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Needed: Sane Rule About the Privatization of Infrastructure

By Phineas Baxandall
Senior Analyst for Tax & Budget Policy

You'd think the only reason American infrastructure lacks funding was rules preventing private businesses from throwing money at it.

Last week Congress introduced a couple of bills to solve this imaginary problem and one that would set some ground rules to protect the public.

It's worth asking first whether private infrastructure investors really do see the United States as an uninviting place. Contrary to the claims made by privatization advocates, an industry study released this month by London-based EC Harris found that the United States already provides more attractive profit opportunities than almost anywhere in the world. The United States is ranked in the highest category of "highly attractive" countries. Only Germany is considered more attractive overall, due to its strong encouragement of private participation in European rail improvement. When it comes to highways, the U.S. is already the world's most attractive place for investors seeking reliable profits.

The point isn't that America should strive to be the best place on the planet to make a buck off private roads, rail, ports and transit. Regardless of whether you think there should be more privatized roads, we shouldn't fool ourselves into thinking that good deals are being turned away at the border.

Elected officials can be unduly attracted to public-private partnerships because of the allure of politically bruising votes for gas tax hikes or other new revenue by funding infrastructure. Money from private investors sounds like free money. Rarely discussed are the steep increases in user fees that travelers will pay or the public subsidies and guarantees that taxpayers will finance.

Following this script, Illinois' Senator Mark Kirk proposed last week a hodge-podge of new subsidies and rule changes to bring billions by "lifting federal restrictions" on public-private partnerships. While announcing The Lincoln Legacy Infrastructure Development Act, the Senator noted that, "One of President Lincoln's greatest legacies was the Transcontinental Railway Act, which led to the completion of the largest infrastructure project in American history without a dime from Congress."

The Transcontinental Railway is a curious historical chapter to evoke, even from the land of Lincoln. Private participation was made possible by public handouts in the form of millions of acres of farm land and generous loans. The companies on the receiving end of these donations built great private fortunes, but often fell into public receivership and refused to connect to their competitor's tracks. The financing arm, a public-private partnership called Crédit Mobilier, became the center of the greatest financial scandal of the 19th century, complete with bribes to Congressmen and huge public bailouts.

The other curious Congressional bill last week would require Amtrak to sell off its Northeast operations, letting private companies select which equipment to strip away and leaving the nation's passenger rail carrier without its most profitable routes. Despite the fact that enormous private subsidies would be required, the legislation pretends that European-style bullet trains can be built without spending public dollars for them.

Amtrak's Northeast operations are already highly profitable and have witnessed large gains in ridership. A major constraint on improving Amtrak's capacity in the Northeast is that the tracks must be shared with some of the nation's highest-volume commuter rail lines. It's not clear how these other public functions would be protected under privatization.

You'd think the only reason American infrastructure lacks funding was rules preventing private businesses from throwing money at it.

Last week Congress introduced a couple of bills to solve this imaginary problem and one that would set some ground rules to protect the public.

Thankfully, other efforts in Congress would bring sanity to the world of private infrastructure investment. After witnessing the serious problems with infrastructure privatized in Chicago, Senator Richard Durbin introduced a bill that would protect taxpayers by ensuring that the federal government gets paid back for prior investments in assets that get auctioned off.

In addition, the bill would provide a number of common-sense protections for the public:

    • Provide a clear process for investors, other stakeholders and the public alike.
    • Make transparent the anticipated effects for user fees and workers at these assets.
    • Ensure plans for adequate maintenance and operation
    • Create rules for assets to revert to public control in the event of bankruptcy.
    • Eliminate conflicts of interest.
    • Assess whether a proposed transaction creates better public and financial benefit than a similar transaction would using public financing.
    • Ensure that the nation's interstate commerce, public health, environment, or homeland security will not be adversely impacted.

Adding momentum for these reforms, Congressman Peter DeFazio has introduced a companion bill in the U.S. House. The bills have gained support from a number of groups around the country such as Transportation for America, PolicyLink, CEOs for Cities and others.

America's transportation problems are serious enough that we need serious policy that looks out for the public interest, rather than unrealistic solutions to problems that don't exist in the first place.

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