2007 October 11 Thursday
Trend Toward Infrastructure Privatization Seen

Writing for City Journal Steven Malanga reports on the trend toward privatization of government-owned infrastructure.

Across the country, cash-strapped governors and mayors are discovering that their airports, bridges, toll roads, water systems, and other revenue-generating operations are worth far more than they thought, and are eyeing auctions that might produce windfalls similar to those in Chicago and Indiana. They’re also looking to recruit private investors to build and operate new toll roads, bridges, and other infrastructure.

If the deals can overcome resistance from anti-privatization groups and from politicians who benefit from keeping a stranglehold on government assets, they could help make up for decades of underinvestment in infrastructure—and thereby renew America’s landscape. “There’s probably $100 billion in domestic capital alone that’s being raised to invest in these transactions, and when that’s leveraged with debt, you’re probably looking at up to $400 billion in money that’s ready to go to work,” says Dana Levenson, Chicago’s former chief financial officer and now an investment banker at Royal Bank of Scotland. Add foreign investment to the mix, and the sums get even more impressive.

I understand why shifting infrastructure from the public to private sector can make the market more efficient and perhaps increase the total rate of accumulation of capital. So it might raise living standards. But I see one problem: A government unburdened of the need to spend money on one purpose might just shift its spending to other purposes and not become any less a burden on the taxpayers. Why? If taxes get really high then enough people object that taxes get lowered. But below some threshold range it seems that governments can tax and will tax and will spend it all on something.

At the same time, privatization creates prices on road and bridge access where access previously was free. Yet taxes probably don't go down. If government doesn't make privatized roads and bridges less efficient does it just make other parts of the economy less efficient? Therefore is infrastructure privatization a benefit or maybe even a net negative for productive taxpayers?

If governments maintain roads and bridges they are basically forced to use a portion of tax revenue to engage in activities useful for the vast bulk of the population. The populace expects governments to maintain roads just as the populace expects governments to provide police and prisons and courts. When these essential functions get privatized do governments just engage in more destructive activities?

Under-investment in infrastructure is creating big costs to the economy and wastes a lot of our time.

Over the last 25 years, as the miles driven on U.S. roads have doubled, road spending has increased by less than 50 percent. Deterioration is the inevitable result. Nearly a fifth of America’s roads are in pitiable shape, according to the U.S. Department of Transportation, and nearly one out of every three bridges earns the department’s “structurally deficient” rating. Road congestion, a by-product of too little new building, costs the American economy about $65 billion annually, as trucks and cars snarled in traffic burn up time and fuel. The clogging is likely to get worse. “These costs have been growing at about 8 percent per year—almost triple the rate of growth of the economy,” Tyler Duval, assistant secretary of the Department of Transportation, informed Congress in February.

Privatization can improve the efficiency of use of assets.

The winning consortium in the Chicago Skyway auction estimated that traffic would grow annually by about 3 percent; the city’s own study used a more conservative 1 percent growth rate. The variation of merely a few percentage points of growth, stretched out over decades, helped create the huge divergence in the Skyway’s perceived value.

Further, the Skyway sale transfers risk from the taxpayer to the private owner. If the road’s traffic doesn’t grow as anticipated, the investors must accept a lower rate of return; the taxpayers will already have their money. Of course, if traffic outpaces expectations, the investors get a windfall. The Skyway’s new owners—a partnership between Australia’s Macquarie Bank and a Spanish construction firm—have shown that they intend to make their property live up to the brighter projections. Within three months of closing the deal, they had installed an electronic toll-collection system to help zoom traffic along and assigned additional collectors during rush hour to gather cash more quickly. The result: reduced wait times, boosted Skyway use—and more money coming in. Chicago didn’t bother with any of these reforms when it managed the road, a Macquarie managing director testified before Congress last year. Unlike the city, he said, Macquarie was “heavily incentivized” to run the road efficiently.

But is infrastructure privatization a net benefit to the economy?

Share |      By Randall Parker at 2007 October 11 09:55 PM  Economics Privatization


Comments
Ned said at October 12, 2007 7:07 AM:

I drive across the Chicago Skyway all the time. I can't say I've noticed any difference since it was privatized. There's a lot of road repair going on right now, but that's the case all over Chicago. The fare plazas don't seem any better - the waiting times are no different from those on the adjacent Indiana Tollroad. The really nice thing about the Skyway is the relatively high tolls - $2.50 for cars, much higher for trucks. This keeps a lot of cars and most trucks off the road. Alternative free routes are available, but they tend to be very slow, with many trucks. I'll gladly pay such a price to zip through congested areas.

ziel said at October 12, 2007 7:37 PM:

I'll gladly pay such a price to zip through congested areas.

