News & Analysis
Investment Banks See Opportunities in Crumbling Roads and Bridges
Cleaning up roadkill and maintaining runways may not sound like cutting-edge investments. But banks and funds with big money seem to think so. Reeling from more exotic investments that imploded during the credit crisis, Kohlberg Kravis Roberts, Carlyle Group, Goldman Sachs, Morgan Stanley and Credit Suisse are among the investors who have amassed an estimated $250 billion to finance a wave of infrastructure projects in the United States and overseas. Much of it was raised in the past two years, although some investors – mainly outside the United States – have been in the business for a long time. Macquarie Bank, which is based in Australia and is the world's largest private manager of infrastructure, has funds with stakes in airports from Sydney to Brussels to Mexico and other investments like Thames Water in Britain. Emerging economies are another target. Morgan Stanley hopes to invest up to a quarter of its $4 billion global infrastructure fund in India, a senior executive at the bank, Gautam Bhandari, told Reuters this week. Until recently, the use of private funds to build and manage large-scale U.S. infrastructure assets was slow to take root. States and towns could raise taxes and user fees or turn to the municipal bond market. But the strategy is gaining steam in the United States as governments struggle under mounting deficits that have limited their ability to improve crumbling roads, bridges and even airports. With politicians like Governor Arnold Schwarzenegger of California, warning of a national infrastructure crisis, public resistance to private financing may start to ease. – International Herald Tribune
Dominant Social Theme: A little privatization never hurt. Good solution to big government.
Free-Market Analysis: The kind of privatization that is being considered by American governments these days is actually not a return to the private marketplace that defined America during its wealth-creating heyday. Privatization actually means the provision of services by private entities. But what is being considered in a cash-strapped America is the USE of private entities to perform public functions more efficiently than government entities may be able to perform them.
The single salient point in all this is that government is a monopoly and that monopolies are endlessly inefficient. Whether the monopoly service is administered by a "private" or "public' entity, the result will eventually be the same: corruption and gradual diminishment of services. In fact, numerous American states have tried some sort of "privatization" of this sort in the recent past and the results have not been good. In New Jersey, for instance, the results were so dismal that the state ended up taking back over the functions that had been farmed out.
What is actually going on is that the state is making the private sector the collection agent for state coffers. Wall Street sees an opportunity in this, no doubt because Wall Street has unfortunately helped in the past with the gradual blurring of America's public and private sector and understands the mechanism better than most. Also, for those with the requisite funds, there is big money in public-private partnerships and less risk, too. But the downside is that separation between the services of government and the role of the private sector is thoroughly confused in the public's mind, leading to the perception that there is neither a qualitative nor quantitative difference between such endeavors.
This is actually a very dangerous perception for those who believe that free-markets must be encouraged and cultivated if the West is to continue on as a viable cultural and sociopolitical entity for more than a privileged few. The gradual merger of the two sectors is a bit analogous to when, in Roman times, the Empire hired private citizens to become tax collectors for a percentage of the take.
Conflating private and public sector functions is a sure sign of a civil society's erosion. First the state aggressively expands its functions – then having done so, it rents back authority to the private sector for a "piece of the action." There is another name for this of course: fascism – the use of private enterprise to enforce government authoritarianism. The current American administration's use of private mercenary forces, the talk of turning toll roads throughout the United States over to foreign entities, the attempts to co-opt organized religion for public purposes, complete with public funding, all of these are indications of a blurring of public and private functions in the United States and actually in the Euro-zone as well.
Conclusion: Of course, it is better for private enterprise to provide necessary civil services than public entities. But private entities should provide these services not on a contractual basis but as an outgrowth of a business need – complete with other competitors who are providing similar services. Were this to take place, America's "crumbling infrastructure" would soon right itself and likely taxes would not have to be raised in the process. But the kind of privatization that is apparently being discussed now will be both costly and destructive. Those who initially participate in such "privatizations" will doubtless profit, as will certain select government officials. In the longer term, all will lose – except perhaps those who have taken what they can get and then departed, leaving behind an even messier situation.