More Public Infrastructure Sale Tales of Woe

Coming to a state or city near you, and quite possibly the one you are in….bankers bearing promises of solving budget woes by selling public infrastructure to private investors. This is in best case scenario makes about as much sense as using your house as an ATM to pay expenses, and in a worst-case scenario, is more like burning your furniture to heat the house. But desperate times lead to desperate and often short sighted measures.

Reader May Sage pointed us to this Truthout article, which we recommend reading in full. Key extracts:

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….

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. It gets payments, even though Chicago did not get fares when it had to close streets…..

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….

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….

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.

This is only a partial list of infrastructure horrorshows. Expect to read of a lot more as this troubling trend continues.

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45 comments

  1. ian

    Shortsightedness doesn’t begin to explain away the sale of infrastructure to raise cash. The dependence on borrowed money rather than tax and fee revenue has led to this widening chasm between revenue and expenses. The politicians,bureacrats,and political insiders are desparate to keep the whole scheme afloat. But after they have pawned off all the infracstructure,then what? They have no plan. They have no common sense. Intelligence runs counter to common sense. They have none of that either. Locally,statewide,nationally,we have an absolute pathetic lack of meaningful leadership. Just pathetic.

  2. NYT

    Totally OT. Looks like the UK inquiry is even more pathetic than the Angelides one in the US:
    “One intriguing fact that has come out this weekend is that Sir Fred Goodwin, the former chief executive of RBS, had no official internal email address – or certainly not one his senior team were aware of. The most prominent directors at the bank have told us they could not contact him directly and had to send messages to his secretary. Some wonder whether this was a way of Sir Fred avoiding information he did not want to see and maintaining a “clean-skin” approach to what was going on around him.”
    http://www.telegraph.co.uk/finance/comment/kamal-ahmed/8363538/Sadly-the-FSA-is-risking-failure-on-RBS.html

  3. pjwrites

    It is interesting that I would end up here after just posting this story on zerohedge.com.

    Can’t remember what country this happened in, but will never forget the story.

    A small town was struggling and had only one real resource, which was an abundance of water. The town council, in their infinite wisdom, decided to “privatize” the rights to their water, selling those rights to an “investor”. The investor finagled certain concessions from the town council, including legislation that would make it illegal for the residents of the the town to access water without paying a fee, and that included rainwater. The residents could not collect water in any manner on their own under penalty of law. In other words, you couldn’t even collect rainwater in a can without risk of imprisonment.

    You can guess what happened next. The investor kept raising the price of the water to local residents, in order to reap greater profits for himself. He drove the price of water so high that soon, residents were beaten and imprisoned for trying to steal their own water. The town sat in the midst of plenty but eventually died from want.

    The investor survived, of course, and was able to sell the town’s water to several other towns, where I have no doubt that the same scenario will have played out.

    Human nature is what it is and should be tempered with common sense and a look back at history, in an attempt to foresee all potential outcomes.

    A country owns its resources and those resources – much like mother told you – should be shared by all citizens.

  4. ella

    Remember, remember the same tale was told when they stole our public hospitals. Our governments sold our hospitals for what turned out to be a pittance. Then hospitals were resold in a relatively short time for huge private profits. Now look at how expensive hospitals have become.

    And how many years ago was this 20-30? History and its repetition, will we never learn? Once again our public assets will be stolen and in the end cost us so much more. But then if we are to save them, our governments will need the courage to take on the “tax entitlements” of the wealthy. Not a chance. The ubers make sure that their entitlements are always protected. And us, well we are willing to give it all away. Why I wonder why?

    1. Billy D

      …not just “entitlements for the wealthy”. We need to control entitlements for all.

      Everyone tries to get as much of a free ride from the government as possible… and all of it needs to be dealt with. Greed and “Money for nothing” attitudes know no class.

  5. DownSouth

    Public infrastructure sales are key to the imposition of neoliberalism, as explained by Paul Conney in Argentina’s Quarter Century Experiment with Neoliberalism: From Dictatorship to Depression.

    3.2 Privatizations of Public Enterprises

    Another of the three pillars of neoliberalism, privatizations, or the selling off of public enterprises, played a significant role during the 1990s in Argentina. Between 1991-1998, Argentina sold off a total of some us $31 billion worth of public enterprises (Rock, 2002: 68), though the majority of which was sold off between 1991-1995. Although this improved the fiscal balance for those years, this was partially offset due to the debt equity swaps agreed to by the Menem administration. However, this meant that after 1994 there was not only nothing left to sell, but also resources that could have been a steady source of revenue, such as the National Oil Company (ypf), would be providing no future income other than taxes. Besides ypf, the Argentinian government also sold off the national airline, the electric and gas utilities, water, the railroads and many other public enterprises.

