Again, this is why we do not privatise public utilities

We’ve been down this road: with water (also here), with public roads, with rail. With electricity.

And again with electricity:

NSW taxpayers could be forced to pay more than $15 billion to indemnify private companies bidding for the state’s power assets, a report has found.

The indemnities – against losses that privatised coal-fired power stations would face under a new national carbon trading scheme – would wipe out the $15 billion revenue boost the Iemma Government expects to gain from the privatisation.

An analysis by the independent think tank the Australia Institute has revealed the carbon trading scheme the Federal Government intends to introduce to combat global warming would dramatically reduce the value of coal-fired generators.

According to the author of the report, economist and institute director Clive Hamilton, the cost of the indemnity could reach $15.4 billion.

“This amount would be the cost borne by NSW citizens if the NSW Government indemnifies private buyers against future carbon liabilities,” he concludes.

Maybe, maybe not:

The State Government has challenged the institute’s findings. Alison Hill, a spokeswoman for the Premier, Morris Iemma, told the Herald last night: “There will not be an indemnity.”

But the Iemma Government has set a precedent by indemnifying Bluescope Steel for the next 25 years to ensure new investment in its Port Kembla steelworks.

“The Government has form on this issue,” Dr Hamilton said. “And they will come under even greater pressure from potential buyers to offer them indemnities, too. There is nothing to say the Government could not, and would not, do this in secret, using all sorts of commercial-in-confidence provisions, and the public may know nothing about it for 20 years.”

The NSW Government said last night the indemnity given to Bluescope did not apply if a carbon trading regime was introduced.

Of what is and is not a part of the conversation, Clive Hamilton made this excellent point:

“It’s a bad time to be selling electricity assets when there is so much uncertainty about the carbon liability of coal-fired power plants,” Dr Hamilton said.

The institute’s report warns that no prudent investor would commit to major expenditure in such a risky commercial environment, predicting that “carbon liability and the indemnity issue will dominate negotiations in the sale process”.

If there is one truth to privatisation, it is that the private capital folk make damn sure there will be no bag-holding done by them. The risk is always pushed into the future, and onto taxpayers – the group without a seat at the table. There is no reason why this will go any differently for NSW citizens.

In fact, if the government is serious about forming any manner of trading scheme, it makes sense for them to retain, securely, control over any public utilities that will form key components of such a scheme. Selling them off and then going for cap-and-trade regulation is not at all the sensible order of things.

Report card for America’s infrastructure

Subtitle:

Long commutes.
Dirty Water.
Delayed flights.
Failing Dams.

With each passing day, aging and overburdened infrastructure threatens the economy and quality of life in every state, city and town in the nation.

That’s from the American Society of Civil Engineers. Former students will recognise this complaint from the days of the Highway Bill, USD275b, as pork-laden as one could imagine a single piece of legislation being and ultimately doing bugger-all for anything. It was the usual combination of media vacuity, Republican conservatism and Democratic spinelessness, so we got gay marriage and Terry Schiavo, instead of Government.

We’ve seen what has happened routinely, since: the levees in New Orleans, a steam pipe in New York (built in 1924 and hardly repaired since). I found this “report card” via the blog Management IQ, over at Business Week, and it comes in response to the bridge collapes – relatively minor, really, on the scales of Failed Infrastructure, but man did the news howler monkeys need something (and get it. It’s everywhere).

It might seem silly to blame Republican-model conservatism: those steam pipes sat un-invested-in through Democratic and Republican governments, in all combinations and at all levels, and still they sat there. It isn’t a Republican thing, per se, so much as an ongoing matter of fact. George Monbiot, in his book Captive State, wrote a lot about it, through Tories and New Labour, in Britain.

Nearer to the US, Emily Thornton wrote about the issue in Business Week only recently:

Roads To Riches

Why investors are clamoring to take over America’s highways, bridges, and airports—and why the public should be nervous

…

In the past year, banks and private investment firms have fallen in love with public infrastructure. They’re smitten by the rich cash flows that roads, bridges, airports, parking garages, and shipping ports generate—and the monopolistic advantages that keep those cash flows as steady as a beating heart. Firms are so enamored, in fact, that they’re beginning to consider infrastructure a brand new asset class in itself.

With state and local leaders scrambling for cash to solve short-term fiscal problems, the conditions are ripe for an unprecedented burst of buying and selling. All told, some $100 billion worth of public property could change hands in the next two years, up from less than $7 billion over the past two years; a lease for the Pennsylvania Turnpike could go for more than $30 billion all by itself. “There’s a lot of value trapped in these assets,” says Mark Florian, head of North American infrastructure banking at Goldman, Sachs & Co (GS).

There are some advantages to private control of roads, utilities, lotteries, parking garages, water systems, airports, and other properties. To pay for upkeep, private firms can raise rates at the tollbooth without fear of being penalized in the voting booth. Privateers are also freer to experiment with ideas like peak pricing, a market-based approach to relieving traffic jams. And governments are making use of the cash they’re pulling in—balancing budgets, retiring debt, investing in social programs, and on and on.

