Truth Be Tolled

Selling off assets a mistake

By Michael A. Olivas

From the Houston Chronicle

The financial wizards of Wall Street are dancing themselves into a frenzy after discovering a golden opportunity right beneath their noses.

Like astronomers excited by a new celestial body, large investment houses are now sweeping the landscape with telescopes, hunting for attractive public assets that can be "privatized" through purchase or lease. From toll roads in Indiana to lotteries in Texas and more than a dozen states, all of our revenue-generating public assets are up for grabs.

Unless we stop the madness, we risk giving away key components of our public infrastructure at fire-sale prices.

Why should we care about who owns our highways, operates our lotteries or manages our public networks? That's the sly question posed to us by investment houses proffering bales of greenbacks to cash-strapped states throughout the country.

Perhaps the best reason to be wary of these megadeals is the scale of the fervor they have generated on Wall Street. If we've learned anything from the investor scandals of the past two decades, it's this: If a deal sounds too good to be true, it probably is.

Unless we stop the headlong privatization of public investments, we may wake up one day repeating Gertrude Stein's famous line: "There is no there there." But unlike Stein, we won't be talking only about Oakland — we'll be lamenting the barren balance sheets of our public treasuries.

Here are five reasons I believe we should rethink our stance toward privatization:

• Reason No. 1: Private interests are not driven to serve public needs.
There are two simple reasons why Wall Street wants to buy or lease state assets: They already exist, and they generate tons of cash. But in addition to paying down debt (in the case of a toll road, for example), these assets fund important public initiatives involving transportation, health, education and other essential government services. In Texas, to cite just one example, more than $1 billion collected through the Texas Lottery finances statewide education initiatives and medical research at the University of Texas Medical Branch at Galveston.

Arrangements such as these were carefully negotiated in the public arena, and it's doubtful if any of them could survive privatization. The private world lives by a simple credo: If it fails to deliver profit, it deserves to be eliminated. So, unless we resist the impulse to privatize, there's bad news ahead for Texas schoolchildren and researchers at UTMB-Galveston and for other worthy citizens and public needs nationwide.

And just where do we draw the line? Are state pension funds up for grabs, along with all of our state highway departments?

• Private companies are not guardians of public trust.
It's worth remembering how the Houston Astros opened their 2000 season in a spiffy new stadium named "Enron Field." The lesson is that companies come and go, and there are no guarantees that the purchasers or lessees of our public assets will perform any better than the likes of Enron, WorldCom or Tyco.

When our publicly elected officials perform badly, or criminally, voters at least have the opportunity to vote the bad guys out of office. But when we relinquish the control of our state assets to "outside entities," we are literally at their mercy.

• Beware public officials who resurface in private sectors.
During his 24-year tenure as a U.S. congressman and senator, Phil Gramm presided over numerous public initiatives in Texas. After leaving office, he resurfaced as one of the powerbrokers at UBS, the international brokerage house. Similarly, Kathleen Brown served as treasurer of California. She now works for Goldman Sachs and is spearheading an effort to lease the California lottery.

Ex-politicos are certainly entitled to earn a living, but there's something unsettling about powerful politicians moving into new roles where they can target public assets for lease or purchase. The easiest way to ensure a smooth transition from public to private life for these former politicians is to cut them off at the pass — and prevent the sale or lease of public assets that were created or operated during their tenures in office.

• States will never recoup their public investments.
By leasing its key tollroad to a foreign investment group, Indiana earned an instant windfall of nearly $4 billion. Despite the huge up-front payment, critics of the deal say that Indiana will never recoup the massive public investments that created and sustained the tollroad over the years. Private companies that pick the low-hanging fruit of public assets sustain zero start-up costs, are unburdened by government employees and their pensions and avoid the risks that taxpayers assumed when they voted to fund the project. This state of affairs has a name — "privateering" — and it's not in the public interest, since we are long past the point of provoking land rushes to "tame the frontier."

The ongoing benefits of our public assets belong to the taxpayers who created them — and not to international banks, U.S. private interests or former governmental officials cashing in on their connections.

