Sunday, November 11, 2007

"Public assets belong to taxpayers who created them, not international banks, private interests or former govt. officials cashing in on connections."

Investors want to acquire large public assets. Here why that's a bad idea


The Houston Chronicle
Copyright 2007

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.

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