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7/31/2019 Private Equity, Public Inequity: The Public Cost of Private Equity Takeovers of U.S. Water Infrastructure
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Public InequityPrivate Equity,
HE PUBLIC COST OF PRIVATE EQUITY TAKEOVERS OF U.S. WATER INFRASTRUCTU
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Food & Water Watch works to ensure the ood, waterand fsh we consume is sae, accessible and sustainable
So we can all enjoy and trust in what we eat and drink,
we help people take charge o where their ood comes
rom, keep clean, aordable, public tap water owing
reely to our homes, protect the environmental quality
o oceans, orce government to do its job protecting
citizens, and educate about the importance o keeping
shared resources under public control.
Food & Water Watch Caliornia Ofce
1616 P St. NW, Ste. 300 25 Stillman St., Ste. 200
Washington, DC20036 San Francisco, CA 94107
tel: (202) 683-2500 tel: (415) 293-9900
ax: (202) 683-2501 ax: (415) 293-8394
[email protected] [email protected]
www.oodandwaterwatch.org
Copyright August 2012 by Food & Water Watch.
All rights reserved.
This report can be viewed or downloaded
at www.oodandwaterwatch.org.
About Food & Water Watch
7/31/2019 Private Equity, Public Inequity: The Public Cost of Private Equity Takeovers of U.S. Water Infrastructure
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THE PUBLIC COST OF PRIVATE EQUITY TAKEOVERS OF U.S. WATER INFRASTRUCTURE
Execuive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Privae Equiy Targes U.S. Waer and Sewer Sysems . . . . . . . . . . . . . . . . . . . . . . . 3
Rate Hikes Follow Private Equity Deals: Social Dynamite . . . . . . . . . . . . . . . . . 3
A errible deal in Sana Paula, Caliornia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Pushing Privaizaion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The inrasrucure privaizaion bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
An indusry-backed deal in Chicago, Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Privatization as a Mega-Credit Card and Budget Gimmickry. . . . . . . . . . . . . 6
Sheer olly in Nassau Couny, New York. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Financial Consultants Conlict o Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
A rejeced gamble in Reno, Nevada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Publics Lack o Bargaining Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Eye-Waeringly High Prois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Squeezing Dry and Running . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Leveraging Risks and Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Gilding Inrastructure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Circumventing Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Lacking Transparency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Recommendaions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Local Public Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Public-Public Partnerships. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Increased Federal Funding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Reauthorization o Build America Bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Endnoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
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2 Food & Water Watch tXXXGPPEBOEXBUFSXBUDIPSH
Executive Summary
Invesmen bankers and oher major inancial players are
increasingly ineresed in aking conrol o waer and sewer
services across he Unied Saes. Privae equiy vehicles
are armed wih more han $100 billion or inrasrucure
worldwide. Alhough mos deals in he U.S. waer uiliy
marke have involved exising privae secor companies,
a number o und managers anicipae ha he ongoing
iscal crisis will drive some governmens o privaize heirwaer inrasrucure. To make ha predicion a realiy,
major inancial ineress are backing various governmen
proposals ha aciliae privaizaion and privae inancing
o public inrasrucure.
This is an alarming developmen. Privae equiy players
ypically ocus on shor-erm prois and may seek o lip
asses afer driving down service qualiy and driving up
prices. Households and businesses could end up paying
more or inerior service.
Key indings:
There have been only hal a dozen sizable privae
equiy akeovers o waer and sewer services in
he Unied Saes, bu our new deals were nearing
consummaion or awaiing regulaory approval in 2012.
(See Table 1, page 4.)
Major inancial irms are promoing large, complex and
risky privaizaion deals, which essenially ac as high-
ineres credi cards o inance budge shoralls and
inrasrucure projecs. Cash-srapped governmens
lack he bargaining power and know-how o properly
negoiae hese deals.
Privae equiy players have argeed annual reurns o
a leas 1215 percen.
Privae equiy players usually lip asses wihin a
decade.
Privae equiy akeovers end o be highly leveraged
and risky.
Privae equiy players are noorious ax avoiders and
evaders. In he las ive years, or example, he Carlyle
Group made more han $4 billion in proi bu paid an
eecive income ax rae o only 2 percen.
Privae equiy akeovers resric ransparency and
accounabiliy.
Given he risks and coss associaed wih privaizaion,
governmens should no ranser conrol o heir waer
and sewer services o invesmen bankers or oher privae
ineress. Cash-srapped communiies can insead explorepublic-public parnerships o reduce he cos and enhance
he perormance o heir public waer and sewer services.
The ederal governmen can suppor public secor uili-
ies by providing a dedicaed source o unding or he
Drinking Waer and Clean Waer Sae Revolving Funds
and by reauhorizing he Build America Bonds program.
A renewed ederal commimen and responsible public
managemen o our naions waer and sewer sysems are
he bes ways o ensure sae and aordable service or all.
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Private Equity, Public Inequityt5IF1VCMJD$PTUPG1SJWBUF&RVJUZ5BLFPWFSTPG648BUFS*OGSBTUSVDUVSF 3
Private Equity Targets
U.S. Water and Sewer Systems
Privae equiy irms, invesmen banks and oher major
inancial insiuions are argeing U.S. waer and sewer
services or akeover. Since he mid-2000s, inves-
men unds managed by inancial behemohs including
JPMorgan Chase, Ausralian bank Macquarie and he
Carlyle Group have assumed conrol o waer and sewersysems across he counry. (See Table 1 on page 4 or a
lis o major ransacions.) These deals are par o a larger
privae equiy push or inrasrucure worldwide.
Alhough privae equiy irms and banks can inves heir
own equiy in inrasrucure projecs, i is more common
or hem o use capial pooled rom oher wealhy individ-
uals and insiuions ino inrasrucure unds and similar
vehicles ha hey manage.1 (See Table 2 on page 5 or he
10 larges inrasrucure und managers.) As o January
2012, privae equiy players had raised $186 billion hrough
276 dieren inrasrucure unds and were seeking
anoher $93 billion hrough 144 inrasrucure unds.2
The privae equiy craze or global inrasrucure began
around 2005.3 Afer plummeing because o he lae-2000s
recession,4 invesor appeie picked up again in 2010.5
(See Figure 1, page 5.) The economic downurn repuedly
boosed he appeal o lower-risk projecs like inrasruc-
ure. Invesing in inrasrucure is considered a deensive
sraegy ha can proec agains marke lucuaions.
