April 26, 2012
Buy, Sell or Hold: How Can Governments Decide?—A Commentary by Stephen L. Carter ’79
The following commentary was posted on Bloomberg.com on April 26, 2012.
Buy, Sell or Hold: How Can Governments Decide?
By Stephen L. Carter ’79
One of the best sentences I have read in the last year is by the economist Tyler Cowen.
“We thought we were richer than we were,” he writes in his book “The Great Stagnation.” The elegant simplicity of this statement explains our economic crisis, sweeping in everybody who went overboard -- governments and bankers, homeowners and investors. The world is rich, but not as rich as we all thought it was.
Cowen’s bon mot popped into my mind after the recent announcement by Cristina Fernandez de Kirchner, president of Argentina, that her government will nationalize YPF, the nation’s largest oil company, controlled until now by the Spanish energy conglomerate Repsol YPF SA. (REP)
Repsol has promised to fight by every legal means. Fernandez’s critics argue that she is playing to the masses while enriching her inner circle. Other Latin American countries are worrying about how outsiders will henceforth view the region’s investment climate.
Fair points. But more interesting, and more significant, is the way Fernandez’s populist posturing runs against the tide of recent history. Around the world, governments are behaving as though Cowen is right -- we don’t have as much money as we thought we did -- and, as a result, are not buying assets but selling them.
Rush to Invest
The question to ask is which of the many assets that private investors might want should remain in public hands. In the U.S., alas, we seem to be getting the answer exactly wrong.
The rush to invest in infrastructure is hardly news. Buoyed by predictions that the world will need tens of billions of private dollars over the next few decades to build and maintain roads, railroads, airports and so on, banks and hedge funds have been rolling out suitable investment products. By some estimates, the amount of private money available for infrastructure investment is in excess of $180 billion.
In response, the world is selling, selling, selling. From Great Britain to South Africa, governments have aroused controversy with plans to sell or lease everything from highways to power stations.
In the U.S. this revolution has set off howls of protest, in blue and red states alike. In 2008, public opposition forced Governor Ed Rendell to abandon a plan to lease the Pennsylvania Turnpike to a private consortium for $12.8 billion for 75 years. About the same time, Missouri gave up on negotiations to lease to private investors some 800 bridges in return for commitments to rebuild and maintain them for 30 years.
Here, the U.S. is an oddity. In much of the world, people take nationalistic pride in public ownership of such vital services as energy and telecommunications. In the U.S., we are perfectly happy to leave these key sectors in private hands (though both are more heavily regulated than most other industries). Instead, we fight to keep government in charge of our decrepit roads and bridges.
It isn’t clear quite why. Roads are expensive to maintain. As a 2011 report prepared for the U.S. PIRG Education Fund points out, the frequent claim that the highways pay for themselves is a myth. The various “user fees” (such as gasoline taxes and tolls) pay only half the cost of building and maintaining our thoroughfares. Over the past 60 years, the amount spent on roads has exceeded the user fees by more than $600 billion (in 2005 dollars). In other words, maintaining the highways has required public money that could have been spent elsewhere.
Privately controlled highways would have to pay for themselves -- in most cases with higher tolls. This would be most inconvenient for drivers, but at least the costs would be borne principally by those who actually use the roads -- including trucking companies, who would pass the costs on to consumers -- instead of invisibly, through taxes and borrowing.
Libertarians have long favored private highways on ideological grounds. But now there are practical arguments for selling them off.
Our roads are in terrible condition. According to a report from Transportation for America, a coalition of groups lobbying for better investment in infrastructure, nearly 70,000 highway bridges -- about one in nine -- are classified as “structurally deficient.” (That was the rating, remember, of the Interstate 35W bridge that collapsed in Minneapolis in 2007.) The cost of repairs may run as high as $70 billion. The money has to come from somewhere -- and remember Cowen’s astute observation.
Yet we continue to fight for our roads. Progressive critics of President Barack Obama’s cherished national infrastructure bank have charged that it is a transparent device aimed at accelerating the “privatization” of infrastructure. Another critique warned that leasing highways to private investors “will severely limit transportation innovation and public choice.”
In truth, one of the arguments the Obama administration has presented in support of the infrastructure bank is that assets such as roads and transit do not generally attract much private investment because of a lack of “effective mechanisms” to generate a return. This is a polite way of saying that many entrepreneurs consider highways and bridges a poor investment. If so, pushing them into private hands will probably yield no better results than keeping them public.
But that is a matter the market can decide, without government subsidy. Although the results of private investment in the roads have occasionally been uneven, there are grand success stories, such as the $1.8 billion, 99-year lease of the Chicago Skyway.
It is difficult to understand, in an era when nearly all the traditional state monopolies have collapsed, our affection for publicly operated highways. When competition is permitted, the state tends to have trouble turning sharp corners. FedEx and UPS were eating the Postal Service’s lunch long before the Internet made most of the rest of the mail obsolete. Private primary and secondary education is heavily preferred by those who can afford it.
Not even the fabled monopoly on the legitimate use of force has survived. Governments around the world routinely purchase military services from private companies. In the U.S., police are greatly outnumbered by private guards. Some corporations and most large colleges and universities maintain security forces that are authorized not only to carry weapons but also to make arrests.
In short, the border between the public and the private, what the state alone must provide and where the market can function, has grown increasingly fuzzy. Markets can be wonderfully efficient. But not everything should be traded in a market.
My own list of assets that should never be sold off would begin with prisons. Why? Because when the state acts to take away our liberty, even when we have done terrible things to earn punishment, every moment of our confinement should be overseen by constitutionally accountable actors. Others might begin the list elsewhere. Nobody, I suspect, would begin with the roads.
No doubt there would be advantages to continuing the tradition of public ownership of infrastructure. But Cowen’s point holds: We don’t have the money. Railing against “privatization” won’t make the cash appear.
As for Fernandez’s decision to nationalize YPF, yes, she is going against the grain of history, and one hopes that the government will run the oil company efficiently: the growth penalty that countries pay for inefficient use of infrastructure has been long understood and repeatedly confirmed.
But whatever happens in Argentina, the occasional nationalization is not likely to dull the appetite of infrastructure investors. A 2004 study of 1,000 Latin American infrastructure concessions showed that in nearly a third of the cases the contracts were renegotiated, and often to the benefit of the private contractor.
In short, the YPF contretemps will not scare away investors who search the world for lucrative infrastructure investments. And because a large chunk of that $180 billion is likely to be invested in the U.S., it’s an opportune moment for a serious conversation about which resources must, and which need not, stay in public hands.
(Stephen L. Carter is a Bloomberg View columnist and a professor of law at Yale University. He is the author of “The Violence of Peace: America’s Wars in the Age of Obama,” and his next novel, “The Impeachment of Abraham Lincoln,” will be published in July. The opinions expressed are his own.)