But are investors getting an even better deal? It’s a question with major policy implications as governments relinquish control of major public assets for years to come. The aggressive toll hikes embedded in deals all but guarantee pain for lower-income citizens—and enormous profits for the buyers. For example, the investors in the $3.8 billion deal for the Indiana Toll Road, struck in 2006, could break even in year 15 of the 75-year lease, on the way to reaping as much as $21 billion in profits, estimates Merrill Lynch & Co. (MER) What’s more, some public interest groups complain that the revenue from the higher tolls inflicted on all citizens will benefit only a handful of private investors, not the commonweal (see BusinessWeek.com, 4/27/07, “A Golden Gate for Investors“).

There’s also reason to worry about the quality of service on deals that can span 100 years. The newly private toll roads are being managed well now, but owners could sell them to other parties that might not operate them as capably in the future. Already, the experience outside of toll roads has been mixed: The Atlanta city water system, for example, was so poorly managed by private owners that the government reclaimed it.

It’s a pretty good piece, detailing the few neat characteristics of investing privately in public infrastructure. It is extremely low-risk, with a captive market. That captivity being one of the problems, as Sydneysiders discovered with the cross-city tunnel, for example. Every country, every city will, by now, have a local variant of the same theme.

The other problem, as the highway bill, New Orleans levees, New York steam pipes, etc. bring out every now and then, is that there is little incentive to invest in proper infrastructural upkeep – even by government, still less by private managers. Only recently the Metronet story demonstrates the pitfalls of even going halfsies, and letting the government keep responsibility, supposedly, of the infrastructure.

If you’ve read this blog at all, or if you sift through the privatisation stories, you’ll notice that I am not, at all, a fan, but the US makes a very distinct example. Since the early days of FDR and the freezing-out of the Republicans, they have deliberately taken the country back from the bottom-up: comptroller, state houses and finally gerrymandering whatever they’d missed, once they had Congress and the Senate (thank you, Gingrich revolution). Anyone the least bit left heard this in any grassroots/Daily Kos stories at the last election.

Along the way, the (mostly) Republican brand of conservatism (for Gingrich and Vitter types, read: impeach Clinton while nailing everything-that-moves-and-isn’t-their-wife) contributed greatly to this problem: underinvestment in schools, highways, hospitals, telecommunications, you name it (again, Democrats and the media take their place in the blame, either as good people who did nothing or, like Jack Murtha as a well-known case, as bad as anyone else in the house). Privatisation followed the Grover Norquist school of drowning government in a bathtub, i.e. starving State and local treasuries of funds. Lack of proper oversight meant that, once private, little was done to ensure that private money was in fact going to maintenance.

This is another moral hazard problem. If you bought a highway, motorway, bridge, tunnel, rail network or so forth, where is your incentive to actually maintain it properly? If proper oversight doesn’t force you to, fine you, take your property away, then there is no risk there. In the event of a disaster the government will be needed anyway because of the scale – so why bother?

This is the problem, and what makes the US a great example. The government does not invest anything like at the required level, because pork and highways to bloody nowhere in Alaska are too important (if they did, the National Guard would have had its equipment replaced, not blown to shit in a desert in Iraq and left in pieces). Once privatised, infrastructure is still not properly maintained. In fact it, like the steam pipes in New York, effectively disappear, until they blow up in our faces.

This brings us back to the American Society of Civil Engineers, who tell us, consistently in fact, that more than 27% of the country’s bridges are “structurally deficient or functionally obsolete.” Or that “$1.6 trillion is needed over a five-year period to bring the nation’s infrastructure to a good condition.” Their ‘Action Plan’ can be found here. It’s worth going through.

In a conversation with a colleague about the ability of the US to protect/repair its way out of whatever will happen with climate change, he insisted I not use New Orleans as an example for my side – because it is poor and nobody gives a shit about it. I agree, to an extent, just as I agree with the assessment of Kanye West, to an extent (in that it isn’t so much that Bush doesn’t like black people, he just doesn’t understand poverty. When he refers to a woman working three jobs and says it’s great, or points to a war veteran and says he’ll get him some new legs. He clearly has no empathy or imagination whatsoever). If Manhattan fell to an earthquake or a tsunami or cyclone, then we’d be able to really judge.

It is, though, an example of a critical problem with governance. Senators, for example, are concerned with their own states. The money to properly fortify levees in New Orleans will be assigned not based on general recognition of that need, but the outcome of horse-trading, during which other states will get money they do not need. That is not government, that is politics. Privatisation and under-investment in public infrastructure is not government, it is business. At some point (some point before the disasters) we need government.

If you can’t believe the American Society of Civil Engineers, who can you believe? Economics students, join in with the most obvious rebuttal (Jason, if you’re reading this, no coaching). I’ll give you a hint: it is called the Agency Problem.