Uiliies, in paricular, end o have relaively sable earn-
ings because hey are naural monopolies wih sronggovernmen proecions.6 Perhaps or hose reasons, one
survey o privae equiy irms in 2011 ound ha waer was
he op area o ineres or invesmen managers,7 and in
anoher survey, insiuional invesors ranked waer and
wase managemen as he second leading area o ineres
in he inrasrucure arena.8
Rate Hikes Follow Private
Equity Deals: Social Dynamite
Alhough privae equiy players have raised a subsanial
amoun o money or inrasrucure projecs, his capial
is no cheap. Privae secor inancing especially equiy
invesmen is much more expensive han governmen
borrowing.71 Privae equiy invesors expec o be well
compensaed, and he public will pay ha price hrough
rae hikes. The abiliy o increase user ees orms one crux
o privae equiys ineres in aking over public inra-
srucure.72 Bu, as Thomas Puter, ormer chie execuive
o Allianz Capial Parners, said during a 2011 conerence
abou inrasrucure invesmen, This is social dyna-
mie.73
Indeed, privae equiy akeovers are a bad deal or hepublic. A governmen audi o privaely inanced projecs
in he Unied Kingdom concluded, Our indings sugges
ha he public secor may ofen be paying more han is
necessary or using equiy invesmen.74
A terrible deal in Santa Paula, California
In 2008, Sana Paula, Cali., privaized he design,
consrucion, inancing and operaion o a new $65 million
waer reclamaion plan. Alinda Capial Parners inanced
he aciliy, which PERC Waer Corp. agreed o build and
operae under a 30-year deal.75 Alhough privaizaionadvocaes poin o he arrangemen as an example o
how privae capial can be deployed in he waer secor,76
he ciys ormer inance direcor John Qinn called i
The Macquarie ModelIn the mid-1990s, the Macquarie Group, an Australian bank, pioneered the model of using private equity from insti-
tutional investors to buy roads and utilities.9 Since then, it has exported the model around the world.10 As of 2011, the
Macquarie Group managed 95 infrastructure businesses in 23 countries,11 including companies that provided water
services to more than 8 million households worldwide.12
WVUVWZDWHUDFTXLVLWLRQZDVLWVSXUFKDVHRI6RXWK(DVW:DWHULQWKH8QLWHG.LQJGRP13 Then, in 2006, it led theFRQVRUWLXPWKDWSXUFKDVHG7KDPHV:DWHU 14WKHODUJHVWZDWHUDQGVHZHUFRPSDQ\LQ(QJODQGDQG:DOHV 15 Five years
ODWHU0DFTXDULHEHJDQDSLHFHPHDOVHOORRILWVVWDNHLQ7KDPHV:DWHUVHOOLQJSHUFHQWRIWKHFRPSDQ\WRD8QLWHG
$UDE(PLUDWHVVRYHUHLJQZHDOWKIXQGSHUFHQWWR&KLQDVVRYHUHLJQZHDOWKIXQG16DQGSHUFHQWWRD8.SHQVLRQ
fund.17
0DFTXDULHHQWHUHGWKH86ZDWHUPDUNHWLQZLWKWKHSXUFKDVHRI$TXDULRQ:DWHU&RPSDQ\ 18 (See Table 1, page
DQG)LJXUHSDJHWZDVWKHUVWLQYHVWPHQWRILWVELOOLRQ86LQIUDVWUXFWXUHIXQG19 At the time, Macquarie
Infrastructure said that it also sought long-term concessions of public wastewater systems and planned to target cash-
strapped cities and states.200DFTXDULHDQQRXQFHGDQHZELOOLRQ1RUWK$PHULFDQLQIUDVWUXFWXUHIXQGLQ 21
7/31/2019 Private Equity, Public Inequity: The Public Cost of Private Equity Takeovers of U.S. Water Infrastructure
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4 Food & Water Watch tXXXGPPEBOEXBUFSXBUDIPSH
YEAR PRIVATE EQUIT Y PLAYER DE AL T YPESELLER OR
CONTRACTORVALUE TARGET
200622$*+LJKVWDU&DSLWDO/3
via Hydro Star23
Acquisition of
privately held
water company
1XRQ%924
(Dutch utility
company)25
PLOOLRQ
(purchase
price)26
8WLOLWLHVQFVHUYLQJPRUH
than 300,000 water and sewer
FXVWRPHUVLQVWDWHV
200628
%&QYHVWPHQW0DQDJHPHQW
&RUSDQG&$&DSLWDO0DQDJH -
PHQW&RYLD%&/WG 29
&RUL[
Acquisition of
privately held
water company
.LQGHU0RUJDQ
QF86HQHUJ\
company)30
PLOOLRQ
(purchase
price)31
50% of Fairbanks Sewer
:DWHUQFLQ$ODVND 32via purchase of Terasen
:DWHUDQG8WLOLW\6HUYLFHV33
ZKLFKZDVUHQDPHG&RUL[34
(Acquired the rest of Fairbanks
6HZHU:DWHU&RPSDQ\IURP
private investors in 200935)
200736
0DFTXDULH%DQN via Macquarie
8WLOLWLHVQF38 (see Figure 3 on
page 12 for ownership structure)
Acquisition of
privately held
water company
.HOGD*URXS
%ULWLVKZDWHU
company)39
PLOOLRQ
(purchase
price)40
$TXDULRQ:DWHU&RPSDQ\
H[FOXGLQJ1
7/31/2019 Private Equity, Public Inequity: The Public Cost of Private Equity Takeovers of U.S. Water Infrastructure
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Private Equity, Public Inequityt5IF1VCMJD$PTUPG1SJWBUF&RVJUZ5BLFPWFSTPG648BUFS*OGSBTUSVDUVSF 5
a errible deal. Qinn old he rade publicaion Public
Works Financingin 2009 ha he ciy inended o reinance
he projec wih municipal bonds in 2013, adding ha unil
hen, were going o be paying premium prices o und
heir prois.77
Alhough Alinda had no received any waer deal since
Sana Paula,78 in 2010, afer closing a $4.1 billion inrasruc-
ure und, Alindas managing parner old Reutersha
increased privaizaion o U.S. inrasrucure was an inevi-
able rend as municipaliies seek new unding sources.79
Alinda, in collaboraion wih a Black & Veach subsidiary,
submited a proposal in 2011 or a 30-year lease o hewaer, sewer and elecric sysems o Gardner, Kansas.80
Pushing PrivatizationPrivae equiy akeovers o waer and sewer sysems
all ino wo broad caegories: (1) acquisiions o exising
privae secor waer companies, and (2) privaizaions o
governmen uiliies hrough public-privae parnerships
or asse sales. In general, privae equiy players have had
more success aking over waer and sewer sysems ha
were already privaely owned (see Table 1, page 4), bu i
governmen inances remain weak, privae equiy players
believe ha privaizaions will become more rampan.86
The infrastructure privatization bank87
In an apparen atemp o exploi he lagging recovery o
he public secor, various banks and privae equiy irms
RANK FUND MANAGERNUMBER OF FUNDS(closed and in market)
TOTAL CAPITAL(raised and targeted)
1 0DFTXDULHQIUDVWUXFWXUHDQG5HDO$VVHWVSDUWRIWKH0DFTXDULH*URXS81 19 ELOOLRQ
2*OREDOQIUDVWUXFWXUH3DUWQHUV
IRXQGHGE\&UHGLW6XLVVHDQG*HQHUDO(OHFWULF822 ELOOLRQ
3 $UF/LJKW&DSLWDO3DUWQHUV 5 ELOOLRQ
4 $OLQGD&DSLWDO3DUWQHUV 3 ELOOLRQ
5 GS Infrastructure Investment Group (part of Goldman Sachs)83 2 ELOOLRQ
6 +LJKVWDU&DSLWDOIRUPHUO\DOLDWHGZLWK$PHULFDQQWHUQDWLRQDO*URXS 84 4 ELOOLRQ
7 (QHUJ\&DSLWDO3DUWQHUV 3 ELOOLRQ
8 55(()QIUDVWUXFWXUHSDUWRI'HXWVFKH%DQN*URXS85 2 ELOOLRQ
9 %URRNHOG$VVHW0DQDJHPHQW 4 ELOOLRQ
10 Innisfree ELOOLRQ
2004 2005 2006 2007 2008 2009 2010 2011
Figure 1.Private Equity Appetite for Infrastructure:Annual Capital Raised by Unlisted Infrastructure Funds
SOURCE: %UDGEURRN(OOLRW)XQGUDLVLQJPreqin Infrastructure Spotlight, vol. 4, iss. 5. May 2012 at 6.
