Selling off Assets: A Road to Failure?

Today I read an article on Reuters indicating voters are increasingly supportive of government leasing infrastructure assets. I cannot imagine how anyone who truly understands infrastructure and government can come away with a blanket statement supporting privatization of government assets.Highway
From reading the story, I can only think that these voters are making this decision after politicians have given them little background information and the choice of selling/leasing or paying more taxes. Of course most voters presented with only that information would choose to privatize.

But let’s look at what really happens in many cases when government decides to privatize:

Why do those in charge of our assets even consider something like this?

  • Those in charge decide they need cash, and fast, without raising taxes. So they start looking around at what they can sell.
  • Those in charge are approached by a private entity with a privatization proposal.
  • The government entity might lose key workers responsible for the operation and maintenance of a facility and not want to bother looking around for new employees.
  • Those in charge are trying to cut costs and start looking at dumping assets that require large expenditures.

Often these deals are set up with all the best of intentions. Government leaders are truly trying to cut costs and save money; private companies are just trying to make a living and see a revenue stream that allows them to offer a service.

So why is privatization so risky for government?

First of all, because what is being sold is usually vital to the health, safety, and/or welfare of the community. Let’s just look at two examples of assets that are owned and maintained by government.

Major thoroughfares in our country were initially built for the purpose of helping the U.S. in times of war to allow for fast movement of troops and equipment across our country. They also allow for fast movement of goods and services across our country and as such have now become vital to the economic well-being of our country.

Water and Wastewater Operations
In the late 1800s and early 1900s our country lost thousands due to outbreaks of disease and sickness – much of it linked to poor sanitation and contaminated drinking water supplies. People today are so used to having safe drinking water and effective elimination of wastes that they might take all this for granted. But all of this is only possible because of strict regulations by the EPA, trained professionals who provide treatment and maintenance of our water and wastewater facilities, and continued investment in the systems by our politicians.

So let’s consider some of the risks that can occur in each of these examples if a community leases or sells government assets:

Example 1: A government entity approves a long-term lease to a private company for a major tollway that is designed with a 20 year life. After 20 years of collecting tolls, the company is now faced with a 40 million dollar road and bridge reconstruction project. If they were a well-run business, they would have banked a portion of their revenue to help fund this. The other alternative available is a bond for the project backed by future revenues.

But what if they didn’t bank this money or they do not want to or can’t afford to give up future revenues. Looking at losing millions, they decide to fold or go bankrupt? What is the government entity to do? Not fixing the asset is not an option. People depend on it; the economy depends on it. So the government is then faced with spending 40 million after not collecting tolls for all those years and having to pledge future tolls to the project. And in the end, the taxpayers have to pay anyway – they just put it off 20 years. The government must also spend money ramping up their road maintenance departments to handle the return of this asset.

And where is the money government got in the up front lease purchase? Who knows. Often these funds seem to be spent on non-infrastructure related expenditures. Many times used to shore up failed funds that were poorly managed.

Example 2 – a major tollway is sold to a private company. After about 10 years of little to no maintenance, the road starts to fail considerably or perhaps the traffic on the road increases to the point that there are increase accidents and travel times. People complain to the company, but why should the company listen to them. The road is a major corridor, and they know people will drive it. People have little to no recourse – there is no one to be voted out in this case. So people are forced to have to use a failed asset with no voice in the matter.

Example 3 – God forbid our country goes to war and fighting occurs on U.S. soil. We need to move troops and equipment across the land and provide vital services to our citizens, but the country we are at war with owns our assets: roads, water, wastewater. Even if we somehow secure these facilities, enough significant damage could have been done before this could happen. And now with many assets controlled over the Internet, who knows what damage they could do or have provided for in these facilities in case of this type of situation. Is this a paranoid outlook and extreme. Yes, but is it worth the risk? Just because some politician doesn’t want to work a little harder or better at managing the asset.

Example 4 – Now let’s look at an asset that might at first not even seem that vital to the well-being of a community: parking meters in a downtown. The community for whatever reason decides to approve a long-term lease to a single company. The company is ill-prepared to handle the resulting maintenance and user interactions. People are upset and complain to the government, but they have their money and have no further leverage to get the company to address complaints.

Because the volume of complaints to the government rise to a level that concerns politicians, the government decides to go ahead and perform the maintenance and repairs to the meters themselves using their own staff. And the company continues to collect revenues from the meters as they will for the next 50 or 100 years while the government tries to address citizen concerns. Oh, and by the way, shortly after getting the lease approved, the company raised parking meter rates considerably. And again, the government officials have no leverage to prevent this.

What happens now? In this case, the economic well-being of the community might be threatened if people decide against driving to this community and paying these fees. Local business loses out on sales; local tourism loses visitors.

(The example above might resonate somewhat with those living in Illinois.)

