June 15, 2007    Volume 14, No. 11

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Rudy Giuliani Benefits From Sale Of U.S. Highways To Foreign Companies; Q&A With Pat Choate On Privatizing U.S. Highways & The NAFTA Superhighway



BY RICHARD McCORMACK
richard@manufacturingnews.com


The sell-off of American highways to private companies coupled with the controversial plan to build the "NAFTA Superhighway" has become an explosive political subject in many states. The influx of foreign companies involved in becoming owners of public assets has further enraged the public, as have details about their financial ties with some of the country's most well-known politicians.

One of the biggest whoppers in the whole debate about political patronage and the sell-off of public infrastructure concerns the $100-million buyout of the firm owned by Republican presidential contender Rudy Giuliani by Macquarie, the big Australian investment banking firm.

Macquarie Infrastructure has partnered with the Spanish firm Cintra Concesiones de Infraestructuras de Transporte in the controversial purchase of the Indiana Toll Road. The two companies are also part of a major political uprising in Texas concerning the privatization of State Highway 121 outside of Dallas. A Macquarie division has spent $110 million buying up 42 local newspapers along the Trans-Texas Corridor (the NAFTA Superhighway corridor).

Pat Choate, who was Ross Perot's running mate on the 1996 presidential ticket, has spent the past year studying the NAFTA Superhighway and state and federal governments' desire to privatize America's highways. Choate is known as one of America's foremost economic experts on infrastructure. Twenty-five years ago, he wrote two influential books --"America in Ruins" and "Bad Roads." He alerted America that there was an "infrastructure crisis" coming. It is now squarely upon us.

President Reagan appointed Choate to his task force to develop the policy agenda for his second term. Choate wrote the infrastructure section.

Choate is a native Texan whose family has lived in Ellis County for more than 160 years. He is currently director of the Manufacturing Policy Project. He received an M.A. and a Ph.D. in economics from the University of Oklahoma.

He sat down recently with Manufacturing & Technology News editor Richard McCormack to discuss the latest developments in the ongoing saga of privatizing America's infrastructure. He provided documentation for virtually everything he describes in the interview below.

Question: What are the latest developments in the debate over privatizing American highways?
Choate:
Texas is the battleground for a major policy shift on who owns and operates America's public infrastructure, including highways. You have the U.S. Department of Transportation trying to get the states to lease public roads to private toll operators and allow these private operators to build new ones. In Texas, there is a budgetary shell game under way. The governor and the legislature beginning with George W. Bush, have diverted $15 billion out of the state highway department and put that money in the general budget. In Texas, they now have 85 percent of their highway transportation money going into maintaining their roads and only 15 percent going into new construction, compared to the national state average of 52 percent going into maintenance and 48 percent into construction.
The Texas legislature and governor have chosen to get big chunks of up-front money -- $2-billion to $3-billion per project on 13 projects around the state along with $6 billion or $7 billion on the 600-mile Trans Texas Corridor -- by turning public roads over to private interests.
Fundamentally what is happening is Gov. Perry wishes to finance his tax cuts by getting pre-payments on leasing public property. They are turning the public infrastructure over to private entities for 50 years.

Q: How is that playing out in Texas?
Choate:
You have a handful of citizens -- people who are really extraordinary -- who said they're not going to put up with it. The first thing they did was actively participate in the Texas Department of Transportation environmental hearings. They got 14,000 people to show up at those meetings which TxDOT really intended to be perfunctory events.
There was a documentary filmmaker who made "Truth Be Told," which just won the Houston Film Award for best documentary. He filmed the public hearings -- it's terrific stuff. The witnesses were passionate and could not believe the governor and legislature intended to convert one of the state's major freeways into a privately-owned toll road.
When the legislature came back in session this year, they had heard from their constituents. They approved a piece of legislation [HB-1892] by a vote of 131-to-1 in the House and 27-to-4 in the Senate that mandated a two-year moratorium on privatization. Yet the governor vetoed it.
When the bill looked like it was going to pass, Perry rushed forward and signed a contract with [Spanish firm] Cintra to complete the privatization of Rt. 121 in Dallas.
Involved in this rush deal on Rt. 121 in Dallas was a very prominent New York lawyer from a Texas firm named Bracewell & Giuliani who was paid very handsome amounts to put together the finance and legal work. In March, Macquarie Bank from Australia bought [Presidential hopeful Rudy] Giuliani's investment division, which had less than 100 people and lost $1.65 million last year. Macquarie paid $100 million for it. Giuliani personally gets $70 million.

