On Selling Assets

A reader sent me the following via e-mail. He thought it was one of the best things he had read on privatization and I agree with him. It is rather long.

The Highwaymen

Why you could soon be paying Wall Street investors, Australian bankers,
and Spanish builders for the privilege of driving on American roads.

by Daniel Schulman with James Ridgeway

January/February 2007 Issue


"the road is one succession of dust, ruts, pits, and holes." So
wrote Dwight D. Eisenhower, then a young lieutenant colonel, in November
1919, after heading out on a cross-country trip with a convoy of Army
vehicles in order to test the viability of the nation's highways in case
of a military emergency. To this description of one major road across
the west, Eisenhower added reports of impassable mud, unstable sand,
and wooden bridges that cracked beneath the weight of the trucks. In
Illinois, the convoy "started on dirt roads, and practically no more
pavement was encountered until reaching California."
It took 62 days for the trucks to make the trip from Washington,
D.C., to San Francisco, and another 37 years for Ike to complete a
quest, inspired by this youthful journey and by his World War II
observations of Germany's autobahns, to build a national road system for the
United States. In 1956, President Eisenhower signed the Federal-Aid Highway
Act, which called for the federal and state governments to build 41,000
miles of high-quality roads across the nation, over rivers and gorges,
swamps and deserts, over and through vast mountain ranges, in what
would later be called the "greatest public works project in human
history." So vital to the public interest did Eisenhower, an old-style fiscal
conservative, consider the interstate highway system, he even authorized
the federal government to assume 90 percent of the massive cost.
Fifty years to the day after Ike put his pen to the Highway Act,
another Republican signed off on another historic highway project. On
June 29, 2006, Mitch Daniels, the former Bush administration official
turned governor of Indiana, was greeted with a round of applause as he
stepped into a conference room packed with reporters and state lawmakers.
The last of eight wire transfers had landed in the state's account,
making it official: Indiana had received $3.8 billion from a foreign
consortium made up of the Spanish construction firm Cintra and the Macquarie
Infrastructure Group (mig) of Australia, and in exchange the state
would hand over operation of the 157-mile Indiana Toll Road for the next
75 years. The arrangement would yield hundreds of millions of dollars in
tax breaks for the consortium, which also received immunity from most
local and state taxes in its contract with Indiana. And, of course, the
consortium would collect all the tolls, which it was allowed to r!
aise to levels far beyond what Hoosiers had been used to. By one
calculation, the Toll Road would generate more than $11 billion over the
75-year life of the contract, a nice return on mig-Cintra's $3.8 billion
investment.
The deal to privatize the Toll Road had been almost a year in the
making. Proponents celebrated it as a no-pain, all-gain way to off-load
maintenance expenses and mobilize new highway-building funds without
raising taxes. Opponents lambasted it as a major turn toward handing the
nation's common property over to private firms, and at fire-sale
prices to boot.
The one thing everyone agreed on was that the Indiana deal was
just a prelude to a host of such efforts to come. Across the nation, there
is now talk of privatizing everything from the New York Thruway to the
Ohio, Pennsylvania, and New Jersey turnpikes, as well as of inviting
the private sector to build and operate highways and bridges from
Alabama to Alaska. More than 20 states have enacted legislation allowing
public-private partnerships, or P3s, to run highways. Robert Poole, the
founder of the libertarian Reason Foundation and a longtime privatization
advocate, estimates that some $25 billion in public-private highway
deals are in the works—a remarkable figure given that as of 1991, the
total cost of the interstate highway system was estimated at $128.9
billion.
On the same day the Indiana Toll Road deal closed, another
Australian toll road operator, Transurban, paid more than half a billion
dollars for a 99-year lease on Virginia's Pocahontas Parkway, and the Texas
Transportation Commission green-lighted a $1.3 billion bid by Cintra
and construction behemoth Zachry Construction to build and operate a
40-mile toll road out of Austin. Many similar deals are now on the horizon,
and mig and Cintra are often part of them. So is Goldman Sachs, the
huge Wall Street firm that has played a remarkable role advising states
on how to structure privatization deals—even while positioning itself to
invest in the toll road market.
