Privatization done right can be a great boon. Done poorly, it can harm the public for decades. We see another example of the latter ongoing in North Carolina (h/t @mihirpshah). The Charlotte Observer reports:
The N.C. Department of Transportation’s contract with a private developer to build toll lanes on Interstate 77 includes a controversial noncompete clause that could hinder plans to build new free lanes on the highway for 50 years.
The clause has long been part of the proposed contract. But it was changed in late 2013 or early 2014 to also include two new free lanes around Lake Norman – an important $431 million project supported by local transportation planners.
Some area officials were surprised that under the contract with I-77 Mobility Partners, the developer would likely collect damages if the state added two new general-purpose lanes from Exit 28 to Exit 36 at the lake.
Many of these long term privatization contracts are loaded with “submarine” clauses like non-competes that lurk underwater ready to rise up torpedo the public without warning. Did the people of North Carolina know that they were signing away their right to make public policy for the next 50 years when they did this deal?
What raises serious a red flag is that the clause that incorporated the I-77 added lanes project was added late in the game, which suggests that the current impact were not an accident:
Bill Coxe, a transportation planner with Huntersville, said he doesn’t know who lobbied for the revision. The new language wasn’t part of the draft contract from 2013, but it was added before the final deal was signed in June. “We saw that late in the game,” he said. “We aren’t sure who modified that.”
…
Mooresville’s representative on an advisory committee that helps make transportation recommendations said she didn’t know about the change to the contract with the developer. Neither did Andrew Grant, a Cornelius assistant town manager who helps shape regional transportation policy.
So many of these deals have less to do with bringing in private capital to finance infrastructure improvements than they do contractually creating a decades long stream of monopoly rents for the contractor.
Chicago got burned when an arbitrator ruled it owed $58 million to the group that leased the city’s lakefront parking garages. The city had promised it would not allow anyone else to build a garage open to the public to compete with the lessee. But it did anyway and they had to pay damages.
Contra the claim in the article that these clauses are necessary to attract investment, simply look around and see that businesses take huge investment risks every single day in markets with no barriers to entry for competitors. You don’t see Walgreens going to city governments and telling them they won’t open a store unless the city promises not to approve a CVS within a two mile radius, for example. We often see retail competitors right across the street from each other
But why invest in the actual marketplace when you can sign a sweetheart deal that grants you a five decade monopoly?
In this case, it appears to be free lanes and toll lanes side by side on the same facility. So there’s some justification for some sort of agreement on the state’s plans for the free lanes. But given that the free lane expansion was already on the books and supported by transportation planners, to have the project de facto killed through a clause slipped into a private contract in a way that does not appear to have been vetted by the public is dubious. If the residents of the area had known the free lane project they were banking on would be basically taken off the table for 50 years, it might have created protests that could potentially derail the contract. So by simply adding a non-compete clause, the state and contractor could do the same thing without stirring up the public until it was too late. It’s all the more reason why there needs to be much, much more scrutiny on the terms of these deals.
Aaron M. Renn is a senior fellow at theManhattan Instituteand a Contributing Editor atCity Journal. He writes at The Urbanophile, where this piece first appeared.
Interstate 77 map by Nick Nolte (Own work) [Public domain], via Wikimedia Commons
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