$50
$40
$30
$20
$10
0CapitalRaised(b
illionsUSD)
Table 2. Ten Largest Infrastructure Fund Managers, as of January 2012
SOURCE: 'DYLV(PPDQIUDVWUXFWXUH*3VPreqin Infrastructure Spotlight, vol. 4, iss. 1. January 2012 at 11.
7/31/2019 Private Equity, Public Inequity: The Public Cost of Private Equity Takeovers of U.S. Water Infrastructure
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6 Food & Water Watch tXXXGPPEBOEXBUFSXBUDIPSH
worked wih allied oicials and groups o promoe priva-
izaion and privae invesmen as viable ways o address
inrasrucure needs and budge shoralls.88 For example,
inance behemohs including he Carlyle Group,89 Goldman
Sachs90 and Swiss bank UBS suppored a naional inra-
srucure bank,91 which would promoe privae invesmen
in U.S. inrasrucure hrough public-privae parnerships.92
These invesors oreseeably would benei rom such an
insiuion.
Rober Wol, chairman o UBS Group Americas and
presiden o UBS Invesmen Bank,93 has been a prominenproponen o a naional inrasrucure bank. According o
a 2010 aricle in he Wall Street Journal, Mr. Wols chie
obsession, Whie House oicials say, is pushing a naional
inrasrucure bank ha local governmens and he privae
secor could use o und big projecs like bridges and
waer-reamen plans.94
Wol, a gol buddy and campaign undraiser or Presiden
Barack Obama,95 has had ample opporuniy o prosely-
ize his ideas. Obama appoined Wol o his Economic
Recovery Advisory Board in 200996
hree monhs aferUBSs asse managemen arm closed a $1.5 billion inra-
srucure und97 and hen o his Council on Jobs and
Compeiiveness in 2011.98 Boh commitees recommended
privae capial invesmen in inrasrucure, a naional
inrasrucure bank and public-privae parnerships.99
An industry-backed deal in Chicago, Illinois
Alhough he Whie Houses inrasrucure bank proposal
was deemed dead on arrival in 2011,100 Chicago decided
o be he guinea pig or a smaller-scale version. Rahm
Emanuel Obamas ormer chie o sa and curren
mayor o Chicago pushed hrough he Chicago Inra-
srucure Trus ha will combine a small amoun o ciy
capial wih capial rom banks and oher privae inves-
ors (including Ciibank NA, Cii Inrasrucure Invesors,
Macquarie Inrasrucure and Real Asses Inc., J.P. Morgan
Asse Managemen Inrasrucure Invesmen Group and
Ullico) o inance more han $1 billion o public works proj-ecs.101Inrastructure Investor, a rade magazine, characer-
ized he plan as an indusry-backed deal o esablish PPPs
[public-privae parnerships] as a poliically and inancially
viable business.102
The ciys primary moivaion appeared o be he desire o
ake deb o ciy books o give he illusion o reducing is
liabiliies.103 We have a ool here ha akes some o he
pressure o axpayers, Emanuel claimed. Use somebody
elses money or a change, raher han heirs.104 In he real
world, however, banks do no provide ree lunches. Chica-goans will have o repay he privae capial invesmen
wih ineres hrough user ees.105 The ciys chie inancial
oicer admited ha privae invesmen inancing could be
more expensive han radiional governmen borrowing.106
Noneheless, he ciy council signed o on Emanuels plan
in 2012.107
Privatization as a Mega-Credit Card
and Budget Gimmickry
The inance indusry seemed o be encouraging cash-
srapped governmens o use privaizaion as a mega-credi card o inance inrasrucure projecs.108 As
researchers said in a repor or he Associaion o Char-
ered Ceriied Accounans, Jus as wih a credi card,
however, he ineres raes have been relaively high and a
some poin he debs have o be paid o. 109
Some localiies have even sough o use privaizaion as a
one-sho rick o ill a budge gap. These arrangemens are
iscally irresponsible and would likely increase long-erm
coss or households and local businesses.110 The New York
Sae Comprollers Oice called his ype o deal budgegimmickry because i provides a shor-erm cash benei
while pushing coss o he uure and poenially increasing
public deb.111 Reliance on one-sho revenue increases
long-erm borrowing coss and can hur axpayers.112
In a repor abou wasewaer privaizaion, he U.S.
Environmenal Proecion Agency explained ha he
paymen ha a governmen receives or privaizing a sewer
sysem is a loan rom he privae eniy which mus be
IMAGE COURTESY OF J. BENOIST / COMMONS.WIKIMEDIA.ORG
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Private Equity, Public Inequityt5IF1VCMJD$PTUPG1SJWBUF&RVJUZ5BLFPWFSTPG648BUFS*OGSBTUSVDUVSF 7
repaid wih ineres by he wasewaer reamen users in
he orm o addiional user ees.113 I also characerized he
governmen proceeds rom such a ransacion as addi-
ional deb he wasewaer reamen users mus repay.114
I coninued, I a local or sae governmen wans o
recoup all o is invesmen in a aciliy and ses a conces-
sion ee or sales price o relec ha amoun, he resuling
annual coss o he privae eniy could be very large and
may resul in signiicant increases in user eesor all hewasewaer users (emphasis added).115
Sheer folly in Nassau County, New York
In 2012, Nassau Couny, N.Y., proposed leasing is sewer
sysem as par o wha he couny execuive called a deb
reducion and sewer sabilizaion plan.116 The couny
seleced Unied Waer o run he sewers and Morgan
Sanley o serve as a inancial advisor. For is par, Morgan
Sanley would receive a leas $5 million o help selec he
privae invesor ha would supposedly pay he couny
upward o $750 million or he lease.117
Credi raing agencies viewed he privaizaion plan
unavorably because i was a one-sho ploy ha ailed
o address he counys underlying iscal problems.118
For similar reasons, he Nassau Couny Inerim Finance
Auhoriy, a sae-appoined oversigh board, rejeced he
counys conrac wih Morgan Sanley in hopes o killing
he lease alogeher.119
In a prepared saemen, he auhoriys direcor George
Marlin lambased he proposed lease: As or he Counys
so-called Deb-Reducion Plan, in my 35 years as aninvesmen banker, I have never come across such an
ill-conceived plan.120 Marlin called he privaizaion an ill-
conceived backdoor borrowing scheme ha was akin o
using a credi card wih a 15 percen annual ineres rae o
pay o a home morgage loan ha had a 4 percen annual
ineres rae.121 In shor, he said he plan was sheer olly.122
)LQDQFLDO&RQVXOWDQWV&RQLFWRIQWHUHVW
In addiion o managing privaizaion businesses, privae
equiy players may also have divisions ha ac as inancial
advisors o local governmens on privaizaion deals.123
For example, wih he inancial advice o Morgan Sanley,
Akron, Ohio, pursued a long-erm lease o is sewers
unil residens voed down he scheme in 2008.124 Morgan
Sanley was no sranger o inrasrucure privaizaion,125
and i has since enered he waer secor. In 2012, Morgan
Sanley Inrasrucure Parners and a Prudenial-managed
inrasrucure und purchased a conrolling sake in a U.K.
waer company.126
Occasionally, hese inancial irms even approach public
oicials wih unsolicied oers o advise hem on need-
lessly complex sopgap measures or budge shoralls.
