Helpful or Harmful? Private Investment in Public Works

Jan. 5, 2017

“Across our country, we need solutions for infrastructure deficiencies,” James Maloney, a spokesman for the American Investment Council recently told the New York Times. “Private equity serves as one of these solutions.”

US infrastructure is in a state of crisis. Water infrastructure alone will require about $600 billion over the next 20 years according to estimates cited recently by the New York Times. In addition, federal spending on water utilities has declined. This funding void has prompted state and federal officials to seek private investors to upgrade ageing infrastructure.

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A public-private partnership is a contractual arrangement between a public agency and a private sector entity, through which the skills and assets of each sector are shared to provide a service for the public, according to the National Council for Public-Private Partnerships.

This video outlines the World Bank’s definition:

Many public organizations are wary of inviting private investment, however. While the allure of up-front cash and new technology can be tempting, the track record for such partnerships is less than stellar. The New York Times recently analyzed several water utilities and found that many of them had negotiated to regain control of their water systems.

The financial trade-offs from these water deals, it seems, can be significant—typically in the form of rate hikes. In Santa Paula, California, for example, where private equity group Alinda Capital Partners managed the sewer plant, the utility more than doubled its rates before the city was able to negotiate a buy back. In Missoula, Montana, where the Carlyle Group managed the water utility, the city sued to repurchase its water system. Although the city won, the court determined that the price should be significantly higher than the original offer.

According to finance experts, public utilities can, in fact, see benefits if their agreements are well structured and if their contracts are carefully outlined to serve long-term goals. Assurances such as these can protect public utilities from equity firms looking to capitalize in the short term by raising rates or flipping the deal to another private equity group.

The incoming administration has made the privatization of public works a pivotal component of its strategy to rebuild America’s infrastructure. President-elect Donald Trump and his team have outlined a number of tax credits worth billions of dollars for private investors willing to take on infrastructure projects. Financial rewards such as these may directly impact the number of public-private partnerships we see in the near future.

We’re curious, has your organization considered partnering with a private equity group? What has your experience been?
About the Author

Laura Sanchez

Laura Sanchez is the editor of Distributed Energy and Water Efficiency magazines.

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