Later On

A blog written for those whose interests more or less match mine.

In American Towns, Private Profits From Public Works

leave a comment »

Governments are not intended to produce a profit. “Tax and spend” is the very essence: taxes are at a level that pays for the services (the “spending” part) with no extra money collected for profit or savings. Tax and spend is exactly what the government is supposed to do, not “tax and save.”

Private corporations, in contrast, must collect enough money not only to cover costs but also return a profit—and the goal is a healthy profit, though sometimes the profit is too obese to really be healthy.

Thus turning government services over to private corporations means that the citizens will pay more. Danielle Ivory, Ben Protess, and Griff Palmer report in the NY Times:

Nicole Adamczyk’s drinking water used to slosh through a snarl of pipes dating from the Coolidge administration — a rusty, rickety symbol of the nation’s failing infrastructure.

So, in 2012, this blue-collar port city cut a deal with a Wall Street investment firm to manage its municipal waterworks.

Four years later, many of those crusty brown pipes have been replaced by shiny cobalt-blue ones, reflecting a broader infrastructure overhaul in Bayonne. But Ms. Adamczyk’s water and sewer bill has jumped so much that she is thinking about moving out of town.

Even as Wall Street deals like the one with Bayonne help financially desperate municipalities to make much-needed repairs, they can come with a hefty price tag — not just to pay for new pipes, but also to help the investors earn a nice return, a New York Times analysis has found. Often, these contracts guarantee a specific amount of revenue, The Times found, which can send water bills soaring.

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.

In the typical private equity water deal, higher rates help the firms earn returns of anywhere from 8 to 18 percent, more than what a regular for-profit water company may expect. And to accelerate their returns, two of the firms have applied a common strategy from the private equity playbook: quickly flipping their investment to another firm. This includes K.K.R., which is said to be shopping its 90 percent stake in the Bayonne venture, a partnership with the water company Suez.

Rich Henning, a Suez spokesman, said that “Bayonne had chronically underinvested in their water and sewer infrastructure, which has certainly contributed to rate increases during the past few years.” He added, “We understand that these increases create stresses for ratepayers.” [unspoken: “But we really don’t care about that: the important thing is to make a good profit with a healthy rate of return.” – LG]

President-elect Donald J. Trump has made the privatization of public works a centerpiece of his strategy to rebuild America’s airports, bridges, tunnels and roads. Members of his inner circle have sketched out a vision, including billions of dollars of tax credits for private investors willing to tackle big infrastructure projects. And Mr. Trump himself promised in his victory speech “to rebuild our infrastructure, which will become, by the way, second to none.”

Private equity firms like K.K.R. have already presented themselves as a willing partner, and Bayonne provides an important case study. Its arrangement is one of a handful of deals across the country in the last few years in which private equity firms have managed public water systems. While these deals are a small corner of private equity’s sprawling interests, they represent the leading edge of the industry’s profound expansion into public services.

For residents, the financial trade-offs from these water deals can be painful.

The Times analyzed three deals in which private equity firms have recently run a community’s water or sewer services through a long-term contract. In all three places — Bayonne, and two cities in California, Rialto and Santa Paula — rates rose more quickly than in comparable towns, which included both publicly and privately run water systems. In Santa Paula, where Alinda Capital Partners controlled the sewer plant, the city more than doubled the rates. A fourth municipality, Middletown, Pa., raised its rates before striking a deal.

Now, some of these cities are trying to take back their water. Missoula, Mont., wrested away its water system, which had been owned by the Carlyle Group. Apple Valley, Calif., whose waterworks were also owned by Carlyle, has filed a similar lawsuit. Santa Paula bought its sewer plant from Alinda last year.

Of course, there’s a reason many communities look for private partners to begin with: Their water systems are in poor shape. Budget shortfalls and political mismanagement can represent a real threat to both infrastructure and citizens. For evidence, look no further than the crisis in Flint, Mich., where the drinking water became tainted with lead.

“Keeping rates down may sound like the ultimate righteous good for ratepayers, but the truth is, not if you’re failing to provide basic care and maintenance,” said Megan Matson, a partner at Table Rock Capital, the boutique private equity firm that invested in Rialto’s water and sewer system. She added that it helps for deals to “provide more obvious public benefits,” noting that her firm partnered with Ullico, the nation’s only labor-owned insurance and investment company. . .

Continue reading.

Pay taxes to support needed services, or pay even more for the services when a profit also is required.

And it’s worse than that. Because profits must grow, private corporations running services (prisons, hospitals, and the like) start to cut costs, which improves profits directly: a dollar saved in costs drops directly to the bottom line, whereas a dollar increase in revenue has costs deducted before a profit is realized. So private hospitals and prisons usually are understaffed for mission requirements, and crowded with too many patients or prisoners (to increase revenue).

It’s much better if governments manage government services and pay those costs via taxes, with citizens holding the government accountable.

Written by LeisureGuy

24 December 2016 at 9:03 am

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s