Monday, April 2nd, 2012
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.