Part 5. David Levinson’s CityLab discussion on transit: Asset values

I’m almost done with my responses to David Levinson’s important contribution via CityLab on How to Make Mass Transit Funding Sustainable Once and For All.

My responses so far:

Today we take up point 6 in his list of seven points, even though I’m only part 5, as I skipped some, because I FELT LIKE IT, OK?

Point 6:

6. Utilities and transportation services can use private equity and bond markets to unlock value. If Uber is valued at $17 billion (or even one-tenth that), how much capital would a well-governed mass transit utility with actual users be able to raise?

Wheee! Money!!!

First, Uber is probably over-valued, but Levinson admits that. Second, yes, we know we have a lot of assets wrapped up in transit, but not all of them are useful. If it’s true that US operators overcapitalize, that means that while we certainly have a lot of productive assets in transit, some of them are not particularly productive and will just go to the great depreciation bin in the sky rather than make anybody any serious coin. This is why some of us get so shouty about bad public investments.

For somebody like Levinson, retiring those assets or redeploying them elsewhere is what should happen because continuing to operate unproductive assets is throwing good money after bad, as people with more sense about money than me say.

However, I’m going to say something that is going to make errrbody unhappy: transit’s assets are worth more as assets because we all know the taxpayer will buy them back if private sector managers allow things to go pear-shaped. If there is something that, over the course of its history, has been ‘too big to fail’, it is transit. From the municipal bail-outs of holding companies in the mid 20th century to the devastating strikes that occurred before then, disrupting transit service in the pre-auto world paid out well for both capital and labor. It was textbook Ralph Miliband. So we should think Uber-level values with a bail-out and buy-out guarantee–which is basically what just about all major infrastructure transfers to the private sector turn out to be given enough time, save for some examples in Asia.

So just as competitive bidding has worked well for London, their public-private partnership on the rail side didn’t go all that well. The Metronet-London Underground deal came about in 1998 in part because the transit provider, Transport for London, was financially stretched and their capital stock decayed. This is a big deal: taking over large capital stocks is risky, let alone doing so because you have to bail somebody out. It means you probably have crumbling assets with an uncertain price tag to fix. We aren’t talking about water or electricity infrastructure nobody sees, and you can let everything look a bit shabby even if you do draw the line at serious threats to service. A big part of what we envision with private transit companies are clean, well-maintained stations and vehicles, and that costs.

Private companies seek to shift the risk of acquiring those assets back onto the public sector to protect themselves from default during construction and reinvestment. Those guarantees can effectively shift the risks of cost overruns and poor management right back onto taxpayers. Metronet ran into similar capital cost over-runs that plague public agencies. On a 30 year contract, they came back to the agency just a few years into the contract arguing that the scope of the renovation work had to be reduced for them to stay solvent. The result is that in 2009, the company went into insolvency administration, and in time the Mayor of London ordered the buyout of Metronet’s contract, which placed the debt back onto the English public and cost taxpayers an additional 100 to 410 million pounds. While newspapers blamed the public sector partner for failing to manage the contracts properly, the public audit on the deal cited Metronet’s own corporate governance and poor management as the primary reason for the failed partnership.

Just to argue the point about how hard it is to predict how these deals can go, another private member of the original 1998 partnership, Tube Lines, experienced none of the cost over-runs, delivered on its agreements, and maintained its contract until 2010 when it, too, was purchased back by the public agency after a dispute over the contract.

So for all practical purposes, the public-private-partnership shimmy–sell off assets for a quick cash infusion, take them back when the company doesn’t want ’em–already allows governments to draw on equity. Governments really are the lowest rate borrowers, due to their ability to fall back on taxpayers, and there are costs to transferring ownership from public agencies to private entities, let alone maintaining the relationships. As a result I’m not sure that private sector equity makes a huge difference here.

Finally, would it kill us to have some transit space remain public space? Penn Station is a valuable building, but some of its value comes from its location and use, and some comes from knowing we own it and some dickweed Frank McCourt/Donald Sterling landlord isn’t going to put the squeeze on us. I value that knowledge, don’t you?

Edited to add: David Levisnon notes in his response that Penn Station was privately owned and destroyed, and, that Grand Central Station is still privately owned. We can’t be anywhere, apparently, where a landlord can’t kick us out unless it’s in a home we own!