Example 5
– This example will only address privatization of a service – not even selling or leasing an asset, and this example is based on strictly on a real scenario that played out. A city hires a local hauler to provide solid waste pickup. The deal is the city pays the hauler a flat fee per household for pickup only. The city then pays the landfill the charge for the city’s waste that is dumped there by the hauler. This goes on for many years with the city paying both entities.

Eventually the waste hauler is bought out by another person who discovers the drivers of the garbage trucks have been telling the landfill that all the garbage they dump there came from this city even though the hauler picks up waste from other communities. This city ended up paying for waste from other cities to the tune of about $300,000 that could be documented. Fortunately the new owner agreed to pay it back over time. But now the city is obligated to hire this particular hauler for fear of not getting their money in the future. And even worse, the hauler will not divulge the amount of waste taken each day out of this community – there is no provision requiring him to. Nor can any citizen ask for it because FOIA rules do not cover a private entity.

I could go on and on with examples but will leave it at that since this post is already long enough!

So what is the answer? Is all privatization bad?

I realize some of these examples are worse extremes, but two of the examples relate what has already been experienced by at least two communities. Are there success stories? Yes, most definitely. But as the say, “the devil is in the details.”

So most definitely privatization can work, but not in all cases and not at all if the agreements are poorly written.

If politicians do not have an adequate business background to cut privatization deals, they need to find someone who does to ensure all the issues and potential risks are addressed. And if the risks do not outweigh the upfront payoff, privatization of the asset must not be approved. Because at the end of the day, the citizens are the ones who will be paying the tab for a failed or poorly executed deal.


Public Works Industry Starting to Blog

Saniblog ImageOver the last few years, I have been on the lookout for blogs and other social media related to the public works industry. Up until lately that trough has been a little dry, but fortunately that seems to finally be changing. As I was working on a presentation I am giving in March in Springfield, Ill., to the joint conference of IWEA and ISAWWA, I went searching as I have so often done for blogs related to water and wastewater and found quite a few. One in particular caught my eye: Saniblog.

Not sure why I haven’t come across it before, as the archive dates back to November 2007, but I know I will be subscribing to the feed now that I have found it. I highly encourage anyone working in the environmental/water/wastewater field to take a trip over to this blog. You will be rewarded with a collection of riveting and highly engaging video related to sanitation.


Stimulus Money Won’t Stimulate?

I am disappointed to have to write this blog post but wanted to make sure others were aware of what is happening due to the language of the Recovery Bill with respect to road construction. So far, from what I have been told by DOT employees, the only roads that will be eligible to receive funding from this legislation will be Federal Aid routes. And those road projects will only receive funding if they were already programmed for construction and already have an approved project development report, an approved set of plans and specifications, and are on the April letting (if they are in Illinois).

This means that the only local roads eligible to receive this funding are local roads that were going to be built anyway with federal funds and a small portion of local funds. So how is the Recovery legislation funding going to help out immediately in this case? These local roads were going to be built anyway. This is significant because this means that the money from this legislation is not generating new jobs or new work. It is paying for jobs and work that would have been created and paid for anyway. And the small portion of local funds that are saved are not enough to make a major impact on job creation.

As an engineer who has been working in the civil engineering/public works field for 25+ years, I know I can get a significant road project for my community out to bid in a month or two depending on the extent of the reconstruction. However, this is only true if the roadway is not a Federal Aid highway because the process for getting a project out using that funding mechanism is lengthy and time consuming due to policies and regulations.

Now I also realize they are talking about another wave of funding, but that won’t happen immediately either, and again, local governments will not be able to prepare projects fast enough if they have to use the federal aid funding process.

I guess I had thought the desperate economic situation was going to allow our Federal government to actually award local governments the funds they need to rebuild their infrastructure without having to impose all these policies and regulations since the need to put people to work was professed to be the first and foremost concern. Now, I realize that this program, like so many that have been passed before is just throwing money out the door without really thinking about the mechanism and results.

Looking back what really should have been done to make this work would have been first to meet with local government people who understand how projects are designed, bid out, and constructed, and get input on the most efficient and practical method to get jobs out and put people to work. Unfortunately this does not seem to have happened, and now we are faced with not being able to receive significant funds to make much of a difference – at least at the local level.

I don’t have much insight on the other funding programs in the Recovery Bill other than the water and wastewater sections, and in those areas, they are talking about loans and only a portion of grants to local government so again, I am not sure there will be a significant impact. These projects were going forward anyway with local funds, and since the federal money will only be a loan, these local funds will have to go to pay off the loan and will not be freed up to go towards other projects.

With the Senate yet to make a decision, I suppose there is still a chance to fix this, but I have not seen any signs that the Senate will address this aspect of the Recovery Bill. I still believe that spending money on public works projects would significantly stimulate the economy, but first we have to have projects chosen and eligible for funding. And from down here in local government, I am very sorry to say the Recovery Bill does not appear to be focused on granting eligibility to all local projects that are sitting on the shelf ready to go to bid. Hopefully the Federal and State projects will be enough to make a difference.