Economics

Private Capital Moves into Public Infrastructure

weiser-constructionMy previous post, “Why the Public Sector Can No Longer Build,” suggested that, given the constraints that make public construction projects enormously costly and slow, the private sector might be able to build them more efficiently on a for-profit basis. Recently, the Wall Street Journal reported that private equity funds have raised $17 billion this year to do just that, even coming up with project ideas on their own and pitching them unsolicited (“Private Investors Push Public Projects”; subscription may be required).

Since they need to generate an equity return for their investors, private projects will have an incentive to screen out inefficient projects that won’t pay for themselves. (In the WSJ article, Mayor of Norfolk Paul Fraim complains that a proposed toll-funded expansion of the Hampton Roads Bridge-Tunnel is vastly inferior to a free tunnel picked up by taxpayers.) With road revenues generating profits, investors will have better maintenance incentives than the public sector. Several infrastructure privatizations, including the Chicago Skyway, were done before the financial crisis stopped the trend.

While this kind of arrangement goes back to the early days of U.S. railroads, it has hazards, as Daniel Walker Howe discussed in What Hath God Wrought: The Transformation of America, 1815-1848. Private equity pay-to-play artists like Steven Rattner may try to induce politicians into sweetheart deals. (This could be the plot arc for a 3-D sequel to Chooch,  Rattner’s foray into the straight-to-DVD world.) And politicians will try to divert proceeds for current spending, as in Robert Poole’s report of a 2006 proposed New Jersey Turnpike sale to cover pension deficits. Still, the risk should be less for new than for existing infrastructure, because if the project doesn’t pay off, investors will take the hit.

Image by flickr user biljacobus1.

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