MuniLand

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.

“It’s a fairly major step forward for P3s in Virginia,” said Secretary of Transportation Sean Connaughton.

Virginia’s 1995 legislation enabling P3s allows private companies to submit unsolicited proposals that meet certain guidelines, and that is how most of the commonwealth’s P3 projects have emerged, Connaughton said.

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:

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 remunicipalisation.org:

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

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 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.

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.

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 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.

The first time many heard about the United States creating a infrastructure bank was in President Obama’s Thursday speech, but the idea has actually been floating around Congress for a number of years. Former U.S. Senator Chris Dodd of Connecticut proposed the idea in 2007 with inauspicious timing. From the American Water Works Association:

In an eerie coincidence, legislation to create a National Infrastructure Bank to address the need for financing of infrastructure projects was introduced with bipartisan support in the US Senate the same day a bridge collapsed in Minneapolis.

The horrific 2007 bridge collapse in Minneapolis is often used as the poster child to promote a national infrastructure bank. In 2007 there were 75,000 other bridges in America that had the same rating of “structurally deficient” as the Minneapolis bridge; the problem continues today. The need for massive spending on our roads and bridges is well understood by everyone.

Alaska got a lot of attention several years ago when members of Congress belittled and then stripped the funding for the infamous “Bridge to Nowhere.” You would think the issue would have faded away as quietly as the Alaskan wildnerness, but the state’s penchant for building bridges to places with few inhabitants has actually been reborn in the Knik Arm Bridge Project, or the Bridge to No Where Part 2. And this time it’s not only members of Congress who are skeptical– locals are pushing back on this new project with lots of facts.

I’m not Alaskan, so it’s not my place to argue whether building a two-mile bridge to an undeveloped area would spur economic growth in the future. But I can look at the proposed public-private partnership that’s financing the project and say that Alaskans will bear all the financial risk and private participants will get a great part of the gain. As was said frequently during the financial crisis, the losses will be socialized and gains will be privatized. This is two-mile long extension of that maxim.

After reading a number of documents related to the Knik Arm Bridge, I estimate the cost to be about $1.5 billion. The Alaska Legislature created a public agency called KABATA in 2003 to create a method to finance the construction, operation and maintenance of the proposed bridge. KABATA has sought Congressional funding and low-cost loans from the U.S. Department of Transportation and is now pursuing a unique setup whereby a private firm builds the bridge and maintains it but bears no financial risk. It’s not clear why it’s necessary to have a private firm involved; after all there is really no privatization involved.