In The New Privatization, Steven Malanga notes that “states and cities are selling their roads, bridges, and airports for eye-popping sums” — but this isn’t really all that new:
The trend proves the axiom that what’s old can be new again. Private investment in infrastructure, especially bridges and roads, was common in early United States history. Immediately after the Revolutionary War, for instance, investors put up $465,000 to build the Philadelphia-Lancaster Turnpike, a 66-mile toll road that proved so popular that it led to further waves of private investing in highways. During the first half of the nineteenth century, private funds provided the young republic with some 600 toll roads. And as the country spread westward during the second half of the century, infrastructure investors helped ease the way, with 100 toll roads in California alone. In fact, the private sector kept building roads until the automobile’s arrival prompted more extensive — and costly — government safety regulations, which at the time made toll roads a largely unprofitable venture. Government turned to new methods — especially municipal bonds, which investors like because they aren’t taxed — to finance infrastructure.Privately financed infrastructure has made another appearance in post–World War II Europe. Starting with 1955 legislation, France began to tap private investors to build and operate what eventually amounted to 3,400 miles of autoroutes between cities. Margaret Thatcher’s energetic privatization drive in 1980s England sold existing government assets and spawned scores of public-private construction projects. The Soviet Union’s collapse led to extensive privatization in former Eastern bloc countries during the nineties. The U.S. Department of Transportation figures that worldwide, more than 1,100 public-private deals have taken place in the transportation field alone over the last two decades. Total value: approximately $360 billion.
U.S. infrastructure is clearly in need of improvement:
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.
The bill won’t be small, and paying for it won’t be popular:
The bill for alleviating these woes will be gigantic. Texas, for example, estimates that it must spend some $100 billion extra on current and new roads to keep up with its anticipated growth over the next quarter-century. Oregon calculates that it needs an additional $1.3 billion a year just to keep its existing transportation network from crumbling. Most states face similar financing gaps — and that’s not including the billions of dollars necessary to update airport security and expand water ports.Public funds aren’t about to solve this crisis. Rocketing gasoline prices have made it politically unpalatable to increase fuel taxes, and some state and local budgets are already buckling under big annual debt payments from decades of borrowing.
Investors have been willing to pay far, far more for highways than state and local governments thought they would:
The vast differences in valuations highlight essential differences between the private and public sectors. For starters, private financiers investing in these deals — mostly managers of international pension funds — often have a greater taste for risk than do investors in government bonds, who typically require governments to rely on the most conservative revenue projections. 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.
For local politicians, shielding public jobs or maintaining jurisdiction over an asset is sometimes more important than improving results. Quasi-public authorities, for instance, now operate many toll roads, bridges, airports, and ports, and too often they serve as patronage mills. To take one example, a federal investigation of a powerful Pennsylvania state senator revealed that the state’s turnpike commission handed out lucrative consulting contracts, paying some $220,000, to one of the senator’s friends, who appeared to have spent most of his time running the pol’s private estate. The investigation has given a huge lift to Governor Ed Rendell’s proposal to lease the Pennsylvania Turnpike, and it is just the latest to uncover patronage and lousy management at the commission — which was supposed to have gone out of business after building the turnpike six decades ago, but today employs about 2,000 people, including 500 administrators, to operate the 537-mile road. “The turnpike commission has traditionally been a patronage cesspool,” says Matthew Brouillette, president of the Commonwealth Foundation, a Harrisburg-based think tank that supports the lease.
Even when outright patronage isn’t involved, civil-service pay scales and cushy union contracts rarely inspire public employees to maximize results. Chicago’s Levenson recommended selling the city’s parking garages, for instance, because they simply didn’t run at capacity, even though they charged less than most competing private garages. “Government is just not set up to give the person supervising those garages a $20,000 bonus if he raises capacity, or fire him if it fails,” says Levenson. In a study that Daniels commissioned after taking office, Indiana found that it spent 34 cents to collect every 15-cent toll. “We would be better off using the honor system,” Daniels quipped.