Privatization

David Levinson

Three Types of Privatization

• Sale of existing state owned business– Europe Developing world, ex-Communist Bloc.– e.g. buses– motive: the private sector is more efficient

• Private Infrastructure Development– e.g. Highways (SR91 in United States)– motive: New money for infrastructure

• Outsourcing of conventional public sector functions by contracting with private vendors– e.g maintenance functions, highway management– motive: Financial Gain for government

Disadvantages of Privatization

• Disadvantages to private firms– Must pay taxes– Must borrow at

market interest rates

– No eminent domain powers

• Disadvantage to society– Type 1 privatization

may upset existing property/equity relationships. Winners and losers are created.

– Cost savings may lead to unemployment when firms cut back on unprofitable services.

– Environmental sensitivity may not be in a private firm's objective function.

Lessons for Success

• Privatization is easier when– Competition in input and output markets– Efficiency gains are large– Few redistributions or transfers are

required– Few controversies with the environment

or opposition to economic growth– Activity or service covers its cost BUT

profits are not TOO high

Transit Bus PrivatizationRegulation Cycle

1. Entrepreneurial2. Consolidation3. Regulation of Fares and

Franchises4. Decline in Profits5. Withdrawal of capital and

services6. Public takeover7. Public subsidies8. Declining efficiency9. Vicious cycle of subsidy

cuts, fare increases, service cuts, declining riders

10. Privatization [Goto 1 or 3]

• Privatization may – 1. Eliminate Public

Ownership– 2. Supplement

Public Ownership

Conditions on Privatization

• Fares– 1. Deregulation of fares (Colombo Sri Lanka, Santiago

Chile) [Colombo kept the public company with low fares and overcrowding; Santiago had a proliferation of modes, drivers formed route associations and raised fares, service is better but still crowding]

– 2. Regulation of fares (everywhere else)

• Routes– Deregulation of routes ... direct subsidies to specific

routes– Regulation of routes ... must provide service on

unprofitable routes -> cross subsidy

Britain's Buses

• New entrants - low cost by lower wages, lower overhead, flexible work rules, do not usually lower prices, passengers are unlikely to wait.

• Existing firms - cut costs, establish a two tier wage structure (old vs. new workers)

• No economies of scale in local bus, large firms can use profitable routes to subsidize competitive routes.

• In Contrast, Transit contracting in United States, mostly paratransit services, some fixed routes

Curb Rights

• Problem - inter-temporal poaching by one firm on a market developed by another (stand here and a bus will come)

• Solution - a property right in a bus stop by time-of-day

Road Privatization

• Unlike buses, roads are not easily contestable.

• Market power is a serious consideration• On low volume roads, tolls cannot recover

costs• Roads are a long term investment, need

guarantees of stability.

• in Europe, many private roads have been nationalized

The Political Economy of Private Roads

David Levinson

Private Roads - A Vision

“CosaNostra Pizza #3569 is on Vista Road just down from Kings park Mall. Vista Road used to belong to the State of California and now is called Fairlanes, Inc. Rte. CSV-5. Its main competition used to be a U.S. Highway and is now called Cruiseways, Inc. Rte. Cal-12. Farther up the Valley, the two competing highways actually cross. Once there had been bitter disputes, the intersection closed by sporadic sniper fire. Finally, a big developer bought the entire intersection and turned it into a drive-through mall. Now the roads feed into a parking system - not a lot, not a ramp, but a system – and lose their identity. Getting through the intersection involves tracing paths through the parking system, many braided filaments of direction like the Ho Chi Minh trail. CSV-5 has better throughput, but Cal-12 has better pavement. That is typical – Fairlanes roads emphasize getting you there, for Type A drivers, and Cruiseways emphasize the enjoyment, for Type B drivers.” (Stephenson 1992)

Private Elements of Existing Highways

• Vehicles• Time• Roadside Services (Gas, Food,

Lodging)• Origins• Destinations• Parking

Reluctance

• Must be reluctance otherwise roads would be private (U.S. has only 2 private roads of note: SR91 and Dulles Greenway).

• Bad experience (California Electricity Deregulation, Britain’s Railtrack).

• Private roads must offer a significant and apparent advantage over public control.

• Burden of Proof is on those who want to change status quo.

• The case must be compelling, and for most places to try it, it must have been done somewhere else first.

• Not just net gains, but also distributional effects must be considered.

