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No Free Money: Is the Privatization of Infrastructure in the Public Interest?

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Chicago is leading the nation in the wave of privatizations. No other American city has been so aggressive in putting public resources into private hands. The transactions are worth hundreds of  millions, or even billions of dollars, and have financial implications for current and future generations. Though the City and its advisors have arguably demonstrated financial savvy in structuring these transactions, they have occurred without meaningful public debate regarding how they serve the City’s long-term goals, that is, how each privatization might constrain or advance the City’s social, economic, or even environmental objectives.

The trend toward infrastructure privatization is happening not just in the United States, but globally. Public authorities in Europe and much of the developing world have been unwinding infrastructure
assets for no less than three decades, with a quickening trend in recent years. Most major European airports, including those in London, Frankfurt, and Paris, are owned and operated by publicly traded corporations.

This report, authored by The Chicago Council on Global Affairs’ Emerging Leaders Class of 2008, is an effort to better understand the benefits and risks of privatization, distill lessons learned from across
the world, and to provide a template for future privatizations of public assets. The class chose to explore infrastructure privatization because:

  • They agreed that in the global era, cities must invest in a firstclass infrastructure to remain competitive.
  • They recognized that federal, state, and city budgets are in dire straits, and many municipalities are considering privatizing assets as a new source of revenue, in many cases to fund objectives
    unrelated to infrastructure.
  • They were concerned about the way the parking meter privatization was handled in Chicago, divided about whether other actual and proposed privatization deals were good for the city, and questioned to what extent privatization was in the public interest.
  • They realized that privatization was relatively new to the United States, but had been employed globally for several decades and that some of the most relevant examples were outside the United States.
  • They believed that other governments could draw from Chicago’s past experiences, as well as those of other cities around the globe, and that The Chicago Council could serve as a useful platform for exploring these examples and developing recommendations.
  • As they are all committed to Chicago and want the city to remain globally competitive, they want to ensure that infrastructure privatization deals in Chicago are pursued in ways that truly promote this goal.

Privatization remains highly controversial among the public. Drawing from examples of five cities examined—Chicago, Hamburg, London, Sydney, and Bhiwandi, a textile center outside of Mumbai—
the group found that both proponents and opponents of privatization deals are vehement in their arguments and often talk past each other, with each group focusing on only part of the issue. Any privatization deal has both financial and social implications. Only by addressing both considerations—and really thinking about the core functions of governance—will the public debate do justice to the fundamental question: When is infrastructure privatization in the public interest?

This report argues that a healthier, more productive conversation around privatization is needed. To date, the public debate has been polarized and has tended to focus on case-specific details of particular privatizations. Questions that should be asked include:

  • How should we best approach this radical transformation of public responsibility?
  • Why is this happening now?
  • What are the alternatives?
  • What is the appropriate role of government, and what can we learn from others as to the proper balance between the private and public sectors?
  • What are the long-term economic and social implications of having an asset in private hands for ten, twenty, or even ninety years?

Benefits and Risks of Privatization

Privatization can be an effective tool to improve public services and improve the health of government finances. Or it can be a way to steal from the future, literally, by selling off future revenues for a quick injection of cash in the present. The wisdom, as always, lies in telling the difference.

  • Public authorities are increasingly turning to privatization for a number of reasons:
  • Privatization can be an effective way to fund critical infrastructure needs.
  • Privatization can provide a source of immediate revenue for strained public budgets.
  • Private infrastructure funds are an attractive investment vehicle for certain investors, making infrastructure privatization appealing to potential bidders.
  • Historically low interest rates enable private firms to make highly leveraged infrastructure investments.
  • Because the private sector can often deliver greater efficiencies than government, privatization can result in better service at lower cost.
  • Privatization can be a politically expedient solution to public problems.
  • The alternatives to privatization—such as raising taxes, borrowing, or spending less—are unattractive.

Privatizing public assets has implications that stretch across generations and involve billions of dollars. The following are an inventory of potential pitfalls that ought to be considered in the context of any
privatization decision.

  • Privatization constrains future options.
  • Privatization may have social implications, adversely affecting certain groups.
  • Privatization deals typically generate huge cash windfalls in the present in exchange for revenue streams that would otherwise accrue to citizens in the future.
  • Privatization may result in an undervalued deal.
  • Private entities may fail to fulfill contractual obligations.
  • A lack of public input in the privatization process can compromise the outcome and leave citizens deeply disaffected.

Key Findings

Based on the examples from the five cities examined along with the group’s analysis of the benefits and risks of infrastructure privatization, the group sought to identify when and how privatization can be
better accomplished, including the possibility that in some cases it should not be done at all. Some key findings include:

• Financial realities mean that the privatization of infrastructure will continue.
• An effective privatization policy would balance financial and equity considerations and give meaningful thought to what constitutes “the public interest.”
• Privatization presents more policy options than merely selling existing assets.
• Privatization can make bad government worse, or good government better. It is not a cure for corruption, since corrupt politicians can use privatization to enrich themselves or cronies at the
expense of the public.
• Privatization is neither good nor bad but an economic tool that can be used well or badly.
• Even a “good” privatization deal can end badly.