Privatization of government resources by Democratic mayors and governors has become a hot topic, shuffling the political deck even as it's drawing tens of investor billions of dollars into a hot sellers market.

Responding to Tuesday's privatization post, E.J. McMahon comments on the difference between Steve Goldsmith's competitive contracting between public and private service providers in the 1990s in Indianapolis in the 1990s and the asset privatizations happening now in Illinois, Chicago, and New Jersey: "The key question with privatization of assets, as opposed to services, is how you spend the money… Any funds raised from the outright sale of an asset, like a lottery or a highway, should either be used to finance other permanent assets --or to pay off debt… Depositing the proceeds in budgetary reserves (one of Daley's uses for the money in Chicago) doesn't pass the test; as one former state budget director put it to me, 'the problem with a rainy day fund is that elected officials tend to think it's always raining.'"

In Governing's recent look at privatization, Chris Swope spends a good deal of ink detailing D.J. Gribbin of Macquarie Infrastructure Group, an arm of an Australian bank and the single largest private investor in the public sector infrastructure market, on Hernando de Soto, an expert on third-world poverty and the author of The Mystery of Capital:

De Soto writes that trillions of dollars of “dead capital” is locked up in the shantytowns of developing nations. This is so because inadequate systems of property law prevent people from using their primary asset — their homes — to create more wealth. In the United States, Gribbin also sees dead capital spread across the land. It’s not locked up in tin roofs and mortar but rather in toll roads and other assets that government doesn’t manage aggressively. “Though the state has title to the asset, it’s trapped in a non-market context,” Gribbin says. “As soon as you move that asset into a market context, now all of a sudden you’ve opened up the world to value that asset.”

The Indiana Toll Road is a good example of what Gribbin is talking about. Before Governor Daniels took office, toll rates had stayed put for 20 years. For five of the past seven years, the road experienced negative cash flow. To get a handle on what the status quo was worth to Indiana, the state’s accountant projected out revenues and expenses over 75 years, assuming that the road would continue to be managed basically as it has been in the past. The accountant came up with a net present value of $1.9 billion.

By contrast, Macquarie/Cintra cut Indiana a check for $3.85 billion. In addition, the companies agreed to immediately pay for an electronic toll-collection system, widen 7 miles of congested road and not only build a new state police post but also contribute to the salaries of new state troopers. What’s more, the private operators will pay for all operations and expenses, as well as any further capital improvements necessary to keep traffic moving at levels spelled out in the concession agreement.

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Other sources contribute to that $2 billion windfall. Macquarie/Cintra thinks it can run the toll road more efficiently than Indiana did — electronic toll collection is a big first step. In addition, the concessionaire is able to depreciate the toll road on its federal taxes — a break that Indiana can’t leverage since states don’t pay taxes. And long-term investors seem willing to pay a premium for the sort of stable revenue stream that a proven toll road such as Indiana’s can produce. Macquarie/Cintra expects to earn a return in the range of 12 percent. That beats the bond market any day, with less risk than investing in equities.

Governor Daniels and his staff couldn’t be happier with the deal. Before, Indiana was looking at a $3 billion backlog in highway projects around the state and no money to pay for any of them. Now, Indiana claims to be the only state with a fully funded 10-year transportation plan. The state treasurer’s Web site shows interest on the up-front lease payment piling up at a rate of $6 per second. “Nobody knows what will happen in 75 years,” says Daniels’ finance director, Ryan Kitchell. “There might be flying cars that don’t use the Toll Road, and we’ll look really smart. Nobody knows. What we do know is we have $4 billion in the bank earning interest today. And we’ll put it into the ground building and maintaining roads that should throw off jobs and economic benefits that last the whole time.”

That, of course, is the perspective of someone making a living investing in infrastructure. There, are though, numerous questions remaining. In addition to E.J.'s point about how the money is spent, there are obvious security and other concerns with selling or long-term leasing infrastructure assets to foreign corporations that recall the to do about a proposed sale of management contracts for six American ports to a Dubai-based corporation.

There's also concern about protecting the value of infrastructure over leases of 75 and more years, especially as long-term revenue remains unclear (flying cars, anyone?), and of course because maintenance needs tend to be put off as leases near completion. Then there's the 99-year lease Larry Silverstein signed with the Port Authority of New York and New Jersey just before the towers were struck, and the subsequent fight for control after the fall of the Towers (and the attempt of insurance companies to claim that as a lessee, Silverstein was entitled to no compensation)—which should serve as a warning of potential control concerns for would-be lessees, and are a major reason who more than five years after 9/11, rebuilding has yet to begin in earnest.

Then there's the question of how politics factor into the equation — the Skyway, for instance, has tolls that are mostly paid by people from Indiana, so there's little political price for elected officials in Illinois for raising the tolls, or letting private corporations do so.

The Skyway is also almost parallel to the free Bob Ryan Expressway, which keeps pressure on the new operator to keep tolls down or lose business. But for roads that aren't paralleled, private ownership often equates to a bottleneck monopoly.

And of course private ownership can be a significant impediment to regional traffic plans, and to intelligently implementing and coordinating congestion pricing and other tools for managing traffic flow and maximizing revenues.

More coming next week on privatization, and on public-private partnerships.