Lambert here: You say “expensive toll roads” like that’s a bad thing!
By Marshall Auerback, a market analyst and Research Associate at the Levy Institute. Cross-posted from Alternet.
President Trump presented his infrastructure plan last week. If you’re keen on the idea of out-of-control privatized utilities gouging customers and manipulating energy markets, or consortia building overpriced, expensive toll roads (until they go bust), then you’ll love the president’s proposals. His mooted public-private partnerships are another variant of socialism for the rich and free market discipline for the rest of us. PPPs are like a religion that offers its adherents the promise of capitalist heaven via tax breaks, subsidized funding, and guaranteed returns, minus the discipline of private bank credit arrangements or potential bankruptcy, the costs of which are invariably borne by a public already experiencing the hell of significantly more restricted access (think toll roads and bridges), higher user fees or “slower lane” traffic (think the end of net neutrality), and the costs of bailouts if and when the venture goes bust.
There is no question that Trump is tapping into a big need for the country when he calls for more public infrastructure investment, but as usual with this president the devil is (literally) in the details. The American Society of Civil Engineers (ASCE) estimates that there are $4.6 trillion worth of needed investments to maintain and upgrade infrastructure throughout the U.S. But the president’s proposed plan offers up a mere $200 billion in direct federal funding over the next 10 years. This is to be complemented with another $1.3 trillion in spending from cities, states, and private investors for a total of $1.5 trillion, which is still massively insufficient relative to the needs outlined in the latest ASCE report card (which currently grades U.S. infrastructure at D+).
So why bother to offer a mere $200 billion figleaf? The paucity of direct federal government funding tells you that this is certainly not going to be a New Deal 2.0. In theory, the involvement of the private sector allows the public sector to transfer the risk associated with delivery, obtain ‘value for money,’ and allows an increased quality of public infrastructure compared to traditional ‘inefficient’ public sector provision, where under-investment is the norm. The PPP literature maintains that access to services and utilities remains equitable and that positive benefits associated with the asset continue to flow onto society. In practice, however, the experience with these types of joint ventures is very different: There are major deficiencies in accountability as public goods are converted into private rents, the transition to which substantially increases personal costs and undermines economic efficiency. Value is extracted from the underlying asset in the form of big salaries to CEOs and board directors, dividend payments to private shareholders, while the promised investment is seldom delivered in full. No private market discipline is enforced on management because in most cases they are given control of what was once a public monopoly, which is simply converted into a private one. It’s rentier capitalism, plain and simple.
Back to first principles: Public infrastructure has long been the backbone of the private economy, as any developer knows. Michael Hudson, distinguished professor of economics at the University of Missouri, Kansas City, notes:
“But it’s not like labor, land, and capital, because the role of public infrastructure is not to make a profit. Its role is to provide public services that are basic for the economy’s living standards and capacity to produce, and to provide these at a subsidized rate. That’s how America got rich and came to dominate the world industrial economy: by publicly subsidizing its basic costs: Low-cost roads, and low-cost other infrastructure.”
A good infrastructure enables the economy to maximize productivity (just think of how much is lost today via endless subway delays or traffic jams on the way to work, as a small example). Historically, Hudson continues, “the government… [has borne] these costs so that public infrastructure would subsidize the economy to lower the cost of doing business,” thereby increasing overall prosperity for society as a whole, rather than using the infrastructure to guarantee a profit stream to a limited number of private entrepreneurs or bankers.
Consistent with this goal, government-funded public works projects have long had broad bipartisan respectability from the days of Alexander Hamilton and Abraham Lincoln to those of Franklin D. Roosevelt and John F. Kennedy. If Democrats can brag about the proud heritage of the Works Progress Administration and the Public Works Administration from the era of the Great Depression (under which 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and 1,000 airfields were constructed), there are still a few Republicans who remember the Golden Age of interstate highway construction that commenced in the 1950s with President Dwight D. Eisenhower. The resultant quantum rise in living standards and economic well-being puts paid to the idea that these were wasteful government boondoggles.
In comparison, Trump’s promise “to spur the biggest and boldest infrastructure investment in American history” is modest in terms of funding provision and financially problematic in terms of funding structures. Very much like his own private real estate interests, the president proposes using minimal “equity” (via direct public funding), instead deploying “leverage” to get most of that $1.5 trillion spent (largely by the private sector). That will inevitably drive up the cost as hedge funds, private equity players and bank credit will add interest charges and incur capital gains charges, management fees and other overhead charges (such as exorbitant salaries for CEOs of these ventures). All these costs would be factored into the prices that the new infrastructure would be required to charge its users with a host of tax breaks, all so as to guarantee a fixed equity return that is pledged to induce the private sector to invest. You can see where this is going: Higher costs are ultimately borne by the public, for whose benefits the infrastructure/services were provided in the first place. In many instances, public entities are outright sold to private groups (or the asset is leased for a long period of time, thereby in theory reducing the cost of funding, but in practice enabling the private groups to backload it, while extracting as much value from the quasi-monopoly in the interim).
