, non-Puerto Rican companies own these businesses. Community control and economic development are non-existent, unless a local enterprise collects and processes the material, yet this would reduce the relative cost savings. There are inherent contradictions in this system, and municipalities that are beginning to implement the Blue Bag program are handling the issues differently in every case. Some use private collection companies, some have not privatized garbage collection at all. So far, Humacao is the only municipality to agree to contract with a worker-owned recycling business for the collection of the Blue Bags, after the function has been fully privatized. The recycling CEPT in Humacao has been pushing the municipality to hasten the process, but so far with little result.

Because the recycling industry in Puerto Rico has not yet fully matured, it is ripe with potential for community economic development through worker and community ownership. Privatization of municipal collection services and other waste management functions would form an integral part of an overall targeted industry strategy, which could also include large scale financing and development of community and worker owned manufacturing of products made from recycled material, thus completing the cycle for the remaining recyclable materials. The recycling industry would comprise an ideal starting point for the Commonwealth government to marshal political and financial resources behind an economic development strategy with the capacity to build local assets, instead of gradually depleting them, as their current privatization program signifies. Such an agenda would certainly garner much wider popular support, in sharp contrast to the negative will that the Telefonica sale has generated.

Telecommunications

The controversy surrounding the privatization of the Puerto Rican Telephone Company (PRTC) is somewhat ironic, given that the company was privately owned and operated from 1914 through 1974, at which time the government purchased it from ITT. The vast majority of criticism surrounding the sale stems from a sense of nationalism, and an understandable need to maintain control over an essential public service, in a economy that becomes more complex, and less rooted, every day. Elements of all three major parties maintain a demonstrable pride in the culture, regardless of their respective opinions regarding Puerto Rico’s political status. Part of this pride entails a supreme, if somewhat irrational, confidence in the ability of the public entity to compete in a deregulated market. This position demands a degree of public posturing among proponents of the status quo, which silences the widely held belief that the true state of the company is a slow, inefficient bureaucracy, which does not serve customers nearly as well as a private corporation would. The proof of this hidden attitude surfaced in a recent scandal involving the presidents of the two main telephone worker unions. Advocates of the sale uncovered that both leaders use Cellular One for their cellular telephone service, as opposed to the cellular division of the PRTC. Their response was that the quality of service skirts the real issue, which is to maintain control of the company. They argue that improvements could be made in that context. After all, the government did just that subsequent to the purchase of the Telefonica from ITT in the first place, after its previous owner abandoned the company because of labor conflicts.

To be sure, however, the environment has changed. The Federal Telecommunications Act of 1996 brought a fierce competition to the island, competition that won’t go away regardless of whether the PRTC remains in government hands. As one editorialist put it:

From a purely economic perspective, it is almost impossible to argue for the status quo. Because of the new competition, one telecommunications expert argues that the company loses at least one million dollars a day in value, money that could be going into the government’s coffers. (Maldonado, 1997, p.158) Marketing and advertising (from existing and new competitors) are expected to inject another $25 million into the local economy just in 1998, in addition to the proceeds from the sale. (Johnston, 1997, p. 18)

The economics of the deal have become easily confused with the politics involving the huge sum of money that the Governor will have to distribute. One could argue that RosellÙ is so desperate to push the sale because he has so recklessly mismanaged infrastructure financing on projects like the “Superacueducto” and “Tr¾ n Urbano.” As the union leader on the picket line expressed, he needs the cash. Some privatization opponents don’t want to grant him the political satisfaction. RosellÙ has countered the criticism with details of his plan to use only interest generated from an enhanced infrastructure fund. The retort then becomes, “do we trust him to do this well and honestly?” After bungling previous projects, concern may be well founded. Some suggest creating a tri-partisan commission to oversee the sale. (Delfin, 1997, p. 14)

If the same level of civic dialogue were to be focused on a proposal to share ownership between workers and consumers, the state of affairs may by now have been resolved, with less hostility. While the development group Fomento de Corporaciones Propiedad de Trabajadores (FCPT) has sent several letters to the unions and approached their lobbyist with offers to help structure a deal, the unions have rebuked the idea that such a proposal should come from them. The idea of local or cooperative ownership has only been mentioned publicly twice in the major newspaper—not enough to spark a real public discussion, or pressure either the government or the unions into pushing the idea.

