As a result of fully warranted bad press for some privatization deals, such as the lease of Chicago’s parking meters, there has been a bit (stress only a bit) more critical scrutiny of the de facto sale of public assets to consortia of private investors. Nevertheless, major banks have been using the financial distress of states and municipalities to push these deals as a solution to budget woes, when it’s a short-term expedient that leaves the public worse off. As we wrote earlier:

The problem, of course, is that these deals put important public resources paid for by taxes (or even worse, financed by bonds and thus potentially not even yet fully paid for) in the hands of private investors. They then earn their returns by charging user fees of various sorts. The public must rely on the new owners for reinvestment and maintenance, and depending on how the deal is negotiated, may have ceded control as far as fee increases are concerned. This is tantamount to selling the family china only to have to rent it back in order to eat dinner. Now defenders will argue that there is nothing wrong with this in practice, as long as the price is fair, no one is harmed. That’s spurious. This is worse than an intergenerational transfer. Those future fees not only must recoup maintenance costs (which any owner would presumably pay) and the time value of money, but also the investor’s target return in excess of that. In addition, the large transaction costs of these deals are ultimately borne by the seller. And the list of shortcomings thus far are merely those that result if you have two sides that are equally sophisticated. That is hardly the case with municipalities versus bankers and investors. As the old saying goes, “If you sit down for a game of poker and you don’t know who the sucker at the table is, it’s you.”

One of the themes of Naomi Klein’s book The Shock Doctrine was that disasters, such as the explosion of government budget deficits as a result of the financial crisis, help powerful parties push through programs that would have been hard to sell in ordinary circumstances. An even more cynical version is starting. The wreckage from Hurricane Sandy hasn’t even been cleared, yet financial entrepreneurs are looking to profit from it. From Philly.com:

Rebuilding the shattered Shore and the swamped New York tunnels, along with badly needed updates to the Northeast’s exhausted roads and rails, will be an opportunity to implement streamlined construction laws backed by Republicans and pro-business Democrats in Congress and the states, says Frank Rapoport, Berwyn-based partner at New York law firm McKenna Long & Aldridge L.L.P., and counselor to contractors who support “public-private partnerships” (P3). That’s a label for a group of strategies that replace lengthy government-led construction with private contractors and financiers, financed by “sharing” user fees – like road tolls – once the project is built, instead of borrowing money and charging taxpayers…. P3 funding – which Corbett’s predecessor, Democrat Ed Rendell, also supported and has continued to champion in his part-time retirement gig as an investment banker for Greenhill & Co. – is coming along “just in time” to aid in Sandy reconstruction, Rapoport says. Virginia is pushing a high-profile, privately run, toll-funded expansion of I-495 that P3 backers call a model. Pennsylvania “is following Virginia and Texas” in pushing privately run public projects, he added. Cash-strapped Puerto Rico is using P3 projects “for everything from bridges to schools.

The problem is that these deals are typically exploitative financially, given all the mouths at the trough that get fed on these transactions. Let’s return to that Chicago parking meter deal. Mayor Richard Daley ramrodded it through, informing the city council of the complex deal a mere two days before the vote. The city had projected revenues foregone over the 75 year life of the deal on present value basis of between $700 million and $1.1 billion for cashflows over the life of deal in the $4 billion to $5 billion range. Chicago got $1.15 billion for the arrangement. Sounds like a winner, right? Well, funny that. The selling memorandum for Morgan Stanley-led investors on the very same deal said revenues would not be $4 billion or $5 billion, but at least $11.6 billion, or more than double the top amount projected by the city. And since they’ve put through two rate increases totaling over a 40% increase already, looks they they are on the way to making that happen.

And these deals also contain that Elizabeth Warren would call “tricks and traps” that curtail government sovereignity, are contrary to the public interest, and even create safety risks. From Truthout:

Infrastructure privatization contracts are full of “gotcha” terms that require state or local governments to pay the private contractors. For example, now when Chicago does street repairs or closes streets for a festival, it must pay the private parking meter contractor for lost meter fares. Those payments put the contractors in a much better position than the government. It gets payments, even though Chicago did not get fares when it had to close streets….. Highway privatization contracts also often include terms that forbid building “competing” roads or mass transit. Some even require making an existing “competing” road worse. For example, the contract for SR-91 in Southern California prohibited the state from repairing an adjacent public road, creating conditions that put drivers’ safety at risk. A proposed private highway around the northwest part of Denver required that local governments reduce speeds and install speed humps and barriers and narrow lanes on “competing” roads to force drivers to use the privatized road…. Virginia decided to promote carpooling to cut down on pollution, slow highway deterioration and lessen highway and urban congestion. As a result, Virginia must reimburse the private contractor for lost revenues from carpoolers, even though not all of the people in a car would otherwise have driven individually….

This approach makes about as much sense as using your house as an ATM to pay expenses, and in a worst-case scenario, is more like burning your furniture to heat the house. And even though we know how these movies are going to end, there’s hardly any reporting on these transactions, and thus even less opportunity than usual for the public to demand that its interests be protected. This is classic back-room dealing to the detriment of ordinary citizens, and there’s a good reason why. Making these deals make sense for the public would pretty much stop this gravy train, so it is essentially that they be kept in the dark. Disgracefully, media cheerleaders like Philly.com are only to willing to cooperate.