Illustrating How Infrastructure Deals Result in High Fees and Diminished Service

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.

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  1. amateur socialist

    The rococo phase of late term capitalism: Profits are the well deserved returns earned by hard working entrepreneurs. Losses are everybody’s fault so must be shared by all.

  2. H2O

    They also own the formerly-public w*ter utility in SE England, with similar effects on customer bills and infrastructure maintenance.

  3. charlie

    There is something funny going on with Transurban’s books as well.

    Their US Sub has an extra billion of assets that I can’t figure out.

  4. Peripheral Visionary

    I would have a difficult time seeing the Dulles Toll Road as being representative in any way, particularly as it is located in the D.C. metro region, which, overall, is not representative of anywhere else in any meaningful way.

    Sale of government assets depends, a lot, on what is being sold, how, and to whom. On the one end of the spectrum, wilderness areas should never be sold short of truly exceptional situations, because once sold, they cease to be wilderness and generally cannot be recovered.

    On the other end of the spectrum, money-losing government “enterprises” like FNM and FRE should be divested of as soon as is reasonably possible. Given that they represent a massive ongoing expense to the taxpayer with little general benefit (the benefit that they provide, lower mortgage rates, goes primarily to upper income homeowners, not lower income renters), even divesting them for free would be a net win for the general public.

    Public utilities fall somewhere in between, and there, I would generally say experience would prove to be a good guide. Heavily used infrastructure like the highway system has worked best when it has been government maintained (via contractors) and free for access. Utilities have worked consistently well (if not perfectly) when privately operated but heavily regulated; compare, e.g., the downtime on the electrical grid in the U.S. with that of virtually any other country.

    On a side note, I would challenge the article’s assumptions regarding efficiency of maintenance; having worked in both government-maintained and private contractor-maintained buildings, there is no contest. My current building, a commercial building maintained by a private contractor but with a Federal tenant, is attractive, clean, and well-maintained. A previous building, a Federal building maintained by a Federal cleaning staff, could safely be described as “seven floors of basement”, with the vermin and grime to suit, and with wait times in the months for even such simple repairs as the replacement of a light bulb. Excepting critical functions like the military where there are security considerations, I will take private contractors over government employees on construction, maintenance, logistics, IT, etc. any day of the week.

    1. ScottS

      I would have a difficult time seeing the Dulles Toll Road as being representative in any way, particularly as it is located in the D.C. metro region, which, overall, is not representative of anywhere else in any meaningful way.

      Wow. Well thanks for clearing that up.

      I can comment on the toll roads in Southern California. They are a complete sop for politically-connected developers. They run toll roads out to the middle of nowhere, where a developer has a ton of what was otherwise useless land, and starts developing. They usually run the toll roads through (surprise) wildlife refuges.

      It’s a giant circle-jerk for politicians and crony capitalists.

    2. Yves Smith Post author


      What about the basic economics of these deals don’t you understand?

      You need to sweat an asset subject only to maintenance requirements, which track inflation, to produce a return of ~15% to 20% AND a lot of fees. Where does that come from? The sky?

      These deals INHERENTLY produce aggressive user charge increases and/or skrimping on maintenance. Go look at Macquarie’s airport deals. The two airports with the highest user charges are Macquarie deals. One was in tip top shape when it bought it (Sydney) so unlike Dulles, there was no need/requirement to make investments early on. The other (Budapest) I can tell you is your standard worn Eastern European airport. They certainly haven’t invested there either. I can go down a list of more examples.

      And I can cite crappy private sector maintenance and good public sector maintenance (starting with buildings I’ve lived in in the very competitive rental market of NYC, where per your belief system, landlords would have an incentive to keep their buildings in decent shape). Your building example is every bit as cherry picked as Dulles.

      Asserting that Dulles is not representative don’t make it so.

  5. nonclassical

    “Puget Sound Electricity” was “sold off” here in Washington
    State under Bushit-5 man consortium was sent FROM D.C. to “study” whether to sell off primarty west coast provider,
    to Idaho, Nevada, California, Oregon. The sham vote was always going to be 3-2. I spoke to my state rep. Derek Kilmer at home after. Our state reps were completely frozen
    out ot process-not even allowed public media comment.

    Taxpayer provided-paid for infrastructure selling off is one
    of the most egregious remnants of Bushit, who repealed “Public Utility Holding Company Act” of 1930’s. One friend who lives in second largest city in state has had
    his family’s (2 children under 6) electricity shut off twice
    as electricity bills have skyrocketed, while working wages have dropped by around 10% in cases. Tax revenues are “off”
    in the teens.