Goldman Sachs' role has not been lost on skeptics, who accuse the
firm of playing both sides of the fence. "In essence, they're
double-dipping," says Todd Spencer, executive vice president of the
Owner-Operator Independent Drivers Association, a truckers' group that opposes toll
road privatization. "They're basically in the middle, playing one side
against the other, and it's really, really lucrative."
Despite such concerns, the privatization model has the full
backing of the Bush administration. Tyler Duvall, the U.S. Department of
Transportation's assistant secretary for transportation policy, says dot
has raised the idea with "almost every state" government and is working
on sample legislation that states can use for such projects. "This is a
ground battle in the United States right now," he says. "States just
need to be convinced that this is basically something they should be
considering."
The financial stakes are potentially huge. "You're buying the
infrastructure of the economy, and it's enormously valuable," says John
Schmidt, who served as associate attorney general in the Clinton
administration and as counsel to the city of Chicago on the $1.8 billion
privatization of the Chicago Skyway, the 7.8-mile freeway that connects the
Dan Ryan Expressway in the west to the Indiana Toll Road in the east.
"[Private road operators] haven't been able to get in here previously.
There's been a demand, and it's been bottled up because we just haven't
had privatized infrastructure in this country, so they've been buying
toll roads in Chile and in France. Now, they suddenly have the opportunity
to come into this country."
at the western end of the Indiana Toll Road, just over the
Illinois border, the scenery rolls by like the lyrics to a particularly
forlorn Bruce Springsteen song. Passing over Wolf Lake, infamous in these
parts as the site where "thrill killers" Nathan Leopold and Richard Loeb
dumped the body of 14-year-old Bobby Franks in the 1920s, the highway
skirts ghost factories and decaying main streets until, outside Gary, the
smokestacks give way to cornfields and Christmas tree farms, and the
scenery stays pastoral across the length of northern Indiana. If you've
ever traveled cross-country on I-90, known here as the "main street of
the Midwest," you've driven the Toll Road.
Privatizing this 157-mile interstate artery was the brainchild of
Indiana governor Mitch Daniels, a former Eli Lilly executive and the
director of the White House Office of Management and Budget between 2001
and 2003—a position in which he was known, for his budget-cutting
fervor, as "The Blade." Daniels, by all accounts, began plotting the
privatization of the Indiana Toll Road soon after he took office in January
2005. The new governor was inspired by Chicago's $1.8 billion Skyway deal
but had something far bigger in mind. Leasing out the Toll Road would
be the centerpiece of his transportation plan, "Major Moves," a
name—borrowed from a Hank Williams Jr. album—that Daniels said he came up with
while singing in the shower. Under the plan, Indiana will spend nearly
$12 billion over the next decade on highway construction projects
funded, in part, by the proceeds from the Toll Road lease.
By September 2005, the governor was soliciting bids for the
project, with Goldman Sachs serving as the state's financial adviser—a role
that would net the bank a $20 million advisory fee. The winning company
would maintain and improve the highway, with the lease agreement
spelling out its responsibilities down to the maximum time allowed for
clearing roadkill. In return, the company would collect tolls, which it would
be allowed to raise by a specified percentage each year after 2010.
The deal (including the 75-year term chosen for the lease) was structured
so the companies would gain a huge tax advantage; to further sweeten
the pot, the state instituted the first toll increase in 20 years
shortly before the agreement went through, nearly doubling the rate for
passenger cars and gradually raising truck tolls 120 percent. (The toll for
cars was promptly frozen pending the installation of electronic
tolling, sometime before mid-2008; in the meantime, the state is pa!
ying mig-Cintra the difference.)