On the other hand, the fact that the idea was proposed at all in the media, especially from a conservative Puerto Rican, is a step in the right direction. The editorial by John Marino makes a strong case for reserving a portion of the stock for local investors, which could include employees. As it stands now, two international firms—GTE International and Telefonica Internacional–have already been pre-qualified to buy the company. Government Development Bank President Marcos RodrÍ guez Ema, who leads the privatization effort, has said that his committee would probably consider setting aside some stock for local ownership, although his first priority is to identify a buyer with the financial and managerial resources to keep the company expanding. (Marino, 1997, p. B41) The editorial goes on to cite support for local ownership from such conservative quarters as the Puerto Rico Manufacturers Association and Puerto Rico Chamber of Commerce. They point to an opinion that was expressed by Jeffrey Gates previously in this paper; Puerto Rico needs to strengthen its own capital markets, especially in the “post-936 era,” referring to the endangered corporate tax break which became a decisive factor in the growth of manufacturing in Puerto Rico. In addition, Former Financial Institutions Commissioner H¾ ctor Mayol admitted that an ESOP would improve the Telefonica’s efficiency. (Marino, 1997, p. B41)

In a minute news item, Independent Union of Telephone Workers President Annie Cruz responded to the suggestion of a consumer and worker cooperative with a lukewarm receptivity. “We don’t rule out participating in plans to buy it [the telephone company] through the creation of a cooperative, but for us the best scenario is that it is not sold,” she said. (Staff, 1997, p. 8) Neither RosellÙ nor the unions will abandon the confines of their respective privatization “boxes.”

A journey past the limits of public posturing could yield wonderful results for all of the parties concerned. Taking the form of a worker, consumer, and local investor-owned entity, the “multi-stakeholder” approach mentioned by the Canadian Cooperative Association could indeed ensure accountability, accessibility, and affordability for this crucial public service, while building local assets and capital markets. The Governor could showcase such a revitalized company as the jewel in his political crown, consumers would be happy with improved service, and workers could be assured of keeping their jobs and benefits at current levels, though compensation and work assignments would probably be restructured. Despite the recognizable benefits, however, this plan is unlikely to unfold. Pundits predict that the sale will be finalized in early to mid-1998. (Johnston, 1997, p. 18)

Conclusion

The lack of a satisfactory outcome to the sale of the telephone company, weakened because of conflicting notions regarding the meaning and consequences of privatization, brings us back to questions raised at the beginning of this paper, which the label of privatization does not address directly: is the government the best steward of necessary services, and who should participate in planning for their continued availability and accountability?

On the cutting edge of community economic development once again, the Canadian Cooperative Association sponsored a conference in 1996 to examine just such perplexing issues. Entitled “Facing the Future: A symposium on co-operative alternatives for public sector restructuring,” organizers rightly recognized the trend towards reduced public spending, sale of public assets, and subcontracting of public services. In a paper produced for the gathering, keynote speaker Evert Lindquist proposed a rethinking of our commonly held definitions in order to determine the best way to serve the public, starting with acknowledging our responsibility as citizens to address the complexity of the issues facing governments today:

He frames the issue in terms of “alternative public service delivery,” instead of simply labeling an entity public or private. This notion opens the door to infinite combinations of public, private, consumer and/or worker owned companies, competitively bolstered by some public resources such as tax incentives, contract agreements, or other support systems. The CEPT law already incorporates this idea, and has been tremendously successful at achieving the delivery of recycling services while empowering workers and communities simultaneously. But because it doesn’t exactly fit the definition of privatization, this creative model has not been considered relevant to the debate, though it certainly addresses the question of public service delivery.

In the same symposium, Teresa MacNeill helped to clarify the riddle of “public good” by listing five criteria by which to evaluate shifts in the public sector:

1. It is affordable;
2. It is clearly accountable to the people who pay for it and whom it was intended to serve;
3. It is accessible in the sense that people relate easily to its organization and services;
4. It is flexible in the sense of permitting specialized responses to specific needs and circumstances; and,
5. It involves a range of interests around issues of common concern (civil society) (MacNeill, 1996, p. 3)

She continues by describing how the cooperative model—including worker cooperatives—can meet all of these tests successfully. Clearly the recycling CEPTs comply, although they could achieve a much wider impact with greater public support.

In closing, it is clear that a rethinking of privatization in Puerto Rico has the potential to result in win-win arrangements for each of the four industries described here, as well as many others. Local control through worker, consumer, and community ownership can enhance democracy, build skills and competitiveness, strengthen local capital markets, and preserve community assets for future generations, providing a foundation for an equity-led, people-centered sustainable development strategy. The mutual interests served by employee ownership through privatization offer a unique opportunity to cross ideological boundaries, working together to achieve human and economic development. It remains to be seen whether the citizens and politicians of Puerto Rico will learn from international and domestic experience, and fortify their political will, as they fashion their economic strategies for the future.

Reyes-Del Valle, Nelson. El Reciclaje en Puerto Rico: Un DesafÍ o. Humacao, PR: 1997.