    This is simply Naomi Klein’s, “The Shock Doctrine”=Disaster

    Growing up Vietnam era-Poly-Sci, we saw it all in South America=70’s, 80’s. Perkins’ book, “Confessions of An Economic Hit Man” describes how government-financial sector
    “agents” literally made “an offer that could not be refused”.

    American people’s ignorance of actual history is a huge part of the problem.

  6. john bougearel

    The 7.8 mile Illinois Skyway is another toll system that went private a few years ago. Its a shortcut between NW Indiana and Chicago. It saves commuters 3 miles who would otherwise travel via the 90/94.

    From wiki: Between 2001 and 2004 authorities spent $250 million (USD) to rebuild much of the Skyway. As a result of a yearly increase in tolls, the current rate for passenger cars and other two axle vehicles is $3.50, with higher rates for vehicles with multiple axles. A discount is given during the overnight hours for vehicles with three or more axles. This 50 cent increase went into effect on January 1, 2011.[2]

    The city of Chicago’s Department of Streets and Sanitation formerly maintained the Chicago Skyway Toll Bridge System. A transaction that gave the city of Chicago a $1.83 billion dollar cash infusion leased the Skyway to the Skyway Concession Company (SCC), a joint-venture between the Australian Macquarie Infrastructure Group and Spanish Cintra Concesiones de Infraestructuras de Transporte S.A., which assumed operations on the Skyway on a 99–year operating lease. SCC will be responsible for all operating and maintenance costs of the Skyway but has the right to all toll and concession revenue.

    But the skyway shortcut also has two Indiana East-West tolls that need to be collected along the route.

    On June 30, 2006, this same joint-venture assumed responsibility for operating and maintaining the adjacent Indiana East–West Toll Road for $3.8 billion…in exchange for the right to maintain, operate and collect tolls for the following 75 years.[3]

    The total route for NW IN and Illinois commuters from the East-West Tollway to downtown Chicago is 37 miles. And as mentioned above it saves commuters who would otherwise travel 41 miles using the 90/94 3 miles.

    The three tolls along this 37 mile route costs commuters more than $5 to utilize. The skyway toll tends to be backed up pretty heavily, and can oftentimes take more than 10 minutes to pass through. The speed limit along the toll route is 55 mph, versus 70 mph along 90/94. Because of the road widening of 90/94 in the past decade, there are few bottlenecks except during rush hours.

    No “time saved” using the tollway accrues to motorists.

    And for some inexplicable reason the traffic along the tollway happens to be frequently monitored by police and not along 90/94. Motorists are often ticketed on the tollway as a result.

    To roundtrip to and from Chicago from NW In on the tollways, the cost to the commuters is now more than $10. Because the round-trip costs of using the tollway have escalated from $6.50 to more than $10, the usage of this tollway by motorists has sharply declined.

    1. Peripheral Visionary

      I didn’t see anything in your analysis suggesting that the road would have cost less overall had it remained in government hands.

      If the road is going to cost what it is going to cost, it is going to have to be paid for one way or another. With the road now a toll road in private hands, it is the motorists who use it who will be paying for it. Previously, it was the general public – including (through Federal grants) residents of other states who would never have used it under any circumstances – who were paying for it through their taxes. The expense has not changed, only the distribution of who is paying for it.

      I generally do not favor toll roads, but I have to concede that the argument that they are being paid for by the people who actually use them, as opposed to being paid for by the general public, is a sound one (I am opposed on other grounds, namely that they are an impediment to commerce). The usual arguments I hear against toll roads, however, seem to carry the implicit assumption that when roads are maintained by the government they come free of charge to the general public, which is absolutely not the case.

      We go over the same issues every time a government entity raises public transportation fares. The reality is that public transportation costs far more than the people using it are paying; a large part of the expense is simply being paid for by taxes from people who do not use it. Consequently, all governments are doing when they are raising fares is shifting more of the burden of paying for the service onto those who actually using it.