Driving the Toll Road on a temperate late-summer morning, the sun
squinting through a thick covering of stratus clouds, it was hard to
find anyone who approved of Daniels' deal. "Our economy's already bad,"
said Amber Kruk, an 18-year-old starting her shift at a Perkins just off
the highway in South Bend. "We don't understand why we're giving this
road to a foreign company." Gassing up his flatbed at a service station
off the Toll Road, 62-year-old trucker Richard DeRohan said he runs
the road less now because of the increased tolls. "It should have stayed
in state hands," he said. "I didn't like when they did it in Chicago.
It should be run by a public entity—they're the ones who created it."
In a New York Times op-ed published in May, not long after
Indiana's state Legislature approved the Toll Road deal, Daniels acknowledged
that public sentiment had run almost 2-to-1 against the idea, and then
summarily dismissed the opposition: "Their hearts were in the right
place, but not their logic." Indiana, he argued, "very nearly tore up its
equivalent of a Powerball check" as Hoosiers convinced themselves
"either that our proposal borrowed from the future, or that it gave away a
part of America to 'foreigners.'"
In fact, Daniels argued in a paper he wrote for the Reason
Foundation last spring, "any businessperson will recognize our decision here
as the freeing of trapped value from an underperforming asset, to be
redeployed into a better use with higher returns." Yet his administration
failed to commission an independent financial analysis of the Toll Road
project until the deal was almost done—and when it did, internal
emails obtained by Mother Jones show, the motivation was primarily
political. "Current criticism from opposition is 'no independent analysis' and
Scott and his team have kindly volunteered to fill this void," one
high-level state official wrote in a February 2006 email, referring to Scott
Nickerson, an executive at the accounting firm Crowe Chizek, which
conducted the analysis.
The emails suggest that Daniels' administration remained
preoccupied with how to deploy the analysis to best political advantage—for
example, by releasing it through a third party, such as a think tank. "The
Governor is of the opinion that in order for our response to be
politically independent, he would prefer that Crowe not be formally engaged to
do this work," one email states (emphasis in original). According to
another, "Upon further discussion, the group decided that it would be
beneficial to be engaged by a separate entity to allow us to perform the
consulting project and avoid the appearance of a lack of objective,
independent examination."
In the end, the "independent" analysis, released just days before
legislators were set to vote on Daniels' plan, found exactly what the
state had been arguing all along—that the private-sector bid far
surpassed what the state stood to earn on its own. Near midnight on the final
day of the legislative session, after contentious debate, the bill
squeaked through the House in a 51 to 48 party-line vote.
Not everyone bought Crowe Chizek's conclusions, though. Roger
Skurski, a professor emeritus of economics at Notre Dame, analyzed the deal
extensively on behalf of an Indiana law firm that brought suit to
block the transaction. (The lawsuit ultimately failed.) It was Skurski who
found that the value of the road, over a 75-year term, could be as much
as $11.38 billion; in a letter to Rep. Thomas Petri, the Wisconsin
Republican who chaired the U.S. House Subcommittee on Highways, Transit,
and Pipelines, the economist wrote that "based on the State of Indiana's
own studies and figures...it seems that the conclusion changes from
'deal' to 'no deal.'"
"The public was ignored on this; public opinion was ignored on
this," says Dave Menzer, an organizer at Citizens Action Coalition, an
Indianapolis-based advocacy group that also joined the anti-privatization
suit. "I think that increasingly the public feels like what's driving
politics, what's driving these decisions, is multinational corporations
and deal-makers like Goldman Sachs, Merrill Lynch, and Morgan Stanley.
They're the ones making tens of millions of dollars ultimately at the
public's expense."
