Food & Water Watch Analysis Reveals Wall Street’s Hold on Municipal Water Systems
Washington, D.C.–Following its disastrous foray into the housing
market, Wall Street’s latest earnings scheme is as close as your kitchen
sink: the finance industry is increasingly targeting public water
systems. A new report released today by the national consumer advocacy
group Food & Water Watch, Private Equity, Public Inequity: The Public Cost of Private Equity Takeovers of U.S. Water Infrastructure
reveals that as of January 2012, private equity players had raised $186
billion through 276 infrastructure funds and were seeking another $93
billion to take over infrastructure worldwide.
“Like Wall Street’s manipulation of the housing market in the
previous decade, private equity firms and investment bankers are
increasingly looking to cash in on one of our most essential
resources—water,” said Food & Water Watch Executive Director Wenonah
Hauter. “These deals are ultimately a bum deal for consumers, who will
end up paying the price through increased water bills and degraded
Food & Water Watch’s new report shows that because private equity
players typically seek a 12 to 15 percent return on investment, they
quickly flip assets. Often, they do this after scrimping on service,
investing in elaborate and unnecessary projects, quashing transparency
and avoiding taxation, in turn driving up prices for consumers.
the finance community has identified flaws in these deals. In 2006,
Standard & Poor’s warned that due to excessive borrowing, private
equity takeovers could result in downgraded credit ratings. Governments
could also have to step in and bail out the privatized systems if
economic conditions prevent refinancing short-term acquisition debt and
the private operators default.
George Marlin, a career investment banker and director of the Nassau
County Interim Finance Authority (the state board that oversees the
county’s finances and which earlier this year rejected the county’s
contract with Morgan Stanley to serve as a financial advisor on the
privatization of the county’s sewer system) called the county’s
privatization proposal an “ill-conceived backdoor borrowing scheme” akin
to using a credit card with a high interest rate to pay off a loan with
a lower one.
Despite obvious conflicts of interest, private equity players are
increasingly stepping in as financial advisors to cash-strapped
municipalities exploring possible privatization deals. Compensated
primarily through the execution of such plans, advisors from private
equity firms have a direct financial interest in these deals, much to
the detriment of local residents.
When municipalities privatize their drinking and wastewater systems
to fill budget shortfalls, private equity firms have greater bargaining
power to negotiate more lucrative deals. Many local governments,
especially cash-strapped ones, are ill-equipped to evaluate proposals
from multinational finance firms or to negotiate a fair contract, making
them vulnerable to expensive, unnecessary deals.
Firms have also been known to low-ball contract bids, basing costs on
rosy water use and growth estimates or pessimistic financial
projections. After winning a privatization contract based on these
inaccurate figures, a firm would renegotiate the contract to shift risks
and costs to the public.
“Private equity players aren’t investing in water out of a sense of
civic responsibility. Their first and foremost motivation is profits,
which has already proven incompatible with delivering an essential
resource to consumers,” added Hauter.
Instead of using budget gimmicks like privatization, Food & Water
Watch recommends that municipalities address their fiscal challenges in
an open and transparent manner. Rather than pursuing such risky
privatization deals, governments can improve services and protect the
integrity of the water and sewer systems through public-public
partnerships. Forged between public water utilities, government
entities, or non-governmental organizations, these partnerships pool
resources, buying power and technical expertise to enhance public
efficiencies and service quality—all at a lower cost to consumers than
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