Tag: public infrastructure

Why Public-Private Partnerships that Own or Control Our Cities and Towns’ Water and Infrastructure Are Not the Answer

In this space two weeks ago I demonstrated that plans by President Trump and Governor Snyder to rebuild our deteriorating public Infrastructure will force shrinking or financially strapped cities and towns to turn to private water companies and investors.  The Trump plan would cut the historical federal 75 percent share of grants or low interest 2 percent loans to 25 percent, and then fund only 20 percent of the $800 billion that’s needed to fix our country’s water infrastructure.  Snyder’s Michigan plan would provide state funding of approximately $110 million a year, or only 10 percent of the $1 billion a year that’s needed to maintain and restore Michigan’s infrastructure. It looks like “trickle-down” financing for our cities and towns, with residents facing greater financial burdens and higher risks to health or even loss of water from their taps.

In short, local governments and their residents will be left little choice but to turn to Wall Street investors or large private water firms like American Water Works, Aqua America, and American States Water Company. A number of international water corporations want to seize an even larger control of water supplies, infrastructure, and the revenues from ratepayers. These include Suez, RWE or Thames, Vivendi, and Veolia. Large equity firms are also looking for attractive investments that take advantage of attractive municipal water revenue streams. The reality is that the life expectancy of a large portion of our country’s geriatric public water infrastructure is short, and the move to remove legal or perhaps constitutional barriers to the comingling or outright ownership by private corporations and investors poses a major challenge in the years ahead

Most of our Municipal Water Systems Are Public

About eighty-five percent of municipal water systems in this country are publicly owned and controlled and accountable to residents under constitutional and public governance.  Private water corporations own or control the other 15 percent. In the last few years, the experience or prospect of private ownership of public water—Detroit water shutoffs and Flint lead and health crisis– has fomented public opposition if not outrage.  Cites like Indianapolis, Pittsburg, and Missoula are taking back their pumps, pipes and taps because of inefficiencies, lack of governance or accountability, high water rates, or broken promises to repair broken infrastructure. Missoula went so far as to exercise condemnation to reclaim its water and water system from the Carlyle Group.

On the other hand, the private sector has increased investment or ownership in public water utilities five-fold in the past 10 years through claims of efficiency, productivity and service, and stable water rates for residents and customers. Private firms argue that private markets bring about efficiency and lower water use; more recently, the private sector claims that because governments are not willing to raise taxes and monies to finance public infrastructure, private equity firms offer a pathway to amassing the vast sums of money necessary to rebuild and repair our infrastructure.

In order to make this pathway more attractive, some states like Pennsylvania and Illinois have passed laws to remove traditional barriers to private investment.  For example, municipal water system revenues are protected from raids by the local government council to transfer monies into the general fund.  In addition, valuation of municipal water systems is often based on a cost-based accounting discounted for the remaining life of assets. As a result, to make privatization more enticing, Pennsylvania passed a “fair value” law that increases the fair or market value of the water system assets to generate more revenues from a sale for cities faced with financial failure or shortfalls; this included a relaxation on transfer of money from a sale of the system to the general fund.

Privatization or Public-Private Partnerships

The jargon coming from big water companies, private investment firms, the World Water Forum, World Bank, and governments influenced by a “privatize-everything” ideology is called “PPPs” or “P3s”—Public Private Partnerships. What are they?

PPPs or P3s were invented to mute the negative connotation of privatization of water or other public commons and services.  They include any form of private ownership or equity investment, leasing, control, or share in revenues in public infrastructure that achieves an acceptable income stream or rate of return for a private corporations, investors, and shareholders. Private equity ownership or investment is just that—private. And if private, there is less government control and accountability. Residents must take their concerns, problems, and complaints to a private concern.

As noted by the Center for Progress in a 2016 report on P3s, PPPs involve a form of privately held investment (although the private corporation may be on public stock exchanges) and require a rate of return on investment  of 8 to 14 percent, In part because the income is subject to federal income tax. By comparison, municipal or public infrastructure bonds do not affect public ownership and control of water and infrastructure for residents and customers, and the borrowing cost for municipal bonds currently is around 2.5 percent, and is not subject to federal income tax. 

The point is this.  PPPs are simply another idiom for privatization based on monopolistic control and private control of the money generated off the backs of residents and customers of water systems in our cities and towns.  Because of this, it is important to understand a few things about PPPs or privatization of infrastructure.

PPPs or Public Water and Infrastructure

The real question remains, should public water and infrastructure be privatized? And if a municipality chooses to privatize to raise the cash needed to fix and repair infrastructure, what are the basic principles that should apply? Whether through private or public investment and control, the upgrading, repair and maintenance of this infrastructure will require close to $1 trillion over the coming decade.

Those supporting PPPs claim privatization benefits cash-short communities by offering the money needed to upgrade and repair, promote efficiency and conservation because of the private profit motive. If the Trump administration and states like Michigan squeeze communities by slicing available funds or loans to cover only 25 or less percent of the investment needed to restore our water systems and operations, there may be no choice at all.

