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Infrastructure Privatization, Legislative Privatization, and the Loss of Faith in the Public Sector

The city faces a big expense because of a non-compete clause in its parking-garage privatization deal. This will raise more skepticism about transparency with the proposed infrastructure trust… but it’s not like we got great transparency or oversight from prior privatization deals.

No parking tow zone

 

The Sun-Times has some excellent reporting on an undersung element of late-Daley privatization, courtesy of new hire Dan Mihalopolous and Chris Fusco: “Chicago faces $200 million claim over privatized parking garage.” How’s that again? The company that bought the city parking garages (brought to you by Morgan Stanley, the same giant behind the parking meter deal) claims the city promised no new parking garages with public parking would be built in the vicinity of their purchased garages. That didn’t happen, and now they want dough.

While it might sound typical of the city’s misadventures in privatization, regularly used in the media as a cautionary tale, we can take some cold comfort in not being alone: claims to exclusivity for privatized infrastructure are a regular, and regularly controversial, aspect of public-private partnerships, as Brad Plumer writes:

Moreover, a road that’s privately owned for 75 years has the potential to conflict with other public-policy goals. For instance, as a recent GAO report (pdf) found, four of the five privately-funded toll road projects in the last 15 years included non-compete clauses that prevented the government from building nearby roads. As Tim Lee notes, “real-world privatization schemes are often explicitly protectionist.” So what if a state, say, later decides that it wants to build a rail network that competes with the private road? All sorts of complications could arise.

Here’s an example, from Penn State law prof Ellen Dannin in the Northwestern Journal of Law & Social Policy (emphasis mine):

On July 24, 2008, the Denver Post reported that Coloradans were shocked to learn that the private contractors that had leased the Northwest Parkway had objected to improvements on West 160th Avenue and that the contractors had the legal right to object. The contractors opposed improvements “because they might hurt the parkway financially.” Colorado State Representative Frank McNulty declared: “The purpose of toll roads is to augment state transportation infrastructure, not act as a roadblock to the construction of new transportation infrastructure in the northwest metro area.”

McNulty was wrong, and his comments came a year too late. Had he read the Northwest Parkway privatization contract he would have learned that under its “adverse action” provisions, the contractors had the right to object to new or improved roads and mass transit systems. In addition, the contractors had the right to receive compensation for lost anticipated revenues if those roads or transit systems were built during the term of the ninety-nine year contract.

Another example, from our neighbors in Indiana:

The company has drawn criticism from police and members of other emergency agencies, who said the operator’s practice of installing barriers at turnarounds has hindered their ability to respond to traffic accidents.

“We’re trying to respond to emergencies here,” said Betty Schroeder, director of Steuben County Emergency Medical Service. “I’m like: You’ve got to be kidding me here.”

Matt Pierce, a spokesman for the toll road operator, says the barriers stop illegal U-turns.

As an alternative, the road operator plans to install flexible posts that will deter drivers from using the turnabouts. Emergency vehicles, Pierce says, can drive over the posts.

These non-compete clauses are often written in vague legalese that Dannin describes as “not easy reading even for attorneys… legal terms of art, and they are ae also highly subjective concepts.” Legal terms of art mean complex litigation, which cash-strapped cities are loathe to take on.

Other times, the non-compete clauses are quite clear. In Virginia, the contract for privatized high-occupancy-vehicle lanes on the Capital Beltway requires the state to pay 70 percent of applicable tolls if HOV vehicle use exceeds:

a threshold of 24% of the total flow of all Permitted Vehicles that are then using such Toll Section going in the same direction for the first 30 consecutive minutes during any day, and any additional 15 consecutive minute periods in such day, during which average traffic for a Toll Section going in the same direction exceeds a rate of 3,200 vehicles per hour based on two lanes.

Steve Kattula of Greater Greater Washington estimated that this could be easily exceeded: if the rideshare works too well, the company makes out on it. But the provision is waived if the company makes a 12.98 percent profit.

And the punchline from the Sun-Times article:

Instead of settling these disputes in court, the privatization deals spell out that such matters are to be resolved in arbitration hearings, largely outside of public view. Both claims are before the American Arbitration Association, which promises total confidentiality to the parties in conflicts it’s asked to referee.

How does the AAA work?

American Arbitration Association arbitration is usually less formal than a court trial, proceeds more quickly, and results in a resolution much sooner. In contrast to the court system, a quick hearing date is usually obtained when using the American Arbitration Association. In fact, the American Arbitration Association prides itself on the speed with which a hearing can be set up, along with its expertise in providing neutral arbitrators and offering privacy not generally available via the Court system.

In essence, potential legal remedies to the parking-garage dispute have been privatized as well, for similar reasons: speed and cost. Things like this are why people are concerned about Emanuel’s proposed infrastructure trust, and why City Council is demanding oversight. But keep in mind that the parking-meter privatization, responsible for so much skepticism about this new one, went through in large part because of a lack of political will (for example, to raise parking meter fees), and passed City Council 40-5 two days after it was introduced. Oversight is only as strong as it’s applied, and privatization always looks appealing when the public sector is found wanting.

 

Photograph: theycallmetelly (CC by 2.0)

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