Maryland officials say that letting a private company build and run the Purple Line will avoid many of the inefficiencies of government. But the private sector has inefficiencies of its own.
By using a public-private partnership, or P3, to operate the light rail line, officials at the Maryland Department of Transportation hope for better service at lower cost. The private sector is better able to manage risk, they argue, and it saves money through greater flexibility and tighter oversight. Motivated by incentives, not a rulebook, a private operator or “concessionaire” would use its creativity to run the railroad better.
How well this will work depends on what the incentives are. The ideal concessionaire would be a 30-year-old railroad engineer who invests her life savings of $180 million. She runs the light rail line herself and keeps it impeccably maintained. She thinks about the steady income she will need when medical school tuition bills come due for her 1-year-old son.
Unfortunately, such bidders will be rare. In all likelihood, two groups of intermediaries, railroad managers and money managers, will stand between the source of money and the trains. They will face incentives of their own, which are not necessarily the same as those of riders and investors.
Money managers, in particular, tend to concern themselves with the next quarterly bonus. They earn large fees when the deal first goes through, whether or not it is a good one. During the housing bubble, Wall Street bankers issued bad loans with abandon and joked about the “toxic waste” they were passing on to clients.
What will happen if the cost of running the light rail line exceeds the budget? Managers, worrying about salary reviews and bonuses, will be tempted to maintain profitability by skimping on maintenance.
In the P3 structure, it is the job of investors and lenders to look out for the long term. But they may not do this well. We learned in the crash of 2008 that large financial institutions can do a poor job of oversight. And the Purple Line’s equity investors, who expect a return of 11% per year, may not care that much about the long term. If the business pays dividends for 15 or 20 years and then goes bust, they will have already pocketed a substantial profit.
Under the contract, the state will cut the concessionaire’s “availability payments” if the performance of the Purple Line does not meet targets. But these targets will be hard to set. How do you write specs in 2013 for running a state-of-the-art railroad in 2048?
The penalties for bad work, moreover, are unlikely to be all that severe. MDOT cannot replace the concessionaire until 2050. And the concessionaire’s investors will put up only 7% of the construction cost. The availability payments will go mostly to repay lenders, whose main goal is to keep their money safe. They will hesitate to make loans unless the penalties are kept small and their bonds are not at risk.
In an ideal world, a privatized transit line would be run by a deep-pocketed young version of Jackson Graham, the engineer who built Metro. He might well outperform a government agency led by Pericles and George Washington.
But that is not the choice we face. Large organizations, both public and private, are made up of human beings. They are inevitably imperfect. Decisions about how to run public services must be based on things as they are, or as they realistically might be made to be.