How to prevent misguided privatizations

By Felix Salmon
June 22, 2011

The problem with talking about federal infrastructure expenditures as “investments” is that someone like Dick Durbin is likely to take the term literally. He’s now introduced legislation which says that any time a state or city wants to privatize a transportation asset, it has to repay the federal government first. So if the government sunk a few hundred million dollars into a highway project, for instance, and then the state decided it wanted to sell off the right to collect tolls on that highway, then the toll operator or the state would first have to repay all the money that the feds spent.

Durbin explained to HuffPo’s Dave Jamieson what he was worried about:

As states and cities across the country face grim budgets, more and more are looking to stem their shortfalls by leasing existing assets, such as roads, lotteries or government buildings. The City of Harrisburg, Pa., may soon lease its parking meters to a private investors, as Chicago has already done for a 75-year period starting in 2008. Durbin remarked that he’s already watched the cost of parking soar in Chicago since that city’s deal was inked.

“It’s a caution to all of us,” Durbin said. “When we look at privatization, we have to look at the long-term.”

This is all a bit incoherent. For one thing, parking meters in Chicago and Harrisburg are a bad example here, because it’s hard to make a case that the federal government has a huge investment in them. And while Durbin is right that the 75-year contract in Chicago is far too long, he’s wrong to consider the rise in the cost of parking to be a bad thing: in fact, it’s the whole reason that the parking meters were privatized in the first place. Parking in dense urban neighborhoods should be expensive, but politicians are loathe to raise meter rates, so privatization is a way that they tie their hands and get to blame someone else.

The bigger picture here is that when the federal government invests in transportation infrastructure, it’s investing in a public good, and insofar as there’s a return on that investment, it’s seen in marginally higher tax revenues from the entire region. If some kind of private-sector involvement can improve the way that those assets are operated, so much the better. Remember that Durbin doesn’t have a problem with tolling roads, or charging for on-street parking: he only has a problem with the private sector having a contract allowing it to do such things. If local government does it, that’s fine — even if local governments are often hobbled by political constraints.

Somewhere in the Durbin bill is the germ of a good idea: preventing local governments from selling off valuable franchises for multi-decade terms in sweetheart deals at a fraction of their net present value, just to fill a yawning budget gap. Transportation privatization is hard to do well, and there’s precious little indication that most local goverments are any good at it. Wall Street can often make a fortune in such deals.

But that’s an entirely separate issue to the question of whether the project received federal funding in the first place, or how much money the feds spent. That’s a sunk cost: the federal government should in principle be happy if the private sector is now willing to pick up some of the tab.

A much more sensible way of doing things would be to set up the national infrastructure bank which the Obama Administration has been talking about since before it was even elected. The bank could be given oversight of public-private partnerships, could put together a set of best practices with regard to privatization contracts, and could generally professionalize an area which to date has been rather chaotic, politicized, and ad hoc. What’s needed here isn’t new legislation: rather, it’s the passage of old legislation which has been gathering dust for years. The infrastructure bank is a great idea, and someone should resuscitate it.

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