Understanding
Government Asset Sales
by
Robert Wenzel
Economic
Policy Journal
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When
people think about a government unloading of an asset, they think
of the way it is sold in the private sector: Keys are given to the
new owner, he is free to do what he wants and the old owner walks
away. But this is not the way government assets are necessarily
"sold", especially "utilities. There is an on going
relationship with the government where the monopoly utility gets
to set fees approved by the government. In other words these deals
have as much to do with the private sector as does the rum distiller
business run by Fidel Castro's brother, Raul.
With this in
mind, here's Yves Smith of Naked Capitalism taking a shot at understanding
why the Koch bothers may need seven lobbyists in Wisconsin:
Mike Konczal
(thanks
to ed at ginandtacos) reported earlier today on the latest
release of a movie coming to states and cities all over the US,
namely the sale of state and local government assets to alleviate
pressures on strained budgets.
For those
new to this concept, the term of art is the anodyne “infrastructure
sales” and the company that more or less invented this lucrative
business
is Macquarie Bank of Australia (known down under as “the
millionaires factory”), although US firms clearly intend
to exploit the once in a lifetime opportunity presented by widespread
state and municipal budget distress and downgrades.
The problem,
of course, is that these deals put important public resources
paid for by taxes (or even worse, financed by bonds and thus potentially
not even yet fully paid for) in the hands of private investors.
They then earn their returns by charging user fees of various
sorts. The public must rely on the new owners for reinvestment
and maintenance, and depending on how the deal is negotiated,
may have ceded control as far as fee increases are concerned.
This is tantamount to selling the family china only to have to
rent it back in order to eat dinner.
Now defenders
will argue that there is nothing wrong with this in practice,
as long as the price is fair, no one is harmed. That’s spurious.
This is worse than an intergenerational transfer. Those future
fees not only must recoup maintenance costs (which any owner would
presumably pay) and the time value of money, but also the investor’s
target return in excess of that. In addition, the large transaction
costs of these deals are ultimately borne by the seller.
And the
list of shortcomings thus far are merely those that result if
you have two sides that are equally sophisticated. That is hardly
the case with municipalities versus bankers and investors. As
the old saying goes, “If you sit down for a game of poker
and you don’t know who the sucker at the table is, it’s
you.”
But even
that dim view presupposes that the government body will try to
avoid being fleeced but will. Imagine what happens when government
officials are in a position to lend a helping hand with a wholesale
giveaway to their cronies.
Like
I said earlier, this is the Russian oligarch play all over again.
Smith has a decidedly "public good" view of these operations
and probably would like to see the government maintain control of
the operations, but she gets the problem of these asset sales to
oligarchs.
The real answer
is for the governments to get out of these businesses rather than
continuing them as monopolies with oligarchs and their army of lobbyists
controlling the game.
Read
the rest of the article
February
25, 2011
©2011
Economic Policy Journal
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