      1. Charlie

        You state that “The expense has not changed, only the distribution of who is paying for it.” Not only not true but not the point. Not only do you have the expense of maintaining the infrasturcture but you add the profit that must be extracted by the private investor. The whole point and strategy of conservatives is to saddle as much of the cost onto the public while transferring the profit to themselves and this is the primary objection to selling publically financed and constructed infrastrcture to private companies…Profit plus maintenance equal increased price, switching from public to private benefit decreases the necessary maintenance and leads to higher cost, less product, less benefit and unnecessary and unbenefitial to the majority redistribution of wealth. However…I agree wholeheartedly that the cost of something shold be shouldered by those who benefit, lets start with the military, wall street, sports stadiums, corporations, Power grids, power plants, education (since the beneficiaries of highly educated people are the corporations yet they pay little of the cost)hospitals, phamacuticals, the list goes on and on. In my liberal opinion majority investment/majority benefit is much more productive then majority investment/minority benefit.

      2. Jason X. Ray

        So at what point does it not matter if it public or private money? Is it preferable for public funds to be used initially, to build the infrastructure, and then private funds for any upgrades or additions?

        It’s a simplistic argument to say that only ‘users’ should pay for the use of one part of the infrastructure and everyone should pay for the other bits. This argument doesn’t account for the knock-on effects of having an effective infrastructure. Bridge X is built which allows for better access to location Y which helps build up property values along the way and allows for businesses to grow or expand. These are typical benefits of an infrastructure.

        Additionally, using private money means you have to pay interest, you have to pay for, typically, exorbitant executive salaries, shareholder dividends, etc… Effective use of public funds (or public bonds or windfall taxes) ensures that the public pays only for the cost, not all the associated overhead of private money, and gets to actually enjoy the benefits, i.e. the lowering of costs to live and do business.

        1. Peripheral Visionary

          “Effective use of public funds . . . “

          Zing! Everyone’s a comedian.

          I don’t know what the exact figures on efficiency of use of capital are in the public sector versus the private sector, but I have to think that the government does not fare well. Given that virtually every government program or project of any size goes massively over budget, I would think that the extraordinary and well-documented inefficiency of government spending would argue against government involvement on the basis of efficiency.

          As efficiency is not an effective basis for arguing for government involvement, the main argument would be for public benefit. There, I certainly do not disagree that, if benefits are largely public, the source of funds could be public. But given the long-term inefficiency of government operations, direct government involvement should be limited to the government doing what it can only do, or what it can do best (generally, policy and oversight), and putting out to contract the balance of the work that government agencies are not capable of doing efficiently on their own.

          ” . . . and gets to actually enjoy the benefits, i.e. the lowering of costs to live and do business.”

          I think you are falling into the trap of assuming that simply because we are not being delivered a bill, the cost has magically gone away. We are paying for it all one way or another, either now or at some point in the future.

          1. Yves Smith Post author

            Read my earlier comment. The investors demand high returns and fees. Period. This is rent extraction, a transfer from users to new parties that have inserted themselves into the equation. This has nothing to do with the fundamental economics of these projects.

            And go read Felix Rohatyn’s Bold Endeavors. The government has repeatedly undertaken successful large scale infrastructure projects that the private sector simply could not have executed, from the standpoint of the scale of commitment required and the operational complexity.

          2. ScottS


            The myth of private efficiency only applies in areas with competition. Where is the competition when politically-connected developers win no-bid contracts?

            Even then, anyone who has worked in private industry knows what a lie that is. Projects get started, stopped, mis-managed, bogus strategies pursued.

            If we’re cherry-picking examples, how about the Chicago parking meter privatization? Prices go up, nothing of value added. Where was the private sector magic?

            You haven’t addressed glaring counter-examples to your argument. Your line of reasoning has zero merit. Please come up with a coherent argument and support it with facts.

          3. Jason X. Ray

            So you argue that government can do little effectively, private industry is effective, and that the added costs of profit and interest payments aren’t considerations when maintaining or buidling our public infrastructure.

            Our government, which is us, the people, have started everything. Even those thieving railroad barons did there thieving on the government dime. Private industry has done nothing except try to demonize government initiative and siphon off rent from public spending.

            Highways? Dams? Canals? Railroads? Nope, all government spending. Defense of the nation? Government spending too. Time and again private interests embed themselves in government and try to get favorable deals. The public paid for the railroads, the robber barons overcharged, pocketed the profits, and sat back and watched as our money raised property values on ‘their’ lines so they could pocket the windfall profits for themselves. Even the freaking internet was the result of public spending! You get guys like Gates who comes in and pockets the profits because he was the first thief to catch on to the idea. Check out those Google idiots. They fought every money making idea, like advertising. These guys couldn’t run a bath, but they can pocket the money that they ‘made’. They used government funding and resources to develop ‘their’ algorithm then some manager talks them into using their website for advertising. Brilliant! Freaking run of the mill manager doing what every other idiot was doing at that time.

