This week’s cover story in Business Week offers a primer on the benefits and extensive pitfalls of leasing out public infrastructure — a primer that should give Gov. Jon Corzine and the state Legislature more than pause as they wade into the deep end of the pool on the issue.
In the past year, banks and private investment firms have fallen in love with public infrastructure. They’re smitten by the rich cash flows that roads, bridges, airports, parking garages, and shipping ports generate—and the monopolistic advantages that keep those cash flows as steady as a beating heart. Firms are so enamored, in fact, that they’re beginning to consider infrastructure a brand new asset class in itself.
With state and local leaders scrambling for cash to solve short-term fiscal problems, the conditions are ripe for an unprecedented burst of buying and selling. All told, some $100 billion worth of public property could change hands in the next two years, up from less than $7 billion over the past two years; a lease for the Pennsylvania Turnpike could go for more than $30 billion all by itself. “There’s a lot of value trapped in these assets,” says Mark Florian, head of North American infrastructure banking at Goldman, Sachs & Co (GS ).
There are some advantages to private control of roads, utilities, lotteries, parking garages, water systems, airports, and other properties. To pay for upkeep, private firms can raise rates at the tollbooth without fear of being penalized in the voting booth. Privateers are also freer to experiment with ideas like peak pricing, a market-based approach to relieving traffic jams. And governments are making use of the cash they’re pulling in—balancing budgets, retiring debt, investing in social programs, and on and on.
But are investors getting an even better deal? It’s a question with major policy implications as governments relinquish control of major public assets for years to come. The aggressive toll hikes embedded in deals all but guarantee pain for lower-income citizens—and enormous profits for the buyers. For example, the investors in the $3.8 billion deal for the Indiana Toll Road, struck in 2006, could break even in year 15 of the 75-year lease, on the way to reaping as much as $21 billion in profits, estimates Merrill Lynch & Co. (MER ) What’s more, some public interest groups complain that the revenue from the higher tolls inflicted on all citizens will benefit only a handful of private investors, not the commonweal (see BusinessWeek.com, 4/27/07, “A Golden Gate for Investors”).
There’s also reason to worry about the quality of service on deals that can span 100 years. The newly private toll roads are being managed well now, but owners could sell them to other parties that might not operate them as capably in the future. Already, the experience outside of toll roads has been mixed: The Atlanta city water system, for example, was so poorly managed by private owners that the government reclaimed it.
The issue is far from settled, though it seems foolish of supporters (like Philadelphia mayoral candidate Chaka Fattah this morning on WHYY radio) to crow about the benefits without acknowledging the potential problems.
The thing that strikes me about the discussion is that privatization is being pitched as a creative solution to public financing problem and that so-called liberals like Fattah and Gov. Corzine seem willing to play the game. The problems they are hoping to address — broken budgets and a lack of money for social programs — are very real, of course, but the solution is shortsighted and does not address the root causes of the problem.
In fact, privatizing only exacerbates it because the chief problem is and has been privatization and the demonization of government. We have been engaged in a decades-long downward spiral in which the word taxes and the notion of government as protector of the citizenry has been denigrated. This has led to a starvation of public resources and a group of weak-kneed elected officials at the state level unwilling to raise taxes or talk straight about service levels and who rely on borrowing to pay for what is offered.
Add to this the inability or unwillingness of Congress to fund what is needed (either directly, or through grants to states and local governments) and you have a mess.
“Asset monetarization,” to use Corzine’s term, will remain an attractive approach for governors and legislators around the country until we repair the damage done over the last three decades.
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Hank Kalet 