Privatization Is Changing America's Relationship With Its Physical Stuff

Last month, paddlers in New York state floated their kayaks and canoes in the Erie Canal to celebrate the waterway’s 200th birthday. Workers first dug their shovels into the ground to start the construction of the ditch in 1817. Eight years later, over 300 miles opened for business, making it one of America’s first big gifts to itself.

There was no apparent connection between the anniversary and the promotion, days earlier, by the White House of “Infrastructure Week,” but the timing does invite some meditation. The spotlight event of the weeklong initiative took place on the banks of the Ohio River in Cincinnati, where President Trump gave a speech that left locals underwhelmed and infrastructure experts wondering if there really was a plan to rejuvenate America’s sorely lagging works.

As vague as Trump’s pronouncements have been on the matter, it is clear that the general thrust behind the promised building-and-repair push involves using federal dollars as up-front investment to entice private enterprises to provide most of the financing. While Democrats announced their opposition, the general idea of increased privatization of infrastructure has had a bipartisan cast. President Obama supported a plan to create an “infrastructure bank” that would help finance so-called public-private partnerships (known, for their alliteration, as P3s), but that idea fizzled under the glare of Republican opposition. He also floated the idea of selling off the Tennessee Valley Authority.

Trump’s rhetoric may also lead nowhere. But the focus on the immediate political question of whether it does or doesn’t masks how profoundly the philosophy about how to build and maintain America’s stuff has shifted. The amount of money private equity and other finance outfits have amassed in preparation for an anticipated infrastructure boom testifies to it. Preqin, which collects data on the industry, now counts 84 infrastructure-oriented funds around the world that have each raised at least $1 billion in capital. Not all of this dry powder is designated for use in the U.S., of course, but the most highly publicized recent fund announcement, a deal between Blackstone and the government of Saudi Arabia, shows the hoped-for scale. The Saudis agreed to invest a reported $20 billion into a $40-billion Blackstone U.S. infrastructure fund. In all, Blackstone has plans to invest a total of $100 billion into U.S. works.

Even armed with such a cash payload, private-equity financiers, just as they do when they buy a company, do not typically buy a bridge, or road, or waterworks outright. They often create a separate entity for each project. Then they take a small amount out of their pool of cash, and have the project-specific entity borrow the rest from banks, or they sell bonds that will pay interest to investors in return for using their money. Money to pay those investors, so goes the idea, comes from revenue generated later on by the project.

For example, Spain’s Grupo Isolux Corsán Finance created Isolux Infrastructure Netherlands B.V., which in turn formed I-69 Development Partners to build a part of Interstate 69 in Indiana during the administration of then-Governor Mike Pence. Isolux put down $40.5 million of its own investors’ money and sold $252 million in bonds. That $252 million in debt has proven to be too much. The project was running out of money, subcontractors were going unpaid, and default seemed imminent, so the state of Indiana was forced to take over the project and issue its own bonds.

Something similar happened in San Diego County, and to a road in Texas. Approved in 2006, the Texas 130 toll road was supposed to be completed by Cintra, another Spanish infrastructure builder, through an entity it created called SH 130 Concession Company. In March of last year, SH 130 filed for Chapter 11 bankruptcy. According to a story in the San Antonio Express-News, “the road already is showing signs of persistent pavement problems. And a residential part of Lockhart, the small town on the route known for barbecue, has experienced more severe floods since it opened.”

Whether it’s P3s, or the outright privatization of public assets, as Trump suggests doing with the air-traffic control system, cautionary tales abound. Many experts cite the case of Chicago, which sold off its parking meters to a consortium headed by Morgan Stanley and including the government of Dubai. The consortium paid the city $1.1 billion. The Chicago Sun-Times estimated that the consortium will earn back its investment from meter revenue three years from now, but the deal runs for another 60 years. So Morgan Stanley, Dubai, and the other partners will pocket millions every year ($156 million in 2015) from Chicago parkers. Meanwhile, the city has to pay the consortium every time it takes a meter out of service—during a street fair, for example. As The New York Times explored last December, cities can be blindsided by such deals, especially if a private owner raises the price, for example, of using its water system in order to provide a profit to investors.

“In general,” Tracy Gordon, a senior fellow at the Urban-Brookings Tax Policy Center, explains, “with these [deals] the concern is that it’s difficult to think of costs and benefits, including operations and maintenance, over the life cycle” of the project. California found that out when it wanted to add lanes to State Route 91 in Orange County to ameliorate traffic congestion. The state’s transportation agency, Caltrans, couldn’t add the lanes because it had given a concession to a private company to operate a nearby toll road, and the contract included a noncompete clause.

