The Outstater

April 25, 2018

A LOCAL MANUFACTURER puts the challenge of economic-development agencies into a sentence. “If we’re going to turn our local governments into investment banks,” he says, “we’ll need to find smarter people to run them.”

A hard truth, but there may be even harder ones ahead according to an economist for the foundation. Dr. Barry Keating, speaking earlier this month in Fort Wayne to a group of businessmen, believes there can be systemic flaws in the public-private “partnership” concept that make failure certain.

Dr. Keating,  professor of economics and business analytics at the University of Notre Dame, was a protégé at Virginia Tech of Nobel Laureate James Buchanan and Gordon Tullock, founders of the school of Public Choice economics. The school studies the use of economic tools to deal with traditional problems of political science, including various self-interested agents (voters, politicians, bureaucrats) and their interactions,

His presentation reminds us that when politicians think of a public-private partnership, the “public” in their equation is often simply the government and the “private” is merely the economy. The two don’t mix in a free market.

“Once politicians assume responsibility for the outcome of a particular enterprise, they find that they have made an almost irreversible decision, and one which, over time, will open taxpayers to unlimited liabilities,” Keating told the group.

In support of that conclusion, he made these observations:

Keating asks us to consider the implications of a municipal policy that makes a dupe of any firm not seeking abatement. It is the self-funded firms, he said, that will be more loyal to the community long-term because of what they have chosen to do rather than what they have been allocated as a political gift.

After the presentation, a Fort Wayne councilman raised the attendant concern that these massively funded development authorities, with hundreds of thousands of dollars in “public relations” funds, are overwhelming the local democratic process.

Jason Arp, the chief critic of a $440-million economic-development partnership in his city, says political and special business interests surrounding such a project can become so strong that the local media fear to report what is needed for a community to make an intelligent decision.

It is little known, for example, that our taxes are subsidizing commercial real estate prices here, which, according to Arp, already are among the lowest in the nation. Nor do many know that the private “investment” in these projects may not be an investment at all because it is returned in development fees or protected by shell corporations.

Randal O’Toole, a friend who writes on urban growth for the Cato Institute, notes that this describes one of two kinds of public-private partnerships. It is called an “availability payment” partnership and involves the private partner borrowing money to build something but the public partner agreeing to repay the costs and more or less guaranteeing that the private partner will earn a profit. In other words, the public partner takes all the risk; any claim of true “private” investment is a misrepresentation.

O’Toole warns that this can be used by clever municipal officials to exceed their city’s legal debt limit, the debt on the books being of the private partner and not counted against the public partner’s limit (even though the public partner is contractually obligated to pay the private partner enough to repay that debt).

The second kind is what is often assumed (falsely) to be the case in the typical public discussion. It is a “demand risk” partnership involving the private partner putting up the money and taking all the risk that a project will fail, O’Toole says. The public partner might provide land or a right-of-way but often merely provides a franchise — the right to build.

Councilman Arp, writing for the Fort Wayne Journal Gazette, makes another distinction:  “Targeted economic-development projects only benefit the select few that are directly involved in the construction, financing or lobbying of the venture, while the taxpayer ends up holding the bag.”

And many times this is a “deflated, tattered, foreclosed-upon bag,” he added.

— Craig Ladwig


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