Shortly after the coalition launched its campaign to stop the
deal, Menzer says, its six phone lines lit up with callers from around the
country seeking to help pay for the lawsuit. In less than a month, it
had helped raise nearly $120,000 toward the legal bills. "We saw so many
different interests coming together saying that they didn't like
this," he says. There were libertarians and Republicans, who felt the state
was giving away too much for too little; long-haul truckers, who viewed
the deal as the first stage of a national trend that could threaten
their livelihoods; and environmentalists, who in the fine print of
Daniels' "Major Moves" plan had noticed an effort to revive (and possibly
privatize) a long-stalled project to construct Interstate 69, the
so-called nafta highway, through the farmlands of southern Indiana.
So why did Daniels insist on pushing the project through in the
face of so much opposition? Daniels' office turned down Mother Jones'
requests for an interview, but quite a few Hoosiers have come to believe
that the governor could have been taking his cue from Washington. In
this scenario, Indiana, a bellwether state in many ways, would serve as a
test case. "Working to make Indiana one of the first states to pave the
way for road privatization, to make a bad pun, was definitely his
motivation," Menzer says.
in mid-September, as the 61st United Nations General Assembly
convened in New York, the Waldorf Astoria's dim, ornate lobby was teeming
with diplomats and dignitaries who sat huddled in armchairs, conferring
in a multitude of languages. Rumor had it that President Bush himself
had dropped by the hotel the night before.
Down the hall, in the chandeliered entryway that leads to the
Waldorf's Park Avenue entrance, 300 sharply dressed men and women were
carrying on a different sort of diplomacy. These delegates, as they
referred to themselves, were representatives from white-shoe investment banks
and consultancies; high-powered lawyers; executives from the world's
leading infrastructure companies; and, sprinkled here and there, federal
and state officials, who never seemed to go long without being pulled
into a conversation and handed a business card. They were at the Waldorf
for North American ppp 2006—a conference dedicated entirely to
infrastructure privatization in the United States.
As the conference opened, on the morning of September 19, Tom
Nelthorpe, the editor of the trade magazine Project Finance, addressed the
audience, drawing a laugh when he joked about pirates "plundering the
resources of the New World." "I hope you'll find today's varied program
evidence of a more sophisticated approach," he said.
Emerging markets rarely emerge solely on their own, and would-be
road operators have spent years working to convince state and local
officials that privatization is a no-lose proposition. It has created
something of an echo-chamber effect, says John Foote, a senior fellow at
Harvard's Kennedy School of Government who specializes in transportation
issues. "If you've got enough people whispering in the ears of governors
and mayors and so forth saying that this is the greatest thing since
sliced bread and don't miss the boat, pretty soon people start believing
it."
Perhaps the most tireless of the privatization advocates is Mark
Florian, the chief operating officer of Goldman Sachs' municipal finance
division, who advised Chicago and Indiana on their toll road deals and
says he has personally visited more than 35 statehouses to "help spur
the market." Florian was a speaker at the Waldorf conference, and after
his remarks in the hotel's lavish ballroom, the Goldman Sachs
executive—who bears a mild resemblance to Stephen Colbert—was instantly mobbed,
rock star style, by delegates, all of whom seemed to be on a
first-name basis with him.
"I at times tell my colleagues that I kind of feel like a
missionary—out trying to sell the religion," Florian told Mother Jones. "We
have been heavily invested in this."
Florian's employer isn't just any old Wall Street firm. It is one
of the nation's most active and most profitable investment banks, and
top Goldman Sachs officials have served in numerous administrations.
Last summer, President Bush tapped its ceo, Henry "Hank" Paulson, as
secretary of the treasury. Another former Goldman Sachs ceo is New Jersey
governor Jon Corzine, who in September commissioned an analysis of
whether state assets, including the New Jersey Turnpike, should be turned
over to private companies. In addition to advising Indiana on the Toll
Road deal, Goldman Sachs has worked with Texas governor Rick Perry's
administration on privatization projects, and according to Schmidt, the
former adviser to the Chicago mayor's office, it was a Goldman Sachs
representative who first pitched the city on the idea of leasing out the
Skyway.
