The Privatization of US Infrastructure

March 27, 2008 at 2:16 am 3 comments

By Carol A. Metzner, President, The Metzner Group, LLC, and Managing Partner,
Back in 2006, the Indiana Toll Road was leased to two international companies who will collect the tolls, operate the pit stops, keep up the highway and hope to make a profit. This is just one of several P3s, or Public Private Partnerships, that are racing to “lease” a part of the US infrastructure.

This seemed to be a good concept, as state and federal governments do not seem  able to raise the monies needed to maintain roads, bridges, rail systems, port systems, etc.  If a private entity can pay individual states HUGE amounts of money and do a good job running the systems, then why not sign us up?  After reading many articles on this subject, I am rethinking my position. I am not saying it is a bad idea; just that I am confused as to who reaps the benefits in the long term?  Sure the states get an up front influx of millions – billions of dollars to put toward other programs, but they give up control to private sector entities whose “fidelity is to their stockholders…not to the people who use the road.”
An interesting mix of Democrats, Republicans and Independents are “sounding the alarm.”  In a 2007 article by Daniel Schulman with James Ridgeway, called “The Highwaymen,” they explore the benefits and detriments to these deals.

What are your thoughts?

Entry filed under: Civil Engineering Issues, P3, Public Private Partnerships. Tags: , , .

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3 Comments Add your own

  • 1. SteveHK  |  May 23, 2008 at 10:52 am

    In Hong Kong where I have lived and worked (including participating in the delivery of a number of P3 projects) for many years, a significant number of major road tunnels (each carrying in excess of 70,000 vehicles per day) have been designed, built, operated and then to be transferred back to government. In atleast one instance, ownership has already reverted to the government following expiry of the franchise period. Typicallly a franchise period of 25 or 30 years (including both construction & operation) is involved and a capex for tunnels and approach roads of around US$1b, in current money values is involved.

    Generally speaking, when comparing those projects procured by the private sector with those procured by government, the private sectorprojects have been completed in a shorter construction period, because the franchisee incentivizes his contractor, by bonus arrangements, to strive for an earlier completion. The franchisee makes this bonus self financing because it is paid out out the additional revenue he earns (from tolls) out of a longer toll collection period. His franchise period is construction period plus operation period. Therefore if construction period is shroter than anticipated, operation period is longer and thus more income is generated. The private sector maintains the operating facility much better than the government’s operating facilites and also ensures very speedy removal of any breakdown or accidents, so that traffic flows and thus toll income is resumed as quickly as possible.

    One siginificant situation is that all of the cross harbour vehicle tunnels between Kowloon & Hong Kong (3 in total) are now operated in this way and there are no alternative means for vehicles to cross (no ferrys any more and there is no bridge) Each tunnel has a different toll reflecting the result of the tender when that road tunnel was procured. Consequently the cheapest toll is charged at the oldest tunnel which has the smallest traffic capacity. Because of the toll tarrif arrangements, the government can neither initiaite a toll increase or a toll decrease and consequnetly has, from a traffic management point of view, lost control of traffic planning and management as major tailbacks of traffic buildup throughout the day, but especially at peak periods, in the highways leading to the tunnel with the cheapest toll.

    Is there a role for P3 pojects? Yes, but the government must still be able to manage its overall traffic policy and not by accident set up a scheme which means that it loses control of that policy

  • 2. Mark  |  April 7, 2008 at 1:31 pm

    At its most fundamental level, such a scheme does not make any sense. In short, the concept is to take a public good/service and hand over control to private agency. Private agents answer exclusively to their shareholders (whom are not necessarily users) whose sole concern is a return on investment, otherwise known as the highest profit possible. Maintenance, enhancement, and any other activity that a private agent may conduct is done so secondary to, and for the expressed purpose of, profit. That is not in the public users best interest.

    Further, I suspect that when the state receives payment from the privatization, the money is highly unlike to be maintained for transportation needs. Even if it initially dedicated for this purpose, over time, I fear that it will be aggregated out for other non-transportation needs. This result further aggravates the very situation it was intended to alleviate.

    The above “free market” argument claiming that a private agent can only charge what people are willing to pay has nothing to do with privatization. This same argument can be applied to the public controlling agency. This argument also neglects elasticity in that people may be willing to pay ‘hefty tolls’. One need only compare current fuel costs to consumption for an example of our collective behavior regarding transportation cost.

    In the US, people are willing to pay whatever it takes to keep driving their car. A private agent will use this to their advantage.

    Lastly, if there is money to made in management of a good or service, it is not exclusive to a private agent. The public agency could reap the same. It’s a matter of reform and streamlining, not privatization.

  • 3. aepcentral  |  April 3, 2008 at 5:52 pm

    I wouldn’t necessarily be too worried about this issue of P3 and the development of these private toll roads. Many public outcries fear these private entities are going to charge an arm and a leg for tolls. These roads will not go without zero government oversight and regulations, and watchdog groups will be watching this issue well, like a watch dog. The fact of the matter is, if the owners want to charge hefty tolls, let them. We will find alternative routes, they won’t make any money, and they will be forced to lower the toll to a level that the public will use.


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