An aricle in Governingmagazine said abou alernaive
inancing schemes or iscal gaps, Some o hese soluions
may be brough o heir atenion by invesmen bankers
who come o he able armed wih an array o exoic
and ofen diicul-o-undersand inancing ools.127
These advisors are no imparial judges. Even when hey
canno bid on he privaizaion projec isel, hey sill have
a srong incenive o push hrough a big deal because heir
compensaion ofen depends on i. Their paymen ypically
includes a success-based ee ha hey receive only i
he privaizaion goes hrough. Because his ee is usually
a percen o he ransacion value,128 he advisors have a
srong inancial incenive o recommend he bigges deal
possible, even i i were a errible deal or he communiy.
A rejected gamble in Reno, Nevada
In July 2008, Goldman Sachs approached he ciy o
Reno, Nev., wih an oer o ac as a inancial advisor on a
long-erm lease o he Truckee Meadows Waer Auhoriy,
he waer provider or he area.129 The ciy was led o
believe ha a 50-year deal could have eched as much
as $165 million in cash.130 Goldman Sachs would have
charged a ransacion ee equaling a percenage o oal
ransacion value plus he amoun o any required capial
expendiures during he irs 10 years o he deal. Tha
percenage increased wih he ransacion value.131 I he
ransacion did no go hrough, he invesmen bank wouldhave received no paymen.132 This would have given he
company a srong inancial incenive o push hrough he
larges deal possible.
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Afer he waer board voed o explore his idea, he uil-
iys general manager resigned in proes.133 The ollowing
week, afer considerable public opposiion o he lease
idea, he board unanimously voed o rescind is earlier
voe, keeping he sysem in public hands.134 As residen
Fred Thalke old he uiliy board, Gambling wih wha is
inarguably he mos imporan asse in his communiy is
no somehing ha should be endorsed.135
A monh earlier, Mark Florian, who was head o Goldman
Sachss Inrasrucure Banking Group a he ime, esi-
ied a a congressional hearing in suppor o a naional
inrasrucure bank and privaizaion, among oher hings.
Public-privae parnerships are also an opporuniy,
Florian said. We should encourage hese srucures since
our own U.S. pension plans are now ineresed in invesing
in hem.136 As o March 2012, Goldman Sachss inrasruc-
ure und had raised more han $10 billion.137
3XEOLFV/DFNRI%DUJDLQLQJ3RZHUWhen local governmens explore waer privaizaion under
iscal duress, hey are especially vulnerable o being misled
by privae ineress. A cash-srapped municipaliy can have
diiculy aording adequae legal and oher assisance
necessary o evaluae and negoiae a deal.138 Even wihou
iscal pressure, municipaliies usually lack he skills neces-
sary o eecively negoiae a privaizaion conrac or
waer and sewer uiliies. According o John Zielger in he
Public Contract Law Journal, Local governmens around
he counry, however, are legally ill-equipped o ener ino
high-value, long-erm concession conracs.139
Local governmens, especially iscally sressed ones, have
less bargaining power han naional or mulinaional
companies. This problem is exacerbaed when he priva-
izaion deals involve large privae inance players.140 I
would never be on he ciy manager in ha case, a ciy
advising irm old Governingmagazine.141 For example,
afer Chicago privaized is parking meers o a Morgan
Sanley-led consorium, meer raes quadrupled in some
areas and changes in policy ouraged consumers. Puting
us agains he invesmen banks in a deal like ha is likehaving litle leaguers play he New York Yankees, Chicago
Alderman Thomas Allen old Business Week.142
(\H:DWHULQJO\+LJK3URWV
Privae equiy players may use heir greaer bargaining
power o ge lucraive deals. Many privaizaions include
governmen guaranees or privae invesors or allow
renegoiaions afer he governmen selecs he winning
bid. Because o hese provisions, a irm may low-ball is
bid or a privaizaion projec by using, or example, overly
opimisic waer use and demand projecions.143 In his
siuaion, he governmen selecs a irm expecing subsan-
ial savings bu ends up paying more o compensae he
irm when acual revenues do no mee he irms rosy
projecions.
Privae equiy players may also ry o inlae heir reurnsby convincing governmens ha heir coss are higher
han hey acually are by using pessimisic inancial
projecions.144 The irms may use he semblance o risk
assumpion o exaggerae capial coss and demand higher
ees rom he public.145 In pracice, privae operaors and
invesors end o be risk-averse and expec o be well
compensaed or any risk hey do assume.146 They could
seek o pass on exra coss o consumers by increasing
raes or reducing service level.147
Wih argeed reurns o a leas 12 o 15 percen,148
privae equiy unds expec proi levels ha are oohigh o be pracical and useul or mos waer and sewer
uiliies.149 This is apparen in counries wih more experi-
ence wih privaely inanced inrasrucure. For example,
a U.K. Parliamen invesigaion o equiy invesmen in
privaized inrasrucure projecs concluded in 2012 ha
privae invesors were making excessively high reurns,
indicaing he counrys privae inance model was
inappropriae or uure public works projecs.150 Upon
releasing hese indings, Margare Hodge, who chaired he
commitee ha conduced he sudy, called or an end o
he era o invesors receiving eye-waeringly high rewards
while aking ever decreasing risks.151
Squeezing Dry and Running
Privae equiy invesors ofen sell heir sake in privaized
inrasrucure projecs beore he end o a conrac wih
governmen. In he Unied Kingdom, ypical reurns o
hese sales have averaged beween 15 percen and 30
percen and reached as much as 60 percen in some
cases.152 A European Services Sraegy Uni repor on equiy
sales in U.K. public-privae parnership projecs concluded,[T]he very high level o prois earned by consrucion
companies and banks provides urher evidence ha PPP
[public-privae parnership] projecs are litle more han
money-making mechanisms or he privae secor.153
Indeed, many privae equiy unds have shor invesmen
horizons, invesing in individual projecs or less han a
decade beore resale.154 For example, Alinda Inrasrucure
Fund II had a 10-year und horizon and a arge inernal
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rae o reurn o 20 percen.155 Highsar Capial decided o
sell o Uiliies, Inc., a large U.S. waer company, six years
afer acquiring i.156 (See Table 1, page 4.)
This shor-erm ocus can conlic wih he public ineres,
especially when invesors own waer uiliies.157 As credi
raing agency Sandard & Poors warned, Regulaed
inrasrucure asses do no ypically lend hemselves o
operaional urnaround or inancial resrucuring wihinhe hree-o-ive-year invesmen period ypically adoped
by such [privae equiy] players.158
Privae invesors use a variey o acics o achieve hese
rapid earnings. Afer a privae equiy akeover, a waer
uiliy may undergo dramaic resrucuring,159 and he
holding company may issue a special dividend declaraion
o he equiy parners, reurning he equiy invesmen
o he invesors.160 The deb necessary o pay premiums
o sockholders o he arge company could weaken he
pos-acquisiion company, according o a repor or he
Naional Regulaory Research Insiue.161
Leveraging Risks and CostsPrivae equiy players ypically pay or waer sysems and
oher projecs by leveraging a small amoun o equiy
raised rom privae invesors wih a large amoun o loans
and oher deb.162 Leveraging borrowing money o
&RQVLGHUDPLOOLRQDFTXLVLWLRQRIDZDWHUXWLOLW\
WKDWKDVDQDQQXDORSHUDWLQJLQFRPHRIPLOOLRQ7KHQDQFHVRIWKLVGHDOFDQYDU\VXEVWDQWLDOO\GHSHQGLQJRQ
the buyer.