            I also get pissed off when I see money wasted, but programs that go over budget are not a ‘government’ problem. They are a mix of incompetent industry and incompetent government insiders. The answer is not to allow private industry to do all the spending instead. The answer is to remove the moral hazard; this intermingling of industry insiders and government. The answer is to vote for leaders who understand how money works, not promise vague BS like an ownership society or hope or some other nonsense.

            Don’t demonize government spending because without it you don’t have school, roads, society. You have slaves who exist at the whim of insiders.

  7. Eric

    Not all infrastructure deals are created equal. Yields on many assets, especially infrastructure, were bid down to incredibly low levels in 2006 and 2007. The Indiana Toll Road concession was done at 60x(!) EBITDA, or a yield of 1.7% (!). This is obviously a far, far cry from “mid to upper teens”). In addition, toll increases were limited to inflation or 2%, and Indiana’s “non-compete” consists merely of a restriction within 10 miles of the tollway (I am familiar with the area … that is not much of a restriction). Moreover, Macquarie does not own it. If someone wants to pay you 60x, with those conditions, taxpayers should do that deal all day long, full stop.

    With respect to the prior comment, as a long-time NYC subway user, tolls go up, irrespective of whether state or privately controlled. In fact, given budget crises impacting most states (IN may be an exception), the 75 year toll increase limitations on the Indiana toll road which Macquarie must abide by will very likely end up looking like a very good deal for the drivers.

  8. Paul Tioxon

    Once again a republican is Gov of PA and once again, the state liquor sales monopoly is proposed for sale to raise revenue. In PA, you can only buy wine and distilled liquor at state owned, state run stores, called State Stores. Going back to the prohibition era, the State Liquor Control system is the single largest buyer of booze in the world. It is the sole wholesaler and retailer, by law. It makes hundreds of millions in revenue for the state, and it employs almost 10,000 across the state, almost all unionized.

    The most recent budget for the state which seemed almost certain to contain projections of one time revenues of an exaggerated $2BB in proceeds from selling off the liquor licenses, DID NOT happen. It did not happen due to a major political lobbying tidal wave, led by the AFL Union leader from Philadelphia who started cornering state reps months ago. It has been beaten back so successfully that even the state treasurer was quoted as saying that the sale of this asset would not solve the problem, but would also produce a hole in the revenue stream that he did not know how to replace. It would be too problematic of a loss from a revenue perspective to kill the golden egg laying a stream of profits.

    There is no strong, organized, politically savy group of citizens in America, or anywhere else in the world through recent history, that can stand up to organized capital as the labor unions. The political power of the ballot needs to be fortified by economic power, via paid agents who act politically in dedicated activity to preserve your economic status. And the political power of your agents with state power, party politicians that you elect to execute policy need an economic base as well. People need jobs and control of profitable economic sectors, to fund their political initiatives, to consolidate and defend their socio-political status. If you do not have a strong economic platform, your political hold will be tenuous. Without millions of unionized auto manufacturing jobs, or millions of local, state and non profit hospital and university jobs, organized into dues paying unions, where will organized power come from in the downward slope of the business cycle?

    The rise of the Sun Belt with new group of power elites must feed on some sector of the economy. New York has Wall ST, Stamford Hedgistan, what do the rising Cowboy entrepreneurs do to face off against their Yankee East Coast Establishment nemesis? They started with military contracting and aero-space. From Houston mission control to LA aero space technology companies, the government contract fueled the political power of the south. Ross Perot leased computers to do federal welfare and social security administration, for one example. But what if you could just take a fully developed industry and derive profits, more like rent from utilities from preexisting government services? Privatization is the Aryanization of wealth from the state and federal government into the private control of the militant right wing of capitalism. Without the kinder, gentler health care benefits and 40 hr work week with paid vacation and 10 holidays and sick leave. Since so many other avenues to wealth have been locked up by the East Coast Yankee Establishment, someone has to be dispossessed to guarantee the profits for a permanent seat at the table of power sharing. Hollowing out the middle class requires that the foundation of their economic prosperity, however small a percentage it is of the whole, is still a vast horde of wealth for a small cadre to be well paid and an even smaller elite to live like gods among men. This explains why there is such a hands off approach to Wall St and the banksters. If you start carving them up, sending their leadership to club fed, than you open the gates for the barbarians from the southwest to come into power unopposed. The financial sector is the economic platform from which political power is retained and cultivated. It is not shared with the boot wearing shit kickers, so they gotta go out git their own. Out of the taxpayer’s hide. And the last trip wire of Democracy is being probed as the Social Security Trillions are eyed for privatization. There is an entire generation of frustrated millionaires in waiting who lust to turn public wealth into their dynastic platform of political power.

