It isn’t hard to understand why infrastructure deals (the sale of government owned assets to private investors) are inherently a ripoff. We’ve had such a vogue for private contracting that a lot of services that are almost certainly more cheaply run by the government (e.g., logistical support for the military as proven by Iraq profiteering by Blackwater) that it’s a pretty safe assumption that most assets now held by government bodies are the the sort of thing that it makes sense for the government to own: high cost to build, long lived, not terribly complex to maintain assets.
Infrastructure investors like to see returns in the mid to upper teens. The deals are complicated to put together, so the fees are high. The deal needs to generate enough to pay the fees and generate the required returns. Since it is pretty much impossible to run something like a parking meters “smarter”, the usual course of action is a combination of increasing charges to the users (taxpayers who in the past used it for free or much less) and cut maintenance costs.
The Sydney-based investment bank Macquarie pioneered this business. Reader Crocodile Chuck pointed us to one of its latest capers. From the Sydney Morning Herald:
Australian investors are being accused of highway robbery by motorists in Virginia who blame Macquarie Group for what they say are exorbitant road tolls….
The complaints have been taken up by a member of the US Congress and Virginia’s transport authorities who have agreed to set up a committee to look at ways of making the 22-kilometre Dulles Greenway “more user-friendly”.
But the prospect for lower tolls is poor. The road, one of the most expensive in the US, charges up to $US5.25 for car journeys but has not paid a dividend to its owner, Macquarie Atlas Roads, for the past three years. Some residents and local companies have boycotted the road – choosing traffic jams on alternative routes – and week-day traffic volumes fell 3 per cent last year. Despite this, toll increases helped lift income by 1.8 per cent.
Now the Macquarie investors were required to make some front loaded investments in the road as a condition of the transaction. But the aggressive fee increases have resulted in a serious reduction in service quality via the toll road being underutlized (and perceived as a ripoff even by those who do use it), which leads to the redistribution of traffic onto other roads, imposing costs on drivers making trips that wouldn’t have the toll road as a logical option (ie, the tolls impose costs on drivers who didn’t use that route in the normal course of affairs pre the toll rise). But no one was savvy enough to require that they allow for distance based metering, which the owner won’t put in unless subsidized:
But a prime criticism of the Dulles Greenway is that it does not incorporate distance pricing that would allow it to charge less for short trips. In some cases travelling barely two kilometres attracts the maximum toll. The road has few electronic tag readers and relies heavily on cash collection points.
But TRIP II’s [CEO Tom] Sines says that adding more electronic toll points would cost an estimated $US6.5 million, while distance tolling could ultimately hurt revenues. He says the company might be interested if authorities pitched in upfront and were willing also to “backstop against any lost revenue”.
Note that the current tolls and any increases must be approved by the Virginia State Corporation Commission. But the sorry reality is that having entered into a misguided, short-sighted pact, the locals have no ready way to exit or redo this deal.