Selling the bridges

The Minnesota bridge collapse brought dramatically home what anybody who spends a significant amount of time driving already knew – our infrastructure in general, and roads in particular, are in awful shape. The Manhattan Institute's Stephen Malanga has a solution in today's WSJ: privatizing the roads.

Malanga discusses burgeoning privatization projects all over the world, including close to home -- the Indiana Tollroad and Chicago Skyway. Public money to refurbish our roads is drying up and the situation is getting desperate. Malanga notes:

Traffic congestion already costs our economy about $65 billion a year in lost productivity. Research also suggests that every $100 million invested in road maintenance and repair will save about 145 lives over the next decade.

I read another appalling statistic this morning: 13,000 traffic deaths a year attributable to substandard roads.

The big question is whether the private sector will do any better. As I said several months ago about the Illinois plan to sell the state lottery,

The state says private ownership would be more efficient than government ownership. There's something to that. Although state governments can compensate for their lack of expertise by hiring private firms to manage the lotteries, the firm would still lack the incentives provided by a private firm's capital structure. A private firm needs owners, not voters.

I criticized the lottery plan because the state would have to promise to protect the gambling monopoly by maintaining gambling restrictions, whether or not that's in the public interest. For this business as for others competition may be better than a state-protected monopoly. And there's something unseemly about the government's in effect selling its power to permit or regulate an activity. But roads don't really have this problem – they have naturally monopolistic features that don't depend on legislative action.

Once the contractor gets the road, there's a risk it will be as bad a caretaker as the government. Malanga notes the "significant restrictions and operating requirements written into the contracts," like the one for the Indiana tollroad. But how do we know government agents will enforce these provisions? As I said in my earlier post, the contract creates "one big rent-seeker lobbying for more freedom of action in Springfield."

We do have some assurances. First, people tend to notice when roads are bad and blame the politicians. Right now, the politicos can just say we can't afford to fix them. There's less of an out when all they have to do is enforce obligations the state has already paid for.

Second, as Malanga says,

[i]f the roads become too expensive or unpleasant to drive, their owners risk losing business that they are counting on to make their investments successful.If the roads become too expensive or unpleasant to drive, their owners risk losing business that they are counting on to make their investments successful.

The big problem is that, as Malanga says,

Public officials will also have to resist efforts to funnel privatization proceeds to politically popular programs or to short-term budget fixes, instead of using the money to further enhance their transportation infrastructure.

Indeed, I noted re the lottery sale that "Governor Rod Blagojevich gets the cash now and the political credit for spending it on schools, while his successors contend with the consequences." Given these problems, the authorizing legislation needs to specify how the sale proceeds will be used.

Finally, there's a neat irony here. Corporations started as state monopolies providing big things the government couldn't handle – railroads, canals and the like. Now we seem to have come full circle. In fact, to complete the story, I've argued that "uncorporations" -- i.e., partnership-type firms -- are taking over a lot of the functions that corporations now have. At one time in the US we had relatively small governments, corporations building and running the infrastructure, and partnerships handling everything else. Maybe we’re headed back in that direction.

Comments

[kurt]

Since when has leasing become equivalent to privatization? For something to be private the owner should have control of dispossing of the property, which these companies cannot do. The property remains in government hands. Furthermore, the lease comes with all kinds of stipulations, which make price discrimination probably impossible. Only full privitization, whereby companies actually get to own the land, and set their own usage terms, prices etc., will work. I am not worried about roads becoming too expensive, as users will still have many different options available to them (carpooling, public transit, telecommuting), putting downward pressure on prices. If you don't want road congestion, users should be confronted with the real cost of their road usage. Only complete privitization will give this number.

[wj]

The flaw in the privatization approach is that private companies are rife with exactly the problem which looks (so far) to have caused the problem with this bridge: deferred maintenance. Unless the contract is somehow written to carefully and explicitly forbid that (and having worked in a number of corporations I can testify that they are really good at finding means and rationalizations to defer spending money on maintenance), the problem won't be touched.

[Sameer Parekh]

I think the solution vis-a-vis safety and private companies is quite simple. If a private company doesn't maintain a road/bridge/whatever, and someone gets hurt, they can be held liable. The same doesn't apply for government.

[kurt]

Indeed Sameer, try getting a government bureaucrat sued for negligence, for example. And for wj, why would a company want to defer maintenance? That would entail slashing capital value, which will not make them shareholders happy.

[wj]

kurt, the reason to defer maintenance is simple: money not spent on maintenance becomes profits for the current quarter, thus helping the company management meet shareholder expectations. That, in turn, increases the value of the stock and thus the value of the managers' share options.

Spending money on maintenance may improve the capital value (or keep it from dropping). But that is much less visible.

Those may not seem like sensible motives to you. But I can attest from personal experience that, whatever the motives, deferred maintenance is a huge, and on-going, problem in the private sector.

[Stephen Johnson]

Just a quick note. The bridge that collapsed in Minn was privately owned. So much for that idea. The government needs to be responsible for certain parts of our lives. Roads is one of them. Stephen

[Delia]

And haven't we had our federal government sticking in all sorts of laws prohibiting individuals from suing companies and limiting the size of the awards and trying to control trial lawyers?

Yeah, this should work out really well. How happy are you with your cable company? At least your life doesn't depend on it.

[M. Hodak]

Unless I'm missing some insider sarcasm about this, Stephen Johnson is full of shit.

Even if the bridge were privately owned (which it certainly isn't), how would its collapse argue for government needing to be "responsible" for roads?

[kurt]

wj, I would assume that shareholders of these roads are largely going to be pension funds, which seek long-term profitability.

Stephen, privately owned?

[M.Z. Forrest]

The business relationship is not being expressed properly, and this leads to countless amounts of confusion. When a bridge or road is 'sold', what is actually sold is a concession. There are plusses and minuses, but they aren't the privatization ones. This relationship is prodominant in Europe, and it is one of the oldest business relationships.

One has significant control in a concession relationship.
a) The profitability of a concession is in the latter part of a contract, so compliance is quite easy. A non-compliant concessionaire would have his concession taken away.
b) Maintenance isn't generally an issue with road concessions, because the contract is usually entered into when construction is needed. The concessionaire bids knowing what capital improvements they will have to do, and the concession contract length is adjusted to accomodate it.
c) Privately concessions are entered into all the time. You see it in the term concession stand.