That deal, which yielded $9 million in fees for Goldman Sachs, was
"an eye-opener" for the company, Florian recalls: "That was a pretty
phenomenal transaction. As soon as we were involved in that and saw the
potential application of doing this more broadly, we were very excited
about doing that." After the Skyway lease closed, Florian says, Goldman
Sachs was inundated with calls from investors worldwide who wanted a
piece of America's transportation infrastructure. "We said, 'Well, gee,
if all these people are interested in investing, perhaps we can create
a vehicle for them to invest through,'" he explains. To that end,
Goldman Sachs put together an infrastructure fund that, by the time Florian
addressed the conference, had already surpassed its original $3 billion
target. Other investment firms, including Morgan Stanley and the
Carlyle Group, began putting together their own funds. So appealing is the
infrastructure market that Goldman Sachs has made significant chang!
es to its municipal finance group to better position itself for a
coming boom.
When Goldman Sachs began advising Indiana on selling its toll
road, it failed to mention to the state that it was putting together a fund
whose sole purpose would be to pick up infrastructure for the best
price possible in order to maximize returns for its investors. Nor did the
bank advertise the fact that, even as it was advising Indiana on how
to get the best return, its Australian subsidiary's mutual funds were
ratcheting up their positions in mig—becoming de facto investors in the
deal.
"The firm is an established adviser, but we also have this big
investment arm," Florian told Mother Jones, arguing that Goldman Sachs'
dual nature typically doesn't cause a problem in corporate deals. "But
this is a trickier marketplace, and people are cognizant of that because
it is so public. It's so new.... We're going to really feel our way
along here." A Goldman Sachs spokesman later contacted Mother Jones to
stress that there is "a wall" between the firm's investment and advisory
divisions. "Asset management makes its investment decisions
independently of the rest of the firm," he said. Asked whether the firm has a
system to prevent conflicts of interest, the spokesman demurred.
Florian says Goldman Sachs does have a system for avoiding
conflicts in situations when Goldman is a principal investor in a deal. "We
put in a voice mail and some information about that situation and what
our role might be, and it literally goes around the world.... It's a good
system, but it's not always perfect." Indeed, the system didn't stop
Goldman Sachs last spring from vying to advise the city of Chicago on a
deal to privatize Midway airport—even as it was seeking, along with
other partners, to take over British Airports Authority, one of the
companies likely to bid on the airport.
"One of the things we've learned in these recent corporate
scandals is that those firewalls may not be very soundproof," says Duane
Windsor, a professor of business management at Rice University and an expert
on business ethics. "There is a lot of leakage back and forth...that
kind of problem where the motives are so mixed that it's hard to tell
why you are getting a certain piece of advice.
"There's no reason to think the people in these companies are
abnormally honest," he adds wryly.
Dennis Enright, a principal at NW Financial Group, a New
Jersey-based investment banking firm that advises municipal governments, says
that in transactions involving vital public assets, investment banks such
as Goldman Sachs should be carefully watched. "It does seem odd that
they are effectively teeing up assets for their corporate clients to
buy," he says. "In most situations, that wouldn't be deemed ethical." John
Foote, the Kennedy School fellow, also suggests that Goldman Sachs has
"some decisions to make. People don't want them playing on both sides
of the fence."
So, we asked Florian, does Goldman Sachs want to be an adviser or
an investor in the business of roads? "Both," he replied.
since its emergence as a major political issue in the Reagan era,
privatization has become a default option for politicians of both
parties aiming to off-load everything from prisons and welfare offices to
Social Security. The movement has spawned its own industry of
contractors, consultants, think tanks (with the Reason Foundation in the lead),
and lobbyists; as a result, private companies now do everything from
feeding soldiers in Iraq to taking welfare applications and even operating
entire city halls for towns such as Sandy Springs, Georgia, a city of
85,000 that has outsourced its public works, administration, and finance
to the Colorado-based firm ch2m hill. But the brass ring has long been
seen to be the nation's enormous, and aging, infrastructure.
