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Thursday, March 30, 2006

Selling Public Infrastructure to Fund Government

Daniel Gross has a nice column in Slate on "the foolish plan" to sell public infrastructure:

Lost Highway - The foolish plan to sell American toll roads to foreign companies, by Daniel Gross, Slate: If a governor told you there were a way to spread pork, raise funds for infrastructure investment, promote jobs, avoid raising taxes, and put a dent in the trade deficit—all in one fell swoop—you might think he had a bridge to sell you. And you'd be right. Only in this case, it's a toll road. And instead of a sale, how about a long-term lease?

Earlier this month, in a triumph for Gov. Mitch Daniels, Indiana's House narrowly approved his proposal to lease the 157-mile Indiana Toll Road ... for $3.85 billion to a joint venture of Cintra, a Spanish company, and Australia's Macquarie Bank. The two companies have been active in the U.S. road business. In 2004, the two inked a 99-year lease for the 7.8-mile elevated Chicago Skyway. Last year, Macquarie completed its acquisition of the Dulles Greenway outside Washington, D.C. And Cintra, ... is a strategic partner to the Texas state government in the planned Trans-Texas Corridor. There are likely more such deals to come.

For Daniels ... the 75-year lease is an elegant solution. The state needs billions of dollars to invest in new roads. Getting the cash upfront will allow Daniels to speed up construction on needed infrastructure projects, create new jobs, and fund his ... Major Moves initiative. ... And by raising the cash from foreigners, he's doing his part to rein in the pernicious current-account deficit. "Too often in Indiana, we see Hoosier dollars and jobs leaving the state. Major Moves is an exciting opportunity to recapture U.S. dollars by attracting foreign investment, and use them to create jobs for Hoosiers," he said.

What's in it for the foreign companies? Huge potential profits. Gigantic, steady profits. Toll roads are an incredible asset class. They're often monopolies. They can support debt, since they provide a recurring guaranteed revenue stream that is likely to rise over time... The heavy lifting has already been done: The state or federal governments have acquired the land and rights of way, built the roads and maintained them for years, and enacted toll increases. All the private companies have to do is deliver cash upfront, maintain the roads, and collect the windfall. The buyers can also increase their profits by making toll roads run more efficiently with technology. ...

This easy money for foreigners makes the locals uneasy. ... I think the uneasiness has ... to do with what it says about the peculiar fiscal climate in the United States. How is it that in the richest nation on the earth, localities simply don't have the cash to do necessary maintenance on basic infrastructure, the political will to raise such funds, or the competence to run such easily profitable operations? Why are they being forced to sell off long-term cash cows for short-term cash?

Leasing or selling a public asset is a classic one-shot—a short-term measure that bolsters the balance sheet today but that can't be repeated. While politicians ... focus on getting through the next few fiscal years with minimum pain, .... [f]rom Gov. Daniels to his former boss, President Bush, there's a troubling unwillingness to align governmental resources with the express goals and responsibilities of government. At the federal level, we rely on China's central bank to buy our bonds and fund basic operations. As a result, our tax revenues wind up in Beijing—as interest payments. At the state level, Indiana is relying on foreign companies to lease public infrastructure like toll roads. And under these arrangements, tolls—taxes people pay for driving—are being paid to foreign shareholders of foreign companies.

Of course, by selling public infrastructure at high prices, state governments could be taking foreigners for a ride. The Japanese famously overpaid for Rockefeller Center, after all. It's possible that Indiana just ripped off the Spaniards and Aussies. But I doubt it.

I want to repeat that selling off assets to pay the bills "is a classic one-shot—a short-term measure." It's like a household selling a car to pay the month's bills. If income and expenditures don't change, what do you do next month?

    Posted by on Thursday, March 30, 2006 at 11:58 AM in Budget Deficit, Economics | Permalink  TrackBack (0)  Comments (20)

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