Autumn on Lake Audobon

Autumn on Lake Audobon
Autumn on Lake Audubon, Photo by Alison Kamat

Tuesday, March 29, 2011

Dulles Greenway: "Illustrating How Infrastructure Deals Result in High Fees and Diminished Service," Yves Smith, Naked Capitalism

Yves Smith, who publishes the Naked Capitalism blog, is a leading blog commentator on finance.  Her blog has been recognized in both the blogosphere and by Wall Street for its insights into diverse financial matters and she regularly appears on TV & radio financial news broadcasts.

In this post, Ms. Smith comments on the profit-driven goals of Macqaurie Group, the Australian firm that owns and operates the Dulles Greenway, and its impact on fees and service.  Her commentary raises a number of important questions about the privatization of public infrastructure and the use of public-private partnerships that extend well beyond roadways.  
It isn’t hard to understand why infrastructure deals (the sale of government owned assets to private investors) are inherently a ripoff.  We’ve had such a vogue for private contracting that a lot of services that are almost certainly more cheaply run by the government (e.g., logistical support for the military as proven by Iraq profiteering by Blackwater) that it’s a pretty safe assumption that most assets now held by government bodies are the the sort of thing that it makes sense for the government to own: high cost to build, long lived, not terribly complex to maintain assets. 
Infrastructure investors like to see returns in the mid to upper teens. The deals are complicated to put together, so the fees are high. The deal needs to generate enough to pay the fees and generate the required returns. Since it is pretty much impossible to run something like a parking meters “smarter”, the usual course of action is a combination of increasing charges to the users (taxpayers who in the past used it for free or much less) and cut maintenance costs. . . .
. . . Now the Macquarie investors were required to make some front loaded investments in the road as a condition of the transaction. But the aggressive fee increases have resulted in a serious reduction in service quality via the toll road being underutlized (and perceived as a ripoff even by those who do use it), which leads to the redistribution of traffic onto other roads, imposing costs on drivers making trips that wouldn’t have the toll road as a logical option (ie, the tolls impose costs on drivers who didn’t use that route in the normal course of affairs pre the toll rise). . . .
Click here to read the rest of this blog post.

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