Over at the eminent Becker-Posner Blog, they've turned their brilliant minds to the Indiana Toll Road. There's a lot of talk about the general nature of privatizing public assets, but the specific deal gains some attention as well.
Judge Posner writes:
It is difficult to determine whether the $3.8 billion price tag for the Indiana Toll Road is closer to the competitive or the monopoly price level. On the one hand, the lessee cannot raise tolls until 2010 or 2016 (depending on the type of vehicle), and increases after that are capped. On the other hand, the tolls were raised significantly just before the lease, and allowing the operator in 2010 to begin raising toll rates annually by the increase in GDP may confer windfall gains, since the cost of operating the toll road may not increase at so great a rate. One would have to know a great deal more about the economics of operating a highway than I do to figure out whether the terms of the lease confer monopoly power on the lessee.
I do not regard the monopoly concern as a strong objection to the leasing of the toll road, however. The reason is that most, maybe all, taxes have monopoly-like effects, in the sense of driving a wedge between cost and price. Suppose the lease price would have been only $2 billion had the state imposed more stringent limitations on toll increases. Then the state would have $1.8 billion less in revenue and would presumably make up the difference by increasing tax rates or imposing additional taxes, and these measures would have allocative effects similar to those of higher tolls charged by the lessee of the toll road. If the monopoly issue is therefore considered a wash, the principal effect of the lease will be the positive one of reducing the quality-adjusted cost of operating the toll road and the lease is clearly a good idea.
He goes on to engage a common criticism of the lease:
Against all this it will be argued--it is an argument emphasized by opponents of leasing the Indiana Toll Road--that privatization, at least when it takes the form of a sale or long-term lease of government property for a lump sum, beggars the future by depriving government of an income-producing asset. The argument, at least in its simplest form, is unsound, because the state is not disposing of an asset but merely changing its form: from a highway to cash. The subtler form of the argument is that, given the truncated horizons of elected officials, the state will not invest the cash wisely for the long term, but will squander it on short-term projects. This is a danger--how great a one I do not know. It would be an interesting study to trace the uses to which privatizing governments here and abroad have put the proceeds of sales of public assets.
Of course, proponents of the lease have pointed out that the $3.8B is being invested for the long term, in their opinion, quite wisely in Indiana's logistics-based economy.
Prof. Becker, on the other hand, includes this bit:
I differ with Posner in believing that the revenue from a monopolized privatization would not be fully raised elsewhere if not raised from the privatization because it is difficult to tap other sources of revenue to substitute for foregone revenues from privatizations. Put differently, governments end up with bigger total spending budgets when they increase their revenue from privatizations by giving privatized companies some monopoly power.
But overall, he too is in favour of privatizing public infrastructure, and if anything, the Indiana Toll Road lease wasn't generous enough:
When dynamic competition is effective, a public enterprise, like a toll road or the postal system, should be sold without any restrictions on future pricing, unlike what happened in the sale of the Indiana toll road.
Meanwhile, Doug Masson wants to be a bit more specific, citing two additional objections:
1) It’s unfair for the motorists of northern Indiana to be the main source of taxes to build roads in other parts of the state; and 2) Toll Roads are not as conducive to economic development as are free roads . . . Does anyone believe Honda would be locating in Greensburg if I-74 were a toll road?
The second objection sounds like it could yield testable hypotheses.
Advance Indiana contends that the roads in the other parts of the state will pay dividends to those in Northern Indiana, and chastises the partisanship of regional politicking.
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