Since we so seldom have positive news to report on NC, we thought it was important to highlight a promising development. Senator Richard Durbin has introduced legislation that would considerably complicate the effort of Wall Street players to
pillage privatize state and government assets for fun and profit.
It is key to understand what a bad deal these transactions are for ordinary citizens. In addition to having sizeable up front fees, the return requirements are well in excess of the government entities’ borrowing rates, typically just under 20%. That means after you allow for the up front charges, the effective cost of funding is likely to be 20% or even higher. How does it make the remotest iota of sense for governments to fund at rates comparable to that of credit card borrowers? (Note this 20% figure applies only to a large portion of the funding, the equity slice, but given that these deals, involve aggressive rate hikes, and deals like the Chicago parking meter deal have NPVs for the deal of roughly 2x, if not more, than the sellers received, the extraction via user charge increases is extremely aggressive, and calls the attractiveness of the funding into question).
On top of that, the deals also impose serious restrictions on government sovereignity and often have extremely unfavorable clauses that serve to guarantee the investors’ returns. Again, one fundamental concept in finance is a risk/return tradeoff. A deal with a target return that high presupposes a high level of risk, so the degree of guarantees sought should lead to a large reduction in target returns. But as this Dylan Ratigan segment describes, that’s not how these transactions work:
The Durbin legislation seeks to curb these abuses. Huffington Post summarizes its main provisions:
The bill would require states and cities to repay any federal funds they used to build or maintain the assets, such as toll roads or airports, as a condition of leasing them, likely thwarting many deals before they happen. It would also call for more transparency in the negotiation of such deals….
“I’m really trying to stake some ground here on a principle and position that we ought to reflect on,” Durbin told HuffPost. “The federal government is in debt. We are borrowing money to sustain our operations, and we’re sending some of that money to states and localities for investment in infrastructure. We’re making quite a sacrifice. If a decision is made by a local unit of government to privatize that public infrastructure, federal taxpayers should have a seat at the table.”….
Durbin’s bill would pertain only to transportation assets, and it would attach a federal lien on any transportation project that has received more than $25 million in federal money or is valued at more than $500 million.
If passed, the law would likely bring to an end the proposed privatization of Amtrak. This week House Transportation Committee Chairman John Mica (R-Fla.) rolled out a plan to privatize the rail service in the Northeast, claiming trains would run smoother between Washington and Boston if they were in the hands of private entities.
Given that some of the most heavily publicized examples of bad infrastructure deals, the Chicago parking meter deal and the Indiana toll road deal featured in the Ratigan video (which terminates in Chicago), took place in Durbin’s back yard, his antipathy for infrastructure sales appears to come from close contact.