The Harms of Infrastructure Privatization: A Step Backward in Progressive Policymaking
July 26, 2021
By Joseph Stiglitz
This week, the White House and congressional negotiators are working to hammer out a bipartisan infrastructure framework—one component of the Biden administration’s laser focus on upgrading crumbling infrastructure and making essential, long-overdue public investments that would be of enormous benefit to the country.
As always, however, the devil is in the details.
Specifically, the bipartisan framework lists several items as “proposed financing sources for new investment,” including public-private partnerships (P3s) and asset recycling. These proposals should be a cause for concern.
In many cases, such measures are back doors to privatization—with public funds paying for projects controlled by unaccountable private firms whose primary motive is to increase their own profits.
These kinds of proposals represent a misguided reversion to a neoliberal framework that has, for decades, widened economic inequality, prioritized extractive corporate power over people, and hollowed out our public capacity.
The fundamental, flawed premise of these initiatives is that the government is inevitably inefficient, so giving control of these assets to the private sector represents an opportunity for arbitrage: Both the private and public sectors can be better off.
Experience around the world shows otherwise. There are several reasons for the disappointing results: For example, the private sector faces much higher costs of capital, and infrastructure projects are long-term investments, where differences in the cost of capital matter a lot. This puts the private sector at a marked disadvantage.
Moreover, it turns out that in many areas, the public sector is remarkably efficient and innovative—more than it is given credit for—and the private sector is less efficient than is commonly recognized. It is rife with what economists refer to as “agency problems,” where conflicts of interests and misguided incentives lead to outcomes that are far from socially desirable—as we saw in the financial crisis.
In addition, contracting with limited liability companies is a one-way bet—one of the reasons for the asymmetric outcomes in which the government bears the losses and the private companies reap the gains. When things don’t go the way they’d hoped, companies either walk away from projects or force renegotiations, essentially holding hostage a government that must still provide essential services. And when things turn out better than hoped, when costs are lower or demand is higher, the private firms keep the windfall gains.
Most importantly, it is hard—indeed impossible—in any contract to specify the full range of public concerns that one would want a “good” partner to keep in mind, and these are at the center of many key public infrastructure projects.
Government, by design, can play a powerful role in creating an economy that focuses on people and the planet, and can often do it more effectively and efficiently than the private sector. A government can leverage its scale to coordinate and align resources cohesively to meet societal needs; it can use its laws to mitigate and rectify legacies of racism and address market failures; it creates a process of democratic accountability that puts collective needs at the center; and it sets goals and spurs essential changes that would otherwise not happen.
Policies such as those being proposed, in which the private sector is given, if even temporarily, significant control over these public assets—making key decisions, including imposing charges from which they derive their profits—undermine government’s ability to accomplish these goals and give outsized power to private sector companies with conflicts of interest and misaligned incentives. And they do so without any evidence that the private sector is more efficient in these contracted areas. As a result, these provisions have historically, around the world, not had the promised beneficial effects, either on economic productivity or on the government’s budget, and instead often have adverse societal effects:
- enhancing extractive corporate power;
- weakening public power and democracy;
- widening racial and economic disparities; and
- dampening worker power.
Enhancing extractive corporate power. The private sector’s central goal is to maximize profit, not deliver necessary services. It has proven impossible to ensure that private providers’ incentives match public interest in these arrangements. Too often, contracted companies generate more income by exploiting workers, cutting corners on quality, charging high prices to users, and/or excluding certain groups from service—not by increasing efficiency.
And, as already noted, the government tends to absorb the risks of investments without getting a share in any returns reflecting the risks it bears and the capital it provides. As a result, the hoped-for contribution to the government’s budget may well not even be realized.
Weakening public power and democracy. Particularly with something as fundamental as infrastructure (broadly defined, as President Biden has done), democratic input and accountability are essential. Infrastructure proposals represent a unique opportunity to invest in and empower public institutions while building a more cohesive and responsive government and economy. Privatization does just the opposite: It dilutes the role and responsibilities of government in an often-deliberate attempt to diminish the capacity of public institutions and weaken already-low public trust. And it does this without any proven public benefit—and with a long history of harms that result from subjecting people to the whims of profit-driven executives.
Widening racial and economic disparities. One of the many virtues of public institutions is that they can prioritize being accessible to all citizens regardless of age, race, gender, class, or ability. Their core mission is to serve the public interest. In contrast, private institutions are built to serve the interests of a narrow group of shareholders and executives, all but ensuring questions of equal access will be thrown to the wayside in favor of a singular pursuit of profit. This directly and disproportionately harms people who are already systematically marginalized, further widening the chasms in our economy.
Dampening labor power. Another implication of private control of infrastructure is its impact on workers. In an effort to contain costs and maximize profits, private entities often skimp on job quality, limit wages, and don’t make either working conditions or the training of workers a priority. The single-minded focus on profits means that broader social goals are sidelined.
Privatizing key infrastructure is a big step in the wrong direction.
Instead, policymakers should move government’s unique role and abilities to the center of the infrastructure package, doing what they can to better align our public infrastructure with the public interest. Doing so will be good for the budget. It will be good for the economy. And it will be good for our society.