Roads, in particular, are ripe for the picking. Congestion is
increasing, and the Federal Highway Administration estimates that it will
cost $50 billion a year above current levels of federal, state, and
local highway funding to rehab existing bridges and roads over the next 16
years. Where to get that money, without raising taxes? Privatization
promises a quick fix—and a way to outsource difficult decisions, like
raising tolls, to entities that don't have to worry about getting
reelected.
More often than not, those entities are foreign—primarily because,
unlike U.S. firms, foreign companies have years of experience
operating private toll roads in South America, Europe, and Australia. One of
the biggest among them is mig, a $6 billion subsidiary of Macquarie Bank
Ltd. The company operates roads in the United Kingdom, Canada, and
Germany, among other countries, but, as ceo Stephen Allen told the
Australian TV show Business Sunday in 2005, "The attractive market to us is the
U.S.... We're well positioned in what we think could be a huge
market." The company's annual report offers an upbeat illustration of mig's
business: a picture of a sad-faced terrier alone in a living room at 6:10
p.m. ("Before"); a picture of the same terrier with attractive couple,
in the same living room, same time ("After"). "Our motorways deliver
people to places faster than if they used the often heavily congested,
slower alternative routes," the copy notes.
mig once owned 40 percent of Cintra (Concesiones de
Infraestructuras de Transporte, S.A.), a Spanish company whose holdings include 21
roads across Europe and the Americas. Cintra's 2005 annual report
describes the company as "one of the world's leading private transportation
infrastructure developers," and reassures investors that it offers the
magical combination of high profits and "a low risk profile." Investors
in toll roads face stable revenues as well as expenses—and, best of all,
"limited competition."
Indeed, private road operators often insist on noncompete clauses
that limit governments from expanding nearby roads. In 2003, Orange
County bought back the lease for a set of pay-to-drive express lanes in
the median of Route 91, just so it could finally expand the adjacent
road. Toll road companies can even get governments to do their enforcement
for them: In July 2004, the consortium that owns Toronto's 407 etr, a
67-mile highway that relies on transponders and cameras to collect
tolls, sued the provincial government to force it to deny license plate
renewals to motorists who hadn't paid their tolls. In the end, the
consortium, which included mig and Cintra, was successful.
Over the past few years, the federal government has rolled out the
welcome mat for private road companies. The 2005 highway bill changed
the tax code to allow private firms to raise tax-exempt financing for
road projects, something that only governments were able to do up to
now. (For congressional pork buffs, this was the same legislation that
contained Alaska Republican congressman Don Young's "bridge to nowhere,"
and that, by way of homage to Young's wife, Lu, was named the Safe,
Accountable, Flexible, Efficient Transportation Equity Act—A Legacy for
Users, a.k.a. safetea-lu.) The bill also expanded eligibility for a
transportation subsidy program that includes loan guarantees and lines of
credit, and created a pilot program that lets participating states use
tolling to finance interstate highway construction and invite
private-sector participation on the projects. "It's a very, very sweet deal," says
a veteran congressional transportation committee staffer who!
requested anonymity because of his role advising members on highway
policy.
one morning last May, Congress took up the issue of highway
privatization in a hearing of the House Subcommittee on Highways, Transit,
and Pipelines. In attendance were D.J. Gribbin, a former chief counsel to
the Federal Highway Administration who went to work as a lobbyist for
Macquarie early last year; Goldman Sachs' Mark Florian; and Governor
Mitch Daniels, who was then a little more than a month away from sealing
his historic deal with Cintra and mig.
Referring to Indiana's decision to privatize its toll road,
Daniels told the committee that so far, no one in government has come up with
a workable solution to patch the gap between transportation needs and
available funding. "All across our state, hundreds of road and bridge
projects have been promised for years, in some cases decades, with no
source of funding and no hope of becoming reality unless bold new steps
are taken.... We looked at every option to address this funding
shortfall, from raising the state gas tax [to] issuing more debt, increasing
heavy truck fees, and increasing vehicle registration fees, to name just
a few. It was clear that very few of these 200-plus projects would
become reality on a business-as-usual basis."