    Another major concern was the manner in which the privatization process took place, often lacking transparency and clearly favoring the transnational corporations and local conglomerates, as evidenced by the majority of the state enterprises being sold below their worth or involving debt equity swaps (Azpiazu and Schorr, 2004). Although the drive toward privatizations was coming from the Peronist party, the imf provided a significant
    external push by strongly advocating these policies and supporting tncs in subsequent negotiations.

    It was during the military dictatorship of 1976-1983 that public enterprises were deliberately undermined, being disproportionately impacted by budget cuts. There had been a growing need for the renovation of physical capital that did not take place, “arguably” because of the level of the state’s indebtedness. Changes in management occurred on a regular basis because of political shifts, causing a lack of continuity in terms of management and leadership, and therefore their ability to serve the public declined and the
    quality of service worsened. Such an impact is independent of being a public or private enterprise. Instead of privatizing public enterprises, the junta or the Menem government could have made their functioning a greater priority, and given them the infrastructure necessary to perform well, as with any private firm providing services.

    Privatizations of state enterprises had a rather significant impact on unemployment in Argentina, especially in the provinces. A total of over 110,000 workers were laid off between 1990-1993 (Duarte, 2002: 76). This increase
    in unemployment had the greatest impact in the poorer provinces. It should come as no surprise that, after the wave of privatizations, these provinces were having greater problems with their budgets. Additional impacts
    of neoliberal policies on workers are discussed below in section 5.

    1. DownSouth

      It always frustrated him [the historian Carroll Quigley] that each nation, including our own, regards its own history as unique and the history of other nations as irrelevant to it.
      ▬Harry J. Hogan

      A wise man learns from his experience; a wiser man learns from the experience of others.
      ▬Confucius

    2. pefect stranger

      It appears the President of Argentina will sail under different wind:

      “There’s no such thing as a free market as the one we were taught in schools or as the one that foreign powers recommend,” the Head of State said during the presentation of an Industrial Strategic Plan at the Government House.

      http://www.buenosairesherald.com/article/59895/cfk-theres-no-such-thing-as-a-free-market

      But, the schools such as LSE (London School of Economics) and their counterparts in US, will sell you PhD or any diploma for hefty price. The favorite PhD thesis: Open Society and free-market! Make sure George Soros (Popper) is your mentor.

      1. DownSouth

        • Free markets deliver freedom but democracy doesn’t.

        • When it comes to making economic decisions, people are all-knowing calculating machines pursuing prudence and price and profit and property in a completely coercion-free environment.

        • When it comes to making political decisions, however, they are complete and total morons, putty in the hands of the engineers of consent.

        • People can be trusted to make economic decisions but not political decisions.

        These are the assumption that one must buy into in order to believe that free markets produce freedom and democracy doesn’t.

        Free markets are even more of a utopian pipedream now than they were when they were immortalized by Adam Smith. As C. Wright Mills explains in his review of Behemoth: The Structure and function of National Socialism 1933-1944:

        To define “capitalism” as consisting of the “free competition” of a large number of independent entrepreneurs with freedom of contract and trade is, of course, to speak of the past. A more enduring trait, and therefore one better fitted to be seized upon in a definition, is the major institution of modern society: private property in the means of production. Now rapid technological change, requiring heavy investments, further augments the gobbling up of the little by the big and this monopolization eventuates in an extremely rigid economic structure. Powerful corporations demand guarantees and subsidies from the state. Thus, in the era of monopolization “the administrative act” and not “the contract” becomes “the auxiliary guarantee of property.” Intervention becomes central, and: “who is to interfere and on whose behalf becomes the most important question for modern society.”

  6. bmeisen

    Germany’s been there, done that. For example the city of Stuttgart, home to 3 of the most succesful industrial operations in the world, Mercedes, Porsche and Bosch, which employ tens of thousands of high-wage, highly-qualified, reasonably-taxed workers, sold baubles like waste water treatment plants and mass transit systems, leased them back and, under the leadership of Christian Democrat Schuster, got stuck holding the bag. The scandal has a bright side – citizens are less willing to smile and wave when their schaukeling politicians turn up at the Volksfest. K21 deserves some attention in the States.