• Beware a future that blurs public and private interests.
Building and maintaining a large public highway can involve eminent domain and financing supplied through tax-free bonds. These techniques are the preserve of politicians acting in the public interest, and they have no application in the private arena. After an investment house acquires a toll road, it's easy to imagine the board of directors voting to add new lanes — but only to serve drivers traveling to and from communities being developed by the firm and its investors. And if land needs to be condemned to create these new corridors, who gets to wield the power of eminent domain — an elected official, or the CEO of a major investment group?

Using information obtained under the Freedom of Information Act, The New York Times confirmed how companies are pursuing a concerted campaign to buy and lease large public assets, and are training their ranks to counter any voices of skepticism. But before we sell or lease the fruits of our public treasuries, a little skepticism may be a good thing.

Let's put the burden of persuasion and proof on those who would open their books, enter into full disclosure of public-private arrangements and fees and convince us that we should give them the keys to the public store.

I'll be thinking about these and other points the next time I attend a game at Enron Field, err, umm, make that Minute Maid Park.

Olivas is William B. Bates Distinguished Chair of Law at the University of Houston Law Center.

Lowering speed limit to promote toll road?

By Patrick Driscoll

From San Antonio Express-News

A recent toll road contract that shoehorns market incentives into a government monopoly would reward the state for lowering speed limits on Interstate 35, effectively steering drivers to the toll road.

The privatization contract for Texas 130 from Austin to Seguin, cutting a parallel path east of I-35, was quietly signed in March amid a legislative furor over whether to freeze such agreements. It includes a controversial clause that penalizes the state for widening or building competing roads.

If a project over the next 50 years — with some exceptions — interferes with Texas 130 toll traffic, the Texas Department of Transportation would have to pay Cintra of Spain and Zachry Construction Corp. of San Antonio for their lost profits.

But the state can also get credit, though not payment, for driving traffic to the tollway, including by lowering posted speeds on I-35.

Not that TxDOT would do that, and certainly not for financial gain, spokeswoman Gaby Garcia said.

"We don't expect to be reducing speed limits on I-35," she said. "They are set by traffic engineering studies and not by economic gain."

But toll critics say a gate is open to the manipulation of I-35 traffic to ensure toll profits, and they don't trust TxDOT as the sentry.

"Our highways are being hijacked for private interests," said Terri Hall of Texans United for Reform and Freedom. "Who's going to rein in this agency? It just baffles me."

To change a speed limit on a road, TxDOT usually follows a complex formula based on the fastest pace set by 85 percent of motorists. But conditions such as crash rates could warrant lower speeds.

Laws and policies can also lower speeds, for reasons such as conserving gas.

"Speed limits are not arbitrarily set," Garcia said.

But just as a speed limit giveth, sometimes it taketh away.

If TxDOT raises the speed limit on I-35, it must pay Cintra-Zachry for any toll losses, according to a maze of requirements in the 192-page toll contract and its 476 pages of support documents.

Oddly, any improvements to the freeway are exempt from the competition clause. Also exempt are projects in existing 25-year plans.

The contract doesn't stop there — it also covers speed limits for the 40 miles of Texas 130 that will run from Seguin to south of Austin, where it'll hook up with another segment that now loops around the city.

Cintra-Zachry will pay TxDOT $25 million upfront if the limit is set at 70 mph but will fatten the offer to $92 million for 80 mph and $125 million for 85 mph, which state law allows. The agency could opt instead to take a growing bite of profits.

Under the privatization deal, TxDOT's first, Cintra-Zachry will finance, build and operate the $1.3 billion tollway in the hope of eventually turning a profit.

Motorists in cars will pay about 15 cents a mile, with rate increases capped to the annual growth of state domestic product. There will be no tollbooths — collections will be done with electronic tags and cameras.

Cintra-Zachry recently began a process to buy the land, and it expects to start construction in a year or two and open the roadway in 2012. The state will handle property disputes.

Other people's money

"Sure, you can expect political objections, but if you play your cards right,
you'll win."

--James Bass, the chief financial officer of TxDOT, quoted by Jerome R. Corsi on
World Net Daily addressing the EuroMoney conference in New York yesterday regarding the leasing of public assets to foreign investors

According to Corsi, Bass likened the process of establishing public-private partnerships with those investors to playing a game of "Texas hold'em."

