Saturday, December 13, 2008

"All over the country, privatization deals are falling apart due to a lack of capital."

Recession Slows the Rush to Privatize


Melissa del Bosque
The Texas Observer
Copyright 2008

For a decade, Texas’ penchant for privatizing everything from the building of roadways to administering food stamps was growing as fast as the national debt. These days, however, the nation’s financial crisis is putting a damper on Texas’ love affair with privatization, according to government accountability advocates.

Private companies are finding it difficult to raise the amount of cash that used to woo government officials to sign over their publicly owned infrastructure, says Melissa Cubria, a policy advocate with the nonprofit Texas Public Interest Research Group.

“Texas still has a somewhat sound economy, but no states are going to be jumping into big privatization deals like before,” Cubria says. “Investment banks just don’t have the kind of money they used to have.”

All over the country, privatization deals are falling apart due to a lack of capital. In Pennsylvania, government leaders quashed the idea of privatizing a turnpike after a private company said it could only raise $10 billion instead of $30 billion for the project. In Missouri, a plan to privatize bridge repairs fell through after the private company said it would have to rely on more public money than previously planned.

In Texas, the nation’s economic instability has not yet affected any privatization projects, Cubria says, but it has government officials thinking twice about going forward with large projects like the Trans-Texas Corridor. Cubria warns that the financial crisis illustrates that private companies are not always better equipped to manage financial risk.

“Financially troubled private toll operators might neglect maintenance and demand a bailout from taxpayers,” she wrote in a recent policy paper for state leaders. “The state would be required to hire expensive lawyers to recoup its losses.”

While the struggling economy puts the brakes on some privatization projects, cash-strapped officials may still be willing to take the bait, says Phineas Baxandall, a senior analyst for the U.S. Public Interest Research Group. Investment banks like Goldman Sachs will continue sending envoys to cash-strapped states in an effort to ink privatization deals, Baxandall says, because investment in public infrastructure is still considered a safe investment during these financially murky times.

“Private companies are less able to provide a lot of cash, but then states are more desperate and more likely to take a bad deal these days,” Baxandall says, “which will more than likely end as a bad deal for the public.”

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