    1. Jcaunter

      Obama’s trying to figure out how he can get in on the action and privatize some Federal government assets. Look for a big “for sale” sign on the DOJ soon. Oops, that one’s already been sold.

      1. ScottS

        There’s been “for sale” signs outside of the buildings of the legislative, executive, and judicial branches of government for a while, but it’s not the buildings that are for sale.

  7. attempter

    I have to object to the term “short-sighted”. The record on “privatization” goes back far enough by now, and this record is clear. It’s nothing but embezzlement which then increases the cost of living for everyone.

    It’s no longer possible to be stupidly innocent about it. Any official who would alienate public property this way is a corrupt, embezzling criminal, and anyone who supports it is simply advocating robbery.

    All privatizations are invalid, and the people are free to redeem their stolen property at will. The officials and the private “owners” are criminals who should be dealt with as such.

  8. steelhead23

    I am not trained in macroeconomics, but privatizing economic infrastructure seems like a recipe for economic disaster. Allow me to point at two, large, federally-owned sources of electrical power – TVA and BPA. Both market low-cost federal power. The regions served enjoy cheaper than average electricity. In the Pacific Northwest, cheap power has brought us Google, Boeing, Intel, aluminum smelters and plentiful irrigation. In short, cheap electricity is an economic boon to the region. While this is an extreme example, most publicly owned infrastructure provides more economic benefit than it costs. And frankly, I see no advantage to local residents of having this “consumer surplus” captured by private industry and investors in the form of profits. In my opinion, this is the intentional end-game of the financial crisis – We the People get impoverished, while the elite acquire even more they could never spend.

  9. Tertium Squid

    One of the arguments for infrastructure sales is that the free market, competition, etc etc etc will have lower costs and better service than some bloated government bureaucracy.

    On the face of it this argument makes no sense when what is being sold is a scare public resource, like parking in a crowded downtown. Same for electrical power. We can perhaps imagine conditions where competition

    Notice that private businesses are very interested in purchasing rent-seeking monopolies from the state. Free market competition is not what they want.

    This article very helpfully points out another way this flies in the face of the “free market”: not only do many of these contracts essentially guarantee the revenue of the infrastructure-purchasing entity, one of the ways they do it is by using the power of the state to PREVENT competition.

    All of this is the opposite of any genuine free-market ideology. It is fascism.

    1. Tertium Squid

      All this fascism reminds me of millers during the Middle Ages. They paid a fee to the local lord or whoever and therefore purchased the right to do all the grinding in a community.

      This put them in a very advantageous condition – a local monopoly over a captive populace, and the power of the state to prevent competition and even fine peasants who tried to grind their own wheat.

      It had a terrible effect on society, though – stifling innovation in particular. I think it also had a baleful effect on community relationships, and there was no small resentment against millers.

      Perhaps that’s why Chaucer made his miller such a bounder.

    2. craazyman

      Electric power is a bit more complicated. Shareholder-owned (i.e. private) electic utilities do a pretty good job supplying low-cost electricity and have for decades.

      The last huge scandals surrounded the Insull holding companies previous to the Great Depression. The nuclear cost over-runs in the 1970s were a train wreck that didn’t discriminate between state and private.

      But they do a pretty good job because they are carefully monitored and controlled by state public utility commissions and to some degree by national regulators, such as the Federal Energy Regulatory Commission.

      Power costs at the consumer level are less a function of ownership structure than the cost of fuel, which varies by region of the U.S. Federally owned hyrdo generation — like BPA and TVA — is cheap because hydro fuel is free. Other areas of the country don’t have those kinds of hydro resources and have to use coal or natural gas. Natural gas is cheap now, but in 2008 it was 3 times the price. So a municipally owned utility generating with natural gas would have had a potential price disadvantage to a privately-owned utility distributing hydro-powered generation bought from TVA or BPA or running a coal plant.

      With electric power anyway, it’s not so simple as state-owned = good; shareholder-owned = bad.

      With roads and parking meters etc. privatization seems to be a horrible deal, by and large, for citizens. Partly it seems to me this is because there are no regulatory commissions to keep these miscreants under control, and so they run amuck. State ownership is not a panacea, consider the Soviet Union in it’s heyday or Cuba, etc. It’s a balancing act it seems to me. Wherever there’s an absence of separation of powers, there’s a presence of abuse, whether by private operators or state operators.

  10. Tertium Squid

    Sigh. Sentence from second paragraph completed:

    “We can perhaps imagine conditions where competition can be brought to bear, but only at enormous cost and, probably, with similar concessions from the state.”

