Private ownership of public infrastructure… A doom of inequality
It is happening as I feared. Hilary Russ writes… Private money, public projects: More U.S. states doing deals. The movement has started for private funds to own public infrastructure. This is the entrenchment of inequality, which will be very hard to reverse. So why do I fear private ownership of public infrastructure? From what I saw in Chile…
In Chile, private companies own the highways. There are toll booths along the highways. It is almost impossible to get on or off the highway without paying a toll somewhere.
The title of the picture you see below is translated, “Don’t be caught without cash.” It is a list of the toll charges along certain routes of the highways of Chile. At roughly 500 Chilean pesos to the US dollar, here are the fees in $USD.
- Santiago to La Serena in the north is 1126 kilometers/700 miles. The toll charges are $25. This is adding 90 cents to every gallon of gas if your car gets 25 miles/gallon.
- Santiago just to the coast (V region) is 300 kilometers/186 miles. The toll charges are $20. This is adding $2.69 to every gallon of gas if your car gets 25 miles/gallon.
- a relaxing trip from Santiago to Concepcion in the south is 1176 kilometers/730 miles. The toll charges are $30. This is adding $1.02 to every gallon of gas if your car gets 25 miles/gallon.
- You will note some toll booths have special rates that are higher for weekends, all through the night and seasonal peak times, like holidays and summer.
There is more to the story. When a highway in Chile was built, private money was used from politicians, private investors and private investors from Spain. The loan has a term over a number of years upon which it should be paid off, and the tolls should then decrease to just charge the cost of maintenance, not the original cost of construction. Yet, the tolls never decrease, they keep rising as the years pass by. Then even rise more in the summer months when there is more traffic. People have tried to fight this problem in Chile, but to no avail. The private interests own the highways and set the tolls. Case closed.
And Chile has a minimum wage of $2.25/hour.
The article by Hilary Russ shows us that private ownership of public infrastructure is growing in the US.
“Short on funding but big on need, U.S. states and cities are increasingly turning to such deals, known as public-private partnerships, or P3s, hoping to leverage assets that can bring a quick infusion of private dollars to rebuild crumbling infrastructure.”
“The last 12 to 15 months have seen more deals and more opportunities to invest in the sector, said Jim Barry, head of BlackRock’s infrastructure investment group. “After let’s call it a decade of promise, I think we are actually beginning to see that movement,” he said. “Over the next five years, you could have a lot of deal flow.””
“The pacts have been common for decades in the U.K., Australia and Canada but have been slow to catch on in the United States. Now, analysts say, a shift is under way.”
“Now, there are more projects in development and more investor interest than ever in the U.S. P3 market, analysts say. Public agencies are also looking more closely at the pacts because they’re able to add less debt to their books while shifting construction risk to the private sector.”
“You’re actually seeing … a real pipeline of projects” building up since 2012 and continuing through at least this year and possibly next, said John Medina, a global project analyst at Moody’s Investors Service. “The projects include everything from a light rail system in suburban Washington, D.C., to the replacement of hundreds of bridges in Pennsylvania.”
“Investors clearly have an appetite for infrastructure.”
“The needs are huge. The nation should spend $3.6 trillion on infrastructure by 2020 to recover from decades of neglect, the American Society of Civil Engineers said last year.”
“Wall Street and public officials have also expanded their definition of what a public-private partnership is – and thus expanded the number of deals that some people consider P3s – no longer applying it only to big, new transportation infrastructure. Student housing, courthouses, jails, parking garages and community centers are all trying out versions of such pacts.”
“Facing a budget crisis in late 2008, then-Mayor Richard M. Daley leased the city’s meters for 75 years to a private company for about $1.2 billion. Parking rates and citizen complaints soared. Months later the city’s inspector general found that the city undersold the lease by, conservatively, about $1 billion.”
“Chicago is the worst-case scenario, and every mayor in the country knows about it,” said Donald Cohen, executive director of the nonprofit In the Public Interest, which focuses on privatization and contract. “The city got hosed.”
As private money begins to own infrastructure as opposed to paying taxes, so that the public owns it, the American economy we once knew will be gone. Inequality will become so entrenched, that it will be very hard to reverse the process. Once private companies own a greater percentage of infrastructure, we will see laws passed to protect them. We will see subsidies when needed. We will see costs rise for using public infrastructure.
Didn’t the INET conference just discuss shared public risk in order to get shared public benefits, instead of private investors taking on private risk and getting private benefits??? Yes, they did.
This is all happening thanks to the dynamics of inequality, low demand, low taxes on capital and easy monetary liquidity to the rich. I hate to watch America go down the drain like this.
Should a government, any government come to the point of not being able to afford its infrastructure, to the point of selling it off, then that government is not collecting enough TAXES and is not monitoring its money well. When the people build, the people maintain. Look to the leaders and managers as to where the failure comes from. One might start by checking their pockets first.
>>>Facing a budget crisis in late 2008, then-Mayor Richard M. Daley leased the city’s meters for 75 years to a private company for about $1.2 billion. Parking rates and citizen complaints soared. Months later the city’s inspector general found that the city undersold the lease by, conservatively, about $1 billion.<<<
Chicago sold it parking meter system to a private company for $15 million/year. The city got a $1.15 billion up front payment — divided by 75 years that comes to $15 million/year. Now that company wants something like $30 million a year back from the city: $14 million for a lost meter revenue due to construction and street closings over a 9 month period in 2001 — and $13.5 million for lost to handicapped placards in 2010.