How much? $10? $20? This is where private firms could really make a killing - offering speed lanes for a price. In big cities, there are enough high-earners to make such programs feasible. Could you imagine the thrill of cruising along at 75mph for a mere $15 a day, flying by the poor shlubs stuck in horrendous traffic in the standard lanes to your right? It's luxury boxes for commuters. Of course the investment bankers will give the passes to their kids running off to the beach, so working-class families will be baking in bumper-to-bumper traffic trying to get to their rented bungalow while some 17-year old blondes are flying by them in BMW convertibles in the 'EZ-Cruze' lanes. Hey, maybe I should trademark that - could become a valuable property. But who could object? 10% of the pass revenues will no doubt be earmarked for education, so it's a win-win for all!

RueHaxo said at October 12, 2007 8:10 PM:

Ziel...that is a great idea. I know the govt. maintained interstates in Oklahoma have a speed limit of 70mph but the turnpike in Oklahoma has a speed limit of 75 mph. Your idea is great. Higher tolls in exchange for the legal permission to go 85, 95, 105 mph.

Ned said at October 13, 2007 5:15 AM:

$2.50 seems about right for the Skyway - it's not that long. But to be able to zip through Chicago at an unbroken 70 mph and avoid the mess on the Dan Ryan and the Edens - worth at least $20 to me.

m said at October 14, 2007 9:19 AM:

Well,that's the upside,but the downside?

A huge financial windfall to politicians,who will spend(what,you thought you'd get a rebate or something?)on new and exisitng programs to buy votes.

Huge revenue streams formerly spent on infrastructure will be freed up to buy more votes(what,you thought you'd get a tax cut or something?)with new programs.

So,bigger gov't financed by tax rates probably as or higher as now,PLUS the expense of using infrastructure that was once "free" but now is "fee".

Unintended,but not unforseen consequences:
Open border libertarians wanted
"cheap labor".They got "cheap labor" who's votes the Democrats will buy by taxing the dickens out of...wait for it...libertarians!Not mention the crack down on civil liberties in the name of multiculturalism and PC.

But point this out to libertarians and they'll generally denounce you as a "bigotracistnativistxenophobe".
Translated into English,this means:"stop pointing out that I'm not nearly as smart as I brag that I am".

To sum up,privatization of public infrastructure is a deeply mixed blessing,at best.

ziel said at October 15, 2007 4:53 AM:

I wasn't really suggesting this as a "good" idea - more of a dystopian prediction.

WhoKnows? said at October 19, 2007 12:34 AM:

I'm no expert, I'm just curious and asking some questions.

Is it true that the Iraq war is the most privatized war yet? If it is, has privatization helped or hurt?

Is it true that Walter Reed Hospital was privatized? Did conditions there deteriorate because of it?

Privatizing health care? - is it true that there was an article in the August 2003 issue of the New England Journal of Medicine that stated - for every $100 that passes through the hands of the government-administered Medicare programs, between $2 and $3 is spent on administration leaving $97 to $98 to pay for medical services and drugs. But for every $100 that flows through insurance companies' hands from $8 to $60 (averaging about $15) sticks to corporate fingers along the way.

I do know one thing though, even if a government is becoming increasingly dysfunctional there is always the potential to turn it around and return it to it's original intended purpose which, in part, is to serve the common welfare. An organization whose only purpose is to increase returns for investors will never put the common welfare above profits, NEVER! Given enough time, a corporation will start to cut corners(among other things) and increase what it charges to increase profits.

I would love to hear some examples of where privatization has improved a former government public works function, just to help balance my opinion.


Randall Parker said at October 19, 2007 5:28 PM:

WhoKnows?,

The money collected to pay for Medicare and Medicaid creates what is called "deadweight loss" due to disincentives caused by taxes. That deadweight loss is a similar percentage per dollar spent on government-funded medicare as the overhead of buying private medical insurance. So government funding does not eliminate overhead costs, it just shifts it around into a different category.


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