'No easy answers'

"Transparency and accountability will force public officials to face difficult questions. When forced to measure up to these public interest principles, public officials are less likely to see high-priced road sell offs as an 'easy out' to their difficult budget problems. There are no easy and attractive answers to questions such as what happens if diverted traffic from increased tolls leads to gridlock in nearby communities."

--Phineas Baxandall, Ph.D., U.S. PIRG Senior Analyst for Tax and Budget Policy, in his report, "Road Privatization: Explaining the Trend, Assessing the Facts, and Protecting the Public"

Download a PDF file of the report here.

Some things should be left in the public domain

By Alan Snitow and Deborah Kaufman

From USA Today

Falling bridges, collapsing levees, bursting pipes, sewage spills, failing electrical grids — this short list of major infrastructure failures in just the past few years might lead one to think that there's a conspiracy, that terrorists are taking down our public services and tax-built assets.

But it turns out that we are doing it to ourselves, first by underinvesting in our water, transportation and energy systems, and then by trying to solve the problem by auctioning off these assets in a fire sale to the highest private bidder.

Water utilities have been among the most controversial items up for sale, but other public services are also on the block as state and local governments hope to balance budgets by auctioning off public bridges, highways and airports. Last year, Indiana's toll road was sold to a foreign consortium for $3.8 billion in the largest highway privatization deal in U.S. history. Other public properties under consideration for sale: Chicago's Midway International Airport, the New Jersey Turnpike and the Pennsylvania Turnpike.

This is not a sideshow or an arcane environmental issue. Trillions of dollars and essential services that preserve our public health and national security are at stake.

In the case of our most basic public resource — our water — the federal government has for years starved states and cities of funding needed to upgrade aging plants and antediluvian water pipes that are often more than 100 years old. The reasons for neglect have not been political or financial, but ideological.

The Bush administration — and to a lesser extent the Clinton administration before it — cut clean water funding to drive an agenda committed to private profit over the public trust. That agenda survives in spite of widespread droughts and a growing climate crisis that will require a strong government hand to ensure universal access to clean, affordable water.

The privatization drive, until now, has survived in spite of public opinion. Republican pollster Frank Luntz recently found that 86% of Americans support a federal trust fund for water. "I can tell you from personal experience," he told a House committee, "that such an overwhelming consensus about the role of Washington doesn't happen often — but it exists here."

Federal and state politicians don't seem to be hearing that message, perhaps because it is drowned out by the lobbyists and campaign contributions of multinational water companies that seek to profit from water scarcity.

But what happened this summer in Stockton, Calif., is already altering the terms of the debate.

In July, the Stockton City Council voted unanimously to roll back the largest water privatization in the West. After four years, the $600 million showcase deal with a multinational consortium, OMI-Thames Water, has been scrapped in favor of a return to public control.

The decision came after repeated court rulings determined that the deal violated California's environmental law, but the legal issue was only the last straw. Noxious odors drifted regularly from the sewage treatment plant. There were sewage spills, fish kills, increased leakage from underground pipes, staff turnover and increases in water rates after years of rate stability.

Citizen watchdog groups had also reported that the private company had adopted a "run-to-fail" approach to preventive maintenance. "Employees were feeling frustrated that they couldn't maintain the facilities the way they had previously," said Stockton City Council member Susan Eggman.

Four years into the 20-year contract, nobody was willing to go to bat for OMI-Thames. The Stockton City Council's unanimous decision was supported not only by the formerly pro-privatization newspaper The (Stockton) Record, but even by Gary Podesto, the former mayor who drove the deal.

"If I were there, I would do the same thing," he told the Record. Although a "non-disparagement" agreement forced local politicians to portray the decision as amicable, this was a rout, and OMI-Thames was unceremoniously being shown the door.

There was, however, another deeper reason for dissatisfaction: widespread concern about the loss of citizen input into the future of an essential resource.

Stockton Mayor Edward Chavez told us, "The real lesson is: If you really want to make people angry, shut them out."

In 2003, the City Council approved the deal by a 4-3 vote just 13 days before a citywide ballot would have required voter approval for privatization. The initiative won, but the vote was declared moot because of the earlier City Council action. The heavy-handed maneuver enraged many Stocktonians and shifted the debate.

