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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?

By Randall Parker    2007 October 11 09:55 PM Entry Permalink | Comments (8)
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