Cities for Sale
Psst! Wanna buy the New Jersey Turnpike?
Almost lost in the deluge of news out of Wisconsin was a paragraph tucked into Gov. Scott Walker's original "budget repair bill" giving the state government the right to sell state-owned power-generation facilities—which supply heating, cooling, and electricity to Wisconsin's government buildings—essentially without any oversight, checks, or balances. As the bill put it, any such sale would, by definition, be "considered to be in the public interest." The blogosphere erupted in a storm of speculation—and New York Times columnist Paul Krugman joined in —that the sale of the plants was intended as a gift to Koch Industries, the mammoth private company run by the Koch brothers, the billionaire Tea Party Medicis who provided conservative support for Walker's agenda.
But the language didn't make it into the final bill. So what had been just a local Wisconsin issue is now a nonissue, right?
Actually, the privatization of state and, especially, local government assets is a very real, very national issue, albeit one in which the left's favorite villains in Wisconsin—the Koch brothers—don't figure as prominently as the left's other favorite villain—the banks. The deep budgetary woes of states and cities around the country have made the quick (but one-time) infusion of cash resulting from an asset sale a handy temporary solution. The big banks advise cities about whether privatization is a wise choice. They also control the ability of states and cities to access the market for their financing needs. But the banks' investment funds may also stand to make money off privatizations. As Josh Rosner, a managing director at the research firm Graham, Fisher who was a prescient critic of the housing boom, says, "Given what we've seen [in other deals], I have concerns that the banks will or could use their lending power" to push privatization deals that get done via closed bids, aren't publically debated, and may not be in the public interest.
Privatization of assets that most of us consider public goods—like airports and highways—has a long, often-uncontroversial history. Australia and Europe have used so-called "private public partnerships" to fund infrastructure projects that otherwise might not have been feasible. But as a 2008 report by the Government Accountability Office noted, there is a right way and a wrong way to privatize. The right way includes shorter leases, some revenue sharing between the private owner and the government allowing taxpayers to benefit from any upside, and a transparent, deliberative decision-making process.
In the U.S, infrastructure privatization has been less prevalent, partly because of fierce local opposition—after all, privatization of an existing asset involves turning an apparently "free" asset into one for which people have to pay. But in the years before the financial crisis hit, the talk in financial circles was that the wave was coming to the United States. Proponents of privatization argued that cities and states needed private capital to fund all the upgrades that our decaying infrastructure so desperately needed. A 2007 report by Ernst & Young and the Urban Land Institute estimated that the United States needed $1.6 trillion in infrastructure investment over the next five years. Anticipating a privatization wave, big financial-services firms, including Goldman Sachs, Citigroup, Morgan Stanley, and JPMorgan, raised multibillion-dollar infrastructure investment funds. According to Reason Foundation, 2007 was a record year for private infrastructure fundraising, with a total of $34.3 billion raised.
No city embraced privatization more eagerly than Chicago, where I live. In 2004, the city leased the Chicago Skyway, a 7.8-mile toll road, to a fund run by an Australian firm called Macquarie Bank. Then, in 2008, Chicago entered into a 75-year lease of its 36,000 parking meters to Morgan Stanley Infrastructure Partners in exchange for an upfront $1.157 billion.
Then the financial crisis hit, and would-be buyers could no longer raise the cheap debt that made these deals doable. Chicago had entered into a deal to sell its Midway Airport to a group of investors that included Citigroup's infrastructure fund, but it had to cancel it because the buyers couldn't get financing. Gov. Ed Rendell of Pennsylvania, who had struck a deal in 2008 to sell the state's turnpike to a group that also included Citi's fund, lacked the political support to push the deal through—an analysis commissioned by the Democratic Caucus said the turnpike would be more valuable if the state kept control—and in any event, the buyers pulled the bid due to lack of debt financing. The privatization business dried up. (Earlier this year, Rendell joined the investment bank Greenhill & Co. to work as a senior adviser on privatization deals. He'll work with the former Morgan Stanley banker who advised him on the failed turnpike deal.)
Bethany McLean is a contributing editor at Vanity Fair and the co-author of All the Devils Are Here: The Hidden History of the Financial Crisis.
Bethany McLean writes a weekly business column for Slate and is a contributing editor to Vanity Fair. She is the author (with Joe Nocera) of All the Devils Are Here: The Hidden History of the Financial Crisis and (with Peter Elkind) "The Smartest Guys In The Room."
Photograph of new Jersey Turnpike by Mario Tama/Getty Images.