Now, doubts about corporate water privatization are spreading from small towns such as Lee, Mass., to midsize cities such as Stockton and metropolises such as Atlanta, where water privatization failed miserably in 2003.

Even so, whenever a bridge falls, a levee breaks or a steam pipe bursts, we invariably hear renewed calls to privatize. Let Stockton's experience testify that privatization is not the solution.

Instead, what is required is a new commitment by citizens and government to rebuild our infrastructure so that our water and other essential services remain in the public domain to be managed for the benefit of all citizens, and not for the profit of a few.

Alan Snitow and Deborah Kaufman are producers of the PBS documentary film "Thirst" and, with Michael Fox, are co-authors of the new book "Thirst: Fighting the Corporate Theft of Our Water."

As one bubble collapses...

A letter to the U.S. Treasury Secretary Henry M. Paulson Jr.

A New York Times editorial

By Theresa Tritch

Dear Mr. Secretary,

I’m concerned that as the mortgage bubble is deflating, Wall Street and its Washington champions — you prominent among them — are poised to inflate the next bubble.

The immediate problem is liquidity, the combination of confidence plus cash that fuels deal making. It’s drying up as lenders grow fearful that today’s typical borrower may be tomorrow’s market casualty.

You know better than most that Wall Street can’t thrive without liquidity.

But you also seem to believe that liquidity equals prosperity. History and current events indicate otherwise. When money is too easy — as it was for much of this decade — asset prices rise, lenders and borrowers take excessive risks, and bubbles form. The effects are amplified if regulators turn a blind eye, as they did in the past several years.

The damage from the latest bubble is now becoming evident, including credit seizures so severe that the Federal Reserve must intervene, and foreclosures on a scale last seen in the Depression.

And yet, you recently told The Wall Street Journal that in your judgment, there is nothing government should do “in terms of restraining risk taking.” That judgment, if followed, virtually ensures another bubble, which could be even more dangerous — not only to the economy but to the national interest.

Today, the deepest and most coveted pools of liquidity are the trillions of dollars held by other governments, amassed in the course of trade. And now, just as Wall Street needs liquidity, those governments increasingly want to use their dollars not only to make loans — as has been customary — but to buy up private assets in the United States and elsewhere, like banks, office buildings, high-tech companies, retailers, pipelines and corporate stock.

Ownership implies control that lending does not. And ownership by foreign governments is politically problematic in ways that private ownership is not. That is especially true given that many of the biggest investment pools, known as sovereign wealth funds, are held by nations that have exceedingly complex relationships with the United States, economically and strategically.

Most of the cash in sovereign funds — some $2.5 trillion is now on hand from a projected $17.5 trillion in the next 10 years — is held by exporters of oil and gas from the Persian Gulf, Russia, Algeria and Venezuela. Megafunds are also held by Asian exporters, mainly China, Singapore and South Korea.

Wall Street wants to dive in. Your bent for unbridled risk urges you on as well. Sounding more like a current chairman of Goldman Sachs than a former one, you recently told The Times’s Steven Weisman, “I’d like nothing more than to get more of that money.”

You noted that sovereign funds evoke “a natural fear that they’re going to buy up America.” You misread the reaction. It is not fear, per se — which implies timidity or ignorance — but prudent awareness of possible danger.

No one knows how politically motivated sovereign wealth investments could be, if not at the time they are made, then later, as governments change their policies. Russia has already tried to use its economic power for political ends, alarming Europe with warnings of energy shortages in response to political decisions it dislikes. Ditto the nations of OPEC, whose pricing decisions can hardly be ascribed to economic self-interest alone.

The answer is not to shun sovereign wealth funds. But as Treasury secretary, you must take the lead in developing binding regulations to guard against the possibility that foreign governments could someday use large investments in America to gain political advantage.

Your usual preference for voluntary codes of conduct would be inappropriate and insufficient. A current government may pledge not to interfere in a host nation’s politics, but a future ruler may not keep a predecessor’s pledge.

A unilateral approach would also be counterproductive. Unless the rules are binding internationally, sovereign funds could play Western companies off one another as they scramble “to get more of that money.”

