Auctioning off the infrastructure

June 17, 2011

Fiscally-stressed municipalities have leased roads, airports and statehouses to private entities. I’ve never seen a good compendium of how these privatizations worked for various stakeholders. But it is fair to assume that private investors are attracted because there are ways to increase margins and make profits. A 2008 New York Times article identified some of the approaches used by investors:

Private investors recoup their money by maximizing revenue — either making the infrastructure better to allow for more cars, for example, or by raising tolls. (Concession agreements dictate everything from toll increases to the amount of time dead animals can remain on the road before being cleared.)

There is a lot of cash sitting on the sidelines to take public assets private.

Reeling from more exotic investments that imploded during the credit crisis, Kohlberg Kravis Roberts, the Carlyle Group, Goldman Sachs, Morgan Stanley and Credit Suisse are among the investors who have amassed an estimated $250 billion war chest — much of it raised in the last two years — to finance a tidal wave of infrastructure projects in the United States and overseas.

There are many sides to this debate and media coverage is growing. Congress has several pieces of legislation that seek to do different things. Representative John Mica wants to privatize Amtrak. There are mixed reviews on his proposal. Sailing off in the other direction is proposed legislation from Senator Dick Durbin which forces states and municipalities to repay any federal funds that helped build public transportation that was privatized. He also wants additional transparency in the process.

The U.S. Public Interest Group has worked for a number of years on the privatization issue and seems to be one of the thought leaders in this space. They developed six basic principles to protect the public interest:

  • Retain public control over planning and management.
  • Ensure that the public receives fair long-term value for assets. Just because a state or locality faces dire fiscal straits, they shouldn’t sell public assets at a discount.
  • Make no deals longer than 30 years because lawmakers cannot reasonably anticipate our infrastructure needs or assess the market value of public assets beyond a few decades.
  • Require state-of-the-art safety and maintenance standards that will increase over time.
  • Maintain complete transparency and accountability so the public knows the complete terms of specific proposed deals and make lawmakers vote on them.
  • Use no budget gimmicks. If governments do sign these deals, the money must be used to address other long-term needs.

This is a good list for the public sector to use when evaluating these deals. With so much money at stake, expect this debate to become louder. There is a lot to get on the table.

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