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Leasing Sovereignty: on State Infrastructure Contracts

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Infrastructure privatization is in the news. Pennsylvania, California, Colorado and Indiana, among many other states and municipalities, have in the past ten years privatized—or attempted to privatize— toll roads, parking meters and other public infrastructure. State and federal policy has encouraged these public-private partnerships and infrastructure privatization. We’ve been here before. Private development of public infrastructure was common in states and municipalities in the nineteenth century. This was typically done through granting corporate charters and franchises. Widespread disillusionment with this model led to a public finance counterrevolution in the twentieth century. Privatization re-emerged in the 1980s and 1990s. Headlines such as “Why Does Abu Dhabi Own All of Chicago’s Parking Meters?” and “Cities for Sale” attest to the continuing controversy surrounding these arrangements.

Ellen Dannin has furnished the most extensive academic critique of infrastructure privatization contracts to date. The typical agreement can run over a hundred pages, span the better part of a century, and includes contract terms that make the public the guarantor of the contractor’s risk. Such provisions curtail otherwise routine exercises of sovereign power in order to protect the contractor’s revenue stream. Dannin identifies three clauses designed to reduce contractor risk by limiting the range of government action. First, “compensation event” clauses require the government to pay the contractor when certain triggering events occur, such as an emergency road closure. Second, non-compete clauses prevent the government from building or repairing competing infrastructure. Third, the contractor retains the right to object to government decisions that affect the profitability of the contract. Each of these provisions requires the government to exchange some quantum of sovereign power for up-front cash payments desperately needed to cover short-term budget gaps—a need all the more acute in the aftermath of the financial and real estate crises.

This paper focuses on one of the more troubling features of infrastructure contracts: non-compete clauses. One such clause, discussed below, forbade road improvements that would divert traffic away from the leased toll road. The Chicago parking meter concession, to take another example, required the city to pledge that it would not build additional parking meters within one mile of the concessionaire’s leased meters. The relevant legal principles include the Contracts Clause, the reserved powers doctrine, legal prohibitions on alienating sovereignty and the inherent police powers of the state. I conclude that the noncompete terms run afoul of deeply-rooted common law and constitutional principles. If I am right in this, it follows that infrastructure contracts ought to preclude terms that permit the alienation of sovereignty. To be sure, what counts as an “alienation of sovereignty” will not always be obvious. Governments as a general rule must fulfill their contract obligations. But this general, abstract rule is subject to a limiting principle. On the one hand, the government acts as sovereign trustee of the public interest. In this capacity, government is a public actor with a certain degree of trumping power over private interests. On the other hand, when the government enters the market arena it is cast as an equal counterparty in a commercial contract. In this capacity, government resembles and is expected to behave as a reciprocally bound private actor. But this resemblance is often illusory. Unless our ancient anchor terms are hopelessly circular the essence of government remains public and not private. Because the government is not just a private party, advancing the broader public interest—however difficult to define—is not precisely symmetrical with advancing aggregate private interests. In other words, “efficiency” notwithstanding, the government cannot auction off its power to govern. Longstanding legal norms limit the scope, duration and subject matter of public-private contracts. States contemplating public-private infrastructure deals should think twice before selling the public birthright for a mess of pottage.