Privatization of public infrastructure through “public-private partnerships,” or “P3s,” is the rage in states these days. In Maryland, transportation officials now propose to use this method to build a new light rail line—called the Purple Line—through the suburbs of Washington, DC. A close look at this plan illustrates the potential dangers of jumping too quickly on this fad.
The Purple Line, which is now close to construction after a long political struggle, will have great value however it is financed. It will connect the two largest employment centers in the state’s suburbs with the center of Washington’s Hispanic immigrant population, and also run through the middle of the University of Maryland campus. A daily ridership of 74,000 is predicted.
An important motivation for privatization—to all appearances, the most important one—is the state transportation department’s desire to borrow money outside the state’s strict limit on debt that will be paid back from taxes. For this purpose they have constructed a complex financial structure. State tax money will go to a private company to pay for running the trains. Fare revenue will come back to the state and then be returned to the private operator which will use it to pay off construction loans.
Whether money borrowed through this scheme is classified under the law as non-tax-supported is yet to be determined. But it’s clear that it’s an evasion of the intent of the debt limit. Thus the reaction to a blog post where I described this arrangement and raised questions about its propriety is a telling sign of the atmosphere among the privatizers. The link was tweeted by P3 enthusiasts from the Cato Institute and elsewhere as an objective summary of the plan. They didn’t seem to notice anything might be amiss.
State officials offer a second argument for the P3—that it will offer better service at lower cost. The private sector is better able to manage risk, they argue, and it saves money through greater flexibility and tighter oversight. Motivated by incentives, not a rulebook, a private operator or “concessionaire” would use its creativity to run the railroad better.
It’s certainly true that government tends to be inflexible and the quality of its services can suffer from that. But whether a contractor can do any better depends on how it is organized and what its incentives are. One big problem is the private sector’s proclivity toward short-term thinking.
The perfect concessionaire would be a thirty-year-old railroad engineer who invests her life savings of $180 million. She runs the light rail line herself and keeps it impeccably maintained. She worries about the steady income she will need when medical school tuition bills come due for her one-year-old son.
Unfortunately, such bidders will be rare when the Purple Line contract is let. In all likelihood, two groups of intermediaries, railroad managers and money managers, will stand between the source of money and the trains. They will face incentives of their own, which are not necessarily the same as those of riders and investors.
Money managers, in particular, tend to concern themselves with the next quarterly bonus. They earn large fees when the deal first goes through, whether or not it is a good one. During the housing bubble, Wall Street bankers issued bad loans with abandon and joked about the “toxic waste” they were passing on to clients.
What will happen if the cost of running the light rail line exceeds the budget? Managers, worrying about salary reviews and bonuses, will be tempted to maintain profitability by skimping on maintenance.
In the P3 structure, it is the job of investors and lenders to look out for the long term. But how well will they do that? We learned in the crash of 2008 that large financial institutions can do a poor job of oversight. And the Purple Line’s equity investors, who expect a return of 11 percent per year, may not care that much about the long term. If the business pays dividends for fifteen or twenty years and then goes bust, they will have already pocketed a substantial profit.
Under the contract, the state will cut the concessionaire’s “availability payments” if the performance of the Purple Line does not meet targets. But these targets will be hard to set. How do you write specs in 2013 for running a state-of-the-art railroad in 2048?
The penalties for bad work, moreover, are unlikely to be all that severe. The state cannot replace the concessionaire until 2050. And the concessionaire’s investors will put up only 7 percent of the construction cost. The availability payments will go mostly to repay lenders, whose main goal is to keep their money safe. They will hesitate to make loans unless the penalties are kept small and their bonds are not at risk.
In an ideal world, a privatized transit line would be run by a deep-pocketed young version of Jackson Graham, the engineer who built Washington’s Metro. He might well outperform a government agency, even one led by Pericles and George Washington.
But that is not the choice we face. Large organizations, both public and private, are made up of human beings. They are inevitably imperfect. Decisions about how to run public services must be based on things as they are, or as they realistically might be made to be.
Benjamin Ross is a transit activist in Maryland. His forthcoming book, Dead End, is about the politics of urbanism and transit. Professionally, he is an environmental consultant, and he wrote The Polluters: The Making of Our Chemically Altered Environment.