Public Infrastructure as Stealth Privatization

AP Photo/Seth Perlman, File

Road construction crews work to build a four-lane highway on Route 29 in Edinburg, Illinois. 

Donald Trump hasn’t released an infrastructure plan but has given a good sense of the direction his administration will take.  His proposal will likely use giant tax breaks to spur a massive increase in private control of public infrastructure in what David Dayen called a “privatization fire sale.” Trump will be able to say the plan will both mean no new taxes and guaranteed profits for investors for decades.  It’s too good to be true.

There’s no doubt America needs a massive infrastructure upgrade. The American Society of Civil Engineers estimates nearly $4 trillion in needs including decades of deferred maintenance of our drinking and waste water systems, our roads and bridges and more, as well as new infrastructure such as light rail and broadband communications needed respond to 21st century challenges and opportunities.

The battle in D.C. will be over four things: Whether and how much we decide to invest in public infrastructure at all, how we pay for it, where investments are focused, and who controls it—private investors or public interests.  

It’s a debate with enormous consequences for the country’s future and the looming challenges of economic inequality and climate change. It’s also about much more than physical assets and the economics of infrastructure. At its core, it’s a battle over the fundamental role of government and control of basic public goods, how we grow as a nation, how the responsibilities are shared, and how the benefits are distributed.    

It’s also a debate about our fundamental relationship to government—as that of consumers who get only what they can afford or citizens who rely on each other for the basics that we all need and that benefit us all—whether we use that particular road or bridge or not. The need is great, the benefits are clear—getting goods to market, people to work, clean water to drink, access to information, our planet saved.

As the battle heats up in Washington, it’s worth understanding a few of the basics of getting infrastructure built in the U.S.—how it’s financed, who pays, who builds, and how it’s operated and maintained over its lifetime. It’s both complex and simple at the same time.  

Traditionally, infrastructure projects are built with public debt raised through tax-exempt bonds sold to institutional investors like pension funds, mutual funds and individual investors. The debt is paid back from only one source in two ways. The one source is us—individuals and businesses. The two ways/streams are taxes and fares or tolls. Engineers and architects design it (some public and some private), construction companies (always private) build it, public agencies run it and maintain it and public finance offices manage the money by paying off the debt and balancing the budget over the life of the asset. Pretty simple.

In fact, despite the outcome of the national election that appears to represent a rejection of government involvement in our lives, hundreds of local and state bond measures passed on the same November ballot. These measures increased different types of taxes to pay for vital public schools, transit and water systems. Many of those measures will fund traditionally financed and operated projects. But the need for investment far outstrips the funds generated by those measures so state and local governments are still on the hunt for funds to meet their needs.

The first stop is the federal government whose primary role is to add funds to the mix for projects in cities and states across the country. There are different funding mechanisms the feds can use but the role is limited to being a source of funds since virtually all infrastructure is built by state and local governments. They can use tax breaks, loans and loan guarantees, interest rate subsidies and cash grants but in the end they are just a bank.

That leaves three critical questions for the Trump plan: How much money will Trump be able to convince Congress to grant? What form will it take (i.e. tax credit, subsidized interest rates or cash)? What requirements, prohibitions, and preemptions will be attached to the funds and what will they mean for cities and state who want to build infrastructure that creates good jobs, addresses climate change, and addresses the needs of communities that desperately need investment.

Public opposition to taxes has opened the door to private investors, construction giants, global water companies, and others who see enormous potential for market share and stable returns. There’s a lot of money to be made and a guaranteed revenue stream for decades in long contracts. Desperate mayors and governors who want to build a bridge, widen a roadway, expand a light-rail line, build a new school, or upgrade their drinking water system are ripe targets for the infrastructure industry. They can solve a real problem without the inconvenient need to ask voters to fund a bond. They can promise no new taxes and great new stuff for their cities and states.

Enter public-private partnerships (P3s). It’s a simple idea with complex and potentially troubling implications—substitute public debt with private capital looking for stable investments and add the better, cheaper, faster promises of privatizing goods and services.

Note the language shift. P3s are not privatization but a benign partnership, buffed with the sheen of “business friendly” and the allure of “partnerships” to solve our collective problems.

The term public-private partnership has become an imprecise catch-all that can capture the traditional procurement described above (public money, private builders, public operation) but is now typically used to describe a project that privatizes the entire process—from design and financing to operation and upkeep—to private contractors, investors and contractors.    

The need for capital is real and in some cases urgent. It is possible that private capital could meet the need although at lower than their usual rates of return and without shifting operational control for multiple decades. We call this option “P3 without privatization” since the public maintains full control (not just ownership) of the asset.

Unfortunately, investors and infrastructure companies are pushing for the full privatization that relies on private finance, operations, and maintenance to be able to capture decades of stable revenues that come with long-term operation and maintenance of the asset. The promise they offer to policymakers is alluring, at worst false and at best not entirely true—lower costs, faster construction, and new ideas and innovations.

They claim that the significantly higher cost of private debt (typically 8 percent to 14 percent) is offset by other benefits over the life of the asset including lower cost, shifted risk of increased project expenses to the private partner, and innovative efficiencies. And relying on private capital is off the public balance sheet—no new debt, no new taxes. They use an analytical tool called a Value for Money (VFM) analysis that monetizes those benefits before comparing traditional public procurement with a privatization approach. The VFM is often the key “proof” used by decision makers to show the superiority of privatized infrastructure over public infrastructure.

