United States | The art of the deal

The promise and pitfalls of privatising public assets

Privatisation can increase efficiency and spur investment. It can also go wrong

|WASHINGTON, DC

DONALD TRUMP ran for office promising to spur the private sector to rebuild America’s roads, bridges and airports. But it seems that Republicans want to start their modernisation in the sky. On June 21st House Republicans unveiled a bill that would privatise air-traffic control, a policy the president announced earlier this month. If the administration is to be believed, this is just one of many privatisations that could increase efficiency and encourage infrastructure investment. Could such a national sell-off work?

Unlike much of the world, America has never seen a big push to privatise. That is partly because America did not see a wave of nationalisations after the second world war, as countries like Britain did. As a result, it has few public assets, like airlines or telephone companies, that are obvious candidates to be sold. An exception is land owned by the federal government, which covers 28% of the country. Another is the Tennessee Valley Authority, a public electrical utility established as an economic development project after the Great Depression. (President Obama entertained privatising the TVA during his second term, but did not get round to it.)

Yet America is hardly at the forefront of private infrastructure ownership, either. Its airports, for example, are mostly publicly run, whereas in European cities such as London multiple privately owned airports compete. Though America’s railway tracks are privately owned, its national passenger services are all run by one lumbering state-owned firm, Amtrak. And air-traffic control is choked of investment by the annual budget process. Countries like Canada have turned their systems over to self-funding, non-profit bodies, which are investing in technology. Tracking aircraft with satellites rather than radar may soon allow planes to fly closer together on some routes. America is already five-to-ten years behind, says Bob Poole of the Reason Foundation, a free-market think-tank.

Privatisation works when firms can run assets or services more efficiently than the government can, or when competition between firms can bring down costs over time. Sometimes it is easier for private companies to set prices properly. For example, America’s airports charge planes to land in proportion to their weight; were they privately owned, they would probably base price on runway congestion, which small planes are prone to cause.

Privatisation can also provide a cosmetic accounting benefit, by keeping costly infrastructure investment from pushing up deficits. This may lie behind the administration’s wish to encourage “asset recycling”, a term coined in Australia. The idea is to lease one piece of infrastructure, such as a toll road, to investors, and spend the money raised on something new.

Cheerleaders for asset recycling envisage states leasing stretches of the sprawling interstate highway system to private tolling companies, raising vast sums for new investment. This has not happened much before, partly because a law from 1956 bans tolls on many interstate roads. But much of the system is now at the end of its intended lifespan and politicians are mostly unwilling to raise petrol taxes sufficiently to replace or upgrade it. So lifting the ban on tolls seems appealing.

Whether asset recycling works depends on the details of any given deal. It has a mixed record. In 2006 Indiana sold a 75-year lease on a 157-mile (253km) toll road in the north of the state for $3.8bn. The funds were invested in other roads. The state built 413 miles of new highway and resurfaced another 4,000. The firm that bought the toll rights overpaid and went bankrupt in 2014. But other investors have since taken over the lease, with no noticeable downsides for drivers, according to Aaron Renn of the Manhattan Institute, a think-tank. In fact, the public purse benefited from the overpayment.

But it is equally easy for the taxpayer to end up on the bad side of a deal, and for an unwieldy monopoly to be created. In 2008 Chicago leased its parking meters to a consortium for 75 years for $1.2bn, a price that was almost $1bn too low, according to a report by the city’s inspector-general. Big rises in parking charges caused a public backlash, while the city lost the right to change parking policies without compensating investors. Worst of all, rather than being invested in new assets, the money raised was used to plug the city’s short-term deficits.

Avoiding the temptation to squander the proceeds is the first challenge for any privatisation. It is also important to get the length of the lease right. Very long-term deals are likely to have to be renegotiated, says José Gomez-Ibanez, of Harvard Kennedy School, because circumstances change. The public must also be won over. The ideal model for roads would be to impose tolls only once they have been repaired, says Mr Poole.

It would be up to the states to get such details right. They own most of the relevant assets, like the interstate highways (though these are regulated in Washington). The federal government’s role would be to help, or just to get out of the way. During his campaign, Mr Trump promised to provide $167bn in tax credits to the private sector to encourage investment. His administration also recently promised to allow more private infrastructure projects to issue tax-free debt, much as cities can while they are in charge.

The problem, though, is not a lack of willing investors, says Mr Poole. Infrastructure funds will jump at the chance to invest in American projects, as will pension funds seeking long-lived assets. The problem is a lack of opportunities. The logical place to start, then, would be to expand existing pilot programmes. In 1996 Congress set up such a scheme for privatising airports. Only one, in San Juan, Puerto Rico, has so far taken advantage of it. Similarly small pilots exist for putting tolls on interstate highways. The White House has also said that it is considering encouraging states to privatise assets by paying them a bonus for doing so.

The privatisation push may not succeed; it will certainly spark political opposition. (The air-traffic control proposal is said to have too little support to get out of committee in the Senate.) If it does go ahead, America’s infrastructure will probably benefit. But do not expect every deal to go well.

This article appeared in the United States section of the print edition under the headline "The art of the deal"

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