water privatization – Chicago Newstips by Community Media Workshop http://www.newstips.org Chicago Community Stories Mon, 14 Jul 2014 17:31:05 +0000 en-US hourly 1 https://wordpress.org/?v=4.4.12 Chicago infrastructure trust – and water privatization? http://www.newstips.org/2012/08/chicago-infrastructure-trust-and-water-privatization/ http://www.newstips.org/2012/08/chicago-infrastructure-trust-and-water-privatization/#comments Mon, 27 Aug 2012 20:59:56 +0000 http://www.newstips.org/?p=6578 A new report on private equity takeovers of public infrastructure focused on privatization of water services highlights Chicago’s infrastructure trust and warns of higher costs, degraded service, and diminished accountability.

“The infrastructure trust makes us more vulnerable to a public-private partnership” either to finance water system repairs and upgrades or for an operation-and-maintenance contract, said Emily Carroll of Food and Water Watch, which released the report.  “Taxpayers should be wary of getting a raw deal,” she said.

Mayor Emanuel has said he opposes the sale of Chicago’s water system, but the infrastructure trust is set up specifically to foster public-private partnerships, which Food and Water Watch considers a form of privatization, Carroll said.  In so-called P3s, public control over infrastructure is lost and ratepayers are on the hook for private financing costs, she said.

She points to the experience of Atlanta, which canceled a contract with a private corporation for water system operation in 2002 after huge problems with repairs, including emergency responses, and inflated charges for work done.  When only half the promised savings were realized and revenues fell short, the city requested the company’s billing records and was refused, according to FWW.

Water rates

And while Emanuel recently raised water rates to pay for repairs and upgrades, he could later come back and say more money is needed – and the higher rates would make the system more attractive to private investors, Carroll said.

In investment industry surveys, water systems are rated among the most desirable kinds of infrastructure, according to the report.  One of the Chicago trust’s participants, Macquairie Infrastructure and Real Assets, spent $578 million to purchase a private water company in 2007 – the largest private equity water service deal listed by FWW.

The report cites a trade publication describing Chicago’s $1 billion infrastructure trust as “an industry-backed deal to establish PPPs as a politically and financially viable business.”

Currently “private equity vehicles are armed with over $100 billion” seeking highly profitable investments in public infrastructure around the world, in an attempt “to exploit the lagging recovery of the public sector,” according to the report.

About Chicago it says:  “The city’s primary motivation appeared to be the desire to take debt off city books to give the illusion of reducing its liabilities.  ‘We have a tool here that takes some of the pressure off taxpayers,’ Emanuel claimed.  ‘Use somebody else’s money for a change, rather than theirs.’

“In the real world, however, banks do not provide free lunches.  Chicago will have to repay the private capital investment with interest through user fees.

“The city’s chief financial officer admitted that private investment could be more expensive than traditional government borrowing.  Nevertheless, the City Council signed off on Emanuel’s plan.”

Higher costs

In fact, private equity financing is “much more expensive than government borrowing,” according to FWW.  “Private equity players have targeted annual returns of at least 12-15 percent.”

While the financial industry encourages governments “to use privatization as a ‘mega-credit card’ to finance infrastructure projects,” FWW cites a report by the Association of Chartered Certified Accountants: “Just as with a credit card, the interest rates have been relatively high, and at some point the debts have to be paid off.”

In the UK, a parliamentary commission found that private investors in infrastructure projects were making “excessively high returns” and concluded the private finance model was “inappropriate” for public works projects, according to the report.

While surveying water privatization issues around the country, the report raises more general concerns about private equity financing that could be relevant to Chicago’s experiment:

— Private equity investments in public infrastructure tend to be highly leveraged, adding risk and long-term borrowing costs, and private equity players “usually flip assets within a decade” to cash in on deals.

— Financial consultants for cities come from investment firms and have potential conflicts of interest.  The general use of “success-based” fees based on a percentage of the transaction deal gives consultants “a strong financial incentive to recommend the biggest deal possible,” even if it is “a terrible deal for the community.”

— Often public-private deals allow investors to renegotiate terms after a bid is chosen, so they will initially low-ball estimates.  Costs and profits can later be boosted with pessimistic financial projections and other devices.

— Private investors tend to overbuild or “gold plate” infrastructure projects in order to increase profits.

FWW was particularly concerned with the fact that Chicago’s infrastructure trust is set up as a nonprofit rather than a public entity, legally exempting it from open meetings and freedom of information requirements, Carroll said.

 

Related:

Chicago water for sale?

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