Infrastructure Privatization Contracts and Their Effect on Governance

Abstract:     
For all but those who have an ideological commitment to privatization, the issue driving privatization is how to fund public infrastructure. Thus, arguments for privatizing infrastructure are (1) to provide money so cash-strapped governments can fix crumbling infrastructure and (2) to shift future financial risk to the private contractor, as well as, of course, the financial rewards.

The reality, though, is far different. Provisions commonly found in infrastructure privatization contracts actually make the public the insurer of private contractors’ return on investment. Indeed, were it not for the lengthy provisions that protect contractors from diminution of their expected returns, the contracts would not run on for so many pages.

Of greater importance, infrastructure privatization contracts give private contractors a quasi-governmental status, with power over new laws, judicial decisions, propositions voted on by the public, and other government actions that a contractor claims will affect toll roads and revenues. Such a hybrid may well violate the non-delegation doctrine that bars private entities from exercising power that is inherently governmental. This paper examines the operation of three provisions commonly; found in infrastructure contracts: (1) compensation events; (2) noncompetition provisions; and (3) the contractor’s right to object to and receive compensation for legislative, administrative, and judicial decisions. These provisions operate to give private contractors power over decisions that (1) affect the public interest, (2) that are normally made by public officials, and (3) that are subject to public oversight, disclosure, and accountability - oversight that does not apply to private contractors.

The paper advocates a public discussion of these provisions, rather than a discussion on infrastructure privatization that has focused narrowly on tolls; reflexive pro- or anti- private or public provision; assumptions that there are no alternatives; and how to spend or invest up-front payments.

Working Paper Series