Privatization Proves Nettlesome

There’s news galore all around the privatization front.
Selling off the state’s huge Tidewater port facilities has been nixed; a bunch of private firms show interest in a partially state-funded new tollway tracking U.S. 460; and Gov. Bob McDonnell has finally unveiled his big idea for selling off the state’s ABC stores.
The news, however, is both mixed and quite telling. In every case, funding the right price for the project at hand has been a very nebulous exercise. It shows that privatization, which the state jumped into with great fanfare back in the mid 1990s, is not exactly the cut and paste selloff that its proponents would have you believe.
As the state Department of Transportatin has found out when it considered selling off the gigantic port facilities built with public money over many years, private business people are what they are for a reason. They will but the price squeeze on you. They want a good deal (even better a one-sided one) and could care less about the neo-Jeffersonian nonsense that the usual “think tanks” and blogs and gubernatorial streamlining commission types would have you believe.
Take a look at the three proposals:
  • Transportation Secretary Sean Connaughton has pulled the plug on three proposals to operate the Virginia Port Authority facilities in Norfolk, Portsmouth and Newport News. Illinois-based CenterPoint Properties, a partnership of Carrix INc. of Seattle and Wall Street giant Goldman Sachs; and Washington-based Caryle Group with tentacles everywhere all had submitted proposals in 2009. Problem was, the proposals were embarrassing low balls figured on 2009 traffic when the Great Recession had crunched cargo traffic. Upfront cash offers ranged from $250 million to $750 million — not exactly big bucks. A later deal by APM Terminals for VPA to lease its $500 million container facility in Portsmouth for 25 years helped seal the others’ doom.
  • McDonnell badly wants a privatized superhighway through the peanut country of Suffolk and other southeastern counties to Petersburg to replace pokey U.S. 460 and offer a safety valve for the clogged U.S. 64 on the Peninusla. Not a bad idea, but McDonnell somehow expected that the state wouldn’t have to poney up any public cash (the usual GOP pipedream). After no bidders showed up, some undisclosed public money was put on the table. Bids are in from 460 Partners, which includes Skanska USA Civil Southeast, AECOM and Bank of America; Multimodal Solutions LLC, including constructon giant Kiewit Cnstructioon, the Louis Berger Group and Autostrade; and finally, Spain’s Cintra Infraestructuras S.A.U., which is one of the leading public-private infrastructure building outfit on the face of the earth (presumably their executives won’t have to monkey with any anti-Hispanic immigration laws that the hard right wing in this state want so badly). It isn’t clear how the financing will work, but proposals in 2006 flopped in part because they would call for tolls of $13 per vehicle to go only 55 miles.
  • Lastly, McDonnell has finally unveiled his selloff plans for ABC stores. He claims selling off 300 or so ABC stores will bring in $500 million and keep pumping in nearly $250 million annually in taxes. Facing hard oppostion from his own party, he dropped his goofy idea to add a 4 percent tax masquerading as a fee on mixed drinks in bars. In its place is a 2.5 percent tax on bars and restaurants that choose to buy liquor from wholesales and not retailers. Plus there’s a $17.50 per gallon excise tax on spirits that would be higher than the national average and higher than neighboring states. Opponents are readying their attack, saying the governor’s numbers are loopy. What’s worse, the last two states to privatize their ABC system — West Virginia and Iowa — did not make nearly the revenue from the sell-off as they initially thought. The plan — and the funny way McDonnell has come up with figures — will not be this a slam dunk.
This is a lot to absorb, but it is a “teachable moment” as Barack Obama likes to say. Privatization is a lot harder than it looks. Assessing fair values on properties built with the sweat of Virginia taxpayers is not easy not matter what the dogmatists claim. And when you look at all the effort the McDonnell Administration is putting into these privatization things, you have to ask: Why here? Why now? Why isn’t he concentrating directly on jobs?
Peter Galuszka

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7 responses to “Privatization Proves Nettlesome”

  1. they would call for tolls of $13 per vehicle to go only 55 miles.


    Equal to a gas tax of $5.90 per gallon.

    Remember that, the next time someone tries to talk about tolls.

  2. E M Risse Avatar

    From the Jimmy’s Market Soup Broadcast, 10 Sept 2010:

    “Governor McDonnell proposes selling the Commonwealth's Liquor stores for a big profit. He will make up the loss of income to the state in future years by tripling the number of liquor outlets in the state, and raising the tax on alcohol. I have a counter proposal! Keep the liquor stores, and sell the lottery! When you purchase a lottery ticket at 7/11, they can keep the money. There will be a huge tax on it, of course.”

    It is assumed that she means that the revenue stream remains in the Community (including the school Agency?), the seller (7-11) gets a percentage and the tax is divided between the SubRegion and the Commonwealth.


