Bridge Maintenance, Privatization, and More Stupidity from CNN
When I listen to CNN discuss business and economics, I often realize that the Stupidest People on the Planet don’t all write for the National Review. Case in point:
ROMANS: The American Society of Civil Engineers estimates $1.6 trillion to fix everything up, all our infrastructure problems, dams, roads, tunnels. We did a little bit of math, that’s about $5,000 for every man, woman and child in America. That is an awful lot of money. Politicians don’t win elections by saying; you’re not going to notice anything I’m going to do but it’s going to cost you a lot of money.
ASCHER: You know that estimate is a very big number, but it’s made up of lots of component pieces. I think if you look into it you’ll see some of the types of infrastructure that they’re gearing monies towards are really important to you and me every day. Other things are things that could be handled better by the private sector, they would be invested in better so I think you really want to get past the big number and start looking at the components.
VELSHI: That discussion, the private sector that has come up a few times, the idea of having private companies run roads and bridges and tunnels and things like that. How practical is that and where has it worked?
ASCHER: Well it has worked overseas, I mean if you look at places in Asia and Europe, I think in the UK about 15 percent of the roads and bridges have been privatized, they are toll brides, they are toll roads. I mean it certainly worked in Latin America. It’s worked in a number of places. It’s been the political environment that’s not here. The politics is so complicated nobody has been able to get it off the ground.
While we often posted on this topic, it was Max Sawicky who early on put it best:
When a government takes a lump sum in exchange for permitting a private firm to manage a road and levy tolls, it is not only privatizing. It is borrowing, worsening its fiscal position. Most states are looking at growing budget shortfalls in the future, as Medicaid costs in particular continue to grow more rapidly than their revenues. The Gov could just as easily contract out operations and management, but keep the tolls for itself. The fact that the money is earmarked to new projects – investment – is irrelevant. It’s still borrowing. You could just as easily keep the roads and float a bond – also borrowing – for the new projects. The leasing is not necessary. The political onus against explicit borrowing can warp decisions.
Let’s take a simple example. Suppose a state government needs $2 billion in funds to fix its bridges. Let’s suppose this state owns toll roads that generate $150 million in income per year. The stupid people at CNN think the only way to raise the $2 billion is to sell the rights to the toll roads to a private firm. Well, let’s assume that a private firm does purchase these rights for the next 75 years for $2 billion. Not a bad deal given the fact that the internal rate of return is 7.5 percent. If the cost of capital were only 5 percent, then the present value of these rights exceeds $2.9 billion. So our private firm has made $900 million in present value by snookering the taxpayers of this state.
But we need to fix the bridges now – right? Yea – and the state could borrow the $2 billion paying $100 million in interest to the bank. The state still keeps the income from the toll roads and end up better off than it would by selling the rights to the toll roads at a price below their present value.
When we discussed the privatization of the Indiana toll roads, we had to endure the infestation of our comment box by a troll who seems to be Donald Luskin’s Mini-Me. But even this troll recognized that the present value comparison was the appropriate framework. This troll even provided some analysis that claimed the present value of the expected future toll income was less than the price received by the Indiana state government. Never mind the fact that the assumptions used in this supposed analysis were entirely bogus. Our troll trusted the analysis anyway.
But the fools at CNN cannot even get the right conceptual framework. When the supposed business reporters of a network are dumber than a Luskin Mini-Me, the network needs to fire these business reporters.