Selling or leasing public assets to business corporations (privatization or corporatization) is on the rise at state and municipal levels. The reasons driving this trend:
worsening budget deficits by state and local governments,
imminent need to upgrade long-deteriorated infrastructure; and
increasing pressure by investors who’ve seen huge losses from housing and other risky investments seeking safe and stable returns
Privatizing/corporatizing roads, airports, water and sewer systems, and other public assets by national or transnational corporations has many negative consequences:
loss of public jobs,
declining service, and
exporting of income from local communities to shareholders and CEOs of foreign corporations.
Another negative consequence is the loss of control, of self-governance, of democracy. Keeping public utilities public gives citizens power:
the power to inspect the books of public utilities or departments,
the power to hold accountable the director of a public utility or service department,
the power to pressure city officials to control rates, retain jobs, improve service,
the power to directly create laws via citizen initiatives to control rates, retain jobs, improve service.
Attempts to privatize/corporatize public assets is happening in Ohio. The latest example is a proposal by the Mayor of Akron to lease the city sewer system (see reference in article below). Akron’s financial advisor is the investment firm of Morgan Stanley corporation (also referenced in article below) — which stands to gain millions from the scheme. Morgan Stanley corporation is one of one of several investment firms (including Goldman Sachs) who see privatization/corporatization as a financial safe haven in these economic turbulent times. It’s where money can be made — that is, off the backs of ratepayers and users.
The record of privatization/corporatization of public utilities from a local perspective has been poor. According to Food and Water Watch:
– Atlanta canceled its contract with United Water corporation after 4 years of terrible service,
– Ft. Wayne, IN decided to take over its water and sewer system from a corporation after it hiked its rates 75%,
– Stockton, CA has just won back its water/sewer system after a judge determined privatization would have serious environmental impacts,
– New Orleans dropped its privatization plan after studying the idea for 5 years and spending $5.7 million (by contrast, Akron spent less than 3 months studying the issue with no public hearings),
– In Newark, NJ, the city council voted down privatization,
– Felton, CA has taken back its water system after a corporation took it over and wanted a 74% rate hike,
– Foreign corporations ship profits out of communities to investors and wealthy CEOs.
The above indicates not only the problems of privatization/corporation but how democratic citizen resistance can stop or reverse the trend. Akron citizens have launched an initiative to “let the people decide” and “keep public utilities public” in response to the Mayor’s plan. Citizens to Save Our Sewers and Water (Citizens SOS), which AFSC helped organize, has gathered sufficient signatures from registered voters to qualify for the November ballot. The initiative which would change the city charter or constitution calls for any sale, lease or transfer of any public utility to be without force until and unless the proposal is approved by Akron voters (the current system allows a transfer with only city council approval). Citizens SOS is also gearing up to oppose a separate ballot measure by the Mayor that specifically calls for privatizing the city sewer system. More information about the initiative and Mayor’s plan is at http://www.AkronOhio.net.
The citizens of Akron are responding both reactively and proactively to privatization/corporatization:
by organizing against the specific immediate threat to handing over a public asset to a foreign corporation, and
by organizing to change the city charter to prevent any transfer of a public utility without direct public approval.
This is what “municipalizing” democracy is all about!
Wall Street to privatize US infrastructure
Global Research, August 3, 2008
Roads, airports on the block as budgets tighten
Fri Aug 1, 2008 12:37pm EDT
By Jonathan Stempel
NEW YORK (Reuters) – Cash-strapped U.S. state and city governments are
likely to sell or lease more highways, bridges, airports and other assets
to investors desperate for stable returns after being frazzled by the
The trend is set to pick up speed given worsening budget deficits in state
capitals and city halls nationwide.
It will also be welcomed by Wall Street bankers hoping to help create and
market so-called “infrastructure” transactions at a time many debt markets
remain paralyzed, and after major U.S. stock indexes fell into bear market
“When you are nervous about everything else, you put your money in a toll
road,” said John Schmidt, a partner at the law firm Mayer Brown LLP in
Chicago. “That’s the logic of infrastructure. Returns are stable and
predictable. You won’t get fabulously rich, but you’ll get stable cash flow.”