7KHDYHUDJHSXEOLFO\WUDGHG86ZDWHUXWLOLW\FRPSDQ\
has a capital structure of around 50 percent debt to
50 percent equity, and thus could borrow money to
QDQFHKDOIRIWKHSXUFKDVHSULFHDQGLQYHVWLWVRZQ
equity to pay for the other half. A private equity vehicle,
on the other hand, could leverage its equity investment
by using debt to pay for 90 percent of the acquisition.Such leveraging would likely increase the interest rate on
bonds and other loans.
Assuming that the interest rate on debt would increase
from 5 percent to 6 percent, and with everything else
HTXDOOHYHUDJLQJWULSOHVWKHDFTXLULQJFRPSDQ\VUDWHRI
return on equity, while reducing its income tax burden by
more than a third. (See Table 3.)
(IN MILLIONS OF DOLLARS)PUBLICLY TR ADEDWATER COMPANY
PRIVATE EQUITYHOLDING COMPANY
D&RVWRIGHEW 5% 6%
Capital Structure
(b) Debt
F(TXLW\ + +
(d) Total purchase price
Income Statement INCREASE (DECREASE)WITH LEVERAGING(e) Operating income
(f) Debt expensea DIFFERENCE PERCENT
(g) Income tax expense
b
(39%)K1HWLQFRPH
L5DWHRIUHWXUQRQHTXLW\c 9%d 28% 19%
Table 3.6LPSOLHGEDODQFHVKHHWFRPSDULVRQRIDPLOOLRQDFTXLVLWLRQby a publicly traded water company and a private equity holding company
$GDSWHGIURPDQH[DPSOHLQ+LOO6WHSKHQ*1DWLRQDO5HJXODWRU\5HVHDUFKQVWLWXWH3ULYDWH(TXLW\%X\RXWVRI3XEOLF8WLOLWLHV3UHSDUDWLRQIRU
5HJXODWLRQV'HFHPEHUDWWR
NOTES: a 'HEWH[SHQVHFRVWRIGHEWGHEW>OLQHIOLQHDOLQHE@
b QFRPHWD[H[SHQVHRSHUDWLQJLQFRPHGHEWH[SHQVHDYHUDJHLQFRPHWD[UDWHLQWKHZDWHUXWLOLW\LQGXVWU\ >OLQHJOLQHHOLQHI@
c 5DWHRIUHWXUQRQHTXLW\QHWLQFRPHHTXLW\>OLQHLOLQHKOLQHF@
d This conforms with industry statistics. The water utilit y industry as a whole has an expected rate of return on equity RISHUFHQWWRSHUFHQWIURPWR
How Leveraging Can Increase Investor Returns
While Minimizing Income Tax Responsibility
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10 Food & Water Watch tXXXGPPEBOEXBUFSXBUDIPSH
inance deals and srech equiy capial is an inegral
aspec o privae equiy deals; i can boos invesor reurns
while lowering he eecive income ax rae.163 (See box on
page 9 or an example.)
Privae equiy deals in inrasrucure are ofen highly
leveraged. In he Unied Kingdom, abou 90 percen o
he unding or a ypical privaely inanced inrasruc-
ure projec was rom deb.
164
Similarly, one invesmenmanagemen irm recommended leveraging invesmens in
waer inrasrucure wih 60 percen o 90 percen deb.165
Highly leveraged deals are risky and can increase long-
erm borrowing coss.166 In ac, Sandard & Poors warned
in 2006 ha privaizing asses o global inrasrucure
unds could resul in a downgraded credi raing because
inrasrucure unds were increasingly highly lever-
aged.167 As risk increases, he company mus pay higher
ineres raes o debors and higher reurns o invesors,168
and he deb used o inance he acquisiion could impair
he uiliys abiliy o inance uure improvemen projecs,especially i is bond raing is downgraded.169
According o KPMG Inernaional, Excessive or poorly
srucured deb could cause he privae eniy inancial
sress, increasing he need or a governmen akeover
should he operaor deaul.170 I capial markes change
and long-erm ederal ineres raes rise, he privae equiy
irm could have problems reinancing is shor-erm acqui-
siion deb, increasing he risk o deaul.171
Leveraging generally does no occur on he books o a
regulaed uiliy bu a a higher corporae level. When
he deb is held a he holding company level, i gives he
alse appearance ha he equiy buyou does no change
he uiliys inancial risk and ha he paren holds all he
addiional risk.172 This is inaccurae. The uiliy remains he
source o cash lows o repay ha deb,173 and raepayers
ulimaely pay or he associaed risks and coss.174
Gilding Infrastructure
When privae equiy players acquire waer and sewer
sysems, i makes more inancial sense o keep he deb onhe books o he holding company insead o he acquired
uiliy company because a regulaed waer uiliys proi
depends on he amoun o equiy i has invesed in inra-
srucure. (See Figure 2.)
Sae public uiliy commissions regulae he raes o
invesor-owned waer and sewer uiliies. The regulaors
allow he companies o charge raes o recoup deb coss,
axes and operaing expenses and o earn a reurn on heir
equiy invesmen.179 Overcompensaing sockholders
The Carlyle Groups Water Strategy7KH&DUO\OH*URXSWRRNLWVUVWIRUD\LQWRWKH86ZDWHU
XWLOLW\LQGXVWU\LQZLWKWKHSXUFKDVHRI3DUN:DWHU
&RPSDQ\3DUN:DWHU&RPSDQ\ZKLFKKDGEHHQD
FORVHO\KHOGSULYDWHFRPSDQ\RZQHGDOPRVWH[FOXVLYHO\
E\+HQU\:KHHOHUDQGKLVIDPLO\ VHUYHG
SHRSOHLQ&DOLIRUQLDDQG0RQWDQD
$WWKHWLPHRIWKHSXUFKDVH&DUO\OHLQWHQGHGWRUHVHOO3DUN:DWHU&RPSDQ\ZLWKLQYH\HDUV Carlyles
:HVWHUQ:DWHU+ROGLQJVWKHQDQFLDOYHKLFOHLW
FUHDWHGWRPDNHWKHSXUFKDVHZDVLQIDFWDOLPLWHG
OLIHHQWLW\WKDWH[SLUHGEHIRUH$FFRUGLQJWRD
FRQVXOWDQWIRUWKH0RQWDQD&RQVXPHU&RXQVHO&DUO\OHV
SODQZDVWRVHOORWKHFRPSDQ\DIWHUEXLOGLQJXSWKH
&RPSDQ\VUDWHEDVHDQGHQWHUSULVHPDUNHWYDOXH
7KLVZRXOGOHDGWRUDWHLQFUHDVHVIRUFRQVXPHUV By
LQYHVWLQJLQLQIUDVWUXFWXUH&DUO\OHLQWHQGHGWRUHDOL]H
DVXEVWDQWLDOFDSLWDOJDLQZKHQLWUHVROGWKHFRPSDQ\
LQH[SHFWLQJDQLQWHUQDOUDWHRIUHWXUQRI
SHUFHQWD\HDU
$VRI&DUO\OHZDVDOVRWDUJHWLQJVHYHQZDWHUXWLOL -
WLHVLQ&DOLIRUQLDLQFOXGLQJRQHZLWKPRUHWKDQ
FXVWRPHUVDQGDQRWKHUZLWKDERXWFXVWRPHUV
DVSRVVLEOHDGGRQRUWXFNLQDFTXLVLWLRQVE\3DUN:DWHU
&RPSDQ\&DUO\OHVLQIUDVWUXFWXUHIXQGKDGDQDVVHW
YDOXHRIELOOLRQDQGDERXWSHUFHQWRIWKHWRWDO
FDSLWDOLQWKHUPVPDQDJHGIXQGVFRPHVIURPSXEOLF
SHQVLRQVDQGDJHQFLHVLQFOXGLQJWKH&DOLIRUQLD3XEOLF
(PSOR\HHV5HWLUHPHQW6\VWHP&DO3(56
Figure 2. Regulated Utilites MakeMoney by Investing in Infrastructure
Equity Investment
$UHJXODWHGLQYHVWRURZQHGZDWHUXWLOLW \VSURWGHSHQGVRQLWV
equity investment and its authorized rate of return on equity.
