Pros and cons of privatization.

• Position: Company overview

[ILLUSTRATION OMITTED]

This article is an excerpt from No Free Money: Is the Privatization of Infrastructure in the Public Interest?, part of the Emerging Leaders Perspectives series sponsored by the Chicago Council on Global Affairs. The publication is available at www.thechicagocouncil.org.

While public officials may see privatization as a panacea for government ills, privatization remains highly controversial among the public. Both proponents and Opponents of privatization deals are vehement in their arguments and often talk past each other, with each group focusing on only part of the issue. Proponents of privatization tend to stress the financial gains of a deal and the potential operating efficiencies of the private sector. Opponents usually stress the social implications. In fact, any privatization deal has both financial and social implications. Only by addressing both considerations--and really thinking about the core functions of governance--will the public debate do justice to the fundamental question: When is infrastructure privatization in the public interest?

THE ARGUMENTS FOR PRIVATIZATION

Public authorities are increasingly turning to privatization as a public policy tool for a number of reasons, including a constrained capacity to build and maintain necessary infrastructure; budget challenges; a belief in the efficiency of the private sector; and a lack of viable alternatives. These drivers occur in a context of a demand for investments that both generate cash and protect against inflation, among buyers eager to take advantage of historically very low borrowing costs. Each of these is briefly examined below.

1. Privatization Can Be an Effective Way to Fund Critical Infrastructure Needs. In the global era, cities around the world are building and enhancing their social and physical infrastructures to become or remain competitive. They are also facing the daunting challenge of how to pay for the upgrades. It is hard to imagine a more vivid picture of underinvestment in essential infrastructure than the 2007 bridge collapse in Minnesota, in which an eight-lane bridge across the Mississippi River crumbled into the water during rush hour, killing 13 people and injuring scores more. For well over a decade, the American Society of Civil Engineers (ASCE) has given U.S. infrastructure very poor grades in its Report Card for America's Infrastructure across a range of categories. (1) In 2009 the ASCE reported that the United States would need $2.2 trillion in investment just to maintain its existing stock of roads and bridges--not to mention new investments in transit, energy, communications, and other infrastructure that are necessary to make our lives better in the twenty-first century.

   While the United States invests an average of 2.4 percent of its gross domestic product every year in infrastructure, Europe and China invest 5 percent and 9 percent, respectively. (2) Governments in the United States--local, state, and federal--are in no position to close this gap. Public finances in many jurisdictions (e.g., California and Illinois) were in poor shape before the financial crisis; now they are worse. Governments at every level are making cuts. Taxpayers are refusing to pay more, and often voting to pay less. Privatization can be a politically expedient tool for funding infrastructure improvements.

   It is also important to recognize that privatization revenues can finance investments in infrastructure and human capital that make future generations more productive. For example, if revenues from an asset are used to improve the quality of, or the access to, education (particularly for disadvantaged citizens), the economic benefits could be quite significant. Privatization can unlock capital for investments in infrastructure that promote growth, ease congestion, improve the environment, or otherwise enhance the lives of future generations.

2. Privatization Can Provide a Source of Immediate Revenue for Strained Public Budgets. Policymakers are increasingly turning to privatization as a way to deal with strained public finances. The demographic trends in most industrialized societies--and in some industrializing societies such as in China--will impose huge additional costs on the public sector in coming decades. Citizens around the world are generally living longer (spending much longer stretches in retirement) and, especially in industrialized countries, having fewer children. While this is a healthy trend in many ways, it also puts new stresses on the traditional mechanisms for funding old-age benefits, since the ratio of retirees receiving public benefits to workers paying for those benefits is growing steadily.

   Aging societies--including America's large baby boom cohort, which has now reached retirement age--will create a more or less permanent fiscal crunch around the globe. The present financial crisis exacerbates the structural challenge within aging societies. Like the federal government, states and municipalities are reeling from increased financial claims just as their tax revenues are at cyclical lows. Privatization offers a large source of immediate revenue to help meet these budget challenges.

3. Private Infrastructure Funds Are an Attractive Investment Vehicle for Certain Investors, Making Infrastructure Privatization Appealing to Potential Bidders. It may strike some as a curious fact that a once little-known Australian bank is among...