Law Review Blasts Toll Road, Parking Meter Privatization

A University of Chicago Law School professor is challenging the prevailing wisdom regarding the sorts of transportation privatization deals that have grown increasingly popular. The Minnesota Law Review last month published a critique by Julie A. Roin that argued such deals have more in common with the medieval practice of tax farming than true privatization. She cited as a primary example Chicago, Illinois Mayor Richard M. Daley’s 2008, lease of the city’s parking meters to Morgan Stanley for 75 years in return for an up-front payment of $1.2 billion.

"The agreement exchanges future public revenues for present public funds, just like debt," Roin explained. "And just like many debt arrangements, the parking meter deal will leave future ratepayers decidedly worse off… Future ratepayers will be doubly disfavored relative to current residents: they will have to pay higher taxes to maintain the same level of services, even as their disposable income is reduced by the extra parking fees mandated by the agreement."

"Many recent privatization deals have been motivated less by the possibility of achieving efficiency advantages than by politicians’ desire to surreptitiously borrow money," Roin wrote. "The upfront payments received by jurisdictions entering into privatization agreements… are, at best, the present value of what would have been future tax (fee) revenue. Rather than true privatization transactions, it is more accurate to describe these deals as loans repayable out of future governmental revenues."

The problem with the debt created by such deals is that they are less flexible and more expensive than conventional forms of debt, such as bonds. They are also significantly less transparent. Traditional debt in the form of publicly traded bonds harnesses market forces to ensure both sides get the best deal possible. Privatization arrangements inherently favor the corporate interest.

quot;Because of the scale of these transactions, relatively few potential buyers exist for any particular deal," Roin wrote. "This leaves opportunities for collusion or simple underpricing at the expense of the selling entity. In Chicago’s parking meter deal, for example, only two bidders vied for the project. Although one can certainly claim that there was a fair public auction of the Chicago parking meter system in that anyone could have entered the auction, the paucity of bidders can also be regarded as a symptom of a defective market, one susceptible to control by insiders or other elites and simply too thin to be trustworthy."

Cities and states also get the worse end of the deal from non-monetary arrangements such a "non-compete" clauses in privatization contracts. These protect private profit at the expense of flexibility in future public policy. Chicago’s deal, for example, guarantees the number of parking spaces and hours of operation that apply 75 years in the future. Roin suggested such deals might be discouraged by limiting the length of contract terms to, for example, no more than five years.

"Robbing Peter to pay Paul accomplishes very little when Peter and Paul are the same individual," Roin observed.

Such a simplistic limitation, however, would likely lead to governments not getting the best deals for certain long-term transactions. Roin suggested better legislation would protect future taxpayers by forcing any such deals to escrow funds equal to the amount of taxes or fees that would have been generated by the leased asset. These funds would be released year-by-year so that the present generation would not be borrowing from a future generation. Roin argued that without some limitation, such deals would grow more intrusive.

"In the not-so-eventual future, jurisdictions may even ‘sell’ the rights to collect property and income taxes to investors alleging better collection techniques and expressing a willingness to accept the risk that future revenues will fall," Roin wrote.

Privatization and the Sale of Tax Revenues (Minnesota Law Review, 7/7/2011)

[Courtesy: Thenewspaper.com]