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Lecture 4 - Infrastructure Privatization

Narrator: Listen to part of a lecture in a United States Government class.

Professor: We’ve been talking about the basic services and facilities that an economy needs to function, roads, bridges, rail systems, water supplies, power grids, and so forth. What we call infrastructure.

Now, traditionally much of a society’s infrastructure, particularly the transportation infrastructure, has been owned and operated by states, by governments. But lately, local and state governments have started to consider and sometimes actually enter into various deals to privatize parts of their infrastructure, particularly in the transportation sector.

And why is this privatization happening?

Well, as you may know, in the 1950s and 60s there was a tremendous highway building boom. Governments created a huge interlocking network of highways with associated bridges and tunnels. But these facilities are getting old now and they’re becoming more and more expensive to maintain, very expensive actually.

Tolls and tax revenues don’t often cover all the needed repairs.

Student: So why don’t the governments just raise tolls and taxes?

Professor: Well, that’s not so simple. Government officials are elected by voters and voters get upset when their taxes go up. And as for highways tolls, commuters especially don’t like paying higher tolls, merely proposing increases can damage political careers.

So there’s tremendous pressure on governments to find other ways to maintain infrastructure assets. One solution is to sell or lease a part of the infrastructure, a toll bridge, a tunnel, something like that to a private company, usually a company that specializes in this sort of thing. The idea is that the company that buys or leases a bridge or a highway or whatever will find it easier to keep it in good repair.

Student: That will make commuters happy.

Professor: Right, there could be better service. Since they are not government entities, private companies face less political resistance, say to raising tolls in order to provide that better service. But besides that, there’s another reason governments like these deals. States often have trouble paying their bills and they can use money they get from selling or leasing a piece of infrastructure to balance their budgets.

Student: That all sounds good to me.

Professor: It does sound good, but a lot of people are very wary of privatizing pieces of infrastructure and rightly so. For instance, in almost every case thus far, the first thing private companies do is drastically raise user fees because they say, “Oh, we must do critical maintenance that’s gone undone for years and years. And because we’re a private company, we can’t use tax money to do it. Our only option is raising tolls.

But what’s the impact on people who use a toll road to get to work? What if a private owner doubles or triples the toll overnight?

Student: Uh, users would have to spend a higher percentage of their income on commuting.

Professor: And depending on their income, that percentage could be significant.

Student: But if tolls went up, me, I’d just avoid the toll road and take smaller back roads where there aren’t any tolls.

Professor: That’s a good point. Secondary roads would become attractive to lots of other people too, and private companies know this. They also know that dramatic reductions in traffic would hurt their bottom line. So market forces do play a role in keeping private companies from raising their tolls too much. But the mere prospect of astronomical toll hikes is still alarming to governments when they think about selling or leasing parts of an infrastructure.

Now, from a business standpoint, infrastructure purchases can be great investments! If a company buys or gets a long-term lease on a toll bridge from the government, it’s got an almost guaranteed steady source of revenue for years and years, which means that if the company decides it wants to sell the bridge to another company, say ten years from now, it’ll have no problem finding a buyer.

Student: But what if that buyer, this new owner, continues to charge a high toll but doesn’t do the same amount of maintenance because they want to squeeze more money out of the asset!

Professor: In that case, could the governments buy the asset back? Well, to do that, it would have to raise money either by raising taxes or by selling bonds, both of which are politically sensitive. So it’s unclear in a practical sense whether these deals are truly reversible.