Wednesday, July 5, 2017

Privitisation : The Art of the Deal Economist June 24, 2017 Volume 423 Number 9046

In previous articles, we have discussed various methods the government can take to update aging infrastructure within the United States. One method, public private partnerships, has gotten most attention. This article explains "asset recycling", a concept originated in  Australia. The article defines the idea as, "to lease one piece of infrastructure, such as a toll road, to investors, and spend the money raised on something new" (p. 23), the construction of a new asset or the refurbishment of an existing asset.

The author cites two instances where asset recycling has occurred in the United States, in Indiana and Chicago. The Indiana experience entailed the lease in 2006 of a toll road, 157 miles for the term of 75 years. The state received $3.8bn--far more than the firm that bought the rights could afford. The firm went bankrupt, but the state construction fund benefited from the over-payment.

Chicago experienced the opposite results when it "leased its parking meters to a consortium for 75 years for $1.2bn, a price that was almost $1bn too low, according to a report by the city's inspector-general" (p. 23). Instead of benefiting the construction fund, the city used the funds to reduce their budget shortfall.

Obviously, governments must negotiate wisely to reap benefits of asset recycling. Unlike Europe and other areas, the United States, according to the author, does not have a history of privatization of infrastructure. Additionally,  governments should apply any proceeds to new or existing construction projects, to accomplish asset management goals and  public entities should include terms to renegotiate the agreement to avoid the consequences that Chicago faced.

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