But there are several fundamental issues with VFMs that must be considered. Multi-decade forecasts always involve assumptions that would take decades to assess. And it’s impossible to compare the difference in costs with a scenario that never happened. While in concept, it’s useful to identify things we value that could be worth paying more for private capital, it’s equally important to start with a clear idea of what we all value beyond cost. That could include creation of good jobs with opportunities for local residents, sustainability features and other important community and economic benefits.

Unfortunately, many VFM’s seem to have their finger on the scale and fail to include a broader view of potential benefits. In one of the most comprehensive assessments anywhere to date, the Auditor General of Ontario, Canada, conducted a thorough review and audit of 75 Ontario infrastructure projects just last year. Ontario is the highest user of public-private partnership procurement among Canadian provinces. A review of their findings uncovered common issues with VFMs. There was no empirical data supporting the key assumptions used to assign costs to specific risks. Some risks included in the analyses were inappropriate—such as an increased cost for public procurement—because they assumed publicly managed assets wouldn’t be maintained to the same standard as those procured through the P3 method (source).

The critical factor in determining the benefits or problems of a P3 project is the capability, clarity and willingness to use leverage of the government agencies that plan and negotiate the deals. They can run a rigorous process with clear terms and standards in the private proposals and deep public participation, or they can fail to neither articulate detailed public requirements nor anticipate future issues. Government negotiators are often outgunned at the negotiating table by businesses and financiers with far greater expertise and skill.

The easiest way to evaluate whether a public-private partnership protects and advances the public interest is to look at what can go, and has gone, wrong. Below are the main areas to pay careful attention to.

I.               Loss of democratic control over public policy and decisions

Many P3s include so-called “non-compete” clauses and “compensation clauses,” frequently buried deep in the contracts and long-term leases, that limit or eliminate the public's ability—for decades—to make critical decisions necessary to improve our cities, our transportation systems and address climate change. In 2008, the city of Chicago signed a 75-year contract with a global consortium led by Morgan Stanley to run the city’s 36,000 parking meters. Mayor Richard M. Daley proposed the plan and rushed city council approval four days later with no opportunity to dig into the fine print or solicit public input. The council vote was reduced, in the depth of the Great Recession, to a choice between massive layoffs or an immediate $1.1 billion infusion of cash. The contract includes “make whole” (my term) clauses that require the city to pay the consortium for lost revenue from policy changes such as new bike lanes or bus rapid transit lanes to address climate change or temporary uses such as street fairs—for 75 years. 

II.             Profitability driving public decisions about what gets built

Private investors naturally demand rates of returns that need a profitable revenue stream—projects that generate high tolls, water rates, or transit fares.   Today, many financing schemes also include guaranteed annual payments (called “availability payments”) from general taxes. But the private sector cannot be relied upon to provide investment for the many critical infrastructure needs that are not profitable. For example, aging lead pipes in need of replacement are much more common in the lowest-income cities (source). Replacement and repair projects, which comprise the vast majority of the country’s critical infrastructure projects (source), won’t attract private investors. But neglect of these projects can have profound negative consequences, as evidenced in Flint, Michigan. Moreover, P3s can lock public funds into profitable projects, rather than needed projects, so a shift towards P3’s in Michigan could reduce the availability of public funds that could be used for Flint.

III.           Reduced labor standards

Promised cost savings always come in part from reduced wages and benefits for construction workers who build infrastructure projects and the workers who operate and maintain the asset. Federal funds in a project will include Davis-Bacon or prevailing wage requirements—unless the Trump-Ryan-McConnell legislative package includes a repeal of that 1931 law. The permanent workers become private-sector workers (some direct company employees and other subcontracted) with lower wages and reduced health and pension benefits.

IV.           Limited access and affordability from increased shift to fee-based infrastructure

Private investment always brings a heavier reliance on tolls and user fees to pay debt service and ongoing operations and maintenance of roads, transit, and water systems. Infrastructure isn’t free and the current deficit is a result of lack of investment and spending. But private investment makes progressive affordability schemes more difficult to create. In practice privatized projects have resulted in much higher costs for residents, becoming increasingly unaffordable for lower income people.

V.             Public information becomes confidential and proprietary

Publicly financed and operated infrastructure projects are fully transparent.  Financial documents, planning documents, usage projections, wages, construction contracts, and performance reports are public documents for anyone to see. The rules are different for privatized projects where much of this information is deemed private outside of public reach. A Texas P3, State Highway 130, a San Antonio-Austin highway P3 deal with a Spanish infrastructure developer, Cintra, that promised no upfront cost to taxpayers filed for bankruptcy when revenue projections failed to materialize. The real problem was that the road consortium refused to release the traffic projections that the project was based on claiming they are proprietary information that, if public, could help their competitors. The Texas attorney general and the federal Department of Transportation agreed.

Each of these issues (and more) need to be addressed specifically and directly at every stage of the decision making process to maintain maximum public control over our basic public infrastructure. We don’t yet know what will be included in a Trump infrastructure package, nor if he will be able to get anything at all through Congress. But we do know that the country needs a Marshall Plan level of investment if we are to retain global competitiveness, attack economic inequality and climate change, and create livable communities. It’s only a question of how. 

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