Lisa Schweitzer Part 5: Asset values

Lisa writes:

I’m almost done with my responses to David Levinson’s important contribution via CityLab on How to Make Mass Transit Funding Sustainable Once and For All.

However, I’m going to say something that is going to make errrbody unhappy: transit’s assets are worth more as assets because we all know the taxpayer will buy them back if private sector managers allow things to go pear-shaped. If there is something that, over the course of its history, has been ‘too big to fail’, it is transit. From the municipal bail-outs of holding companies in the mid 20th century to the devastating strikes that occurred before then, disrupting transit service in the pre-auto world paid out well for both capital and labor. It was textbook Ralph Milliband. So we should think Uber-level values with a bail-out and buy-out guarantee–which is basically what just about all major infrastructure transfers to the private sector turn out to be given enough time, save for some examples in Asia.

So she is skeptical of private investment. I don’t blame her, I am not investing my retirement dollars in new rail infrastructure either. But there are many lessons here.

(1) An investment that produces a stable rate of return, even if low, is extremely valuable as a financial instrument for annuities and retirement plans. The Ontario Teachers’ Pension Plan now owns a share of the Channel Tunnel among other infrastructure assets.

(2) Investing in new infrastructure is a lot riskier than investing in already built infrastructure (thus the early financiers of the Channel Tunnel got wiped out twice, similarly the Dulles Greenway and many other privately funded pieces of new infrastructure that were either more expensive than expected, or built too far in advance of demand – yet the physical thing remains, so the public risk is relatively low if the public sector is not already pwned by the private sector).

(3) The case of London is instructive, and suggests some of the risks of what we in the US call Public Private Partnerships and the UK call Private Finance Initiatives, but are really just contracts. The London Underground set up was, to be frank, insane and could only have been designed by overpriced lawyers (I read somewhere legal costs of setting up the contract was £500 before even operating, and that still did not deal with the contingency that actually occurred) without a clue as to how transportation systems work. There, all construction had to occur between 11 pm and 5 am, including set-up and break-down, and the system had to be open and operational for the morning commute. So the concession-holder spent a couple of hours setting up, performed a couple of hours of construction work, and then took a couple of hours of cleaning up. It would be much better to temporarily close the line, do all the work you need, and do it in a relatively short amount of time (months instead of years). Convert the streets above the line to (temporary?) Super-BRT exclusive busway routes with tons of buses to serve the displaced demand. Of course one should do this to only one line at a time. Christian Wolmar in Down the Tube has a great discussion.

(4) Strikes are a lot less effective than before once you no longer have a monopoly provider and a monopsonistic labor union operating with a single systemwide contract.

(5) Obviously unproductive assets should be retired. I have a few in mind, but I suspect most fixed assets (aside from selected intercity rail, commuter rail and streetcar lines) in US transit are redeemable, and all the modern buses are as well, as they can be redeployed.

(6) I am not sure what public space is anymore, but New York’s Penn Station was of course privately built (and destroyed), while Grand Central was privately built (and preserved – due to public intervention), while exploiting air rights to get some additional revenue for an otherwise dying company. In fact Grand Central is still privately owned.

2 thoughts on “Lisa Schweitzer Part 5: Asset values

  1. The Metronet example is so nice because it so perfectly embodies the issues here. With the capital intensive side of the system, you have, as both you and I point out, the financial risks of high capital investments and taking over aging assets. Then–the $50 million in lawyers–encapsulates a second real problem–the transactions costs sunk into trying to minimize political risk. You can find examples of this problem in the highway privatization deals, too: lawyers seem to get a lot of the money that we might expect to get in efficiency benefits.

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