• Higher costs to consumers
• Project cost overruns and other hidden costs to government
• Government costs of managing and monitoring contracts
• Hidden costs to the community
The most popular reason for privatization is the promise of cost savings. This is especially pronounced in difficult economic conditions, when elected officials are faced with serious budget shortfalls. Officials at all levels of government have considered selling off state assets for quick cash or privatizing important services in the hopes of saving money. But communities across the country have found that investors pay low prices for valuable assets to cash-strapped governments, then impose steep fee increases on consumers or other measures to maximize their income from the asset. In many cases, the money received from a 50- to 99-year asset concession lease may fill budget holes for the coming year but fall far short of the actual long-term value.
Likewise, cost overruns in large service contracts can negate any projected savings. The costs of managing and monitoring the contract and hidden transactional costs often are not included in the calculations of projected savings, distorting the true cost of the contract. Increased costs may also appear as hidden cost to the community. For example, government jobs often include health benefits that are lost when the jobs are outsourced to private companies. As a result, more workers may need to rely on the government, thus increasing government costs. Many of the private employees who take these jobs receive lower wages and little or no benefits. Several recent studies have measured the increased use of the Earned Income Tax Credit (EITC) and Medicaid programs when workers are denied living wages and health benefits. The cost saving projections that governments use to justify privatization decisions are often incomplete and erroneous. As numerous examples have confirmed, privatization of assets and services often fails to have the desired budgetary effect that many corporations lead governments to expect.
ITPI recently released a new backgrounder brief that discusses the high costs of privatization. Read it here.
In 2002, Governor Perry introduced the Trans-Texas Corridor (TTC) plan- one of the nation's biggest privatized toll road projects. The TTC was originally planned to be 4,000 miles of 10-lane divided toll roads plus high speed rail, freight rail and utilities spanning from Mexico to Arkansas, New Mexico to New Orleans, and skirting every major city in between. In Texas, the Trans Texas Corridor was intended to link with existing interstate systems, three existing regional transportation systems, and major ports of entry in Laredo, El Paso, Brownsville, Beaumont, Corpus Christi, and Houston. There are four priority segments of the Corridor: the first segment would parallel I-23, I-37, and the proposed I-69 from Denison to the Rio Grande Valley; the second segment would follow the proposed I-69 from Houston to Laredo; the third segment would parallel I-45 from Dallas-Fort Worth to Houston; and the final section would follow I-10 from El Paso to Orange. The project was estimated to cost the government up to $183.5 billion dollars.
Between 2005 and 2008, the Texas Department of Transportation (TxDOT) signed a series of Comprehensive Development Agreements (CDA)- also known as Private Public Partnerships (PPP), worth over $3.5 billion with Cintra-Zachry, a consortium made up of the Spanish firm, Cintra, and Zachry Construction Corporation. The contracts authorized a design of a master development and financial plan to help build TTC-35, the first stretch of the Trans-Texas Corridor from Oklahoma to Mexico, as well as a second stretch that extends from northeast Texas to the Mexico border incorporating the federally planned Interstate 69 corridor. These contracts were developed and signed without public or legislative consent and slowly set forth in motion the TTC Project.
The proposal garnered a lot of public backlash and, in 2007, a 2-year moratorium passed the Texas legislature, significantly slowing the development of the TTC. However, the 2007 moratorium did not apply to the two main corridors of the TTC project, TTC-35 and TTC- 69, and Governor Perry vetoed it in time for TxDOT to move forward with a contract for the design of TTC-69. Still public pressure from all over Texas led to the eventual "death" of the TTC. On June 15, 2011, HB 1201, which formally terminated the TTC project, was signed into law. Despite these small victories, parts of the TTC are still being pursued. The first leg of the Trans Texas Corridor TTC-35 project, called SH 130 segments 5 & 6, is currently being built.
In addition, bills like HB 3789, which reauthorize PPPs in Texas, are slowly being passed. These bills would grant the private toll road developers control of toll lanes, non-toll lanes, frontage roads, buildings on the toll way, parking areas, rest stops, ancillary facilities, etc., and would allow for contracts to be signed without financial disclosures. Essentially, supporters of the plan have taken on a piecemeal approach to passing the TTC proposal, slowly pushing small yet key legislation that eventually facilitates the construction of private toll roads in the state of Texas.