Q: Why hasn't there been much reporting or attention paid to this sale, given its controversial nature?
Choate:
There has literally been no coverage here, but in the Australian press you got all this reporting about the deal saying, "What is Macquarie doing? They are overpaying for this company."
Well, I can tell you exactly what they're doing. Macquarie can't put money into a presidential campaign, but Rudy Giuliani can. It's a back-door way to finance the Giuliani campaign for 20-million, 40-million, 50-million bucks. Macquarie wants to own a president who will do tolling all over America. It is phenomenal.
Macquarie is a very shrewd corporation. As the opposition to this highway deal heated up in Texas, Macquarie bought 42 little newspapers, virtually all of which are along the route and most of which opposed the deal editorially. Why not? They can take billions of dollars out of Texas if Gov. Perry gets his way.

Q: Why has Gov. Perry been so adamant in pursuing this?
Choate:
He's diverting the highway funds to the state budget so he can cut taxes. This is how the no-new-tax guys are financing their stuff. Indiana Gov. Mitch Daniels got $3.8 billion from the sale of his toll road so that he can finance everything else. But when that money runs out his successor and the people of Indiana are stuck for 60 years with a foreign-based company controlling a major part of their development rights through the center of their state.
In Texas, Perry got the legislature to change the standards. Instead of awarding to the lowest price bidder it's now the best value. Talk about flexibility. So now Cintra wins all the contracts. He was rushing to do a contract with Cintra on a high-volume bypass road in Dallas that was two-thirds of the way finished and was built with public funds. Cintra would pay the state $2.3 billion and finish the road and have a 50-year lease on it. In the deal, the governor signed a no-compete clause for 10 miles on either side on the road -- you can do nothing for 50 years that will take traffic away from the toll road.
The other thing he did was have TxDOT set it up so that the North Texas Toll Authority (NTTA), a very experienced toll authority that has worked in the public interest for decades, could not bid on the project. People were furious.
A state senator named John Carona, who chairs the Senate Transportation Committee asked NTTA to use the same assumptions that Cintra used and asked them what they would have bid. They would have bid $3.5-billion more. The outrage was so great that the governor backed off. But Cintra supporters got the Federal Highway Administration in Washington to send a letter which, in effect, threatens to cut off federal highway funds if they redo the bid because of the "integrity" of the bidding process. Give me a break.
[U.S. Sen.] Kay Bailey Hutchison [R-Texas] then sent a letter to [U.S. Department of Transportation] Secretary Mary Peters to get this out in the open. Peters comes back and says that's not what the letter meant. Then the Federal Highway Administration sent another letter, which said that is exactly what it means if you do it. There is a revolution going on over in DOT.
Then [U.S. House of Representatives] member Nick Lampson (D-Texas] had Sec. Mary Peters up before the Transportation Committee [on May 11]. He had all the letters concerning DOT's interference with the bill passed by the Texas legislature. Peters said to him: "We're not going to interfere. Texas can do what it wants if they can get a better deal on it."
Well, when you go into the DOT Web site, you'll find that DOT has "model" legislation for the states showing them how they can change their constitutions and laws so that they can sell off and lease their public roads to private entities. They call it PPP -- Public/Private Partnerships. It's unbelievable.
Mary Peters, a Republican, was transportation director for Arizona. Then she went to work for a large firm that helped states convert and build private roads. The person she brought with her as general counsel, a man named [David James] Gribbins, had worked as a field organizer for Pat Robertson and Ralph Reed for the Christian Coalition. Gribbins then goes to Koch Industries in Wichita where his job is to sell states and communities on PPPs. The Bush administration named him to be the chief counsel at the Federal Highway Administration where he worked with Gov. Mitch Daniels in Indiana doing these deals. He then left to work as the chief lobbyist in Washington, D.C., for Macquarie Bank, one of the largest of these operators in the world. In January, he got nominated to be chief counsel to the Department of Transportation. Macquarie and Cintra work together. It was Macquarie and Cintra that jointly did the Indiana Toll Road and they are doing other projects together. What you wind up with is privateers coming from these beneficiary companies now running the Department of Transportation.

