First Our Homes, Now Our Water?

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 service."

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.

Even 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 privatization.

Private Equity, Public Inequity: The Public Cost of Private Equity Takeovers of U.S. Water Infrastructure is available here.