Funny, how that works by @BloggersRUs

Funny, how that works

by Tom Sullivan

Perhaps it is not just a coincidence or a quirk of American policy-making that the words "innovation" and "reform" lately seem to attach themselves to ideas that drive more public money, public infrastructure, and public control into the hands of private investors. Nor that this meme is driven by lobbyists for public-private partnerships (P3s) where corporations stand to rack up profits by privatizing the commons.

Whether it is turning over state prisons to for-profit Corrections Corporation of America or public education over to publicly traded K12 Inc., we are to believe that despite the scandals and poor outcomes, the private sector will always do a better job than big gummint. We hear the private sector is more "efficient" than efforts run by the people and for the people. But more efficient at what?

This last week, as we noted, ITR Concession Co, and its parent company, the Spanish-Australian consortium Cintra-Macquarie declared bankruptcy on its concession to operate the Indiana Toll Road. The 75-year deal fell apart after only eight.

But getting back to efficiency. Think maybe the Germans could do it better? Maybe not.

... a study by the Federal Audit Office has found that costs may actually be higher for ÖPP [P3] project [sic] than they are for conventionally funded enterprises. The auditors examined seven large, privately financed road-construction projects. They found that five of them would have been cheaper had they been paid for in the usual manner -- that is, with taxpayer money. The total savings were estimated at €1.9 billion. In the A1 expansion project, the Transportation Ministry had assumed that the public-private partnership would be 40 percent cheaper than tax financing, but the final cost was a third higher.

ÖPP projects "did not achieve significant goals" and projects conducted to date have been "uneconomical," the auditors concluded.

Funding costs are higher for public-private deals in Germany than with government-backed loans in the U.S. Still, Berlin infrastructure economist Thorsten Beckers estimates that "the capital costs of such projects amount to almost 28 percent of construction costs. Therefore, Beckers argues, the supposed financial advantages of ÖPP autobahn expansion projects are 'extremely implausible.'"

Writing for Thinking Highways regarding new P3 highway projects in Virginia, Randy Salzman writes that despite the positive press, the Congressional Budget Office sees financial benefit to taxpayers from P3s [emphasis mine]:

The cost of financing a highway project privately is roughly equal to the cost of financing it publicly after factoring in the costs associated with the risk of losses from the project, which taxpayers ultimately bear, and the financial transfers made by the federal government to states and localities,” the CBO’s Microeconomic Studies director told congress in March. “Any remaining difference between the costs of public versus private financing for a project will stem from the effects of incentives and conditions established in the contracts that govern public-private partnerships.”

And those contracts tend to be one-sided, win-win deals for investors – aided by financiers "mining" the tax code. Borrowing from the work of former Penn State law professor Ellen Dannin, Salzman describes the setup and the sting [emphasis mine]:

A private creates a shell company with a major finance – usually foreign – arm and an international construction contractor to bid on the P3. It sells private bonds, bonds generally backed by federal guarantee, and includes those funds as the major part of its “private” contribution. Any state’s representatives at negotiations are outclassed because they have little background in finance or contract law and its legal consultants, like Allen and Overy, are conflicted. The privates’ upfront financing allows the project to get underway quicker and it is implied that private efficiency is overcoming bloated public bureaucracy while heavily inflated traffic projections indicate the privates will be compensated through tolls...

Once the highway is built, the shell company – and we used that word consistently with Secretary Layne – accelerates the depreciation and about 15 years later, just when the highway is actually needing much repair, often goes bankrupt. The bond holders, however, are protected because of federal financing guarantees and taxpayers find themselves facing the costs of a highway re-build when all of the toll income has gone to the shell company backers, now protected by bankruptcy laws from having to pay back loans, bonds or depreciation.

Except as we noted, besides the Indiana Toll Road deal going belly up in 8 years, similar P3 deals have failed in Texas and California in just 2 and 3 years respectively. Is there a pattern here?

In North Carolina, the deals sound familiar. Republican candidate for U.S. Senate, Rep. Thom Tillis, has been promoting a P3 to put toll lanes on I-77 in his own district. Tillis is aided by legislative lieutenants fanning out across the state and by lobbyists working the country like so many Professor Harold Hills to sell boys' bands to the rubes.