3URW
(Authorized
Return
on
Equity)
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Private Equity, Public Inequityt5IF1VCMJD$PTUPG1SJWBUF&RVJUZ5BLFPWFSTPG648BUFS*OGSBTUSVDUVSF 11
encourages overinvesmen and higher-han-necessary
prices, according o he Naional Regulaory Research
Insiue.180 Unorunaely, auhorized reurns on equiy
ypically exceed he acual cos o equiy.
Consequenly, invesor-owned waer uiliies have a
inancial incenive o overbuild, or gold plae, inrasrucure
projecs. This is a well-known phenomenon called he
Averch-Johnson Eec, named or he economiss who irsmodeled i in he 1960s.181 A privaely conrolled uiliy
may, or example, build an unnecessarily large reamen
plan or choose a more capial-inensive reamen process,
such as desalinaion.
Acquiring exising waer and sewer sysems is anoher
way ha invesor-owned waer uiliies can expand heir
invesmen base and drive up heir reurns. For example,
Aquarion Waer Company a privae waer uiliy in he
Norheas ha Macquarie inancial vehicles bough in
2007182 had a business model ha ocused on acquisi-
ions and rae hikes.183
Ineresingly, a 2005 sudy ound ha a higher corporae
income ax rae on uiliy companies could help couner
his incenive o overinves in inrasrucure.184 Leveraged
buyous, however, reduce a irms income ax responsi-
biliy,185 so hey may compel even greaer overinvesmen.
&LUFXPYHQWLQJQFRPH7D[HV
Privae equiy irms also are noorious ax avoiders and
evaders.199 Inrasrucure unds are ofen locaed in ax
havens, and a 2011 repor by he European ServicesSraegy Uni ound ha his was a growing phenom-
enon.200 Because o ax havens, ax reamen o deb and
capial gains, and oher legal loopholes and pracices,
privae equiy irms ofen pay very low income ax raes.201
For example, beween 2007 and 2011, he Carlyle Group
made $4.2 billion in proi bu paid an eecive income ax
rae o only 2 percen.202 In comparison, publicly raded
U.S. waer uiliy companies have an average income ax
rae o 39 percen.203 By no paying he sandard 39 percen
income ax rae, he Carlyle Group avoided $1.6 billion o
income axes over ha ive-year period.204
/DFNLQJ7UDQVSDUHQF\
Privae equiy akeovers usually involve complex corporae
srucures, which can obscure ulimae ownership and
responsibiliy. Transacions ypically occur hrough a
series o holding companies and inancial vehicles.205 (See
Figure 3 on page 12 or an example o how complex hese
srucures can be.) For a privaizaion deal, a privae equiy
player will likely orm a new special-purpose vehicle wih
an exising privae secor waer company. The privae
equiy player will inance he ransacion and he waer
company will operae he privaized sysem.206 (See Figure
4 on page 13 or an example o how his arrangemen could
be srucured.)
To make maters worse, hese privae equiy-owned busi-
nesses, as privaely held companies, do no have o comply
wih mos inancial disclosure requiremens o he U.S.Securiies and Exchange Commission.207 A privae equiy
buyou also ofen lacks disclosure requiremens regarding
inancial covenans or an amorizaion schedule or he
ransacion deb,208 and he special-purpose company se
up by invesors may reuse o disclose inormaion abou
capial coss.209 This presens diiculies or bond-raing
agencies, and can resul in downgraded credi raings and
increased deb coss.210
Sae public uiliy commissions also may have insuicien
inormaion abou he inancial srucure o a buyou deal,
making i diicul or a regulaor o gauge he risk o he
uiliy arising rom he buyou, according o a repor by
he Naional Regulaory Research Insiue.211 The repor
noed ha a privae equiy irm may conceal is inves-
men porolio, adding: The paren companys/privae
equiy irms ineres in keeping his inormaion privae is
no consisen wih he public ineres in eecive regula-
ion, which requires ull inormaion o all acors aecing
he uiliys inancial healh.212
Pension FundsSome pension funds are increasingly looking for
direct investments in infrastructure, but as of
2011, infrastructure remains a small portion of their
RYHUDOOSRUWIROLR/HVVWKDQSHUFHQWRISHQVLRQIXQGV
worldwide invest in infrastructure projects.2183HQVLRQ
funds should be wary of investing equity in water and
VHZHUSULYDWL]DWLRQSURMHFWV9HU\OLWWOHLVNQRZQDERXW
pension fund investments in infrastructure.219 There is
RQO\DERXWYH\HDUVRIGDWDWRHYDOXDWHDQGWKHSHULRG
ZDVVKDSHGE\WKHERRPEXVWHQYLURQPHQWRIUHFHQW
years, according to Georg Inderst, an independent
advisor to pension funds and other institutional inves-
tors, in an art icle in the journal Pensions.220
QVWHDGRISDUWLFLSDWLQJLQSULYDWL]DWLRQGHDOVSHQVLRQ
funds could purchase government debt if they want to
invest in infrastructure.2217RIDFLOLWDWHWKLVLQWKH8QLWHG
States, the federal government needs to create attrac-
WLYHERUURZLQJVWUXFWXUHVVXFKDVUHLQVWDWLQJWKH%XLOG
$PHULFD%RQGVSURJUDP
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The Macquarie Group
Macquarie Funds Group
Macquarie Infrastructureand Real Assets
MEAP Utilities Ltd. MEAP Utilities LPMacquarie Utilities
Holdings Ltd.
Macquarie Utilities, Inc.
Aquarion Holdings LLC
Aquarion Company
Mass Capital Aquarion Water Company Aquarion Safety Valve
Aquarion Water Companyof Connecticut
Aquarion Water Companyof New Hampshire
Aquarion Water Companyof Massachusetts
Macquarie EssentialAssets Partnership
Macquarie InfrastructurePartners Canada
Macquarie InfrastructurePartners International
Macquarie InfrastructurePartners A
100%
100%
100%
100%
100%
100%
100%
Manages
74.06%9.88%
0.01%
46.03% 44.09%
45% 55%
Figure 3.Ownership Structure of Aquarion Water Company, of whichMacquarie-managed funds owned a controlling stake
(As of March 2011, prior to sale of Macquarie Essential Assets Partnershipto British Columbia Investment Management Corporation)
SOURCE: &DPHULQR6WHYHQ9':$TXDULRQ:DWHU&RPSDQ\RI1HZ+DPSVKLUHQF&RUSRUDWH5HVWUXFWXULQJ1HZ+DPSVKLUH3XEOLF8WLOLWLHV&RPPLVVLRQ0DUFKDW0DFTXDULH>3UHVHQWDWLRQ@0DFTXDULHQIUDVWUXFWXUHDQG5HDO$VVHWV-XQHDW13 and 15.