He later remarked, "Just as many business units are more valuable
if separated from their conglomerate parent, an asset like a highway
can be worth vastly more under different management."
The hearing was a fairly docile affair—that is, until Oregon's
Peter DeFazio, the ranking Democrat on the subcommittee, got his turn
questioning Daniels. "So you're saying that there's no political will to
raise the tolls," he began, "but if you enter into a binding contract
which gives a private entity the right to infinitely raise tolls, then
that'll happen—but politically you couldn't say we're going to go out and
raise the tolls."
"Well, you're a busy man, Congressman," Daniels responded dryly.
"I don't expect you to understand our state."
"No, sir. I'm just asking a question," DeFazio shot back, his
voice rising. "Are we outsourcing political will to a private entity here?"
When DeFazio spoke with Mother Jones months later, he was still
seething. Daniels, he said, "just screwed the state of Indiana and the
people of the state of Indiana." In his view, mig-Cintra has "a license
to print money here. They do the deal, put money up front, turn around
and go to a bank, which will gladly give them whatever they want, and
pay themselves back, and they are left with equity and debt. They are
projecting that they already would have broken even around the 15th year.
So we've committed an asset for 75 years and after 15 years the state
could have been making money on it."
DeFazio continued, "When you look at the Chicago Skyway, that's
even worse. They are not even reinvesting the proceeds of the sale in
transportation. They're using them for operating costs. That would be like
anybody selling their assets in order to live. You can't sell your
assets very long to put food on the table—before long you're out of
assets. Chicago has sold an asset, which will be extraordinarily profitable
for the company that got it."
DeFazio's take harkens back to Eisenhower and his vision of a
national highway system as vital to economic development, commerce, and
even national security. "It's a scam, basically," he says. "And you lose
control of your transportation infrastructure. It means you fragment the
system ultimately. It just does not make sense for an integrated
national transportation system."
The transportation committee staffer echoes DeFazio's broad
concerns. "You're replacing a federal-state partnership with a public-private
partnership," he says, "and the whole idea of developing a national
transportation system may go by the wayside." When asked whether private
interests will begin to drive transportation decisions, including when
and where roads are constructed, he responded, "Absolutely. They would
definitely only go to where the profit is." Just as the creation of a
National Highway System promised, in Eisenhower's words, to "change the
face of America," so too could its demise.
Ralph Nader, too, has been vocal in opposing the privatization
deals. Last February he wrote a scathing letter to Mitch Daniels,
comparing the toll road lease to the Louisiana Purchase, "only Indiana is the
France of this deal. You are taking a minuscule up-front payment in
return for a large downstream private profit to a foreign company which is
being handed a captive customer base." Nader says he and other consumer
advocates were late to recognize the trend. "Who would have dreamed"
that the nation would begin actually selling off its core assets, he
told Mother Jones. "That's new. They caught everybody napping."
Some conservatives are also sounding the alarm. Phyllis Schlafly,
writing for the conservative publication Human Events in September
2006, tore into the recent privatization deals under the colorful heading
"Greedy Politicians Seduced by Siren Song of Filthy Foreign Lucre."
"Why the rush to sell our transportation systems to foreigners?"
she queried. "'Follow the money' explains all. State and local
governments pocket the money upfront and get to spend it here and now, so
politicians can cover their runaway budget deficits and enjoy the political
rewards of spending for new facilities. They ignore the fact that U.S.
citizens must pay tolls to foreign landlords for the next two or three
or even four generations."
In some places, highway deals have already become campaign fodder:
In Texas, where Governor Rick Perry has proposed a $184 billion,
4,000-mile network of toll roads, which is expected to be financed largely
through public-private partnerships, the notion proved widely unpopular,
and independent gubernatorial candidate Carole Keeton Strayhorn made
the proposal a key target of her campaign. "I don't think the people
want anything that is riddled with personal profiteering and enrichment,
and this is riddled with all of the above," she told Mother Jones last
July. "This is critical infrastructure and you are turning it over to a
foreign company with a secret contract."