Advocates of P3s and privatization argue that private enterprise can build and maintain infrastructure faster, more efficiently, and at least roughly on par with the cost of traditional government contracting. Pennsylvania’s Rapid Bridge Replacement Project appears so far to be living up to that advertising. Construction began in mid-2017, and, according to a project newsletter, 180 bridges (of 558 slated for rebuilding) had been replaced by spring of this year.

Cities and states insist that there’s no money to pay for projects. The billions being lined up by investors says otherwise.

But though Gordon said that P3s can, and sometimes do, work, she pointed out that the American people, acting through their government, have goals that are different from business. “Government is in the business of providing,” she says. “Business does not want to provide.” Like any business, private equity wants to make a profit; the industry attracts investors by touting its ability to beat the stock market and maximize returns. It can do that by keeping costs as low as possible. So it has an incentive to suppress the costs of labor and materials, and to maximize tolls, rates, and fees.

Government, freed of the profit mandate, is optimizing for social good. It can also borrow money more cheaply. As of this writing, the current average yield on municipal bonds, which is what cities use to build and maintain things like schools, roads, and fire stations, is about 3 percent. The bonds or other debt issued by private-equity-backed enterprises, however, often pay much higher interest rates because they are considered riskier investments. So, the cost of gathering funds is often higher for a private outfit than for a local government, which means that a private owner is more likely down the line to have to, for example, keep the rates high on a toll road.

But the economics aren’t the only issue. P3s and privatization turn citizens into customers, removing them from their role in, and responsibility for, building the nation. They pay their water bills and their bridge tolls to a private company. They do not elect the operators of local facilities. The University of New Mexico historian Jason Scott Smith, the author of Building New Deal Liberalism: The Political Economy of Public Works, 1933-1956, acknowledged in an email that Americans’ relationship to their stuff is “complicated,” citing the railroads as examples of private businesses that forged an important part of the American infrastructure. But, he continued, there has been a profound “public/private, liberal/neoliberal shift that has been important since (approximately) 1980 [and] Reagan.” Trump’s plan, he argued, “seems a culmination of this sort of market fundamentalism.”

Referring to this “myth of the market economy,” William Lazonick, an economist now at the University of Massachusetts Lowell, told me that most Americans, including many economists and politicians, misunderstand or neglect the true history of how the United States built its economy. The lone, visionary entrepreneur and the audacious industrialist are not the originators of the economic system, but rather the products of a system fostered by the collective efforts of the people through their government.

The railroads may have been the product of private enterprise, he pointed out, but they relied on government land grants to help finance construction. And the government gave states federal land to sell so that they could finance the creation of top-flight universities, such as Ohio State, Wisconsin, and Purdue, that promoted innovation and business across the interior of the country. “Aviation doesn’t happen without the government being involved,” via air-mail subsidies and airplane-design subsidies, Lazonick notes. Hoover Dam, the TVA, the California and Colorado River Aqueducts, the internet—the list of infrastructure projects that grew the economy and nurtured individual business success is very long. “So the government is everywhere, but the ideology is that government is not there,” he says.

The Erie Canal established the template, explained Jack Kelly, author of Heaven’s Ditch: God, Gold and Murder on the Erie Canal. When James Madison vetoed the bill Congress passed to pay for the Erie Canal, some promoters urged the canal’s most vocal proponent, DeWitt Clinton, a former mayor of New York City and then a U.S. Senator, to finance it privately. But the canal’s supporters “did not feel it should be private for two reasons,” Kelly says. “First, it would be enormous in terms of capital and no company could come up with it. Second, if a private company went in and tried to make a profit, it might dampen the subsidiary effects of expanding trade and development of the interior—creating farms and so on—because tolls would be high. The state could keep tolls low.”

So the state sold bonds. Incurring that debt was a risky move, but the canal proved to be a boon. “By 1833, it was taking in more in tolls than the interest in bonds,” Kelly said. The canal was paid off faster than expected. Trade expanded. The volume of goods passing through the port of New York grew quickly.

Today, cities, states, and some in the federal government insist that there’s no money to pay for projects. The billions being lined up by investors says otherwise. One way or another, Americans will pay, either through taxes and tolls paid to their government, or through tolls, fees and rates paid to equity investors. “There’s no free lunch,” Gordon, of the Tax Policy Center, said. The Great Depression, when money was much scarcer than it is today, was an era of intense infrastructure investment. As Gordon spoke, she happened to be driving over the Golden Gate Bridge. On November 4, 1930, a year into the Depression, voters in Northern California supported the issuance of $35 million in bonds to build it. It still belongs to the public.