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Private Equity, Public Inequityt5IF1VCMJD$PTUPG1SJWBUF&RVJUZ5BLFPWFSTPG648BUFS*OGSBTUSVDUVSF 13
A U.K. governmen audi o privaely inanced projecs
similarly ound, The amoun o inancial inormaion
invesors rouinely provide is limied.213 This lack o disclo-
sure has inerered wih he publics abiliy o monior
or excess prois and evaluae he role o privae equiy
invesmens.214 In addiion, unlike governmen eniies,
privaely conrolled waer uiliies are usually no subjec
o sunshine laws requiring open meeings and public
disclosure o cerain documens.215 Even i conrac provi-sions require cerain disclosures, The public, however, is
sill an addiional sep removed rom he eniy conrolling
a public aciliy or inrasrucure.216
Recommendations
Local Public Control
Cash-srapped ciies and owns will no resolve heir iscal
woes by urning waer and sewer sysems over o privae
ineress. As public oicials deermine how o cu he
growing budge deicis beleaguering many local govern-mens, hey mus avoid supericial soluions, such as
aucioning o waer uiliies, which can have lasing conse-
quences. Privaizaion can resul in greaer long-erm coss
or he public, and i can saddle generaions o consumers
wih deb ha mus be paid o hrough rae hikes.
Given he experiences o oher communiies, public
oicials should exercise he umos cauion when consid-
ering radical changes o waer and sewer services. They
should avoid privaizaion and oher irresponsible budge
gimmicks, which could price sruggling households ou o
waer service and jeopardize public access o sae waer.
Public-Public3DUWQHUVKLSV
Insead o privaizing waer sysems, municipaliies can
parner ogeher hrough public-public parnerships. In a
public-public parnership, wo or more public waer uili-
ies, governmen eniies or non-governmenal organiza-ions join orces on a no-or-proi basis and leverage heir
shared capaciies o improve waer and sewer services. The
public parners pool resources, buying power and ech-
nical experise o enhance public eiciencies and service
qualiy. These parnerships promoe public-service delivery
hrough sharing bes pracices.222
Through purchasing cooperaives or agreemens, uiliies
and oher public eniies can save ime and money by
purchasing chemicals, equipmen, uel and oher supplies
and maerials in bulk.223
Public waer uiliies can also savemoney when hey work ogeher hrough join capial
projecs or shared service agreemens.224 By parnering
wih more-eicien public uiliies or eaming up wih
non-governmenal organizaions or heir own employees,
public uiliies can creaively address ineiciencies or
make sysem improvemens.225 Compared o public-private
parnerships, public-public parnerships are more eecive,
eicien and equiable.226
Figure 4. Example Structure of a Privatization Involving Private Equity Entities
Lenders
Private EquityEntity
Private WaterCompany
Householdsand
Businesses
Government
Loans
Repayment
withInterest
$ Capital Investment
$$ Return on Equity
$ConcessionFee
$$$W
aterB
ills
Water Service
ControlofWaterUtility
Special PurposeVehicle
$Fee
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14 Food & Water Watch tXXXGPPEBOEXBUFSXBUDIPSH
QFUHDVHG)HGHUDO)XQGLQJ
A dedicaed source o ederal unding or he Drinking
Waer and Clean Waer Sae Revolving Funds (SRFs) can
help communiies make vial improvemens o heir waer
inrasrucure wihou severe increases in waer prices.
These programs provide low-ineres loans and grans or
waer inrasrucure and are an imporan inancing ool
or public waer sysems. Unorunaely, ederal unding or
he SRFs has allen since 2009.227 Wih a dedicaed source
o ederal unding, he SRFs would no longer be subjec o
he ickle annual appropriaions cycle.
5HDXWKRUL]DWLRQRI%XLOG$PHULFD%RQGV
In addiion, he ederal governmen can suppor waer
inrasrucure by reauhorizing Build America Bonds
(BABs) or a similar program. Under he previous BAB
program, a sae or local governmen issued a axable bond
and received a 35 percen direc subsidy rom he ederal
governmen o ose borrowing coss.228
Because BABsare axable, hey atraced new invesors including pension
unds and oher long-erm insiuional invesors ha
are ax-exemp and hus do no receive he ax benei o
buying regular municipal bonds.229
The Treasury Deparmen called his program highly
successul a simulaing inrasrucure invesmen.230
Build America Bonds unded more han $180 billion o
new public inrasrucure projecs in 2009 and 2010,231
saving saes and local governmens a oal o $20 billion
in borrowing coss.232 Insiuional invesors bough more
han a quarer o he $165 billion o bonds issued. 233
BABs are also an eicien way o subsidize public secorborrowing.234 The Treasury Deparmen repored, Unlike
radiional ax-exemp municipal bonds, BABs are target
eficient, meaning ha each dollar o revenue oregone by
he ederal governmen beneis sae and local govern-
mens by a dollar.235 Compared o ax-exemp municipal
bonds, BABs were a cheaper source o money or local
governmens while appealing o a broader se o invesors
including pension unds and oreign invesors.236
Wih responsible public managemen and a renewed
ederal commimen o our counrys waer resources, we
can bes ensure sae and aordable waer service or all.
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Endnotes1 Beeferman, Larry W. Pension Fund Investment in Infrastructure: A Resource
Paper. (Occasional Paper Series No. 3). Harvard Law School, Labor and
Worklife Program. December 2008 at 18 to 21; Maxwell, Steve. The growing
role of private equity in the water industry.Journal AWWA, vol. 98, iss. 1.
:h^
/
can enhance long-term overall returns. September 2011 at 4 to 5.
2 Davis, Emma. Infrastructure GPs. Preqin Infrastructure Spotlight, vol. 4, iss.
1. January 2012 at 11.
W,^>>h/t^
Kentucky for Approval of an Indirect Change in Control of a Certain Kentucky
hWW>/WZ/
&^t/Ed
Z
Commission of Alaska. (Docket No. U-09-046). August 10, 2009; CAI. [Press
Z&^t/
&^t/WZ/: -
/&^
t/Z
and Request for Waiver of 3 AAC 48.400. Regulatory Commission of Alaska.
(Docket No. U-09-046). May 8, 2009 at 1 to 7.
36 Aquarion Water Company of CT, 2007 at 105.
WZ
Dt
Company. February 24, 2006.
Dh/E W
February 8, 2007 at 1.
39 Macquarie Group, 2006.
>t
:
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16 Food & Water Watch tXXXGPPEBOEXBUFSXBUDIPSH
54 Ibid.
W ^D&^
Dt
^
Transfer of Stock in Park Water Co. September 19, 2011 at 2 to 3.
56 The Carlyle Group, 2011.
57 Public Service Commission of the State of Montana, September 19, 2011 at 2
to 3.
58 The Carlyle Group, 2011.
^ZZ
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D
ZZhDD
D
at 1, 2, 9 and 14; Steinberg, Jim. Rialto city council Oks 30-year contract withAmerican Water Works.The San Bernardino County Sun. March 28, 2012;
^:Z
San Bernardino County Sun. June 27, 2012; Steinberg, Jim. New alliance may
run Rialtos water system. San Bernardino County Sun. July 11, 2012.