Functional Highway Classification

Access

Movement

SPEED

FLOW

slow fast

high

low

Functional

Classification

Types of

Connections

Relation to Abutting

Property

Arterial Through traffic

movement between and

across cities

Limited or controlled access

highways with ramps and/or

curb cut controls.

Collector Traffic movement

between major arterials

and local streets.

Direct access to abutting

property.

Local Traffic movement in

residential areas and

between residential and

minor commercial

areas.

Direct access to abutting

property.

U.K. Toll Roads

Turnpikes in Great Britain

0

5

10

15

20

25

30

35

40

1650 1700 1750 1800 1850 1900

Year

Annual Number of Acts

0

100

200

300

400

500

600

700

800

900

1000

Number of Acts Cumulative Number of Acts

Cumulative Number of Turnpike Acts

in Force

U.S. Toll Roads

Toll Roads in the United States 1940-91

-200

-100

0

100

200

300

400

500

600

1940 1942 1944 1946 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990

Year

Net Miles Opened

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Total Toll Miles

Net Miles Opened Cum. No. of Miles

Legal Issues

Article 1, Section 8• The Congress shall have power to lay and collect taxes, duties,

imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States; … To establish post offices and post roads; …

Amendment IX

• The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the

people. Amendment X• The powers not delegated to the United States by the

Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.

Road Bills

• Vetoed by Madison, Monroe, Jackson

• Federal Government can build roads but doesn’t have to.

• National System of Interstate and Defense Highway. We don’t place defense in private hands.

Private Highways and Streets

• Private Highways (Limited Access) in many places. (Private Goods)

• Private streets in some places: e.g. St. Louis, Apartment complexes. Give local control, may have design advantage - easier to impose traffic calming. (Club Goods)

• What about signalized arterials?

Types of Goods

Excludability

Yes No

Rivalry Yes Private “Congesting”

No Club Public

Public Government Federal GovernmentState Government Arterial Roads

Collector RoadsLocal Government Collector Roads

Local RoadsHomeowners Association Local Roads

Utility Transfer to Quasi-Public Authority Collector Roads

Outsourcing Service Contract Operations and Maintenance All Publicly Owned Roads

Management Contract Design, BuildDesign, Build, Major MaintenanceDesign, Build, Operate

New Arterial Roads(in areas unwilling to give up f ullcontrol)

Franchise Project Franchise Lease, Develop, OperateBuild, Lease, Operate, TransferBuild, Transfer, OperateBuild, Operate, TransferBuild, Own, Operate, TransferBuild, Own, Operate

New Arterial Roads

Private Divestiture Private Entrepreneurship Buy, Build, OperateBuy, Operate

Existing Arterial Roads

Degrees of Involvement

Ideology of Privatization: Libertarian Party Platform

• "Government interference in transportation is characterized by monopolistic restriction, corruption and gross inefficiency. We therefore call for the dissolution of all government agencies concerned with transportation, … We call for the privatization of …, public roads, and the national highway system. …"

Is Government Ownership Characterized By:

• Monopolistic Restriction• Corruption• Gross Inefficiency

Would Private Ownership Be Characterized by:

• Monopolies• Corruption• Gross Inefficiency ?

Identifying and Managing Distribution of Gains and

Losses• Payback of Federal Government• Contracting Out• Building a New Private Road• Privatizing an Existing “Free” Road

(and tolling it)• Privatizing an Existing Toll Road.

Welfare and Profits vs. Tolls

Distributional Effects of Privatization

Value of Time: Case 1:Constructionof NewPrivate Road

Case 2: Privatization ofExisting (Congested)Free Road (Tolls from 0to Profit Max)

Case 3: Privatization ofExisting (Uncongested)Toll Road (Tolls fromWelfare Max. to ProfitMax.)

High Winner Winner LoserMedium Winner ? LoserLow Winner Loser Loser

Compensate the Losers?

• Discounted use of facility• Subsidize alternatives• Use the revenue from privatization to

– pay off debt,– pay for other public service, or – give members of public (travelers,

taxpayers, land owners, …) a stake in system (ownership)

• No right formula

Exercise:

• Who should own Metro Transit? How should it be organized.

• Work in pairs, identify alternative ownership regimes, discuss their merits.

Infrastructure

David Levinson(based on notes by

Tae Oum, David Gillen)

Canada• Governments provide system of roads and highways;

– recovers a part of the cost through fuel taxes, vehicle license fees, and other fees and penalties;

– limited number of toll roads and bridges - e.g. Coquihalla

• Transport Canada owns and operate most of the airports in Canada, and provide enroute air traffic control and navigational aid services;

– Toronto, Montreal's Dorval, Vancouver, Edmonton and Calgary airports were transferred to respective local authorities in 1992.

