Privatizing Monopolizable Infrastructure


Business Week writes about how private companies such as Goldman Sachs, Morgan Stanley and Carlysle Groupo are buying up private infrastructure such as key roads, airports and bridges (Golden Gate for $3.4 billion and Brooklyn Bridge for $3.5 billion, for example. Cities supposedly think this is a great idea because they get money they can spend on other things.

I don't understand why this is even considered. You don't put basic infrastructure like this in private hands, because it allows monopoly pricing. They will squeeze the most money out of it they can, and that will be the majority of the surplus value produced by the roads. Since they will set the cost to maximize profits, it will be above what a proportion of the population and a proportion of businesses can afford (check a supply/demand curve to see what I mean - you get a lot more use at price = 0, and you get a lot more money if you price a lot of people out of the market). What this will mean is that a lot of businesses will go under (or never be created), a lot of people won't travel even short distances (which will strangle businesses that need those travellers, price certain people out of certain jobs) and will in general reduce economic activity. However much money any government gets in the short term, it will lose more from reduced taxes due to reduced economic activity and reduced economic growth in the long term. (ie. it isn't just people who use the roads/airports/bridges who lose)

And odds are, you'll eventually have to either regulate these things to keep prices reasonable (at which point the companies will start shorting on maintainance) or you'll have to buy them back at a huge markup.

Infrastructure is one of the two very basic jobs of government, and any government that is getting out of it is refusing to do its job.

Finally, I'll add that these deals often smack, to me, of inside dealing - of selling patrimony for cents on the dollar. Privatizing almost never works out as worth it in the long run for governments, because the short term money they get for it is gone almost immediately (a few billion isn't that much these days) while the costs are around forever. Private enterprise doesn't run monopolies cheaper than public enterprise, because it requires profit it runs them more expensively. Privatizing works when it introduces competititon to a market - real competition with multiple possibilities. If you need to cross a bridge, you need to cross a bridge - you can't swim. The prime rule of privatizing is that you never, ever, give away a monopoly.

These deals are all bad deals for the public and for governemnt, though they may be good deals for those buying the infrastructure in question, or for the politicians who will find some nice donations in their accounts; and good jobs when they decide to cash in and leave public service.


Ian Welsh April 27, 2007 - 3:05pm
( categories: Miscellany | Analysis )

Does that not explain the current move to take guns out of the hands of private "citizens"? Past time for the second Revolution.

Lasthorseman April 27, 2007 - 3:44pm

It's not that the current owners, if they play their cards right, won't get enough for their toll roads. The real risk is that the new operators will pay too much.

Those filthy peasants should just give us the commons.

Watch: when this heats up, they'll say they'll repeal the gas taxes that currently pay for interstates. hahahahahahahaha

Gordon April 27, 2007 - 4:31pm

Wait, wait wait - somebody actually sold somebody else the Brooklyn Bridge?

Oh, leased. Well, that's okay then.

JoeNotCharles April 27, 2007 - 5:39pm

because it's not a toll bridge. But if you want buy it....


“I despise idealogues masquerading as objective journalists.” - Bill O'Reilly, March 30, 2007

Mark April 27, 2007 - 7:36pm

It's not a toll bridge NOW. ;p

Ian Welsh April 27, 2007 - 8:06pm

What the heck. Why fool around they could just sell off something like ... like Texas. Think of that! We could have a big party with that much cash. Oh yeah but Texas is like got private property owned by individuals but wait a minute a public bridge is owned by the public; how can it be sold? So it must be alright to sell Texas.

We could make a catalog. Need a kingly gift? Houston. Need a stocking stuffer? The Washington Monument.

Joaquin April 27, 2007 - 6:29pm

with Omni-Consumer Products trying to buy the city of Detroit in the future.

And JoeNotCharles: I was thinking the exact same thing... Somebody finally fell for it! Except it was a giant corporation, and they actually are buying (leasing?) the bridge and will probably make a huge profit if they can get away with it.

Bolo April 27, 2007 - 6:42pm

Yes, indeed, infrastructure should be the province of the Governement. And that includes taxation, communication, transportation, power and health care.

That's my inner Norwegian talking...

Petronius April 28, 2007 - 12:57am

Australia has invested hugely in building ring roads and tunnels to divert traffic away from congested areas mostly through private enterprise with high road tolls. The net result? - everybody avoids them, including trucking operators interested in keeping their operating costs low unless they are prevented from using old alternative routes because of municipal weight restrictions. Congestion in urban residential areas remains as high as it always was.

Roads/bridges are essential infrastructure in big countries- to limit access is so unhelpful to small businesses which are the main drivers of local/regional economies.

Then again, nothing surprises me anymore. Ian, you are talking like a Canadian - I mean that in the nicest possible way, I am married to one. There is a different socio/political/economic ethos in countries that do not think health care is about ability to afford it - rather a a primary governmental resposibility.

You see, I can get health care free as I need it in Australia, New Zealand and across the 25 EU countries (through my British citizenship which I have kept active) and so can my children who were both born in Australia - Americans are so surprised that they can access it for no cost on the strength of being a human being across the EU. Now thats a different zeitgeist altogether.

I digressed into health care from roads and bridges - but they amount to the same topicial umbrella about a government's role.

Many Americans I have met seem to think it can't be done but when some experience ill health abroad, they are treated FIRST, and its a revelation to them. Most of these other countries spend a lot less on health care, including pharmaceuticals, than the US.

It is not just war profiteers but profiteers across the board that the US needs to question.

sona April 28, 2007 - 1:10am

PS I digressed into health care from roads and bridges - but they amount to the same topicial umbrella about a government's role.

sona April 28, 2007 - 1:12am

There was an interesting article in Governing magazine, i think in January, advising state leaders not to make 99-year leases of tollways (like Indiana i think) because its impossible to project the "value" of the road that far into the future. What, in dollars, is a tollway worth in 2045? who the fuck knows? the bankers renting it?? hah!

besides that they are going to quit filling the potholes and scoop out the money. same as Bechtel water operations in south america, which may have been the straw that broke the camels back after the locals in cochabamba (sp?) rebelled, fought and regained their water, catching the notice of the rest of South/Central America.

also i've heard mysterious tales about that NAFTA superhighway thing which apparently will trace I-35 from Texas to Duluth. But it's also being financed by European banks.

i think the only economically legitimate way to finance these things is a huge tennessee valley Authority-like instrument that recirculates the benefits directly to the local area. Anything going to foreign loans... is that exploitative debt loop we've heard about (not thru the media tho) ...
--
Hongpong.com

HongPong April 28, 2007 - 10:22pm

There is precedent for this.

It isn't fresh in my mind, so all the i's may not be dotted, but what I remember is.....

Many years ago LA had a streetcar system. Right-of-way was purchased by (I think it was) Standard Oil. They were able to block use of 'key' segments by public transportation. People stopped using the streetcars because they could only go so far before having to get out and walk a block or two to pick up another streetcar.

During this period a subway system for the LA area was in the works. Subway development would have been a lot easier then than it is now. There is a tunnel in downtown LA that was built as the first part of this network. As I recall, it is just southwest of China Town.

Standard Oil used right-of-way control to stop development of the LA subway system. The LA plan was later implemented in Toronto.

Car (i.e. gas) dependency in Los Angeles isn't an accident.

laurilink April 29, 2007 - 2:02pm

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