So, what are municipalities and their residents in for? Most reports and commentators give privatization and P3s a bad grade. As pointed out by Padraig Colman in the “State of the Nation” series on privatization, The Financial Times called privatization of water “an organized rip-off,” because British companies had sluffed off sewage, polluted waters, and even charged ratepayers to pay for private debt. While less bombastic, here are some of the pitfalls of PPPs or privatization of public water infrastructure and services:

  • Efficiency from privatization and pricing according to markets or through entrepreneurship is less likely to occur, because the privatization does not create a market, it creates a monopoly.
  • Moreover, experience in general does not support the claim of improved efficiency.
  • Because private investors and companies have a legal duty to return money to shareholders, and because income is taxed, there is a constant pressure to raise prices to cover large capital upgrades and repairs and continued satisfactory dividends and share values. Generally, private systems charge more.
  • Some private acquisition contracts include financing, design, construction, and then maintenance, repairs and maintenance, and can include higher profits built into costs, higher costs of financing, and again higher rates.
  • Cost-cutting measures sometimes result in poor service and short-change the condition of the systems and risk public health.
  • Data and information about the operations are private or harder to obtain, so there is less transparency and accountability.
  • PPPs result in the removal of governance based on fundamental public trust in governments promoting the public interest or the constitutional rights and duties that protect the water, infrastructure, and citizens or residents from inequality, unfairness, and health and environmental risks.

What should residents, officials, public water professionals, and citizens draw from over a hundred years of public water services systems and all of this current debate between public and private ownership and control of our water?  In a word, “Beware!”  Beware of the dangers and pitfalls of privatization and PPPs or 3 Ps. Beware that one size does not fit all, that there are many variables, local conditions, financial and health exigencies, and the long-term public interest that come into play. Beware that if any form of privatization of public water infrastructure, water sources, or services is proposed, to insist on the following declarations or principles, whether the water system and services are public, quasi-public, or private:

  1. Declare all water public; just because our natural public water commons enter an intake pipe does not mean this water loses its public common and sovereign status. Government at all times must manage and provide water as sovereign for the benefit of people.
  2. Impose public oversight with a duty to protect the public service, public interest, public health, and public trust in water and the infrastructure the water passes through;
  3. Establish rights and Impose duties of accountability, notice, participation, equal access to safe, adequate, clean, affordable public water;
  4. Guarantee principles of due process, equal protection of law, and right to basic water service;
  5. Guarantee affordability and equity in access and use of water by all residents and customers;
  6. Implement fair and innovative pricing, subject to public oversight, a public utility or water board, with a statement of rights, duties, enforcement, and government process to assure safe, clean, affordable public water.

Jim Olson, President and Founder

The next article that will appear in this space on public water infrastructure will explain why water is public, why water in a public or private system must remain public, why the infrastructure itself that carries and delivers public water is subject to a public oversight and legal accountability. It will then describe some innovative approaches taken by public and other water services systems to come to address the challenges they and all of us face in the 21st century. Water, water infrastructure, and services are not just physical things or “assets.” They are a sovereign commons inseparable from the people, life, and quality of life they support.


 

Our Public Water, Infrastructure and Health:  Here Come the Profiteers!

Our public water systems are in crisis.

Every person and business in every city and town in the U.S. will face increasing competition for water, more and more repairs, improvements, and replacement of crumbling infrastructure or preventing illness or pollution. They will also face the wild card of increased frequency and intensity of rainfall and flooding, like Houston and Puerto Rico, or at the opposite extreme drought, high temperatures and winds like those that fueled have fueled the fires and destruction across California this past year. There’s simply no way out, and the stakes, threats, and costs are rising faster than the waters along our coastlines from melting glaciers on Greenland. For years, professionals, towns and cities, policy and science organizations, neighborhoods, citizens, and businesses have pleaded for a new federal plan to redesign, rebuild, and improve America’s public water infrastructure, one that continues to provide safe, clean, affordable water for all in this Country.  Except for a few wealthier states and areas of the country, the federal and state governments have not been able to agree on laws that will address this now close to insurmountable crisis.

On February 12, 2018, President Trump unveiled his water infrastructure plan to make “America great again.” The Trump plan pegs the cost of rebuilding the country’s water infrastructure at $600 billion. To pay for this, he wants to reduce the federal government’s share from 75 to 80 percent level to 20 percent; this will quadruple the state and local share from 20 percent up to 80 percent. This means state and local governments will have to compete for a share of the $120 billion a loan application process that appears to reward those states and cities who demonstrate innovative funding partnerships with private investors. 