Q: What's the backlash been in Indiana?
Choate:
They doubled the toll on that road. If the state re-does the contract, it has to pay the company their lost profits for the balance of the contract. This is not about providing the best transportation at the least cost: it's about making the most amount of money. These companies are only there for the profit and they'll raise the rates even if volume drops until they maximize profit. They plot the curve.
This is a radical departure as to how this country has gone about building and operating roads for the last century. The question voters face is do they want to cut other state taxes and finance state operations by selling concessions to private companies for the operation of public facilities in exchange for a big up-front payment and perhaps some part of the revenues?

Q: What's happening with the NAFTA Superhighway?
Choate:
The Trans Texas Corridor is on hold for two years. Seven people in Texas who mobilized the opposition have brought it to a stop. Most of the Mexican toll roads necessary for the long corridor from ports in Southwest Mexico are in place. The rail is in place. The issue is not that there is not going to be a route -- there is going to be a corridor, which is Rt. 35, the major north-south route that now exists. A super corridor has congressional approval and it's going to be built, but the question is this: Is it going to be a private or public road?
Rt. 35 was built 50 years ago with enough space to easily double it. It's a major artery and it's very busy. There are four major arteries north-south in the United States. All four are overcrowded. The truth is we need to expand those roads for our own purposes, but the last thing we need do is turn them over to the private operators. If the federal government allows states to toll these interstates, it's a guaranteed money maker. If the country is going to toll this national highway, it should be through a state public authority and the profits should be used to build feeders. Selling or leasing parts of our interstate system is not something that should be left to the governors or state legislatures. These roads are part of a national system, owned by all of us.
Reps. Jim Oberstar [D-Minn.], chairman of the House Transportation Committee and Peter DeFazio [D-Ore.], chairman of the subcommittee on highways and transit, sent a letter to all of the governors on May 10 telling them not to do any of these deals. They said: "We strongly discourage you from entering into public-private partnerships ("PPP") agreements that are not in the long-term public interest. Although Bush administration officials have lauded PPPs at every turn, the Committee on Transportation and Infrastructure of the U.S. House of Representatives believes that many of the arrangements that have been proposed do not adequately protect the public interest." They said that the committee will work to "undo any state PPP agreements that do not fully protect the public interest."

Q: If there is so much public resentment over these deals, then why are they still happening?
Choate:
What I think has happened is that "read-my-lips" George Bush Sr. couldn't figure a way to operate government without raising taxes. His son solved the problem by radically increasing the national debt, borrowing primarily from the central banks of other nations. Now, we have a new generation of Republicans who say I'll cut taxes, and I'll never raise taxes. They intend to finance their promise by selling off the public infrastructure. What the public doesn't understand and what the media is not explaining is that the private operations of our public infrastructure represents the highest tax you can possibly have because those investors are going to run up the prices they charge to the limit and under the binding contracts these "no-new-tax" governors are signing, we have no democratic alternative for dealing with these contracts.
The other thing that happens is that Perry has found a fantastic way to finance his political career. In his last race for governor, he got $2.5 million in donations from the sponsors of these deals. That is a lot of money. No wonder he is being talked about as a possible GOP vice presidential candidate in 2008. You have engineers, lawyers, investment bankers and construction companies who are happy to keep their champion in there. What other governor would look at the 131-to-1 vote against him and say I cannot be overridden in a veto?
This Texas fight is really important because you have a popular uprising. This was the number-one issue in the Texas legislature this year.

Q: What other private companies are involved?
Choate:
Fluor, Bechtel, and Koch Industries, which is a $30-billion corporation. Goldman Sachs and Morgan Bank are willing to raise the money for these kinds of deals. If you are a governor and you need $3 billion, $4 billion or $5 billion to finance state government and you have a heavily trafficked route, these private companies will come in and pay the state the money and you're all of a sudden flush with cash. They will put together a package and their teams of lawyers will come in to work with you on what you need to do to change your state constitution and change your laws.
If you need to do a referendum, they will help you finance and run the referendum. They'll lobby the state legislature and the local media. To streamline all of this, the U.S. Department of Transportation is working with them state by state on privatizing public roads. The Department of Transportation is flacking for Wall Street and a couple of foreign corporations. This recent exchange of letters with the Federal Highway Administration, Congress and TxDOT shows how they are extorting the states that want to take a more responsible approach. Congress needs to do hearings and put some sunshine on this transfer of our public assets to private buccaneers.



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