Perry has refused to release many of the details of the $1.3
billion contract his administration has signed with Cintra for a toll road
from Austin to Seguin. The Spanish company has enjoyed a cozy
relationship with the governor's office: Perry's former legislative director, Dan
Shelley, worked as a Cintra consultant and lobbyist prior to joining
the governor's staff, and in September 2005, he went back to work for
Cintra. Both he and his daughter, Jennifer Shelley-Rodriguez, now have
lucrative contracts to lobby Texas legislators on the company's behalf.
More and more, the argument over private roads comes down simply
to the bottom line. Dennis Enright, the infrastructure expert at NW
Financial, says the most common argument for privatization deals—that
government simply can't come up with the kind of big money private companies
can mobilize—is a myth: "If the public sector wants to raise $1.8
billion or $3.8 billion, they can do it themselves" with standard financing
techniques. The problem with public-private deals, Enright argues, is
that the companies will cherry-pick the most profitable roads and leave
much of the public stuck in the slow lane. He offers this
hypothetical: "If you want to go on the Chicago Skyway during rush hour, they can
charge you a much higher price because it's premium travel time. Now
what does that do to the rest of the transportation system? It puts all of
those people who can't use the Skyway onto the adjacent roads. Now the
adjacent roads are backed up further. Now [the Skyway!
] can charge even more because they have more of a time advantage."
Enright concludes, "The private operator's fidelity is to his
stockholders—not to the public transportation system, not to the people who
use the road. His duty is to get the most possible revenues out of the
asset." Enright's firm did a study showing that if a pricing scheme
similar to the one agreed to in Chicago had been applied to New York's
Holland Tunnel for the past 70 years, the toll would stand at $185 rather
than the current $6.
Higher tolls and a proliferation of private roads are certainly in
the nation's future unless the federal government delivers some other
solution to a looming funding crisis. The federal highway trust fund,
which is financed by the proceeds of the federal gas tax, is running out
of money—in part because lawmakers have not dared to raise the tax,
currently 18.4 cents per gallon, since the mid-'90s. At this rate, the
fund, which is the primary source of money for federal highways, will be
spending more than it takes in by 2009. "A question has been raised
about what the proper federal role in transportation is," the
transportation committee staffer says. That question now faces Congress, which has
responded, in trademark fashion, by creating a commission. In 2005, as
lawmakers hefted safetea-lu onto the president's desk, they convened
the National Surface Transportation Policy and Revenue Study Commission,
with the lofty mandate of exploring ways to "preserve and en!
hance the surface transportation system to meet the needs of the
United States for the 21st century."
The commission's chair is Transportation Secretary Mary Peters,
who is, as dot's Tyler Duvall puts it, a "tremendous champion" of
privatization. Joining her is Paul Weyrich, the founder of the Heritage
Foundation—the conservative think tank that advocates privatization. Another
commission member, Cornell economist R. Rick Geddes, has suggested
turning the U.S. Postal Service over to the private sector. Geddes told
Mother Jones that, while he is not yet sold on the idea of private
highways, he is "sympathetic" to the model; he said the commission's
recommendations, due by July 1, will likely suggest a number of "tools in the
toolbox."
DeFazio, however, fears the panel may have already made its
choice. "My understanding is it's turning more and more and more toward a
sole focus of how to justify the privatization of infrastructure—just like
Bush's Social Security commission," he says. "You couldn't be on the
commission to study the future of Social Security unless you signed off
in favor of a privatization solution in the beginning. It sounds like
they're trying to pervert the commission we created to take the same
direction."

Additional reporting by Josh Harkinson and Jennifer Wedekind.



@2007 The Foundation for National Progress

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