    1. Jason X. Ray

      Holy smokes. This makes sense; I haven’t thought of the two being opposing forces, but I had been trying to figure out how they interact.

    2. Stelios Theoharidis

      The great American West was built with subsidies from federal coffers and not rugged individualism, without funding for electrification, water infrastructure, highways, rail, defense it would have remained a third world backwater. It continues to be subsidized in that manner due to the structure of the Senate. That is why the more populated coastal states (+Texas) have a tendency to subsidize the remainder of the country. The same principle dominates in state governments, with more affluent populated areas subsidizing rural portions (jails, highways, etc). Dropping some federal dollars on South Dakota to rally two votes in the Senate can be a rather cheap proposition. It is quite ironic that the most antigovernment parts of the country would probably not survive without government largesse.

      Defence contractors started to integrate their supply chains based on these patterns to ensure that there would always be jobs lost if ridiculous defense spending wasn’t upheld. The coastal states do have their fiefdoms in the same manner. You can add insurance and pharmaceuticals, to your finance list. Defense and infrastructure contracting companies stretch across the breadth of the USA.

      The only disagreement that I have is that these centers of economic power (finance, defense, pharma, insurance) are playing both sides of the political spectrum. The political class which is just a revolving door away from the economic elite panders to both sides with little hesitation. Sure certain groups have their favored dance partners, but when the wallet is open both sides and their respective lobbyists/PR firms/think tanks show up for a turn. Obviously the politicians in areas with lower media concentraion are cheaper dates, they have less eligible suitors due to lower economic activity in their areas, hence they seem to be more vehement about defending their dance partners. They are quite willing to take positions that are based on a denial of empirical evidence altogether since they don’t want to put off their only meal tickets.

      You can’t have policy reform without political reform in this country.

  9. Bev

    $11 Billion in higher rates!

    Lying about saving money to capture a public utility and insert themselves as middlemen due a higher rent.

    Texas’ electric deregulation cost is tallied in study

    A report released Monday concludes that electric deregulation has cost Texas residential consumers more than $11 billion in higher rates and that the operator of the state’s major power grid, the Electric Reliability Council of Texas, has been poorly managed and industry-dominated.

    The 101-page report, “The Story of ERCOT,” is the result of a research project of the Steering Committee of Cities Served by Oncor and the Texas Coalition for Affordable Power, which works with 158 cities and other governmental entities to buy electricity in bulk.

    Deregulation, it said, has resulted in higher rates for Texas power consumers rather than the lower rates forecast by lawmakers who passed the state law in 1999.

    Before deregulation, Texas had cheaper rates than most states. Between 1999 and the first six months of 2010, however, Texas residential consumers “suffered greater increases [in electric rates] than residents in all but six other states,” the report said.

  10. sherparick

    Its funny how this story is getting great play in Sydney, but here where the rip-off is taking place the Solons at the Washington Post and Washington Examiner, ignore it except when holding it as an example for building infrastructure without taxes.

    Talk about bad books influencing the world, it must give Ayn Rand some satisfaction looking up from the 8th Circle of Hell to see how profoundly her book has influenced the business and financial classes of the boomer and Generation X generations. They can indulge their selfishness without restrain, believeing they are doing “God’s work.”

  11. Fréd Featherbed

    L’État, c’est la grande fiction à travers laquelle tout le monde s’efforce de vivre aux dépens de tout le monde
    ~~~Frédéric Bastiat~

    The Political state, it is the gigantic swindle through which everybody endeavors to live at the expense of everyone else.
    ~~~Frédéric Bastiat~

  12. MattJ

    Just want to point out that the Dulles Greenway (which Macquarie owns and operates) is not a good example of the problems of infrastructure deals; the road was privately built and has always been privately owned and operated. It is not a case of the state building infrastructure and then selling it off for a one-time bump in revenue.

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