Costs- One of the major criticisms of the TTC project was the cost it would have on taxpayers. In February of 2010, after intense questioning during a joint legislative committee hearing regarding Texas' transportation funding crisis, the executive director of TxDOT, Amadeo Saez, admitted that private toll roads cost taxpayers more money than publicly owned and operated roads. Specifically, transaction costs for the TTC project would generate high costs for the public. According to a 2007 audit report produced by the Texas State Auditor's Office, TxDOT spent $3.5 million on the master development plan and $28 million for environmental studies and preliminary engineering on two segments of the corridor and could have potentially spent up to $16.5 billion for the construction of high-speed rail lines and freight rail for all of TTC-35. Supporters of the TTC project argued contracting with the private sector would be cost-effective for the state but the state audit report disclosure of close to $50 million worth of transaction costs for the initial development of the TTC project proved otherwise.
Included in the TTC proposal was also a provision to convert public toll roads to privately owned and operated toll roads which could lead to potential toll increases. In addition to this, Texas Department of Transportation (TxDOT) intended to charge both the public and private sector for utility, commodity or data transmission within the TTC corridor. Any revenue generated on TTC-owned land would not be invested into regional transportation funds.
Loss of access- Supporters of the TTC argued that due to overpopulation, Texas was experiencing a serious congestion problem which the TTC would solve. However, the actual plans revealed that the TTC would not provide highway access for the communities it planned to build on. Explicit in the proposal was the lack of accessible ramps onto the highway from rural communities, creating corridors that would run miles without any way for drivers to enter or exit the corridor.
Loss of transparency/Accountability- In addition to drawing attention to the high costs of the TTC plan for taxpayers, the 2007 State Auditor's report also warned against the absence of specific information related to costs in the proposal, highlighting the "lack of reliable information regarding projected toll road construction costs, operating expenses, revenue and developer income" in the TTC contracts. Without this information, it would be extremely difficult to accurately estimate the real costs associated with the project. Prior to the official introduction of the TTC plan, key legislation was passed preventing property owners from protecting their land, authorizing highway construction without public consent, and giving the Governor precedential power over regional issues. All of this legislation closed off any mechanism for public oversight. The secrecy of the contract signing and disregard for the negative 2007 audit report in addition to the immense amount of lobbying money that was exchanged during the signing of the contracts has generated an environment of distrust surrounding the TTC project and those involved in supporting it.
Unfavorable Contract Terms- Many of the contract provisions tied the hands of state officials and policy makers. One of the contracts included a non-compete provision that required TxDOT to pay Cintra-Zachry for lost profits if the state engaged in activities that would reduce toll traffic, such as the widening or building of competing roads. Another contract provision encouraged the state to push traffic to the privatized toll road by lowering the speed limit on I-35.
The introduction of the TTC project brought together a wide range of advocates that traditionally do not work with one another. Both Republicans and Democrats fought hard to stop the development of this project which undermined public governance and control over vital arteries of the Texan transportation system. Texas Public Interest Group (TexPIRG), helped ensure that the legislature and the public understood the risks involved with the TTC Project. TexPIRG issued reports and press releases that highlighted financial risks the state would inherit if it decided to take on this project. A few examples are below:
- Factsheet: "Private Roads, Public Costs: The Facts about Toll Road Privatization"
- Press Release: Kay Bailey Hutchison's transportation plan revives the Trans Texas Corridor
- Full Report: "The Trans Texas Corridor: Evaluating and Protecting Against Risks to the Public from Private Toll Roads"
- Press Release: "BREAKING NEWS: Eminent Domain "Reform" Bill is the Trans-Texas Corridor on Steroids"
Meet 5 Big Lenders Profiting From the $1 Trillion Student Debt Bubble (Hint: You Know Some of Them Already)
By Phineas Baxandall
In ancient times, rulers relied on a practice now known as "tax farming" in which tax collection was outsourced to other groups or individuals who maintained order in particular areas and passed on revenue to the monarch. The abuse that resulted from this system is thought to be one reason for the fall of the Roman Empire.Read more »