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Monday, April 2nd, 2012

If You Don’t Like Privatization, You’ll Have to Do Better Than This

The Washington Post has an interesting piece from Brad Plumer called “More states privatizing their infrastructure, are they making a mistake?” that has been passed around a lot by privatization skeptics. But judging from the contents of the piece, the only answer you can reach to the headline’s question is No. Though those forwarding it around suggest it is skeptical towards privatization, the author actually seems to like it and even his negative takes actually make the case for it.

A few of the legitimate risks of privatization were highlighted, but no actual examples of where privatization didn’t work out. Surprisingly, the one clear bona fide case of a privatization disaster, the Chicago parking meter lease, didn’t rate a mention. Instead, Plumer foolishly focused on the Indiana Toll Road lease.

The piece cites critics who suggest Indiana in effect just bonded out a future revenue stream in order to spend cash now. Of course this is true in a sense. But it misses the bigger point. The Indiana Toll Road had been a breakeven proposition at best for 50 years. It hadn’t even paid to maintain itself, much less to do anything else. The notion that somehow the state could have raised tolls itself and diverted the money elsewhere is purest fantasy. It would never have been possible politically. So the lease turned a break even asset into $3.9 billion for the state – that’s called a good deal.

Also, it’s worth noting that the private consortium who leased the Toll Road radically overpaid – by more than billion dollars. That’s not according to just Yours Truly, but also independent business press like Barron’s, which described the purchase as “one of the most illogical prices paid for any major piece of transportation infrastructure.” This is “free money” to Hoosier motorists and taxpayers they would never have been able to realize elsewhere. (See “Foreign Investors Hurting, Hoosier Taxpayers Smiling” and “Major Moves Is Majorly Great” for more details).

Plumer also notes “gotchas” in the contract, such as Indiana having to reimburse the vendor for temporarily removing tolls when a nearby freeway was out of service. Possibly Indiana could have done a better job negotiating here, though this was clearly an extraordinary event. But what’s more important here is that Indiana put $500 million of its windfall into a long term reserve, the earnings of which should more than cover any occasional compensation events. The types of claims Plumer cited are already pre-funded. It’s probably better to use a reserve for unexpected items rather than to try to imagine every conceivable problem that might go wrong in the next 75 years. This reserve also will generate funds for ongoing road projects for many years to come.

So while I agree states should proceed with caution on privatization, using a deal that was a grand slam home run as your only example of what can go wrong only shows exactly what a great deal privatization can be for the public.

More on Privatization
Parking Meters and the Perils of Privatization
Can Chicago Get Out of Its Parking Meter Lease?

Principles of Privatization:
Part 1: Taxonomy of Transactions
Part 2: Value Levers
Part 3: Use of Funds
Part 4: Guidelines for Action

3 Comments
Topics: Public Policy, Transportation

3 Responses to “If You Don’t Like Privatization, You’ll Have to Do Better Than This”

  1. Robert Hurst says:

    If privatization benefits the public, that’s an accident, and a temporary one. Privatization is about getting paid. Anything slopping over into the public realm will be taken back before long. A new cluster of middlemen will sprout up to extract their profit.

  2. John Morris says:

    The big story is likely to be how few bids there are for most of these aleged “assets”, most of which can’t even cover their maintanance costs. Even with almost free Fed controled interest rates and such a low number of solid investment prospects, I doubt there will be many bidders.

  3. John Morris says:

    @Robert Hurst

    Given the things I saw when I clicked through to your site, an obesity map, a story on peak oil and cycling info; I find your comment weird.

    Are you implying that the current tax suppoted “right” to free roads and free parking is a major “public good”? Is it something we should be afraid of losing?

    This kind of contradiction confirms the common theory, that much of the “green” movement (green is the new red) is more about a hatred of capitalism than anything else.

    Serious, “greens” should see the free highway system for the destructive socialist mistake it is.

    The big problem is that if rational economics wasn’t used to plan these assets it’s doubtful they can become profitable.

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