  11. Art Eclectic

    For a glimpse into how thrilling the transition from private to public will be, we have only to look at how happy we are with privately controlled cable and phone service.

    Another instructive lesson is the toll lanes of the express lanes on SR 91 here in Southern California. Leased out for profit, the contract contained a non-compete clause that prevented any improvements to the main freeway that might make it more usable for normal travelers and thus cut into the profit of the express lanes.

    http://en.wikipedia.org/wiki/91_Express_Lanes

    I get the reality – those who use the facilities should pay for them. And they will. Boy will they. Cable at least has competition in the form of satellite and now internet. What competition will the bridge you need to cross to get to work have?

  12. John L

    I work in the highway design/construction industry, on the public side of the line. Here in NC our first new construction toll road, NC 540, was planned for years as a free use interstate route. High construction costs caused the state to decide to build it as a toll road, but the studies indicated not enough traffic would use it for the tolls to pay back the construction bonds. The Feds refused to participate in the funding of these bonds, so the state entered into a partnership with the private owners to lower the cost of the bonds.

    During the design process, the private engineering firms attempted to reduce construction costs by reducing the overall shoulder and paved shoulder widths, as well as reducing the pavement thickness for the through lanes, even though they were required to follow state highway design standards. Other efforts to lower design standards occurred throughout the design and construction period too. AFAIK there aren’t any of those onerous clauses like in Denver and Virginia’s contracts, but it would be too late if they were.

  13. F. Beard

    Oh yea. Let’s sell public assets to the cause of the problem; the government backed counterfeiting cartel.

    I wonder how much they will counterfeit (leverage) to buy those assets?

    The biggest socialists around are the bankers and the biggest hypocrites too.

    I have a counter-proposal: A bailout of the entire US population with new, debt and interest free United States Notes combined with fundamental reform.

  14. cathyerica

    I’m looking for the recording on NPR (Chicago BEZ)at about 10:30pm where there was a discussion between NPR Host and Yves Smith. It was regarding the home forclosures, Mers, investors, banks, and the infamous Servicers. Can anyone lead me to that link? I’d like to have a recording of that.

  15. Psychoanalystus

    Sounds like a Koch brothers wet dream. Buy a crappy car from an American automaker bailed out by chumps (aka taxpayers), fill up it’s tank with gasoline from a Koch refinery, fit it with tires manufactured in a Koch chemical plant, and now extract, in the most feudal manner, chump tolls from allowing them to drive on a freeway built with chump taxes to begin with.

    Happy driving, everybody!

    Psychoanalystus

  16. Strata

    Selling public assets to plutocrats is the desired end to the game of underfunding and undermaintaining public roads, parks, bridges, libraries, schools and utilities. This shift to high-tech feudalism has been in the works since the Reagan administration. At this point, only the American populace (awakened from their trance) can halt and reverse this trend.

  17. Nyeve

    Selling public infrastructure sounds okay, provided the States re-nationalize the infrastructure after they get the money.

  18. John Merryman

    When the pendulum swings back, it’s the banking system which needs to be nationalized. Markets need a medium of exchange in order to function and when that medium is in private hands….
    My theory is just let them keep pushing and stealing as much as possible, as fast as possible. They will become that much more over confident and the rest of us will become that much more aggravated. Just ask Mubarak how much pressure can be applied before it all blows up.

    1. Paul Tioxon

      I agree with Merryman, they will soon enough, destroy themselves beyond redemption. But, exactly will be the agency of the people, such as we find here on NK, to execute rational public policy? If the unions are gone, what nation wide groups are out there now, making organized efforts, with distinct plans of action and clearly outlined policy objectives? MoveOn, AARP, ACORN, ?? I am not sure how many joiners there are that write here. How many community groups do NK readers and writers belong to? Friends of some community park? A farmers market organizer? A church clothing drive volunteer? What small or large group activities do you personally lend your time to? If you are not doing this, what will happen when things fall apart, and ALL YOU got was a lousy tri- cornered colonial hat with matching coffee mug? America is well known for many of its intermediary associations that allows for the lone individual to stand with others,for the improvement of the public as well as the republic. The political parties are a part of this, but they are the most immediate link to taking power. Without some organized associations, working now, the opportunity for taking power later are greatly diminished. Large mass based non governmental organizations, like Amnesty International, as well as the Democratic party are important to build the skill set for sharing power. The existing system of think tank influence peddlers are part of the power structure that we see today and more or less party organs. See Fox News or AEI. Competing alternatives are sorely needed.

