I've been getting calls from reporters in search of the requisite "Cautionary Academic Observation" to round out coverage of these deals. But I've had trouble working up the kind of worry that the press expects. The risk for the public seems limited. It's investors who may be in for nasty surprises by and by.
Not that it's hard to imagine stupid policy choices. Corrupt or clueless governments might settle for prices that short-change taxpayers. Subtler, and thus more likely, than bad bargaining is the fiscal faux pas of selling long-lived capital assets to fund short-term spending. There are plenty of painful precedents.
Recent governmental sellers seem to be avoiding such traps, though. The Daniels deal in Indiana, for example, is a model of prudence. A Spanish-Australian consortium is paying $3.5 billion and committing to major upgrades for a 75-year lease on around 150 miles of pavement. The proceeds are devoted to long-term transportation projects elsewhere in the state, not tax cuts or payroll. Perhaps future rounds will revert to rookie errors, but most leaders eyeing major asset sales, such as New Jersey's Jon Corzine, are nobody's fiscal fool.
Even if privatizing toll roads or parking lots or state lotteries is good for governments, can't it still be bad news for citizens? Won't the new owners -- prodded by shareholders to maximize returns, unconstrained by electoral accountability -- raise rates without mercy? Road and bridge tolls will skyrocket. Parking fees will become exorbitant. Lotteries will grow more ubiquitous, more shamelessly promoted, and even better geared to skin the innumerate than they are under state ownership.
None of this can be ruled out, to be sure. The rationale for privatizing many revenue-producing assets is less that private owners will operate more efficiently -- privatization might revolutionize operations at a state-owned steel mill, but a road is a road is a road -- than that they can set prices more realistically. New buyers are clearly counting on big revenue increases to justify the heady prices they paid.
But my guess is that disappointed investors, not fleeced citizens, will be the emblems of this wave of asset sales. First, governments aren't simply transferring assets and letting the new owners play monopoly at citizens' expense. Intricate contracts, the products of painstaking analysis and protracted negotiations, specify the formulas that determine rates. These contracts are meant to assure fairness to both buyers and sellers -- rates that yield a fair return, but no more, under a wide range of imaginable circumstances, far into the future. Clever as the architects of these arrangements often are, this is a tall order.
Second, while the terms of most transactions circumscribe private infrastructure owners' market power, they do little to shore up owners' all-but-inevitable deficit in political power. Fare-payers are many, vocal and local. Owners are few and in many cases foreign -- no small detail. Over the long term, an immobile asset is an exquisitely vulnerable thing. You can't pack up a toll road and cart it away if a once-sweet deal goes sour. So if contracts are altered, years or decades down the road -- or not altered, when circumstances shift and fairness calls for change -- investors are more likely than citizens to get the short end of the stick.
We've seen this scenario before. A century or so ago, urban railway companies were the era's hot stocks. Ridership and revenues soared for companies like New York's Interborough Rapid Transit and its counterparts in other booming cities. But as Wharton Professor Thomas Conway put it in a long-ago scholarly essay,"There is no industry in which the public exhibits a livelier interest." 2 Citizens fed the farebox every work day, and voted most Novembers. Elected officials faced the constant temptation to tilt fare regulations to favor voters and short-change investors. New York Mayor John Hylan governed as a champion of cheap subway fares and was re-elected by a landslide in 1921.
Companies sought to parry such efforts by pointing to duly signed contracts assuring them a fair return. Their lawyers attacked politicians' gambits as unfair, illegal and even unconstitutional. Transit companies won battles, lots of them, but eventually lost the war. When a company got a board or a court to grant a fare increase, for example, governments countered by mandating free transfers which, again in Conway's words,"had a most demoralizing effect upon the earnings" of the transit companies. It took a few decades, but New York's private subways were regulated into bankruptcy before World War II. The same story played out, with regional variations of detail and timing, in Buffalo, New Orleans, Denver, Saint Louis, Pittsburgh and other cities.
Will it all be different this time around? Investors are more sophisticated, contracts are fancier, and economic demagoguery has fallen out of fashion. The first news feature about a deadly wreck on some secondary road clogged by toll-dodgers will have little effect. Nor will the fifth story about a life laid waste by lottery addiction, or maybe even the tenth on some commuter spending half her pay on tolls and parking. Perhaps political pressures will never breach the legal levees protecting private asset owners.
Suppose, though, that in any single year there's just one chance in 100 that politicians will be able and willing to rework a deal in ways that favor citizens while stiffing investors. Over the course of a 75-year lease, that works out to less than an even bet that investors escape unscathed. A 2 percent annual risk, which may be more realistic, boosts the 75-year probability of expropriation through regulation to more than three in four. Like those odds? I've got a bridge to show you.
1. "Daley's Art of the Lease," The Washington Post, February 8.
2. "The Decreasing Financial Returns Upon Urban Street Railway Companies," Annals of the American Academy of Political and Social Science, Vol. 37 No. 1, 1911.
