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Sunday, December 25, 2016


Beware of "Streets" bearing gifts

by Tom Sullivan

Photo by Pam Broviak via Creative Commons.

Are you tired of paying high prices? Are you interested in a little high-class beef? Do you want a bargain? Tell you what I'm gonna do.
Step up a little closer I don't want to block the traffic.
Now, you look like a smart dame.
What'll it be? I got sirloin, tenderloin, T-bone, rump, pot roast, chuck roast, oxtail stump.
I got a special on T-bone, 79 cents a pound.
— Lucy and Ethel sneak into a butcher shop to sell beef out of a trench coat in "The Freezer" (I Love Lucy, 1951)
Water. It's the next gold rush. Wall Streeters wants their cut. Trump administration infrastructure plans likely will include public-private partnerships whereby private equity will partner with beleaguered local governments. Municipalities reluctant to issue their own debt and starved of revenue by decades of "lower taxes" fever have let maintenance and capital expenditures slide. Public-private partnership deals promise "cost savings for citizens," improved service, lower overhead, greater efficiency, "all without a tax increase or public expenditure," the New York Times reports.

It sounds too good to be true and is. Taxpayers/ratepayers naively believe this means they will reap cost savings. But private equity firms add something to the drinking water municipalities don't: profit margin. That profit is often guaranteed by contract, and in the range of "anywhere from 8 to 18 percent, more than what a regular for-profit water company may expect." Public-private partnerships are premised on handing over the means for generating that profit — essential public infrastructure in the billions — to private equity firms and having them sell it back to the taxpayers who built it.

Are you tired of paying high prices? Do you want a bargain? Tell you what I'm gonna do.

To see how these deals are working out, the Times looks at three such deal, in Bayonne, New Jersey, and in Rialto and Santa Paula, both in California:
Water rates in Bayonne have risen nearly 28 percent since Kohlberg Kravis Roberts — one of Wall Street’s most storied private equity firms — teamed up with another company to manage the city’s water system, the Times analysis shows. City officials also promised residents a four-year rate freeze that never materialized.

In one measure of residents’ distress, people are falling so far behind on their bills that the city is placing more liens against their homes, which can eventually lead to foreclosures.
Those foreclosures come after unpaid debts are sold to collection agencies.

In water infrastructure alone, the nation needs about $600 billion over the next 20 years, according to federal estimates. And yet federal spending on water utilities has declined, prompting state and federal officials to try to play matchmaker, courting private investors to fix what needs fixing.

For years, the Obama administration has been cheerleading public-private partnerships. In a statement, the White House said it backed them “when they are well structured, include strong labor standards, and when there is confidence that taxpayers are getting a good deal.”
Federal officials, like their municipal counterparts, are taking the word of the same sophisticated pitchmen, many offering cash up front to government officials struggling to make ends meet. But ask Chicago about its Skyway and its parking meters. Ask Gov. Mike Pence about Indiana's bankrupt, foreign-owned toll road. You can read more about public-private partnerships here and here and here and here.

Supposedly the "wave of the future," public-private partnerships are failing from Bayonne to the South Bay. But are they really failing for Wall Street? These deals will protect investors before taxpayers and seem financially engineered to fail leaving holding the bag. As Randy Salzaman writes about highway deals:
Beginning with the contracting stage, the evidence suggests toll operating public private partnerships are transportation shell companies for international financiers and contractors who blueprint future bankruptcies. Because Uncle Sam generally guarantees the bonds – by far the largest chunk of "private" money – if and when the private toll road or tunnel partner goes bankrupt, taxpayers are forced to pay off the bonds while absorbing all loans the state and federal governments gave the private shell company and any accumulated depreciation. Yet the shell company's parent firms get to keep years of actual toll income, on top of millions in design-build cost overruns.
As we head into a Trump administration eager for a wave of new infrastructure projects to Make America Great Again with, it's a good idea to ask: For whom? And that's not just a simply a racial or class question. Beware of "Streets" bearing gifts.