Why privatize the roads?

There are two arguments for road privatization that are plain daft.

One is that it will “unlock large-scale private investment” from pension and sovereign wealth funds. This argument fails because the government can already borrow from these through the gilt market at almost zero cost - the yield on 50-year index-linked gilts is below 0.2%. The cheapest way to invest in roads is for the government to borrow. To think otherwise is merely irrational debt phobia.

The second argument is that the private sector can manage the roads better than the Highways Agency. This fails because, insofar as the private sector is more efficient than the public, it is because the pressure of competition forces it to be so. But giving private firms long-lived leases over natural monopolies is no way to increase competition.

So, what is the case for privatization? Jonathan sees it as a step towards road pricing. But there is another argument.

It originates in perhaps the most important fact about western capitalism in recent years - that there is a dearth of investment opportunities; this is why business investment as a share of GDP has fallen in recent years, and why companies have for a long time been saving much more than they‘ve invested in real assets.

Faced with this problem, one function of the state is to create new investment opportunities. And road privatization - like steps towards NHS privatization - does just this.

This is, of course, nothing new. In the 50s and 60s, the state helped create profitable investments by maintaining aggregate demand through increasing public spending - in the US especially upon the military. In the 80s, it did so by attacking workers’ bargaining power and thus relieving the profit squeeze. Although the precise form in which the state helps foster private sector profits and investment varies according to circumstances (and maybe ideology)*, the fact is that a key function of the state in capitalist economies is to help create profit opportunities. As Paul Sweezy wrote in one of the classics of Marxist economics:

We should naturally expect that the state power under capitalism would be used first and foremost in the interests of the capitalist class since the state is dedicated to the preservation of the structure of capitalism. (The Theory of Capitalist Development, p248)

* There’s no inconsistency between profits being raised sometimes by full employment policies and at other times by engineering recession. If we’re in what Marglin and Bhaduri call a stagnationist regime, the former works, but if we’re in an exhilarationist regime, the latter does so.  During the 70s, the UK moved from the former to the latter, necessitating - from capitalists’ point of view - different policies.

Comments

[Luis Enrique]

I recall having read an assessment of PPP, PFI and such like which concluded that road PPP are generally a success (i.e. better value) because if you pay a company to build a road and then maintain it, for a previously agreed fee, they have an incentive to build it better and look after it better, to reduce their maintenance costs.

how that works when you sell off already existing roads, I don't know.

[Keith]

How long before they bring back tax farming as practised before the French Revolution?

Time to make a guillotine in the basement for the backlash.

[rodney dawkins]

Surely we have all seen the way that the state manages roads - builders come out - on Sunday- to get their double time rate; mending the same stretch of road for the umpteenth time, because there is no market mechanism to do the job 'properly' in the first place. Nobody is keeping an eye on total costs over an extended period. Private companies will innovate, and improve road surface durability. The incentive will be there, to get a return on the investment for little old ladies' pension funds. Sorry to mention such a decadent capitalist concept.

[Luis Enrique]

(and I should add, unlike other sector PFI, the contracts are easier to write mainly because the outcomes easier to observe)

[Steve Hurford]

It really is too early to make a sound judgement on this. I spent a good few years in the road building industry and recall more than a few cock-ups on both sides, with technicians thinking they know everything and specifiers making last minute changes and without realising the knock on costs. As for digging up the roads on a Sunday, the traffic disruption on any other day of the week can be too much to contemplate. Let's just wait to see what else Davie boy is going to say on the matter.

[P Spence]

David Harvey's notion of accumulation by dispossession is to the point. The public sector represents untapped profit for capital: we are now witness to the new enclosures. Private property forces others to pay for its benefit when previously such property was communially held and to which all had some right of access. Capital is always predatory and explains why social democracy is a contingent state as we now see clearly across Europe: welfare is no longer affordable when profits are stagnating and hence we have the aggressive neoliberal response to the crisis.

[Ralph Musgrave]

“In the 50s and 60s, the state helped create profitable investments by maintaining aggregate demand..”

I have doubts about that. The state didn’t do much by way of “maintaining aggregate demand” in the 1800s, yet employment levels on average were comparable to today’s.

[Paolo Siciliani]

In theory, you can still have rivalry at the bidding stage for the lease.
In theory, Rodney Dawkins is simply referring to "incentive based regulation" developed many decades ago and used with differing results to regulate many liberalised utilities.
In practice, well, in practice it depends on how strong is the regulatory oversight.
My point is any regime (private, public or hybrid) needs a strong and indipendent regulator to work all right, so provided you have one in place the choice between which regime to use should be simply based on the corresponding cost of capital.....that is to say, what would prevent the govt from setting up an "incentive based" regulatory scheme to monitor and incentivise a public natural monopolist?

[Account Deleted]

Rivalry at the bidding stage for a lease is not the same as competition for the custom of road users. We're not going to sanction multiple roads to the same place (i.e. direct routes with a zero-sum relationship), so the bidding will always be for a monopoly right.

Regardless of whether the maintainer's income is in the form of a state payment or user tolls, his profitability will depend on either securing a higher price up front or squeezing costs ongoing. The former is an encouragement to corruption or cartel price-fixing in the bidding process. The latter may stimulate innovation, but it may just as likely stimulate corner-cutting.

We've been this way before with railway maintenance. It's not an encouraging track record, if you'll excuse the pun.

[A Different Alex]

Portes:

"Road pricing would be better not just for the government and the new owners of the road network, but also for consumers; those people who valued their journeys least would reduce their journeys on the most congested roads at the most congested times, making life easier for those who valued their journeys most"

I seem to remember Tony Benn saying somewhere on Youtube that this sort of language ("consumers") dehumanizes the poor - after all, how can you value a journey highly when you don't have the money to begin with in order to be a "consumer"?