  3. James A. Bacon Avatar
    James A. Bacon

    Peter, you raise good issues in this post, but as usual you set up a straw man argument built around the premise that free market "dogmatists" think that privatization is a panacea that should be pursued at all costs. I'd like to know who those "dogmatists" are, and I'd like to see the evidence of their fallacious thinking.

    Privatization is an *option* that governments should examine and pursue when appropriate. It sounds like the McDonnell administration made the right decision regarding the ports — they should not give away the crown jewels. It is the obligation of the governor, just as it would be of the CEO of a private company, to negotiate the best deal they can. Sometimes market conditions are such that it is impossible to sell the asset for a much as you think it is worth. In that case, the intelligent thing is to call the deal off.

    The same thing applies to the U.S. 460 project and the ABC deal. If you can get private sector participation in the project on terms that are advantageous to the commonwealth, then do it. If you can't get get those terms, don't do it. It's just a matter of discipline.

    Right now, market multiples are low. There is tremendous uncertainty in the economy, and private corporations are reluctant to part with their cash. Good deals (from the state's perspective) are hard to find. There is nothing wrong with testing the market. If McDonnell can't sell state assets for what they're worth to the commonwealth (or, better, for more than they're worth), then he should wait and try again when the market psychology has improved.

    It appears that the McDonnell administration made the right decision on the ports and the 460 project. Let us hope that he makes the right decision on the ABC stores. However, if none of those deals prove to be worth pursuing at this time, it does not represent a defeat for privatization, it means that the McDonnell administration is being disciplined — a good thing. Hopefully, the McDonnell team will come back when market conditions improve and test the waters again.

  4. Anonymous Avatar

    How about Tim Kaine's giving away the very profitable Dulles Toll Road to MWAA (with many benefits flowing to Bechtel) in order to construct Dulles Rail, largely on the backs of the Dulles Toll Road users?

    While Virginia is paying some bucks for the Beltway HOT Lanes, much of the financing is coming from Transurban. In contrast, Dulles Rail gets no private sector money. Yet both projects are operating under the Public-Private Partnership Act. No one has ever explained that one to me.


  5. Gooze Views Avatar
    Gooze Views

    As far as the "straw men" let's start with think tanks like your favored Tom Jefferson Institute (which never met a privatization proposal it didn't like), just about all of McDonnell's staff and various ones linked to Kaine and Warner.

    McD.'s streamlining commission's mission statement is to explore privatizations galore.

    I'd say ABC is in for a rough ride when people realize that the state will get less revenue overall if McD's plan prevails than what they have now. Strange thing to promote when the state is so hurting for revenues but hey it's "privatization" so that makes it OK.

    So, as much as you want to back up and say it ain't so, it 'tis.


  6. Anonymous Avatar

    Why is there even anything to sell? Just close all the stores and let the free market work. Any existing retail store that wants to sell alcohol should be able to. End of story.

    The government should never have been in the liquor business in the first place and has no right to sell its illegitimately obtained "monopoly".

    So in the name of "privatization" we are granting government protected monopolies? That is not the private free market! There is nothing private about monopolies perpetuated at government gunpoint.

    Ever go to a grocery store in Montgomery County and try to buy a bottle of wine? You can't because the government says no.

    You can buy wine in Virginia. And if you want to buy Russian vodka or whatever in a grocery store in Virginia, you should be able to as well. And why should a grocery store have to pay McDonnell or Virginia for anything?

    Who would pay $500 million for the state ABC stores if they knew that the door was going to be opened for the local Safeway to compete?

    Obviously they wouldn't, which just shows that McDonnell's so called "privatization" is just a more subtle form of back door socialism.

    So I challenge all of you to support a real free market in distilled spirits sales and open the door for free to any retail establishment to sell any legal product they want to.

    Don't sell the state liquor stores. Just close them! Without perpetuating anti-free market monopoly licensing they don't have any value.

    So McDonnell is actually anti-free market!

    Take that you liquor commies! Bacon I am calling you out on this!

    And Risse, gambling should be a free market too!

    It is amazing how the government makes selling something illegal, and then later decides they will sell it themselves under monopoly conditions.

    We are supposed to be so thankful for the thin blue line and what with Big Brother Daddy keeping us all on the straight and narrow path to sobriety and thriftiness. Oh that’s right. Daddy now sells the hard stuff and runs the numbers and those guys in blue keep the local grocer out of the competition. Stupid me.

  7. The government should never have been in the liquor business in the first place and has no right to sell its illegitimately obtained "monopoly".


    Good point. Would you make the same argument about their monopoly in selling zoning upgrades? They never "boubht" the zoning downgrades when they were put in place, so what is it that they have to sell?

    At least with the liquor store business they have the store leases and inventory to sell, which government did pay for, and can legitimately sell.

    In Arizona Walmart sells liquor, and it is about a dollar less per liter than at VA ABC stores. And there are a lot more outlets.

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