Is privatization waning?

For thirty years there has been an ideological pressure for the U.S. government to sell public infrastructure, assets and services. Prisons and schools have been privatized. Toll roads, like the Indiana Toll Road, have been sold to private consortiums. Many of these assets were created by earlier generations who regarded their obligations to citizens as important. Now there is a bigger commitment to an economic philosophy that insists government is the most expensive and least efficient provider of services. Somewhere along the line, with little economic or financial validation, privatization was accepted as the best approach for public assets.

Recent events suggest that the tide may be turning. Idaho’s governor, a privatization advocate, has announced that he is ending private contracting for the state’s correctional facility. The Idaho Statesmen-Review’s Betsy Russell reports:

[Idaho] Gov. Butch Otter just announced that he’s ordering the state Board of Correction to halt its ongoing effort to get new bids from private firms to run the privately operated state prison, the Idaho Correctional Center, south of Boise, and instead move to have the state take over operating the scandal-plagued lockup.

‘It’s disappointing, and it’s disappointing because I am a champion of privatization,’ Otter told reporters at the AP Legislative Preview. ‘It’s disappointing, but I think it also recognizes what has been happening, what has happened – it’s necessary. I think it’s the right thing to do. Is it the desirable thing to do for me? Not necessarily, because we had better hopes for outcomes in privatization.’

What happened? The AP reported that Corrections Corp. of America (CCA), the nation’s largest private prison operator, had run into some problems overseeing the Idaho Correctional Center:

Europe’s privatization of public assets isn’t a model for the U.S.

Chart: Policy Dialogues

Some think that when it comes to privatizing U.S. public assets, our nation is a laggard and we really should be following the path of Europe in selling infrastructure into private hands. Here is attorney Kent Rowey, who is a leading infrastructure privatization attorney (and whom I’ve sparred with previously):

This should be a golden age of public-private partnerships — the need exists in cities across the country. And the capital is there, from private investors seeking long-term returns. American infrastructure has fallen behind countries like France, Italy, Spain, Portugal, Poland, Hungary and countries that have long embraced privatization of urban systems. Ironically, the United States has become an emerging economy when it comes to developing P3 projects — in which opportunity needs to be matched with political will and bold thinking to undertake.

Europe went through a massive privatization process starting under Margaret Thatcher in the 1980’s. But unlike the United States, U.K. and European countries had enormous state holdings that encompassed telecoms, utilities, banks, manufacturing and energy companies and many other industries. Few of these are under public control in America, which makes the pool for privatization much smaller.

Virginia for sale

Governor Bob McDonnell might as well have put a for-sale sign on Virginia’s front lawn when he announced that the state’s Office of Transportation Public-Private Partnerships (OTP3) has a “pipeline” of potential privatization projects. The governor and Sean Connaughton, the head of the Department of Transportation, appear to be racing to move as many of Virginia’s public assets into private hands as possible. The Bond Buyer has the story:

In a move that is likely to make Virginia the leading state for public-private partnerships, Gov. Robert McDonnell has announced 22 transportation and infrastructure projects that may be developed as P3s.

The governor is asking for public input on the projects, which include highway, seaport and spaceport projects that are either under active consideration or flagged as possible candidates for P3s.

New York City’s public-private partnerships

New York seems to have developed the best form of public-private partnerships in the nation. The city revitalized itself, after its rapid decline in the 1970s, by allowing private, non-profit interests to take a larger role in public affairs. For example, the city hosts 67 business improvement districts (BIDs) and two major park privatizations, and these show that cities can receive support from the private sector without having to hand over, in exchange, major profit-seeking opportunities and assets to private interests.

Most of the current national discussion about public-private partnerships (P3s) is about selling public assets or leasing them long term to private investors. A recent example is the long-term lease of two major Puerto Rico toll roads to a consortium led by Goldman Sachs whose investors will likely reap revenues of $3.6 billion over 40 years for a $1 billion investment. In the project, the Commonwealth of Puerto Rico granted a monopoly right to private investors to control the asset and charge users for access.

In contrast, the New York City P3s to date have been true partnerships between the public and private sectors with no profit motive. The largest P3 is the Central Park Conservancy:

How American municipalities can learn from Parisian mistakes

Across the nation cash-strapped municipalities are considering the sale of their public-utility systems. These moves are intended to raise cash and rid the municipalities of expensive liabilities such as debt service and pension obligations. But officials considering this approach might do well to look to France and other nations that are rapidly moving in the opposite direction with a “remunicipalization” of their utility systems. In 2010, Paris, in the best known case of remunicipalization, ended contracts with the world’s two biggest water service companies, Suez and Veolia, bringing an end to their 100-year private duopoly. The reversal of a century-old practice in Paris was an acceleration of an international movement away from private control. Per

In the 1990s many countries privatised their water and sanitation services, particularly in the [hemispheric] South, as a result of strong pressure from neoliberal mindset governments and international financial institutions, to ‘open’ up national services.