WZ
hh/
,
February 20, 2012.
61 Ibid.
Z
63 Corix, February 20, 2012.
tK Public Works Financing, vol. 269. March 2012 at 3; Bay-
DhE:D
Dh:
,
t
D
United Water deal. The Jersey Journal. July 24, 2012.
>ZWZ
:
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//
-
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November 21, 2011.
>ZdZ
&Dh
of Water and Wastewater Systems from the Lower Colorado River Authority.
ZZ&//W/
OECD. May 2012 at 11.
69 Lower Colorado River Authority, June 26, 2012; Lower Colorado River Author-
&Dh
Water and Wastewater Systems from the Lower Colorado River Authority.
70 Regulatory Commission of Alaska. Order No. 1. /D-
&/D//&^t/
(U-12-097). July 16, 2012 at 3.
EKh -
d
h^'K
t
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and Public-Private Partnerships. (GAO-10-728). June 2010 at 30.
d
Reuters. September 10,
2011.
& The Wall
Street Journal:
and 23 to 24; American Jobs Act of 2011 at 243(a)(12) and 253(b)(4); Long,
2011.
h^
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global/en/investment-bank/meet-our-management/robert-wolf.html, ac-
h^
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h^ -
ment appointments. October 22, 2010.
94 King, Neil Jr. Obamas lead blocker on Wall Street. The Wall Street Journal.
January 23, 2010.
95 Ibid.
t,WZ
K
February 6, 2009.
Wh^
Infrastructure
Investor. November 8, 2008.
t,WZ
WK
W:
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-
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:
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100 Laing, Keith. House Republicans: White House plan for infrastructure bank
dead on arrival. d,. October 12, 2011.
^z
The
Bond BuyerKD/>
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Private Equity, Public Inequityt5IF1VCMJD$PTUPG1SJWBUF&RVJUZ5BLFPWFSTPG648BUFS*OGSBTUSVDUVSF 17
102 Chicago redux. Infrastructure Investor. April 2, 2012.
103 Shields, 2012; Aldermen sink teeth into infrastructure bank debate. Crains
Chicago Business^D
/d
d,W. April 24, 2012; Renn, Aaron M. What exactly does an
infrastructure bank do for us anyway? h. April 22, 2012.
^&
Chicago Sun Times. April 25, 2012.
105 Hodge, Graeme A. and Carsten Greve. Public-private partnerships: An
WZ, vol. 67,
iss. 3. May/June 2007 at 549 to 550; Shields, 2012; Aldermen sink teeth into
infrastructure bank debate, 2012; Sledge, 2012; Renn, 2012; Spielman, 2012.
106 Shields, 2012.
107 Chicago Oks private investment for infrastructure. Reuters. April 24, 2012;
Dardick, Hal et al. City council approves Emanuels controversial rebuilding
plan. Chicago Tribune. April 24, 2012.
108 Hodge and Greve, 2007 at 552; Onishi, Masamitsu and Graham Winch.
Cross-country case analysis. In Winch, Graham et al. (eds.). (2012). Taking
Stock of PPP and PFI Around the World> -
d
109 Onishi and Winch, 2012 at 22.
110 Dannin, Ellen. Crumbling infrastructure, crumbling democracy: Infrastruc-
Northwestern Journal of Law and Social Policy, vol. 6, iss. 1. Winter 2011 at
/,. May 18, 2012.
118 Gralla, Joan. New Yorks Nassau County lease of sewer plant faces hurdles.
ReutersD/^
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D
EEz'K^
:>dDt Z':.
July 17, 2008.
134 Truckee Meadows Water Authority (Nevada). Minutes of the Board of Direc-
tors. July 25, 2008.
>:dDt
Reno
':. July 26, 2008.
136 Florian, 2008 at 31 to 32.
137 Sakoui, Anousha and Daniel Schfer. Goldman Sachs eyes bid for Veolia
Water. Financial Times. March 13, 2012.
h^'K
139 Ziegler, John. The dangers of municipal concession contracts: A new vehicle
to improve accountability and transparency. Public Contract Law Journal, vol
40, iss. 2. Winter 2011 at 571.
140 Dannin, 2011 at 75; Victor, 2012 at 40.
141 Victor, 2012 at 40.
142 Kelly and Keehner, 2010.
143 Onishi and Winch, 2012 at 21; Dannin, 2011 at 54, 55, 78 and 79; Marques,
Rui Cunha and Sanford Berg. Public-Private Partnership Contracts: A Tale of
d
W
vol. 90, iss. 4. 2011 at 1588, 1594 to 1595.
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18 Food & Water Watch tXXXGPPEBOEXBUFSXBUDIPSH
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157 Hill, 2007 at 22.
^Wd''/&
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Good To Be True? November 30, 2006 at 3.
159 Hill, 2007 at 15.
160 Ibid. at 36.
161 Ibid. at 23.
162 Ibid. at 9 and 10.
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Equity Buyouts. (IFN Working Paper No. 841, 2010). May 4, 2011 at 1 to 4.
EKhWh^^
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Amendment No. 3. February 13, 2012 at 4 and 231.
197 Ibid. at 233.
198 Ibid. at 12 and 231.199 Morgan Lewis. Avoiding publicly traded partnership status for U.S. Federal
Income Tax Purposes. 2012; Norbck, 2011 at 1 to 4; dAubert, Franois.
The transparency challenge facing private equity. W^-
ment, no. 12. October 2011 at 18 to 20.
t
201 Morgan Lewis, 2012; Norbck, 2011 at 1 to 4; dAubert, 2011 at 18 to 20.
d'>Wh^^
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Amendment No. 7. April 13, 2012 at 99.
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billion more than it actually paid.
205 Camerino, Steven V. DW 11-068; Aquarion Water Company of New Hamp-
/Z
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mission. March 31, 2011 at 2.
/WWW
D>Dth
January 2012.
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223 Flake, Marc. Purchasing co-op stretches dollars..
^:
d
E
/'W Go Pro Magazine, vol. 17, iss. 2. April/
May 2009 at 18 to 19.
,D>hZ
^WZh
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Canton
Observer. June 16, 2011.
,WWW,^
h'^W^/Research Unit. July 2005 at 5 to 7 and 12; Southeast Michigan Council of
Governments. Water Meter Updates. AgileGov Ideas for advancing local
:
226 Andrews, Rhys and Tom Entwistle. Does cross-sectoral partnership deliver?
equity. :WZd. vol. 20, iss.
3. July 2010 at 679, 689 to 692; Tucker, Josephine et al. Directorate B Policy
Department, Directorate-General for External Policies of the Union, European
W
partnerships for urban water services in ACP countries. May 2010 at 13 to 17
and 33 to 34.
227 Copeland, Claudia. Congressional Research Service. Water Infrastructure
&,W
and 30 to 32.
228 U.S. Treasury Department. Treasury Analysis of Build America Bonds and
Issuer Net Borrowing Costs. April 2, 2010 at 3.
229 U.S. Treasury Department and the Council of Economic Advisors. A New
Economic Analysis of Infrastructure Investment. March 23, 2012 at 16.
230 Ibid. at 15.
231 Ibid. at 2 and 15.
232 Ibid. at 15.
K121.
234 U.S. Treasury Department and the Council of Economic Advisors, 2012 at 16.
235 U.S. Treasury Department, 2010 at 3.
236 Ibid. at 2 to 3.
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