Wednesday, May 14, 2008

The Profitable Dismantling of Civil Society

THE INFRASTRUCTURE MESS-- THE VERY PROFITABLE DISMANTLING OF CIVIL SOCIETY

By Howie Klein

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Yesterday Scholars & Rogues featured a pretty ominous look at the serious deterioration of basic American infrastructure. The author, Dr. Denny, points out that our otherwise preoccupied government is normally only moved to action by catastrophes-- like the deadly bridge collapse in Minneapolis last year. So that bridge is nearly fixed. They're waiting for a spate of disasters before they do anything preventive. They may not have to wait long and we have far more than "failing bridges to find, fund and fix." Dr. Denny is left cold by the leadership abilities of the current presidential candidates to lead us successfully through a real crisis. Just to keep up, the U.S. would need to spend $225 billion per year for 50 years-- $11 trillion. McCain definitely has a couple wars he'd rather wage. But the country's infrastructure-- not just roads and bridges but also dams, sewage systems, drinking water systems, air traffic control, nuclear plants, electricity transmission lines, levees...-- gets a grade of D. Unfortunately, national politicians don't usually find infrastructure sexy.

Wall Street does, I found out on the radio yesterday. Tens of billions of dollars are coming out of the firms that brought us the real estate and mortgage collapse and going into buying up infrastructure. Alarm bells went off when I heard that the sleazy GOP vulture capital firm Carlisle Group-- whose real estate arm went belly up recently-- is buying up sewer systems and roadways. And they're only one of many.

Republicans want to reduce taxes and let the infrastructure go to hell so that the public supports selling it all off to for-profit companies. Democrats are too cowed to stand up for government functions that have been delegitimized by greed obsessed Republicans (and Blue Dogs and DLC Democrats). So... on to the predators. Today Morgan Stanley-- and I assure you a more unscrupulous and cut throat firm you will never find-- announced that it has raised $4 billion to target investments "that provide public goods or essential services in sectors such as transportation, energy and utilities, social infrastructure and communications." Global Infrastructure Partners (General Electric and Credit Suisse) have capped their infrastructure fund yesterday at $6.5 billion. A new Carlyle subsidiary, Carlyle Infrastructure Partners, formed specifically-- and under heavy political protection-- to rip off American taxpayers and ratepayers is investing $1.5 billion in transportation and water and wastewater facilities, including roads, bridges, tunnels, airport facilities, maritime ports, transit projects and other public benefit infrastructure in the US and Canada. Henderson Investors, CVC Capital Partners, Macquarie (Australia), Rreef, Citigroup, Ferrovial (Spain), Goldman Sachs, J.P. Morgan and Alinda are all up to the same thing.

Infrastructure assets such as utilities, toll roads and airports are attractive to financial bidders like banks and pension funds because of their stable cash flow despite having lower growth rates than other private equity opportunities. GE had disappointing first-quarter earnings, but its infrastructure segment performed better than expected.

The money being ante-ed up for infrastructure projects by private capital is at historically high levels.

New roads, railways, oil pipelines, hospitals and schools: the world is an infrastructure financier's oyster. In Mumbai, for instance, there are plans to build an extension of the city to house 15 million people - nearly double the size of London's population. One UK banker who returned from there last week said: 'I left London depressed at the state of the markets. Going there, you see that there are people making huge sums of money.'

Even in the developed world, there are signs that we do not have the infrastructure to cope with continued economic and population growth. Blackouts, road congestion and capacity problems in airports and on railways are commonplace in both the US and Europe. In addition, an ageing population means different kinds of healthcare facilities are needed.

The question is: how are these essential building blocks going to be financed? There has been a decline in governments' willingness or ability to pay for new facilities in the past 15 years. Among the developed countries, government outlays on capital projects fell from 9.5 per cent of overall spending in 1990 to 7 per cent in 2005, according to the OECD.

Increasingly, it is the private sector that world leaders now rely on to fill the funding gap.