The plan would leave it to each state and local government to figure out how to pay for their remaining 75 to 80 percent share of the costs of a project. Without the larger federal grant or even loan share, states and local governments will have to find ways to finance the $600 billion for water infrastructure. Historically, this has meant tax-based bonds or revenue bonds tied to increased fees by users.  Most users are already maxed out with what they can afford. Stagnant cities and rural areas struggling for population will become prey to private investors who promise to fix the system in exchange for a purchase or long-term lease of infrastructure.  In short, President Trump’s plan will convert our public water infrastructure systems into private water infrastructure systems. His vision to make America “great again” is to encourage and speed up the private ownership and control of our public water commons, so fundamental and essential to the health, well-being, and liberty of every American.

Two weeks earlier, Michigan’s Governor Snyder announced his roll out of a water infrastructure plan for rebuilding the pipes, and pumps, and facilities for water supplies, delivery, and treatment of wastes. Governor Snyder puts the tab at $13 billion. But he proposes only $110 million annually from the state, paid for out of a fee to all users of water systems in Michigan. According to the Governor’s 21st Century Infrastructure Council, the real cost to upgrade and fix Michigan’s pipes and systems is closer to $1 billion a year. The plan does not explain where the additional 90 percent will come from, but the answer is obvious: local governments. So not only will there be a state user fee, local governments will be forced to seek revenue bonds to make up the difference, all of which will come out of the fees of their users. In effect, costs will rise even more steeply, and small towns and our cities will not be able to afford the plan. Instead, there will be increased risks of safety, pollution, disease and health threats, and continuing rises in patches and repairs, that will at some point in time result in another Flint or Detroit with illness, health risks, and water shutoffs because people will not be able to pay what will be disproportionately high-water fees. 

The combined effect of the Trump and Snyder plans is to remove obstacles and encourage private funding and investment and markets to rebuild, control, and operate public water and infrastructure. Private firms are already vying to rebuild the federal highway system in exchange for private control and profit. Privatizing prisons has been a disaster. Governor Snyder recently ended a privatization of food service in schools. The track record of privatized municipal water systems has been somewhere between checkered and a failure. The most tragic was the transfer of Cochabamba, Bolivia’s water system to Bechtel through strings imposed on the financing by the World Bank. When Bechtel took over and placed meters on peasants’ wells, a massive protest forced Bechtel to leave the country. 

Here in the U.S. on a less dramatic but equally compelling scale, privatization has not worked. Promised upgrades are not made or fall short, leaks and failures continue, and the price of water for residents and businesses rise. In 2012, Pittsburg entered into an agreement that promised the French water giant Veolia one-half the money saved by conservation measures as an incentive to fix the system. Water prices soared, some inflated by as much as 600 percent, and thousands of billing errors resulted in turmoil with little access to correct them except protest. Worse lead in pipes and water increased, and by 2016 Pittsburg terminated Veolia’s contract and sued for abuse and breach of trust, gross mismanagement, and maximizing profits over the interests of the city and its citizens. From Bayonne, New Jersey, to Atlanta, Georgia, Missoula, Montana, the story has been the same. In Missoula, after great promises and public support of the city’s sale of its water system to Carlyle Group, the City had to file a condemnation lawsuit to get its water system back before the corporation unloaded its water infrastructure asset for a cool $327 million. The court ruled in favor of the city, transferring the water system back into public hands and oversight.

There is a bitter irony in all of this: Water is public, held by each state as sovereign in public trust to assure health and access to safe water for each person. While a homeowner, farmer, or business does not own the water, each has a right shared in common with others to reasonable use of water from a stream or lake bordering or the groundwater moving beneath the land. In order to protect public health and pay for these new water utilities and their infrastructure, state law prohibits homeowners or occupants from using or installing private water wells or septic systems in areas served by public systems. People will pay even higher and higher costs for the public water they are already entitled to use under our laws and federal and state constitution.

But there’s another twist to this irony. Governor Snyder’s plan for Michigan sets aside the first $110 million to inspect and put a value on our water infrastructure as “assets.” Assets generally refer to property on a balance sheet. If our water is public.  If our water is public and sovereign, and our water infrastructure is public and sovereign, backed by users and taxpayers under full faith and credit of our state, how can it be treated by Governor Snyder merely as an “asset?” One clue is the push to create what are called 3Ps—Public Private Partnerships—which denote any combination of ways to provide for private investment and profits or a rate of return from water systems’ customers.  In order to attract investors and maximize value and gains, water infrastructure must be inventoried and appraised as an “asset.” When the words “3Ps” pop up, proceed with caution.

Water and our public infrastructure has always been public. Citizens, businesses, cities and towns should take a serious pause before jumping on the privatization train.  It is not all gravy, if at all.  The link between our public water and public infrastructure to our health, life, and enjoyment of our homes and communities is to close, too tied to public accountability and transparency, for us to hand over to innocuous acronyms like 3Ps, a nicely spun phrase intended to turn your tap over to private profiteers.

Jim Olson, President and Founder

No matter how we as states and local governments or neighbors solve our public water crisis, one thing is constant: We must vigilantly protect and maintain our water and infrastructure public. There are some things that are common and public by nature, which leads to a question:  President Trump and Governor Snyder, where are the interests of the “people” and “public” and “public sovereign water” in your water infrastructure plans?