Surprisingly, for a country that likes to think of itself as a bastion of free-market capitalism, the U.S. has been (thankfully) slow to embrace PPPs, relative to countries such the United Kingdom. So it’s worthwhile considering the experience of the UK to get a sense of what’s in store should Trump’s plan be implemented as he has outlined. Research by the British group Corporate Watch published in 2014 concluded that:
- Households across the UK would have saved £250 each on their electricity, gas and water bills and train fares had the services remained publicly owned and financed.
- Private electricity, gas, water and rail companies were paying out £12bn a year to investors and shareholders in interest and dividends.
- Had these operations remained totally in the public sector, cheaper government borrowing rates would have saved the UK public £6.5bn: £4.2bn on energy, £2bn on water and £352m on rail.
Corporate Watch also noted that on all metrics—reliability, punctuality, attention to complaints, etc.—services deteriorated across the PPPs, even as costs continued to escalate:
“To satisfy investor expectations, the bills and fares charged by the privatized companies continually outstrip inflation. Between 2007 and 2013, household gas and electricity bills rose in real terms by 41% and 20% respectively. In real terms, water bills have increased by 50% since privatisation, while rail fares are 23% higher than they were in 1995.”
All the while, the promises held out by the proponents of private sector participation in these ventures, in the form of better services, more public patronage, higher efficiency and revenue, and lower public outlays, failed to materialize. Thanks to the government’s promise to maintain ongoing public subsidies, the funding structures allowed private investors to lay off risk to the public sector, while maximizing value extraction from the assets themselves. Governments, meanwhile, effectively assumed the operating risk, covering operating deficits and supplying investment funds, all the while maintaining guaranteed profit margins for the private firms that assumed operation of these services.
There are the other problems that are particularly germane to the U.S.: First, the communities with the greatest needs (e.g., Flint, Michigan, and its lead water crisis) are largely those that are poor and minority-dense. And they will likely get nothing because the profits to help these communities is likely to be inadequate to attract sufficient private sector participation. Second, in more affluent communities, local and state governments are often controlled by developers, and the manner in which these PPPs are adjudicated and allocated is rife with cronyism, as the experience of Indiana’s toll road under then-Governor Mike Pence illustrated. In fact, the vice president is leading the charge on Trump’s infrastructure proposals, even as the much-vaunted privatized toll road that he aggressively promoted as governor subsequently filed for a ‘pre-packaged’ Chapter 11 bankruptcy.
We should also recall, as further warnings of what likely lies in store, the experience of recently deregulated electric utilities (recall Enron, which deliberately aggravated California’s crippling 2001 blackouts with the aim of raising prices), as well as the prospects of more pay-through-the-nose broadband charges (the elimination of net neutrality is almost certainly likely to exacerbate this problem, as variable charges are affixed to slow and faster broadband ‘lanes’). Ultimately, the combination of private funding costs, and ever-rising bills used to sustain the PPPs profits, will have the effect of destroying America’s competitiveness instead of contributing to it. The global experience shows that public-private partnerships vastly raise the day-to-day cost of living as public goods morph to private economic ‘rents’—returns in excess of what investments would yield in a competitive economy, where fat margins are quickly whittled away by competition.
Of course, this does not extend to the private firms involved directly. They do very well—enjoying the best of both worlds—a captive monopoly infrastructure, which enables them to gouge consumers via excessive fees, charges, or fares, with no real need to keep the quality of service up to acceptable standards, amid sustained public subsidies and tax breaks. And if that is insufficient, and the operating firms go bust, the government is usually left to pick up the tab and clean up the resultant mess.
In essence, these public-private partnerships are one of the sick jokes that the neoliberal era visited on all of us in the name of economic efficiency and responsible government—a ‘joke’ because the beneficiaries of all this public largesse have been laughing all the way to the bank as stupid public officials continue to fall prey to their lobbying as they joyfully hand over the keys to the public purse. Trump is simply perpetuating the trend of allowing governments to continue to abrogate their true responsibilities to pursue and safeguard public purpose. Governments should never have become agents of private profit. But under PPPs of the sort proposed in Trump’s infrastructure deal, public purpose disappears and governments simply become underwriters of private profit, while assuming any contingent losses. Society gets more expensive toll roads, toll bridges, more sprawl, more cars, more rake-offs and in the end, more financial trouble and more bail-outs. The fact that governments have become active facilitators of this process gives another reason why our huge global economic and social crisis shows no end of respite.