      1. attempter

        I do those things. We need to form such relocalization groups everywhere. And I advocate that as society continues to collapse (the subject of this post is a perfect example), our commmunity groups seek to take over local governments and/or replace government functions.

        As our council quasi-governments become the de facto providers of services and are acclaimed as such by the people (and we should also be educators to that effect), we should directly claim power and proclaim ourselves as the legitimate governmental power to outsiders, while refusing to recognize the authority or prerogatives of illegitimate criminals.

        As council movements and government arise in that way in more and more places, the councils must make contact and confederate.

        If everything went perfectly, a direct democratic revolution would gradually take place that way while the kleptocracy withered and died.

        In practice, at some point there would be oppression, and we’d have to organize federated resistance. From there, perhaps we could go the Egyptian route, but not in order to “reform” upper-level government, but to dissolve it.

        The council quasi-governments (just using the word “government” as a term of expression) would already exist and would already be performing duties and taking responsibility.

        That’s all the government grown-up human beings ever needed. It’s about time we took adult responsibility for ourselves.

      2. taunger

        I do those too. Usually don’t comment here, but thought you should know that many, many of the good folks are plugged in there. And looking for help, if you are willing.

  19. Paul Tioxon

    Aside from the advanced stages of burning the furniture to stay warm, and winters still got 20 or 30 or 40 months to go, aside from the awesome lack of foresight in that regard is the tax bamboozle. These assets, once in private hands, become tax shelters par excellence, as massive depreciation schedules are calculated in the extreme favor of the new private ownership. This was one of the main tactics of First Union/Wachovia, when they bought up all of the rolling stock of the NYC subway system, leased them back and collected the depreciation. Such a deal, FOR YOU!!, wholesale.

    1. Jimbo

      Great Observation, Paul.

      On the other hand, privatizations have enabled cities like Chicago (1.1B from the parking meters, 1.8B from the Skyway) to put off tax hikes. The Chicago Mayor has gone through almost 85% of the slush fund that the two privatizations brought the city, allowing him to put off tax hikes. (the funds were supposed to have lasted 80 years)

      When critics began to carp regarding the parking meter sale, he replied to his critics, “tell me which taxes I should have increased”

      Others say that the city itself should have increased the parking meter rates, as Morgan Stanley LLC has done. But if the city had indeed raised the rates, then a subsequent administration can lower the rates. By selling the parking meters, the City washed itself of the problem, and was able to provide indirect tax relief to its citizens.

  20. Francois T

    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.

    This is utter hogwash! State only had to promise to unleash judicial hell on these contractors until they’d relent. Who are these contractors anyway? God incarnate? Like these asshats can play with public safety as they please?

    Pfff!

  21. Anon

    As Francois T points out, government is much more powerful than business, if only it decides to use its power. The problem in America is that you have already privatized public office, so there is nobody to stand against the oligarchs and corporations.

    I think these leases are in fact a brilliant idea; let sell the rights to public assets to banks, pirate equity, SWFs and the like. Government gets the cash it needs now and in a few years you can declare the deals were fraudulent, imprison some corrupt officials and take back the assets from the investors. Voila! an effective way of transferring wealth from the oligarchs to the public.

    1. F. Beard

      As Francois T points out, government is much more powerful than business, if only it decides to use its power. Anon

      The moral case will have to be built is my guess. Of course as economic conditions worsen, attempts to blame the victims will sound lamer and lamer. And since the banks have accepted a bailout and are being bailed out via the Fed/Treasury carry trade, then a bailout of the victims is more plausible.

  22. Jon Skelley

    You guys don’t get it. Any time large sums of money exchanges hands in the US there is bribery involved. You can bet on it. There is a simple cure but it does involve firing squads.

  23. Psychoanalystus

    Perhaps it’s time we give up on this fully discredited capitalist system and allow society to evolve toward a better and fairer model. Socialism comes to mind. And while at it, let’s round up all Tea Partiers and ship them off (along with their guns and 30-round ammo clips) to a small island in the Pacific.

    Psychoanalystus

    1. F. Beard

      Perhaps it’s time we give up on this fully discredited capitalist system and allow society to evolve toward a better and fairer model. Psychoanalystus

      We don’t have capitalism since the most important part of it, money creation, is a government backed cartel using a government enforced monopoly money supply.

  24. markincorsicana

    How do you say “Been there, done that” in Russian? Will our oligarchs retire to the Crimea?

    1. voffka

      И я там был. Мёд, пиво пил. По усам текло, а в рот не попало…
      :)

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