Public Infrastructure “Privatization” Pitfalls: Penn State Law Prof.’s Article Worth Reading . . . and Passing Along to Your Favorite Elected Official

If I were to choose a single sentence encapsulating why Professor Ellen Dannin’s recent article on public infrastructure privatization is important and worthwhile reading for our elected officials and taxpayers alike, this would be it:

“Nothing at the [Federal Highway Administration] website, however, warns that language commonly found in infrastructure privatization contracts shifts substantial risk–and costs–to the public while also limiting the state and local government’s ability to make policy decisions.” (p. 76)

Prof. Dannin discusses a number of recent public infrastructure privatization deals/proposals (including long-term leases for Chicago’s parking meters and for the PA Turnpike) that essentially created–or very nearly created–classic “heads-I-win, tails-you-lose” deals that provide cash-strapped government entities with up-front revenue that is then–in large measure–subject to recapture based on contractual provisions that essentially seek to guarantee a the private partner’s return on investment in previously-public infrastructure.

Beyond the questionable fiscal sense that such contracts make for state and local governments, Dannin argues that common infrastructure contract provisions–euphemistically termed “compensation events”–actually “create conditions [or incentives] that pit profits against public safety.”  (pp.58-59)  For example, the proposed terms of the long-term lease contract for the PA Turnpike would have required the Commonwealth to compensate the private counter-party for performing maintenance and ensuring compliance with safety regulations.  (p. 59)  Here’s another paragraph that highlights the issue starkly:

Clashes between the private sector and public welfare are not hypothetical concerns.  For example, in 2006, the Indiana Toll Road contractor installed sand-filled barrels in Toll Road turn-arounds to prevent drivers from using them.  However, those turn-arounds were created to get emergency crews to accidents as quickly as possible.  State officials and emergency services were not consulted or even informed of the decision to block the turn-arounds, and it was months before the contractor agreed to remove the barrels. These problems could have been avoided had the contractor met its contractual obligation to prepare an emergency response plan for the Toll Road.  Thus, privatizing the road left the public with less protection and with its needs for safety not being taken into consideration, despite the requirements of the Toll Road lease.

The article is titled, Crumbling Infrastructure, Crumbling Democracy:  Infrastructure Privatization Contracts and their Effects on State and Local Governance:  Here’s the abstract:

Key arguments for privatizing public infrastructure range from providing money so cash-strapped governments can fix crumbling infrastructure and build much needed new infrastructure to shifting future financial risk from the public to a private contractor.  The reality, though, is far different.  Provisions commonly found in infrastructure privatization contracts make the public the guarantor of private contractors’ expected revenues.  Indeed, were it not for provisions that protect contractors from diminution of their expected returns, the contracts would be far shorter and much less complex.  An effect of those contract provisions is to give private contractors a quasi-governmental status with power over new laws, judicial decisions, propositions voted on by the public, and other government actions that a contractor claims will affect toll roads and revenues.  Giving private contractors such a role may well violate the non-delegation doctrine that bars private entities from exercising power that is inherently governmental.   

This Article examines the operation and effects of three provisions that are commonly found in infrastructure contracts: (1) compensation events; (2) noncompetition provisions; and (3) the contractor’s right to object to and receive compensation for legislative, administrative, and judicial decisions.  The operation of these provisions gives private contractors power over decisions that affect the public interest and are normally made by public officials and subject to oversight, disclosure, and accountability—none of which apply to private contractors.  The existence and operation of these provisions have gone virtually unexamined and undiscussed.  Rather, discussions about infrastructure privatization have been narrowly focused on tolls, reflexive pro- or anti- private or public provisions, and spending or investment decisions on up-front payments. 

 Finally, this Article places infrastructure privatization in the larger context of funding and building infrastructure for the future.  It identifies and critiques substantive and procedural issues that must be resolved if we are to have the high quality infrastructure necessary to meet this nation’s needs and further its goals and if we are to achieve those goals by an open and democratic process

Posted on April 18, 2011, in Uncategorized. Bookmark the permalink. Leave a comment.

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