To date, you have ably educated Congress and the public on why the rise of China and other trading partners is not to be feared or begrudged, but rather managed. The next step in that process is to create rules to manage sovereign funds. The rules should include mandatory, audited disclosures of the funds’ holdings; reciprocity for American investors; and caps on the share of any one company that a government investor may buy.

I understand that rules to restrain risk go against your grain as a former Wall Street investment banker. But as the secretary of the Treasury, you need to safeguard against a flow of foreign government capital that, poorly regulated, could impair national security.

'TxDOT readies its 2 cents on tolls'

By Peggy Fikac

From the San Antonio Express-News

AUSTIN — Top state transportation officials and Gov. Rick Perry's deputy chief of staff are being trained by political and corporate strategy pros before deploying to talk radio programs to promote the Trans-Texas Corridor and toll roads.

The airwave ambassadors are being schooled by experts from ViaNovo as part of a $20,000 consulting contract included in the agency's multimillion-dollar Keep Texas Moving ad campaign, which promotes the divisive transportation plans championed by Perry.

ViaNovo is led by a team that includes former Bush strategist Matthew Dowd, but Texas Department of Transportation spokesman Chris Lippincott said two other firm leaders — Blaine H. Bull and Julie Hillrichs — are doing the training. He confirmed the participation of agency officials and Kris Heckmann, a deputy chief of staff for Perry.

Plans call for several TxDOT division directors, district engineers from Beaumont and Amarillo, agency interim executive director Steve Simmons and Heckmann to start out on satellite radio — in part because "the listening audience is paying for radio so they might be more apt to pay a toll," according to a July e-mail from Coby Chase, director of the agency's government and public affairs division. He wrote that the agency likely will buy advertising time on the satellite networks.

The Trans-Texas Corridor — an ambitious transportation network — and toll roads have been touted by Perry and others as necessary in the face of congestion and of gas tax revenues outpaced by transportation needs. But the initiative has drawn strong criticism over the potential route and the state partnering with private companies to run toll roads.

The Keep Texas Moving campaign, estimated to cost $7 million to $9 million from state highway funds, has drawn concern from anti-toll activists and some lawmakers who question the cost of what they see as a public relations campaign. Its defenders, including Rep. Mike Krusee, R-Round Rock, House Transportation Committee chairman, said the initiative stems from lawmakers' call for the agency to better communicate with the public.

Opinions continued to be divided Thursday as details of the talk-radio part of the campaign emerged through agency e-mails obtained under the Public Information Act.

Lippincott said the contract for talk-radio training went to the Rodman Co. of Portland, near Corpus Christi. Rodman subcontracted with ViaNovo with TxDOT's approval.

Company experts providing training are Bull, a founding officer of Public Strategies Inc. who worked with SBC Communications and before that was legislative director for former U.S. Sen. Lloyd Bentsen; and Hillrichs, whose experience includes being a director in Public Strategies' Dallas office and managing media relations for former U.S. Sen. Phil Gramm.

"I think TxDOT's doing exactly what the Legislature asked them to do — demanded that they do — and legislators who now cry foul are being hypocritical. They were the ones that beat TxDOT over the head in public hearings for not explaining this," said Krusee, who added that specialized training makes sense.

But Rep. Lois Kolkhorst, R-Brenham, who fought for a moratorium on privately run toll roads, said: "The Legislature did not tell TxDOT to go on a media campaign explaining the pros of the Trans-Texas Corridor and private equity investment (in toll roads). The Legislature said, 'Please slow down, take a deep breath. We want you to pause while we make sure we are making the right decisions.'"

Kolkhorst said TxDOT is a "fabulous agency" but there is a "lack of faith in the policy."

Talking points provided to those being trained were positive about toll roads and the Trans-Texas Corridor.

Lippincott said the campaign is an effort to educate people and address their concerns, as lawmakers said the agency should.

"People need to understand what we're doing and why," he said. "They need to be part of the process. We will never solve the transportation challenges that face our state without public information and public awareness."

