Thursday, February 7, 2013

Privatization III

Privatization: Part III

Private roads paved with public gold

In 1995, The California Private Transportation Company (CPTC) was awarded a 35-year concession to construct and operate the first private toll road in the U.S. The company promised less congestion and savings. But the traffic just got worse and state and local officials decided to build more non-toll lanes. CPTC, a private company, filed a lawsuit to block — competition.

Officials had missed a non-compete clause in the contract. In the end, the local transportation authority had to purchase the private toll lanes for $208 million, before they could build the additional lanes needed.

In 2008, Chicago sold its parking meters to a private company for 75 years, taking in a one-time payment of $1.5 billion. In 2011 the company took in more than $80 million, and is seeking another $27 million for free parking for the disabled and other revenue lost during street repairs. For one of the 75 years.

In what a Chicago newspaper described as “an annual ritual that has become as predictable if not as joyous as a New Year’s Eve countdown,” parking rates in Chicago are going up again, to $6.50 per hour in the downtown, the highest in North America.

Deals like these are increasingly common in the United States, sold by the same crowd that the conned cities and school districts coast to coast into disastrous interest rate swaps, rigged the municipal bond market, fixed international interest rates and set up the foreclosure catastrophe.

The main selling points of the “privatizers” are almost always the same: the private sector can do everything better than the public sector, and offers lower municipal operating costs that keep taxes down.

The claims don’t hold up.

Costs may be kept down, but usually by eliminating jobs. It is a patently absurd claim that more unemployment is any city or state’s best interest.

As for lower taxes, what is the difference between the taxes the people to operate meters or collect tolls, and a parking charge of $6.50 an hour? Either way, the people pay.

But privatization is all the rage, foisted on cash strapped municipalities as a solution to declining tax revenues and rising debt service, by investors who “want to help.”

Oh, please.

Privatization is about making money for those with money, at the expense of people who haven’t got any and the public balance sheet.

Writing about infrastructure projects in Dollars & Sense, Darwin Bondgraham explains.

 “It [privatization] is propelled by an infrastructure-industrial complex composed of global construction corporations, investment banks, private-equity firms, and elite law firms organized as vertically integrated consortiums. Allied through their own trade associations, they are actively pressing for new laws to expand the types of public infrastructure from which they can extract profits.”

And the bigger the deal, the bigger the take. Another Wall Street Special. Bondgraham explains.

“The main source of project financing, however, comes from investment banks that lend to the consortium partners. Proponents claim that this private financing source is a solution to the budgetary constraints of governments. But the sources of revenues available to pay for the cost of a project — whether it uses the traditional financing approach or a public-private partnership — are the same: specifically, tolls paid by users or taxes collected.”

In the end, the people pay for the infrastructure their families, communities and economies require. The point of privatization is not to meet public needs, but to divert the potential revenue from the 99 percent to the 1 percent.

As has been well demonstrated, private financing is almost always more expensive than financing projects through a public authority, so the sellers advertise reduced risk to the municipalities. But, what is the actual track record?

In 2010, the private South Bay Expressway in California, owned by an Australian investment bank, went belly-up. A bankruptcy judge forced U.S. taxpayers who had subsidized the project with federal loans to take a 42 percent loss.

The Camino Colombia Toll Road in Texas also went bankrupt, on account of lower-than-expected traffic. Camino Colombia was auctioned off purchased for $12 million by the lead creditor, John Hancock Life Insurance; which promptly resold it to the Texas Department of Transportation for $20 million.

Undaunted, the privatizers are pushing a new scheme. A small army of lobbyists are lobbying state legislatures to re-write state laws, and shift  to what is called an “availability payment” model.

Availability payments are like lease payments. For example, the state pays the private developer of a highway to maintain the road, but instead of the private owner collecting tolls from users, the state pays the private developer directly from the state’s general fund, collected through a gasoline or other tax.

These “availability payments” shield the developers against risk, because their income is not dependent on actual traffic volumes. Their income is guaranteed by the government — the taxpayers.

And of course, there are gimmicks. The privatizing lobby got Congress to exempt from federal taxes the “private activity bonds” (PABs) used to finance these deals. This allows the private borrower to obtain cash at less cost. Another tax cut for the 1 percent.

Out-gunned or just plain gullible public officials must be held accountable to the public interest, and examine the claims of the privatizers against the track record, weigh the long-term costs of unemployment, lost assets and lost revenue and stop paving private streets with the public gold.

Mike Krauss is a former officer of Pennsylvania county and state government and chairman of the Pennsylvania Project. Email:

Editor’s note: Part 3 of four on privatization: Wednesday, Social Security.

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