Would a Port Authority share get you discounts here? Photographer: Michael Nagle/Bloomberg
Would a Port Authority share get you discounts here? Photographer: Michael Nagle/Bloomberg

Recent scandals at the Port Authority of New York and New Jersey have led to a vigorous discussion about how to reform that enormous agency, which touches the lives of everyone who drives, flies or consumes imported goods in or near New York City. The governors of New York and New Jersey have even toyed with splitting the agency along state lines. But the Port Authority's problem is not that it's run by two states. Its challenge is the same one faced by every large, complex public entity: preventing the kind of politicization, corruption and stagnation that so often creep into the public sector.

The irony here is that the Port Authority is itself a 20th century effort to meet this challenge. Created in 1921 as a then-novel entity -- the public authority -- it was intended to bring efficiency to the public sector, which was viewed as riddled with patronage appointments, corruption and inefficiency. With a board of directors appointed by the two governors, the authority was to be like a corporation: The board would act in the interests of the shareholders -- the public -- prioritizing efficiency and long-term thinking and running the agency like a business.

It didn't turn out that way. The huge amounts of cash collected by the agency’s toll facilities proved an irresistible attraction to the two governors, who proceeded to steadily increase their control over the agency. Today, in practice, the Port Authority’s board members act not as independent officers but as the governors’ representatives. And large pools of the agency's profits are set aside for each governor to allocate as he sees fit. After a century of reforms that increased transparency and reduced patronage in government agencies, the Port Authority seems almost feudal by comparison.

Most of the recent proposals to reduce political control generally boil down to minor tweaks that don’t really solve the problem. And many potential changes could cause problems of their own. Anything that makes the board fully independent of elected officials, for example, also threatens to make it unaccountable and self-serving. Anything that would spread control beyond the two governors threatens to bring so many stakeholders to the table that decision-making would become impossible.

If we want to get back to the Port Authority’s noble tradition of providing public good with the efficacy of the private sector, we should look abroad. Local transit agencies in Italy, airports in Germany and the Port of Rotterdam have taken the corporatization approach. What this means is that the entity is reorganized and legally incorporated as a for-profit company -- but with the government holding all the shares.

In some cases, such as Hong Kong’s transit system, a portion of those shares have been sold to investors through an initial public offering. But only 23 percent of its shares are publicly traded; the rest are owned by the Hong Kong government. Thus, the board is still appointed by the government, through its voting shares. The board’s policies reflect a public mission. And, when it generates profits, most of them go back to the public.

The value of “partial privatization” in these cases is not the windfall profit a government makes from selling an asset or even cost reductions (the thing unions fear about privatization), but rather the imposition of good corporate governance on an operation that might otherwise be politically driven and inefficient. The minority investors in the Hong Kong transit system have enforceable rights. They have access to complete, transparent, audited financial statements prepared under normal accounting standards. They have the right to ensure that hiring is done on merit and that board members act in the interest of the corporation. And they can sue to enforce these rights.

Such an approach would work well for the Port Authority. It could be reorganized as a corporation -- perhaps even as a benefit corporation (or “B Corp”) -- owned equally by the two states. The trans-Hudson PATH line, the one Port Authority asset that is essentially destined to lose money, could be organized as a subsidiary or a separate entity with a first claim on Port Authority profits (via a preferred stock holding or similar arrangement). A certain amount of the profits after the PATH’s losses -- about as much money as is now set aside for the use of each governor -- would be distributed each year in dividends, while the remainder would be reinvested in the Port Authority’s infrastructure. Then, 20 percent of the shares would be sold in an initial public offering, turning the Port Authority into a publicly traded company.

Good governance for the Port Authority would be ensured -- but the public would maintain ultimate control. The governors would still appoint the board members, but those people would have to act independently, according to standard corporate governance procedures -- or risk personal fines from the Securities and Exchange Commission and/or shareholder lawsuits. The Port Authority could transfer profits to the states through dividends, but these would be transparent to the public. And with merit-based hiring, the agency could again attract the world’s best transportation professionals to manage New York’s critical bridges, tunnels, ports and airports.

These are precisely the objectives the designers of the Port Authority had in 1921. Of course, corporate structure was not as clear-cut then as it is today; it was, after all, before the creation of the SEC, the Financial Accounting Standards Board and, of course, the Sarbanes-Oxley Act. So a true corporate structure was not an attractive choice in 1921. It is today. Turning the Port Authority into a private corporation owned by the public is the best way to preserve public control while eliminating the political shenanigans that have undermined this critical institution.

To contact the writer of this article: Rohit T. Aggarwala at rta4@columbia.edu.

To contact the editor responsible for this article: Mary Duenwald at mduenwald@bloomberg.net.