The promises that privatisation would improve the provision of drinking and wastewater services soon faltered. Many of the privatised operations quickly began to show weaknesses as they missed targets for expanding and upgrading networks, introduced excessive tariff increases alongside connection fees which were unaffordable for low-income families. Management activities were not transparent and accountable. As a result numerous contracts with private operators were terminated often following popular unrest. Many cities, regions and even countries have chosen to close the book on water privatisation and instead embarked on remunicipalisation or renationalisation of water delivery

Boston funds publicly, while Chicago goes private

Two major American cities are embarking on large capital programs, but in very different ways. Boston Mayor Thomas Menino has a $1.8 billion, five-year plan that he will fund with municipal bonds, while Chicago Mayor Rahm Emanuel is trying to push a $7 billion plan, which will be paid for by private investors, through the city council. It would be hard to find to two more dissimilar approaches to rebuilding America’s urban infrastructure or two more different lists of who will reap the monetary benefit of the improvements.

Boston approaches its infrastructure needs with a rolling five-year schedule of projects that is updated on an annual basis. This allows for more controlled expensing and planning. In contrast, Chicago’s Emanuel announced his infrastructure privatization plan in January with very few details and buy-in only from the private investors who will benefit from their involvement. The Chicago proposal gives control of infrastructure decisions to a panel of four private citizens and one city council member with no ability for the city council to have oversight on projects and contracts. Chicago has a terrible history of leaving taxpayer money on the table in its privatization efforts. In 2008 the city’s parking meters were leased out to private investors for a tiny sum:

Chicago drivers will pay a Morgan Stanley-led partnership at least $11.6 billion to park at city meters over the next 75 years, 10 times what Mayor Richard Daley got when he leased the system to investors in 2008.

The Virginia tunnel goldmine

The battle to privatize America’s public assets had a big win when the Newport News Daily Press reported:

The governor of Virginia, Bob McDonnell announced Monday that a deal with private construction consortium Elizabeth River Crossings to build a new Midtown Tunnel tube; refurbish the existing facility along with the Downtown Tunnel; and expand the Martin Luther King Freeway has reached a financial close.

The project, which is now owned by Australian infrastructure company Macquarie, will add another tunnel under the Elizabeth River to relieve congestion in the Norfolk and Hampton Roads area. Getting control of the project will bring in rich rewards for Macquarie and its construction partner Skanska. For an equity investment of $208 million, Macquarie stands to realize over $5 billion in cash flow over the 58-year concession after repayment of bonds, loans and mandated capital expenditures.

Denver’s botched FasTracks privatization

Reuters ran a piece yesterday that caught my eye: “Macquarie eyes $2 billion North American infrastructure fund: sources.” According to the article, Macquarie, the Australian company active in infrastructure privatization, wanted to leverage its prior American success as it begins to raise funds:

Macquarie has also proved successful in bidding for the few new assets on the market. It was behind the largest U.S. infrastructure deals of the last two years – a $2.1 billion project to build and operate commuter rail lines to Denver International Airport and a $1.7 billion upgrade of a tunnel between the cities of Norfolk and Portsmouth in Virginia.

The privatization of American infrastructure has become a hot topic, despite the lack of notable success stories. The Macquarie project building and operating commuter rail lines to Denver International Airport illustrates the costs associated with this approach. The project is not doing very well: Because of cost overruns, its budget was recently revised upward, to $7.8 billion.

Governor Cuomo has the privatization flu

The governor of New York has announced his intent to ask the state legislature for a new law allowing him to auction off the cash flows of the state’s public assets. Bloomberg reports:

Governor Andrew Cuomo is seeking legislation that would allow private-equity firms to help finance construction of public-works projects, including a new $5.2 billion Tappan Zee Bridge.

The bill would authorize the state to lease bridges, roads and state buildings to help pay for construction, maintenance and operations of infrastructure, said Thomas Madison, executive director of the New York State Thruway Authority. Cuomo doesn’t want to sell state assets, said Karen Rae, deputy secretary of transportation. Carlyle Group LP (CG) and Macquarie Group Ltd. (MQG) are among companies expressing interest in the Tappan Zee.

Chicago mayor to privatize city assets

Chicago Mayor Rahm Emanuel announced the Chicago Infrastructure Trust yesterday, which was described this way by the Chicago Sun-Times:

A bus-rapid transit system with higher fares for faster rides. A CTA Red Line extension to 130th Street with distance-based fares. High-speed Internet service with a fee paid by businesses and individuals.

Those are just a few of the “transformational” projects that might be bankrolled by the “Infrastructure Trust” unveiled Thursday by Mayor Rahm Emanuel and former President Bill Clinton.

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