But Terri Hall, founder and executive director of Texans Uniting for Reform and Freedom, which opposes toll roads and the Trans-Texas Corridor, said: "It's clear that TxDOT is not interested in listening to the people. That's how they've gotten such an image problem. They could certainly use a PR campaign to clean it up — but not with my taxpayer money."

Chasing the paper tiger

Mexico to build more toll roads to pay for ones that failed

From Land Line Magazine

Goldman Sachs Infrastructure Partners is part of a team that bid $4.1 billion to finance the construction of 340 miles of toll roads in Mexico, the Mexican government reported.

Mexico’s communications and transportation ministry has rolled out the welcome mat to private investors as part of a campaign to build new roads and pay off debts on existing failed toll roads.

Goldman Sachs and Mexican construction company Empresas ICA bid $4.1 billion U.S. for the right to build and operate four toll roads totaling 548 kilometers – about 340 miles – in central Mexico. The consortium agreed to maintain the roads for 30 years, at which time they will be returned to the government.

The government will use part of the proceeds for paying off debts and liabilities on failed toll road projects from the 1990s, Transportation Minister Luis Tellez said during a press conference this week. Funds will also go toward completion of a government-built highway from Mazatlan to Durango.

Goldman Sachs and Empresas ICA will pay the Mexican government in October when the contract takes effect. The contract was the first privatization deal awarded under President Felipe Calderon.

Losing bids came from Mexican construction company IDEAL, Spanish toll operator Abertis, Spanish bank Caja Madrid and Spanish builder Obrascon Huarte Lain.

The government promised more announcements related to privatization, including a toll road proposal to be announced by the end of 2007.

NJ warns mayors against opposing road plans

By Gregory J. Volpe

From Asbury Park Press

TRENTON — The political rhetoric over whether to financially leverage the state's toll roads escalated this week, with state Treasury Bradley Abelow warning New Jersey mayors not to oppose the administration's monetization plan.

"Setting yourself in opposition to restoring the state's finances by reducing debt and investing in the state's future potentially aligns you with future tax increases or services cuts," Abelow wrote to mayors on Wednesday.

The letter was in response to one sent to mayors by Assembly Minority Leader Alex DeCroce, R-Morris, urging them to pass resolutions opposing the administration's toll road plan.

"It's certainly an intimidation to local groups that if they don't support the governor's proposal, they will expose them as being in favor of higher taxes," DeCroce said of Abelow's letter.

Abelow spokesman Mark Perkiss did not respond to requests for comment.

Republican Bogota Mayor Steven Lonegan drafted a letter back to Abelow, calling Abelow's letter antagonistic and threatening.

"Here I am waiting for my state aid, wondering what kind of deals are being cut and I get this letter. Totally inappropriate," Lonegan said. "I think it shows that these guys are just desperate to try to get their agenda through."

Abelow and others in Gov. Corzine's administration have been studying whether it makes sense to financially leverage state assets, like its toll roads, to free up cash to reduce debt or for school construction, open space or transportation projects. The money, borrowed from private investors, would likely be repaid through future toll increases.

Without fully disclosing the plan, Corzine and Abelow have pledged that the state's roads will not be sold to a private company. They have criticized Republicans who made it a campaign issue by saying that Democrats are keeping it hidden to avoid talking about toll increases before November's legislative elections.

"I think it's a veiled threat," said Surf City Mayor and Sen. Leonard T. Connors, R-Ocean. "If this is just a good deal, you shouldn't need that kind of — "we urge you not to consider this, be careful' — I just don't like that kind of language."

Paulsboro Mayor and Assemblyman John Burzichelli, D-Gloucester, said the treasurer's language was appropriate.

"No," Burzichelli said when asked if he took the letter as a threat, "considering the rhetoric and approach that the Republicans are taking to take this very serious discussion into one of political convenience for them."

Sen. Diane Allen, R-Burlington, called the administration's tactic outrageous, abusive and designed to bully local officials.

"So the threat is, if you don't go with me, bad things are going to happen to you?" Allen said.

The New Jersey State League of Municipalities is staying out of the debate until a plan is revealed, its director, Bill Dressel, said. Dressel said he received no complaints about the letter by Friday afternoon and declined to say whether he perceived it as a threat. "Certainly, it raises the ante," Dressel said.