To restate the obvious, the US has a huge amount of infrastructure catch-up it needs to do. Infrastructure spending provides an estimated $3 of economic growth for every $1 of spending. That means debt worry-warts need not fear, since deficit spending on infrastructure would lower the Federal debt to GDP ratio would fall.
But since the balanced budget types can’t get out of their own way and embrace MMT, budget hawks and ideologues who prefer private sector profiteering to government provision of services both tout the idea of “public private partnerships” as a scheme for what amounts to privatization of public services. These schemes are a transfer from local citizens, who wind up paying users’ fees, to financiers, design and construction firms, and investors, the overwhelming majority of which are not part of the community. So they are net transfers out….once you ignore political donations.
So as opposed to adding to local growth, these privatizations amount to new taxes in the form of users’ fees, but paid to private owners. Even worse, the deals are very one sided, with “gotcha” clauses like requiring payments if the public amenity is taken out of service for pressing reasons, like an emergency.
These infrastructure deals are also a lousy way to stimulate growth, since where the promoters want to do their projects is routinely not where the real economy payoff is greatest. And the process for selecting the consortium to handle the project, negotiating the deal, and for the promoters to get the funding is much more time consuming than having the government do it itself, making a mockery of the claim that the private sector is more nimble.
But on top of these issues is that certain types of projects, most notably toll roads, have a record of consistent failure that the press chooses to ignore. The Wall Street Journal today, for instance, treats a toll road deal that failed under then-Governor Pence as if it were mere bad luck, as opposed to precisely what you’d expect if you knew the terrain. From the Journal:
The project, a partnership between the state and private investors, was signed by Vice President Mike Pence in 2014 when he was the state’s governor. It is two years behind schedule and only 60% built. The state is in the process of taking it over and will have to issue debt to finish it…
The southern Indiana project near Bloomington had a raft of setbacks early on. The state selected a consortium that included a Spanish construction company, Grupo Isolux Corsán S.A., that hadn’t worked on a road project in the U.S. Its $325 million winning bid was nearly $75 million below the next-lowest one. The company quickly ran into unrelated legal difficulties in Europe that hurt its finances….
There have been some notable public-private failures. Toll-road partnerships in Alabama, Texas and California declared bankruptcy in recent years after revenue from tolls used to finance these projects fell short of projections. Indiana’s first major public-private partnership, a deal with Ferrovial S.A.’s subsidiary Cintra to operate the Indiana Toll Road, fell into bankruptcy after revenue missed targets. It has since been bought by new owners.
The article depicts this Indiana deal as a mere “black eye” and presents another Indiana project as a success:
Indiana has another public-private partnership for a bridge over the Ohio River that was recently completed ahead of schedule and $200 million below the state’s estimated cost.
However, mere completion is not the metric for whether these ventures have worked out. Consider the grim findings of this 2014 story in Thinking Highways by Randy Salzman:
Beginning with the contracting stage, the evidence suggests toll operating public private partnerships are transportation shell companies for international financiers and contractors who blueprint future bankruptcies. Because Uncle Sam generally guarantees the bonds – by far the largest chunk of “private” money – if and when the private toll road or tunnel partner goes bankrupt, taxpayers are forced to pay off the bonds while absorbing all loans the state and federal governments gave the private shell company and any accumulated depreciation. Yet the shell company’s parent firms get to keep years of actual toll income, on top of millions in design-build cost overruns….
Of course, no executive comes forward and says, “We’re planning to go bankrupt,” but an analysis of the data is shocking. There do not appear to be any American private toll firms still in operation under the same management 15 years after construction closed. The original toll firms seem consistently to have gone bankrupt or “zeroed their assets” and walked away, leaving taxpayers a highway now needing repair and having to pay off the bonds and absorb the loans and the depreciation.
The list of bankrupt firms is staggering, from Virginia’s Pocahontas Parkway to Presidio Parkway in San Francisco to Canada’s “Sea to Sky Highway” to Orange County’s Riverside Freeway to Detroit’s Windsor Tunnel to Brisbane, Australia’s Airport Link to South Carolina’s Connector 2000 to San Diego’s South Bay Expressway to Austin’s Cintra SH 130 to a couple dozen other toll facilities.
We cannot find any American private toll companies, furthermore, meeting their pre-construction traffic projections. Even those shell companies not in bankruptcy court usually produce half the income they projected to bondholders and federal and state officials prior to construction.
I strongly encourage you to read this article in full.
A big reason these deals do poorly is that infrastructure firms have copied the model of the creator and leader in that business, Sydney’s Macquarie Bank. It’s also a world leader in rent extraction. From another 2014 article:
Jim Chanos, president of the hedge fund Kynikos Associates and another famous early doubter of Enron, has been Macquarie’s most outspoken critic. In 2007, Chanos told [Fortune Magazine’s Bethany] McLean that Macquarie had ”perverse incentive to serially overpay for assets,” and compared the company to a Ponzi scheme.
McLean explained: “That’s because the assets are owned not by the bank itself but by the shareholders in its funds. The shareholders pay Macquarie management fees that are based on the size of the fund, meaning that Macquarie has an incentive to add to its collection.” That’s why Macquarie had every reason to bid a full billion dollars more than the second-place bidder for the Indiana Toll Road: Every additional dollar earned fatter fees for its bankers.
As an investment bank, Macquarie also earns money from transaction fees, which its infrastructure funds pay every time its banking arm rearranges investments into new corporate structures, or refinances a loan, or closes a deal. Chanos pointed out that 84 percent of the deals Macquarie advises involve its own entities. Shareholders ultimately eat the cost of these self-dealing fees.
Macquarie also pays itself handsome annual fees to manage its numerous satellite entities, in an “externally managed” arrangement criticized by corporate governance advocates. McLean called the funds “fee factories” for the company, noting they generate hundreds of millions of dollars each year for the firm. Even though Atlas is just a holding company with little of its own overhead, it paid Macquarie $36.7 million in fees in 2013 — millions more than it paid out to its shareholders.
The Sydney Morning Herald’s Alan Kohler shares Chanos’ skepticism. In a 2004 editorial, he wrote, “The Macquarie model is justly famous around the world. It is quite possibly the most efficient method of legally relieving investors of their money ever conceived.”
In other words, privately funded infrastructure investments and privatizations should be viewed with prejudice, yet clever PR has meant they are incorrectly seen as a good deal for governments, as opposed to a good deal for everyone but governments and their constituents. As Salzman put it:
The bottom line is that in the P3 [public private partnership] contracting process unaware taxpayers, and drivers, are facing brilliant financiers, the best fiscal minds money can buy. As we should have learned in the mortgage meltdown, the “set of financial interests who have learned how to mine the tax code” – as Virginia’s P3 director noted – have few qualms about how they make money.