Hey, wanna buy a bridge in Brooklyn? The next time you hear that offer, it won’t be coming some greasy con artist, but from…your friends in the state capital and on Wall Street. Having successfully squeezed public spending and privatized government services, the investor class is now gunning for the jewels of our common wealth: our equity assets.
They want to control public infrastructure — highways, bridges, airports, parking garages and shipping ports — and milk them for huge profits. Investors love the low-risk, high-yield returns of a monopoly. They love owning the stable cash flow from an essential public service. And boy, are we commoners going to pay big time unless we raise a ruckus and nip this trend in the bud!
The basic scenario is this: politicians and state governments are desperate for cash, and reluctant to raise taxes. Investors are awash in cash looking for attractive new investments. So investments banks are approaching governments with very seductive deals that promise to unleash short-term gushers of cash to the public purse. Sounds great, but there’s a catch: investors will control our equity assets over the next 75 or 100 years. It’s like some warped, modern-day Rumpelstiltskin fairy tale: Gnome-like investors promise to spin straw into gold — but first they demand that we surrender the common wealth itself!
In most cases, it’s a very bad deal for the commoners. Tolls immediately soar. Low-income travelers pay a disproportionate share. Full-time city employees are turned into part-time “independent contractors,” with reductions in wages and benefits. Upkeep and maintenance of the asset can decline, especially as the initial investor re-sells his ownership stake to others.
Management of the resource becomes driven by the imperatives of private financial gain (Does it increase demand? Is it profitable for Morgan Stanley and the Carlyle Group?), not public need and social equity. This means more potholes; more corner-cutting on safety; less management transparency; and a greater focus on improvements that produce short-term marketable gains, not the ones needed over the long haul.
Last year, Indiana legislators sold off a toll road last year for $3.8 billion. Merrill Lynch & Co. estimates that investors could break even in year 15 of the 75-year lease, and reap as much as $21 billion in profits over the course of the deal. This will come directly out of the hide of drivers, who will pay higher tolls and suffer (likely) declines in road quality, not to mention state oversight costs for assuring adequate performance of the leasing contract.
Other deals are in the offing: the New Jersey and Pennsylvania turnpikes, Chicago’s Midway Airport, state lotteries. Investors are fantasizing about how much the Golden Gate Bridge or the George Washington Bridge might bring ($3.4 billion and $3.5 billion respectively, if toll hikes were allowed). Midway Airport could bring as much as $3 billion.
With these kind of deals, it is not surprising that the sale of public infrastructure is being categorized as a new class of private investment. As Business Week reports in a May 7 article, “ Roads to Riches?” (from which the details of this blog post come):
The Standard & Poor’s 500-stock index has returned about 10% a year, counting dividends, since 1926. Bonds have returned about 5%. Firms say infrastructure will beat both, and without having to sweat out market dips along the way. That’s a huge selling point at a time when stock, bond, and commodity markets around the world are becoming increasingly interconnected.
Morgan Stanley estimates that about $500 billion in investment funds have been raised for 30 funds that want to buy American infrastructure assets. When Goldman Sachs opened a new fund to buy infrastructure, investors showered $6.5 billion on it, $3 billion more than it was seeking to raise. What’s good for Wall Street is good for the country?
The tragedy is that city and state governments could do a whole lot better if they were to raise new money through tax-free municipal bonds themselves, and impose more modest toll hikes. The equity benefits could accrue to we the people. But with so much private money banging on the door, and so little leadership among state politicians to manage our common assets responsibly, the commoners are about to be royally screwed. It’s imperative that we pressure state governments and politicians to resist the siren call of easy, short-term cash, and take a stand to preserve our common equity assets.