...What attracts investors to infrastructure is solid cashflows - user charges and tolls - which provide the opportunity to borrow larger sums to pay for acquisition and investment costs. However, there have been concerns that infrastructure funds have borrowed too aggressively against cashflow, compromising the efficient running of facilities.

And globalization means this travesty won't just be happening in Mumbai... but also in Manhattan. You think the Chinese and Arabs own us now? Just wait.

A few weeks ago I met a really smart guy at a party in Virginia, Andy Stern, president of the SEIU. Last week he and Kansas Governor Kathleen Sebelius did an editorial for the Christian Science Monitor, Main Street, Not Wall Street, Should Fix Crumbling U.S. Infrastructure. They're right but swimming against a powerful, perhaps irresistible, tide. And Wall Street has the money it takes to buy off the politicians it needs to buy off. Their investments in crooked Democrats like Rahm Emanuel, Melissa Bean, Harold Ford and the like are as valuable to them as their investments in Republicans. There is no public interest; just bottom line; and just try telling Rahm Emanuel something different.

At its best, America's infrastructure has powered our economic prosperity, created well-paying jobs, and served the public interest.

Today, however, it has fallen into a dangerous state of disrepair. The Minnesota bridge collapse last summer brought home the urgency of repairing and modernizing our nation's system of highways, bridges, tunnels, power plants, transmission lines, and airports.

But doing so will be prohibitively expensive. Current plans seek to exploit the nation's need for private profit. But there's a better source of capital at hand: public pension funds.

The American Society of Civil Engineers estimates that $1.6 trillion is needed in the next five years alone just to maintain the adequacy of existing infrastructure.

...It would be a monumental mistake to turn the future of America's infrastructure over to the same crowd that brought us the subprime crisis, an economy loaded down with debt, and recession.

We should know better by now than to create a scenario where bridges and highways are sliced and diced like subprime loans into financially engineered "collateralized infrastructure obligations."

America needs a large source of stable, long-term capital to build the system of buildings, roads, and power supplies needed to sustain the country. We need a source of capital that values infrastructure because it provides a reasonable rate of return, strengthens the overall economy, and doesn't burden users with excessive fees.

Enter that source of capital:

Public pension funds, which are responsible for the retirement benefits of more than 18 million Americans, have more than $3 trillion in assets, and a long-term investment approach consistent with the stable returns that infrastructure assets generate.

Pension funds could buy and build infrastructure, putting the profits to work for the retirement of workers, not for the benefit of Wall Street CEOs.

See? Didn't I say he was a smart guy? Let's hope his support for Obama is going to mean at least this.

I spoke with a couple of the Blue America candidates about the problem with infrastructure, Regina Thomas, a long time member of the Georgia legislature and Martin Heinrich, head of the Albuquerque City Council, both of whom have spent a great deal of time and energy dealing with the problems of crumbling infrastructure in their local areas. Senator Thomas told me the deterioration in the last 7 years was symptomatic of Republican government. "They're just reactive to a situation where they should have been pro-active. Then they capitalize on catastrophic situations to make millions for themselves and their cohorts... this is shameful, at best-- oh! I forgot they have no shame when it comes to making money for themselves."

Although the disaster of Hurricane Katrina's weakened and destroyed leeves hit closer to home for Regina and her constituents, Martin has had similar experiences with the underlying philosophy of Republican governance. "For the past eight years we have been a country without a plan," he told me. "We have given no thought to the future. The voices that spoke out about long term planning fell largely on deaf ears. America's greatness comes from our innovation and foresight, and to ignore infrastructure, which plays such a critical role in commerce and Americans' daily lives, is simply short-sighted. Our country has already dug our children a hole that will be extremely difficult to climb out of and to create yet another structural disadvantage is to do them a great disservice."

Savvy members of Congress like Regina Thomas and Martin Heinrich are a first step towards climbing out of that hole and cleaning up the unimaginable mess George Bush is leaving us. Please consider visiting our Blue America page today and lending a hand to Regina and Martin. They both deserve it. (Anyone who donates to both in the next 24 hours gets a Blue America thank you CD-- a surprise.)

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