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.

Comments
8 comments so far

What’s a better thing to back in the current political environment: a) a strategic plan (which, I agree, is a great idea) which couldn’t pass even when there was a Dem majority; b) a much more limited piece of populist-sounding legislation that isn’t brilliantly conceived but will ultimately do more good than harm?

Posted by johnband | Report as abusive

The return on investment in public infrastructure is (e.g.) the ability of citizens to be able to drive. (The line between “investment” and “durable good” is very fuzzy.)

It would be irksome if states were regularly finding ways of bringing in federal money for some purpose and flipping the infrastructure for more than the state itself spent on it, essentially laundering federal money into the general fund. I don’t know that it’s likely that they would find it easy to make a pattern of that sort of thing, though.

Posted by dWj | Report as abusive

A pan European infrastructure bank to help Greece (and others) with impending privatisations might be useful too in order to distance local politicians from difficult deeds.

Posted by polit2k | Report as abusive

Politicians can attempt to shift blame to the private sector when public goods and services are leased away, but it rarely works. People still blame Daley and the city council for the Chicago parking meter debacle – it’s certainly one reason he didn’t seek reelection (in addition to the Olympics and his wife’s failing health.) Most Chicagoans probably couldn’t tell you the name of the company that now manages the parking meters (LAZ) but could certainly tell you how much their local politicians screwed up that deal.

Posted by serfer | Report as abusive

I don’t know if you’ve looked at any of the public-private initiatives Blair/Brown initiated, but pretty much all of are funded by private investors, in stead of large institutional investors like pension funds (who could’ve really used the high-yield, reliable investment opportunies). This should tell you something: that PPPs are almost always engaged in by pols to create such sweetheart deals, because risk-free high-yield investments, for selected companies. There is no reason whatsoever to let private companies fund these things when a government can just issue bonds, or when (state-owned) pension funds have money left to invest.

as to serfer: the politicians did not screw it up, they defrauded. Why else do you think Daley now has a job at the law firm that Daley used to seal most of the deals?

Posted by Foppe | Report as abusive

i think that if the state or local government privatizes a public infrastructure and the Feds helped fund it, they should pay back that money. that was tax dollars that would paid for a long term asset that was expected to be used by the tax paying public. it was an investment that now no longer is a public asset. in private enterprise companies selling assets do so to pay off their investment. the local government has no interest in doing so. they are just trying to fix a current budget problem. they also think they wont get the blame. they will. they also will have less in sales tax as fewer people will pay for toll roads to go shopping

Posted by willid3 | Report as abusive

Not directly responding to the Durbin bill, but we tend to privatize the wrong things anyway. An example is prisons. We don’t transfer the risk of loss to the private company but instead pay them a fee on top of cost – in several variations of cost plus. We see something similar with parking meters: you can’t park anywhere but on the street or a public garage so where is the risk of loss? With parking meters, it’s in over-payment up front that takes too long for payback but unless one pays so much prices rise to levels that reduce parking below a certain number, the private company is essentially reaping a monopoly rent. This is no different than the old Romanov method of dispensing monopolies on various goods or the Spanish / Portugese method of granting a monopoly on slave trading. With prisons, if you get back the costs, how exactly are you at risk?

The parking meters are sold with the idea that reaping current dollars for an asset is worthwhile now. The prisons are sold with the idea that bonus incentives suffice to create savings. I suspect the former will see a lot of bad deals and it’s been shown the latter does not save money but costs more.

We live in a time in which the idea of “private” is meant to carry a magical aura. As in, privatizing Medicare will per se save money because private means saving money. Since Medicare runs an admin cost at somewhere from 3-12%, depending on how one slants the numbers, and private companies run somewhere north of 25%, that requires faith, which is exactly the point.

Posted by jomiku | Report as abusive

Foppe,there is a perfectly good “reason” Brown chose this way. So he pretend he was not upping the debt whilst going on a spending binge. As for sweethearts deals how is metrorail doing?

Posted by Danny_Black | Report as abusive
Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/