What you need to know about privatizing infrastructure

By Ellen Dannin | EPRN | March 2, 2011

Remember the old joke about some sharpie who takes innocents by “selling” them the Brooklyn Bridge? By the time the poor guy finds out he was taken, the crook is long gone.

Flash forward to the present. States and cities are being told that they can fix their budgets and have money left over by leasing their infrastructure for 50, 75, or even 99 years. It sounds great, even miraculous. But we all need to slow down and do our homework, because the rule “If it sounds too good to be true, it is” still applies, and there are good reasons why state and local governments should not want any part of these deals.

The truth is that, rather than making money on just tolls and fees, private contractors make their money through big tax breaks and by squeezing state and local governments for payments for the life of the contracts.

In fact, tax breaks explain why the deals last generations. One tax break for leases that last longer than the useful life of the infrastructure allows investors to write off their investment in just over a decade. A second tax break lets private companies issue tax-free bonds to finance their deals. While tax-free bonds and tax breaks make it less expensive to finance these deals, the downside is that governments lose tax revenue. Losing tax revenue puts government budgets deeper in the red and worsens problems privatization was supposed to fix.

But that’s not all. Infrastructure privatization contracts are full of “gotcha” terms that require state or local governments to pay the private contractors. For example, now when Chicago does street repairs or closes streets for a festival, it must pay the private parking meter contractor for lost meter fares. Those payments put the contractors in a much better [position] than the government was. It gets payments, even though Chicago did not get fares when it had to close streets.

Highway contractors can be entitled to payments if there is an accident on the highway and if the police, fire, and emergency crews do not give “appropriate” notice and do not perform their emergency work in a way that is “reasonable under the circumstances”. And, given the vagueness of those standards, states and cities may end up paying just to avoid the costs of litigation.

Highway privatization contracts also often include terms that forbid building “competing” roads or mass transit. Some even require making an existing “competing” road worse. For example, the contract for SR-91 in southern California prohibited the state from repairing an adjacent public road, creating conditions that put drivers’ safety at risk. A proposed private highway around the northwest part of Denver required that local governments reduce speeds and install speed humps and barriers and narrow lanes on “competing” roads to force drivers to use the privatized road.

And worst of all, these deals put a stranglehold on democratic decision making and the public interest. For example, Virginia decided to promote carpooling to cut down on pollution, slow highway deterioration, and lessen highway and urban congestion. As a result, Virginia must reimburse the private contractor for lost revenues from carpoolers, even though not all of the people in a car would otherwise have driven individually. Chicago is not allowed to reduce the number of parking meters for the life of the contract. So when there have been changes that mean parking meters in one location are no longer appropriate, the city has had to install meters where none have ever been.

All of these contract terms put the public safety and well being last and the investors’ profits first. And, although infrastructure privatization proponents claim that the deals transfer risk from the public to the contractors, a fair reading of the contract terms shows that this is not the case. State and local governments lose control of their destinies and communities, while giving private investors power over our new dollar democracies.

These problems will persist even when the private contractor does a good job in maintaining the infrastructure and providing good public access to it. But contractors have not always done a good job in keeping their agreements.

Shortly after it took over the Indiana Toll Road, the private contractor put sand-filled barrels in turn-arounds with no notice to the state. State officials begged and pleaded for the barrels to be removed, so police and emergency crews could get to accidents and deal with other public safety problems as quickly as possible. Those pleas fell on deaf ears, while the turn-arounds remained blocked for months.

Or consider the poor people of Auckland, New Zealand.  Their government had become enamored of privatization, because they had been told that the private sector always provided better service at lower cost. Mercury, the private company that bought the electrical service for Auckland decided to save costs by eliminating backup power, by not replacing parts of the system that were years past their normal life, by doing no maintenance, by having no electrical cables in reserve, and by terminating its repair crews. When they were terminated, the crews left NZ to find work elsewhere. All these decisions were made to increase company profits.

Those decisions may have lowered the company’s costs, but at a huge price, most of which it did not bear when the power cables to Auckland’s central business district failed. Banks, stock exchanges, restaurants, and all functions that depended on electricity were hard hit. Water, sewage, and all systems went down, and the power outage lasted nearly two months, because it had no repair crews or replacement components on hand.

Auckland’s businesses lost millions of dollars. Companies tried to stay open by using generators, office workers climbed stairs in skyscrapers in mid-summer, and generator noise and diesel smoke filled downtown. At one point Auckland was provided power to essential facilities through an electric cable plugged into a large ship in the harbor.

You would think that New Zealand privatization advocates would have rethought their positions after they saw the carnage created by Mercury. But that was not the case. They actually claimed that the problem was caused by not having privatized enough infrastructure. While ludicrous, given what they had experienced, that view is not unique.

Consider, then, that at this very moment, state and local governments are contemplating signing contracts that restrict their rights to inspect infrastructure paid for with public money. Consider that they are agreeing to sign away their ability to protect the public interest and are setting in motion the same sort of disaster that Auckland faced, while the federal government is offering tax breaks to promote privatization.

The lesson and warning for states and local governments who are being wooed by private contractors is to do their due diligence. Read the contracts. Demand explanations and information. Ask for evidence that the public sector cannot do what private contractors do — and at lower cost – since the public sector does not need to pay dividends to investors. Get advisors who are not beholden to the privatization industry. And use common sense.

If you had thought the miracle of infrastructure privatization sounded too good to be true, now you know it is. But if you still have a hankering to give privatization a try, well, I just might have a bridge to show you . . .

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You can find more details in Crumbling Infrastructure, Crumbling Democracy: Infrastructure Privatization Contracts and Their Effects on State and Local Governance. It was first published in the Northwestern Jounral of Law and Social Policy at 6 Nw. J. L. & Soc. Pol’y 47 (2011), http://www.law.northwestern.edu/journals/njlsp/v6/n1/2/.

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