Thursday, January 01, 2009

Infrastructure Insanity — Part V

The golden age of infrastructure building and spending took place during mid-1950 through the 1970’s. It was during that period that the Internet Highway System was planned and built. The key difference then and now lies in the word “plan.” As described in a mid-November article in The New York Times, while the level of infrastructure spending (measured as a percentage of gross domestic product) is lower, “…money isn’t the main problem. A lack of adequate financing is part of the problem, without doubt. But the bigger problem has been an utter lack of seriousness in deciding how that money gets spent.” The article continues, “It’s hard to exaggerate how scattershot the current system is. Government agencies usually don’t have to do a rigorous analysis of a project –– how it would affect traffic and the environment relative to its cost, and to the alternatives –– before deciding whether to proceed.” And here is the most telling criticism: “In one recent survey of local officials, almost 80 percent said they had based their decisions largely on politics while fewer than 20 percent cited a project’s potential benefits.” Hello the “bridge to nowhere” and other earmarks like it.

In regard to the amount of money dedicated to infrastructure, we are not talking about small numbers here. Government agencies now spend some $400 billion a year on infrastructure but that is still below current levels in many European countries and considerably less than the $560 billion China has recently announced it will spend. One point of encouragement (as described in last month’s article) is that the new president-elect is an advocate of a separate “infrastructure bank” that will force decisions based on the merits of each project rather than on politics.

PPP’s as a Solution or as Manna for Wall Street?

However, that still leaves the subject of how to provide adequate and available financing in an uncertain time of a global economic crisis. But riding to the rescue (supposedly) are the 3P’s –– Public Private Partnerships. While there are various models of the concept, essentially, a private company or consortium of companies, under contract, agrees to operate an existing publicly owned asset (a road, bridge, tunnel, school, prison, etc.) for a specified term for a specified amount of money. A private company could also receive a franchise to finance, design, build, and operate a new facility. In all cases the private party will charge user fees (tolls for example) to recoup its investment. The advantage to the public entity (state or local government) is that the large sums paid by the private party is collected up front and can be used to pay for maintenance of existing infrastructure or for building additional infrastructure projects.

A 25-Year Old Concept

Margaret Thatcher pioneered the idea in the 1980’s in England with the privatization of Briton’s water system. While not yet quite as popular in the U.S., close to 100 P3 projects are initiated or completed in Briton, and in Europe the volume of P3 deals is doubling, tripling or even quadrupling year-to-year in several countries. As explained above, although the private company buys the rights to the project, it charges the public for its use through tolls or some other form of payment over the life of the contract. The public entity (usually A state or local government) benefits from the purchase price, as would be the case in a pending Florida transaction.

Will Florida Be Next?

In order to gain sorely needed funds, Florida Governor Christ appointed a committee to choose the potential winner of a contract to maintain and operate Alligator Alley, the highway leading from the Miami area to the Ft, Myers/Naples area on the West coast. Six companies, each one including at least one foreign participant are vying for the contract that is estimated to be worth close to two billion dollars. If the deal goes through it is expected that toll rates would immediately increase by 50 percent with additional increases yearly thereafter. There is substantial opposition to the deal since the operation is currently profitable.

Projects of this type, most involving huge sums of money are proliferating throughout the world as well as in the U.S. For example, in 2005 Chicago became the first U.S. municipality to enter into a Public-Private agreement for the operation of the Chicago Skyway. A 99-year lease was exchanged for $1.8 billion from a Spanish/Australian group. The Indiana Toll Road raised $3.7 billion for a 75-year lease with the same group. Pennsylvania is close to a deal for the Pennsylvania Turnpike that could involve as much as $12-18 billion. The governor of New York seems anxious to place the New York Turnpike in play. For a while it looked as if the New Jersey Turnpike would be gobbled up but apparently fierce opposition stopped any deal. Texas and Virginia are viewing huge new road projects backed by PPP’s.

Wall Street Smells Profits

As a result, Wall Street firms and banking giants such as Goldman Sachs, Morgan Stanley, and Citibank are seeking to broker deals with dedicated infrastructure funds as well as well-funded pension funds seeking steady and predictable returns. This has generated criticisms and accusations that the financial industry will once again be making millions of dollars at the public’s expense.

It is no secret that members of the Bush administration have always been strong advocates of privatization typified by the Secretary of Transportation, Mary Peters’ comment, “Unleashing the investment locked in the public sector by partnering with business is the most efficient path to the transportation future this country needs and deserves.” However, even Nancy Pelosi (D-CA) stated approvingly, that, “Private investment is playing an increasingly larger role in public infrastructure. Innovative public-private partnerships are appearing around the country, bringing much needed capital to the table.” At a recent congressional hearing, Senator Chuck Hagel (R-NE) said, “The federal government does not and will not have the resources to meet our future national infrastructure needs.” He is one of the sponsors of the legislation forwarded to establish a National Infrastructure Bank mentioned in last month’s article.

The 800-pound gorilla in the room continues to be the current economic crisis that will place even greater severe restrictions on state and local budgets for infrastructure needs. As a result, despite some of the critics condemnations of the privatization of public assets, it is quite likely that the more traditional methods of funding infrastructure (primarily through the issuance of bonds), be it maintenance and repair, or new projects, will be forced to live side by side with public-private partnerships.


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