Friday, August 27, 2010

Debt not "Privatization"

When I hear the word "privatization" I reach for my revolver; everyone has a different definition invented to fit their ideological leanings, and they react without examining the economic substance in question.
So you see debates like this in the WSJ.
Cities and states across the nation are selling and leasing everything from airports to zoos—a fire sale that could help plug budget holes now but worsen their financial woes over the long run.
California is looking to shed state office buildings. Milwaukee has proposed selling its water supply; in Chicago and New Haven, Conn., it's parking meters. In Louisiana and Georgia, airports are up for grabs

"Privatization"—selling government-owned property to private corporations and other entities—has been popular for years in Europe, Canada and Australia, where government once owned big chunks of the economy.
In many cases, the private takeover of government-controlled industry or services can result in more efficient and profitable operations. On a toll road, for example, a private operator may have more money to pump into repairs and would bear the brunt of losses if drivers used the road less.
While asset sales can create efficiencies, critics say the way these current sales are being handled could hurt communities over the long run. Some properties are being sold at fire-sale prices into a weak market. The deals mean cities are giving up long-term, recurring income streams in exchange for lump-sum payments to plug one-time budget gaps.
That passage muddles the entire issue.  Privatization, as an economic movement, was intended (in theory at least) to take a government run monopoly, break it into pieces, sell each to a different investor, and then let them compete.   The break-up of AT&T into the baby bells would be an example of this.  This type of privatization makes a fair amount of sense in my opinion, as you substituting competition for a monopoly.  There are certainly instances where the magic of market competition fails to deliver the outcome you were looking for better, faster, and cheaper, but competitive markets are an awfully powerful tool in many cases.  I still rate markets up there with language and duct tape in the pantheon of humanity's greatest achievements.

When I first moved to Latin America, I remember espousing this point of view to friends and future blog audience members, and broadly defending the concept of privatization.  Fireworks.  I don't know if anybody said yanqui go home, but that was the basic idea.  After a while though, I realized that we were talking about completely different things when we used the word "privatization".  In Latin America, the only privatization they ever saw was one where the government sold a monopoly intact to some friend of the President.  They were entirely right to see this sort of "privatization" as essentially synonymous with "theft".  Unfortunately, this wonderful version of the concept appears to have migrated north.

The most popular deals in the works are metered municipal street and garage parking spaces. One of the first was in Chicago where the city received $1.16 billion in 2008 to allow a consortium led by Morgan Stanley to run more than 36,000 metered parking spaces for 75 years. The city continues to set the rules and rates for the meters and collects parking fines. But the investors keep the revenues, which this year will more than triple the $20 million the city was collecting, according to credit rating firms.
After the deal, some drivers complained about price increases as well as meter malfunctions caused by the overwhelming number of quarters that suddenly were required.
Based on the new rates, the inspector general claimed the city was short-changed by about $1 billion.
"The investors will make their money back in 20 years and we are stuck for 50 more years making zero dollars," says Scott Waguespack, an alderman who voted against the lease. A spokeswoman for Morgan Stanley declined to comment.
So I read this, and I can't even tell what's happening.  It's clear that the city sold a monopoly on the collection of parking meters to MS.  Is this a regulated utility now though, or can MS charge "market" rates?  In one breath it sounds like the city retained control of the pricing and the parking laws, and in the next we hear about how rates went up so much that there's a shortage of quarters (sound familiar?)  Honestly, I haven't looked at the deal, so it sounds like one of two things happened.  Either they really did just sell the whole monopoly to a private group and let them gouge to their hearts content (I assume that meter rates are (or were) significantly lower than parking garage rates in the same neighborhood).  Or, they just sold the rights to collect the money, in other words, they outsourced the operations of the meter readers for an upfront payment.  That is what you call debt, albeit maybe with an equity kicker if MS enforces the rules like a real asshole.

The problem is that either of these possibilities sucks.

In the first case I suppose it's possible in theory to auction the thing off at a high enough initial price that the average taxpayer is no worse off.  Clearly, MS is going to jack the rates once they get going.  But if they are made to pay so much up front for the rights to this extortion, and this money is somehow returned to citizens via lower taxes or low rider jeans subsidies or what have you, then what you in effect get is a transfer of wealth from parkers to non-parkers.  Hooray.  It kinda reminds me of the riddle about selling your vote.  Why don't we allow votes to be sold?  The government that purchases your vote may be awful, but isn't there some price at which you are compensated for how awful they might be?  Wouldn't you rather get this money directly than have candidates blow it on advertising?  While a theoretically interesting case, in practice it's really hard to price the thing high enough to limit the returns you might extract from this sort of "privatization".  So if the city does not control the rates, I would suggest that practically speaking this is just Chicago going Latin American stylee -- the transfer of a public monopoly intact to private hands for a paltry sum.

On the other hand, it's possible that they will not allow MS to set rates and rules, which makes this look more like a regulated utility.  We would need more details to know whether the agreement gives MS any incentive to reinvest, as in the case of a utility which is offered a decent fixed rate of return on capital.  I'm not sure how you profitably invest in parking meters though, unless you control the rules.  And without the potential for reinvestment, this deal stops being a privatization at all.  It becomes debt, pure and simple, no different than Greece "privatizing" the revenues from the Acropolis by letting Goldman Sachs collect the entrance fee in exchange for paying now.  That's a bond.  Stop calling it "privatization".  It's just a bond.  All we need to know about it is the maturity and the effective interest rate (including any changes in meter rates that were agreed as conditions of the sale).  Don't confuse the issue.  Don't claim that you have done anything besides go into hock in a way that moves the debt off your balance sheet so as not to scare your existing bondholders.

Given the figures in the article ($60m in revenues on $1.16b upfront), the rate is only a little over 5%, which doesn't seem outrageous given that the 30 year US treasury is at 3.5%.  Of course, we don't know if there are escalators (for inflation or otherwise) in the meter fees, so we can't tell whether Chicago is getting screwed or putting one over on whoever Morgan Stanley is flogging these off to via securitization/private equity fund/derivative contracts only a particle physicist can parse -- you didn't think they were rolling out of here naked did you?

1 comment:

Al said...

So I wonder if Morgan Stanley owns any parking garages in downtown Chicago.