Sorry handicapped: no more free meter parking for you (supposedly to prevent the one in five found to be used fraudulently in spot checks). Can't use public transportation (my 91 year old mom); can't afford the new, higher $6.50 an hour downtown (most handicapped are elderly in their lower income years)? Public transportation is 75% subsidized — meaning $7.50 each way in Chicago — but we can't be expected to subsidize the handicapped; too EMBARRASSING under the circumstances I guess.
The company seems to think Chicago should give away its parking meter system for free plus $15 million a year extra. The company grossed $80 million from meters in 2011 — expected to rise to $100-125 million soon.
http://www.suntimes.com/news/watchdogs/12299030-452/chicago-parking-meter-company-wants-more-money-mayor-balks.html
http://www.bloomberg.com/news/2010-08-09/morgan-stanley-group-s-11-billion-from-chicago-meters-makes-taxpayers-cry.html
http://www.theatlanticwire.com/business/2010/10/why-does-abu-dhabi-own-all-of-chicago-s-parking-meters/18627/
There is a clause in the US Constitution that prohibits legislatively voiding contracts. That has to be amended to allow revoking sales of public infrastructure.
As usual, none of this will take place without reforming the labor market with legally mandated, CENTRALIZED COLLECTIVE BARGAINING — automatically balancing middle class political (and think tank — did someone say hack tank in the Repub case?) financing against ownership plus most all the votes.
Don’t forget confiscatory taxation. Think of profit the same way we think of patent incentive. Jack Welch would work just as hard to “win” at $20 million a year as $200 million. Would be oligarchs will work just as hard if their children are only going to get half and theirs, etc. And efficiency is all we should care about — no need to identify with the winners.
I agree generally about private ownership of public infrastructure, but I do have to say that the Chile example isn’t convincing. Driving has negative externalities: accidents that kill both drivers and nondrivers, carbon emissions that will result in the deaths and displacement of billions of people, toxic exhaust that already kills thousands of people a year, plus a general waste of space as every car needs dozens of large places available to be stored when not in use. Increasing the marginal cost of car ownership isn’t obviously bad.
Also, there are only 184 cars per 1000 people in Chile (as opposed to 797 in the US), and something tells me that the fraction of the population that drives is not the same group that’s living at the minimum wage. But if highways were paid for with public funds, then the non-driving population would be subsidizing the driving population (as it does in the US), i.e. public funding for private interests. As a non-driver myself, I really don’t see why that’s fair.
The best system would be one where the public funding for building streets with driving/gas taxes and tolls used to recuperate the costs and to discourage driving. If someone wants to relax, they can take a bus for 700 miles to Concepcion instead of driving. If they don’t find buses relaxing, perhaps they can stay in Santiago and take up yoga. At least then they wouldn’t be demanding that the poorer 4 quintiles of the population subsidize their trip, and they wouldn’t be asking entire populations in future drought and flood stricken regions to relocate because they were too precious to sit near people they didn’t know on a bus.
Capitalism is supposed to have an element of competition to control the greed of companies involved. How, as in the Chile or Chicago cases, is competition being used to provide an optimum price for the services????
Public goods and private goods are apples and oranges.
The P3 idea is emerging in public education to ill effect… and accountability based on standardized testing is accelerating the trend. Affluent communities whose test scores are high to begin with are spending more and their students are retaining the broad curriculum offerings and solid teachers. Urban schools serving children raised in poverty get low test scores and are then replaced by for-profit charters whose focus is on the topics tested, whose operations are less costly, and whose profits are returned to shareholders instead of being used to expand social services needed by the students.
“This is all happening thanks to the dynamics of inequality, low demand, low taxes on capital and easy monetary liquidity to the rich.”
and I would add the near-complete co-option of our government by corporate interests.
Alex,
An interesting commentary but I think you missed the main point — that the tolls are about (mostly?) soaking up money for shareholders (forever?), not just supplying infrastructure.
At home in Illinois I think (don’t know) that tolls are used as just another tax — drivers subsidizing drivers (don’t really know). 🙂
Here in Colorado we have just had the announcement of a PPP for US36 between Denver and Boulder. The tolls which will raise revenue immediately raised some outrage, but nobody asked the question I’ve been mulling over: What is the actual price Colorado people will pay — whether in tolls, fees, taxes lost to the Treasury, etc. — over the life of the 50-year concessionaire agreement? I think this would be called Long Range Cost Accounting (LRCA,) and I suspect that the amount of $ exported from Colorado (by the private partner) will turn out to be enough to build the project several times over. I know that LRCA is complex and difficult, but shouldn’t the question be asked? Is this a dumb question?
Forgive my ignorance but under what legal doctrine do local, State and Federal government agencies privatize public assets?
Dave S:
Its the Howard Hughes Doctrine of Paid Politicians. Those bought politicians do as they are told and any politician that won’t stay bought is the lowest thing on earth.