– Some examples of private provision of airport facilities;• Toronto airport's terminal 3 ($500 mm)• Renovation and reconstruction of terminals 1 and 2 ($750 mm)

– a push towards further defederalization and privatization of airports.• recovers a part of the costs through air transport tax, landing fees, concession and other rentals,

general terminal fees, parking fees, etc.

• Railway companies themselves provide their own infrastructure; roadbeds, tracks, yards and stations;

– European Commission has proposed to establish a rail infrastructure company to own and maintain railroad tracks and stations, and let rail carriers use it for fees to provide competing services.

• Ports Canada, a crown corporation, owns and operates major ports in Canada; each port authority (e.g., Port of Vancouver) enjoys substantial autonomy.

Japan

• Regionally based public corporations own and operate major intercity roads;– other roads financed by fuel taxes– many toll roads make profit after paying back the

capital costs of construction and expansion.

• Local authorities own major airports such as Narita and Kansai International airports;– Landing fees and passenger fees are high;– Government subsidize contruction and expansion

costs

USA

• Governments provide system of roads and highways;– recovers a part of the cost through fuel taxes, vehicle licence

fees, weight distance fees from trucks, various fees and penalties.

– federal portion of fuel tax revenues are put into Highway Trust Fund.

– more toll roads and bridges than in Canada.– some private road projects are planned.

• Most airports are owned and operated by municipal governments or local authorities;– air transport tax and other federal revenues go to Aviation

Trust Fund.– airport expansion costs are usually raised by airport bonds

secured by signatory (major) carriers. This gives the signatory airlines power to veto any major changes to landing fee structures or airport slot allocation system.

Public Policy Questions

• Should the freight railways continue to provide their own infrastructure ? If yes, should they be subsidized to the extent that truckers are being subsidized indirectly ? What are the advantanges and disadvantages of creating a common rail infrastructure corporation ?

• Should the governments (i.e., tax payers) subsidize a part of infrastructure costs ?

• Should the extent of subsidy be equalized across all modes of transportation ?

• If so, should we subsidize an equal amount per passenger-km or an equal proportion of the total modal costs ?

Objectives of Pricing Infrastructure

• Economic efficiency • Cost recovery if required by the

policy• Non-economic objectives

Efficient Pricing, Investment, and Cost

Recovery• calls for efficient use of the existing capacity,

and efficient investment on quality and capacity of infrastructure;

• surprisingly large benefits from efficient pricing and investment;– current pricing systems do not reflect true economic

costs – poor design and capacity decisions have resulted in

higher costs of use– under efficient pricing and investment decisions, the

long run requisite increase in investment becomes quite modest.

Charging for Pavement Damage

• Payment damage depends on vehicle weight per axle, not total vehicle weight - the damage power rises exponentially to the third power with the load per axle (e.g., a rear axle of a typical 13-ton van causes over 1000 times as much damageas that of a car.

• In order to reflect the pavement damage costs more accurately, Small and Winston propose a "graduated per-mile tax based on axle weight". This would give truckers (truck manufactuers) an incentive to reduce axle weights by shifting to trucks with more axles, extending pavement life and reducing highway maintenace. The fuel tax currently in place provides truckers with the opposite incentives: the tax rises with a vehicle's axles, since trucks with more axles require larger engines and get lower fuel economy.

Optimal Pavement Durability

• They pointed out that the pavement thickness guidelines of the American Association of State Highway and Transportation Officials (AASHTO) fails to incorporate economic optimization into the design procedure. For example, by increasing rigid concrete pavement thickness only by 2.6 inches from currently 11.2 inches to 13.8 inches would more than double the life of the pavement.

• are suggested as a means to allocate scarce road capacity in congested areas and peak times. The automated vehicle identification (AVI) technology, proved as a reliable means to calculate charge congestion tolls during the Hong Kong experiment, the North Dallas Tollway and in New Orleans, can be used to minimize the cost of administration

Congestion Charges

Air Transportation Infrastructure

• Only Denver airport has been built since 1974.• landing fees based on maximum landing weight of

aircraft• each airport has its own user charge schedules• carriers's on-time performance being affected by

airport congestion• some airports such as New York area airports and

Boston's Logan airport use minimum landing fees during peak periods - to get smaller planes move to offpeak or other nearby airports

• airport gate and landing slots are transferable;– create windfall gain for the existing carriers