[Steve Hurford]

One point which we will have to bear in mind, of course, when it comes to the building of roads by the private sector is that planning processes in the UK can take an infernally long time. The public sector is well placed to take this into account, but how much capital will have to be tied up in the processes with no guarantee of success and what effect will this have on construction costs and subsequent pricing?

[George Hallam]

>>“In the 50s and 60s, the state helped
>>create profitable investments by
>>maintaining aggregate demand..”
>I have doubts about that. The state didn’t
>do much by way of “maintaining aggregate
>demand” in the 1800s, yet employment
>levels on average were comparable to
>today’s.

This is both confused and jejune.

Is the comparison supposed to be between employment levels in “the 1800s” and “the 50s and 60s” (i.e between 2 and 3 percent)? or “today” (2012 - 8.4 percent)?

Once this has been sorted out there is the problem that there are no reliable statistics for unemployment in the Nineteenth Century.

For what it’s worth, Beveridge (1944) thought that unemployment before 1914 was between a half and one third of the rate between the wars. Since the latter is estimated to have varied between 7.4 and 17 percent this would suggest a range of between 2.5 to 8.5 percent. This is well above the range of “the 50s and 60s”.

Then there is the question of the role of the state in maintaining aggregate demand and so creating profitable investment possibilities.

For the sake of argument let us assume that the state had a negligible influence in the 1800s”.

However, it could well be that while this was unnecessary since in the Nineteenth Century capitalism was still developing. Meanwhile, things have moved on, capitalism is no longer young and state intervention has become essential to keep the system from stagnating.

[Leigh Caldwell]

Another argument for private roads is that currently, road quality might be overprovided and quantity underprovided. Usage fees could give investors the right incentives to build another road to somewhere with insufficient capacity instead of maintaining, for political reasons, roads in the Highlands or in front of Buckingham Palace which don't get enough usage to justify their overengineered quality.

Of course, I'd love to see Cameron trying to sell the idea of cutting off rural Scottish communities in order to overrun the English countryside with low-quality roads. It would certainly help Salmond with his referendum, which from Cameron's point of view may be no bad thing.

[james higham]

But giving private firms long-lived leases over natural monopolies is no way to increase competition.

That's so.

[greg]

The dearth of investment opportunities is because of the dearth of money in the middle and lower classes. The investing class has become a rentier class, and this has arrested the growth of markets necessary to encourage real investment. There is no point making real investments in a market when you've already plundered it through financial and political manipulation. See, eg: http://anamecon.blogspot.com/2011/11/morality-and-debt.html

As for roads, capitalizing a road is a bad investment for a private firm. If roads were a good investment, we would have more private ones already. Certainly we would have more private bridges. The destruction of more naturally profitable, prime, investment opportunities has forced private investors to consider roads, and other, more marginal opportunities.

We can expect, therefore, if existing roads were privatized, the tolls would be high, and the roads themselves would be allowed to deteriorate.

[Blissex]

There is a similar argument about dearth of opportunities in the third world here:

http://steadystate.org/growth-debt-and-the-world-bank/
«Trillions of dollars of capital was circling the globe looking for projects in which to become invested so it could grow. The World Bank understood that the limiting factor was what they called “bankable projects” — concrete investments that could embody abstract financial capital and make its value grow at an acceptable rate, usually ten percent per annum or more, doubling every seven years. Since there were not enough bankable projects to absorb the available financial capital the WB decided to stimulate the creation of such projects with “country development teams” set up in the borrowing countries, but with WB technical assistance. No doubt many such projects were useful, but it was still hard to grow at ten percent without involuntarily displacing people, or running down natural capital and counting it as income, both of which were done on a grand scale.»

As to road selloffs, the idea is that investors simply love buying rent monopolies in rich areas, because they are cash guzzlers, if managed as cash-cows, that is cutting expenses to the bone.

Sure regulators could cause trouble, insisting on expensive things like maintenance, but of course there are ways to vest regulators in the success of the privatization project too.

The name of the profitability game is more than ever "barriers to entry", and owning an important toll road is simply fantastic from that point of view.

[Mark in UK]

@ Rodney Dawkins:

"Surely we have all seen the way that the state manages roads - builders come out - on Sunday- to get their double time rate; mending the same stretch of road for the umpteenth time, because there is no market mechanism to do the job 'properly' in the first place."

I think you are wrong on this. Most roadworks are not repairs, but works by utility companies to install cables, piples etc. In other words, private sector works.

The utility companies proved incapable of co-ordinating works between themselves, and eventually, some years ago, legislation was enacted giving local authorities some degree of control over utility works.

For all roadworks including repair maintenance, yes, they do happen at weekends sometimes, I agree.I think that is about limiting disruption during the working week. Its hard to say when the best time for roadworks would be, because there will be drawbacks in one form or another, whenever they are.
When would you do them?

[greg]

@Blissex:

Yes, and our rentiers may impose a very unpleasant form of steady state economy as they gobble up an ever increasing share of the world's productive assets. Including the most profitable roads.

See this interview:
http://michael-hudson.com/2012/02/wall-streets-capital-gain-planning/
on how rent seeking by banks arrests development.

[Blissex]

«Most roadworks are not repairs, but works by utility companies to install cables, piples etc. In other words, private sector works.

The utility companies proved incapable of co-ordinating works between themselves, and eventually, some years ago, legislation was enacted giving local authorities some degree of control over utility works.»

Oh it was much worse than that. There were rules to favour private companies by giving them the right to book roads for utility work for long periods of time for free.

Given this they overbooked the roads wildly to give themselves more flexible scheduling of work and thus saving money to them at huge public cost.

The legislation you allude to has given the right to council to restrict these bookings if they are unreasonable.