Obstacles to Infrastructure Privatizations

Are infrastructure privatizations qualitatively different from normal private-sector

debt-financed investment? A couple of comments on yesterday’s

post on the subject suggests that they are.

Both Gari N Corp and Matthew suggest that there are security implications to

selling off toll-roads and the like, especially as regards disaster management.

I don’t see it. Government can always force a toll-road operator to subordinate

its profit motive to the greater good, if there’s any conflict – and in

fact I doubt that there would be any conflict anyway. If citizens are being

forced to evacuate a city, I have a feeling that the question of tolls is going

to be the least of anybody’s worries.

Gari also I think gets the role of bondholders in such situations wrong:

If your Equity Office LBO defaults, the result could be empty offices. What

happens when the owner of your city’s main toll road defaults? Current wisdom

says "it gets handed back to the government". That’s probably too


Why on earth would a default by EOP result in empty offices? The main result

of a default by EOP will be losses incurred by its new owners, as well as losses

incurred by EOP bondholders. Tenants in EOP properties would probably not notice

anything unless and until a new owner decided to change the way it managed the

properties. And if empty offices caused the EOP default, then maybe

a new owner might come up with a better way of filling those offices.

Similarly, if a toll-road operator defaults, that affects its creditors, but

it doesn’t have any immediate effect on drivers or the government. If the operator

goes out of business entirely, then the road will simply end up being managed

by someone else – either the government, or whoever takes over possession

of the operator’s assets.

Matthew, meanwhile, brings up the prospect of privatizing Amtrak. That is

a very bad idea. I happen to know rather more about rail privatization than

is really healthy, and I can assure you that selling a loss-making passenger

railroad is a recipe for disaster. (Let’s just say I’m English, and leave it

at that.)

Privatizing Amtrak would be especially difficult because of the fact that Amtrak

passenger trains use the same railroads that the enormous US freight-train industry

uses. There’s so much money in freight rail that passengers simply don’t have

priority – something which leads to endemic delays. The problem with US

passenger rail here is structural, and can’t be solved with privatization.

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