The latest enthusiasm for at least partially privatizing infrastructure
assets came on July 30 from New York Gov. David Paterson, who is trying to
plug a budget deficit caused in part by lower tax revenue as Wall Street
“We’re just looking at ways to be more efficient and that’s why I used the
term public-private partnerships — trying to find some creative
solutions,” Paterson said. “The reason I’m avoiding taxes is because I
think taxes are addictive.”
Bankers and others in the industry say there is pent-up demand from
dedicated infrastructure funds and public pension funds to invest in hard
assets — perhaps $75 billion to $150 billion of equity capital — but not
“Economic conditions are tough, and are going to be very harsh on the
performance of state budgets in 2008 and 2009,” said Greg Carey, co-head of
infrastructure banking at Goldman Sachs Group Inc (GS.N:
Stock Buzz). “States are looking
for long-term solutions in running businesses. A public-private partnership
is a tool in their toolboxes.”
A high-water mark came in May, when a group led by Spain’s Abertis
Infraestructuras SA (ABE.MC:
Stock Buzz) and Citigroup Inc
Stock Buzz) agreed to pay $12.8
billion to lease the Pennsylvania Turnpike for 75 years. The total could
reach $18.3 billion, including promised improvements. Legislators must
approve the lease.
Other transactions have included the $1.8 billion lease of the Chicago
Skyway toll road bridge in 2005, and a $3.8 billion lease of the Indiana
Toll Road the next year. Chicago Mayor Richard Daley is preparing to lease
Midway Airport this year.
For Wall Street, infrastructure can be a bright spot at a time of deep job
cuts and expected declines in bonuses.
“We’ve seen an unprecedented number of headhunters recruiting for positions
on the buy and sell sides,” said Rob Collins, head of Americas
infrastructure banking at Morgan Stanley (MS.N:
Stock Buzz). “Infrastructure
investing can be counter-cyclical to economic trends.”
John Ma, the other Goldman infrastructure chief, added: “We’re very
committed to this space. Our business activity has increased dramatically,
even this year.”
ALTERNATIVE TO TAX HIKES
According to the nonprofit Center on Budget and Policy Priorities, 29 U.S.
states plus the District of Columbia may face a combined $48 billion of
budget deficits in fiscal 2009.
But politicians might be loathe to cut spending or raise taxes at a time
mortgage debt, $4-a-gallon gas and rising food prices leave consumers — of
whom many vote — dispirited. Tapping public debt markets might also be too
Meanwhile the American Society of Civil Engineers estimates $1.6 trillion
is needed over five years to raise the often aged U.S. infrastructure to
Pennsylvania Gov. Ed Rendell in July called for the United States to
establish a capital budget to pay for such repairs. It was a year ago
August 1 that the Interstate 35W bridge in Minneapolis plunged into the
Mississippi River, killing 13.
Critics say some infrastructure transactions are short-term budget fixes
that deprive governments of steady cash streams from taxpayer-funded
assets. There is also the risk that private operators won’t do their jobs well.
Advocates of privatization say entities might do better managing assets
than a government answering to voters.
Politicians could also get a boost if they can take credit for reinvesting
sale or lease proceeds in needed projects.
“The argument for a public-private partnership is the private sector is a
lot smarter about paying attention to costs, and because it has skin in the
game will be more attentive to maintaining an asset over its life,” said
Joseph Giglio, a privatization expert and professor at Northeastern
University’s College of Business Administration in Boston.
“Elected officials often shortchange funding of maintenance because they
don’t want to increase user fees or taxes to pay for it,” Giglio added.
“Their election cycle is four years. They can pass it on to someone else’s
Collins, who also advised Pennsylvania on the turnpike, said infrastructure
can also go beyond roads and airports. He said Morgan Stanley is advising
Akron, Ohio, on exploring the leasing of its wastewater system, and Indiana
on the possibility of private management for its state lottery.
“Lotteries have infrastructure characteristics in that they have stable
cash flows and high barriers to entry,” he said. “They could even attract
private equity investment because they are self-financeable and require
minimal capital expenses.”
At Goldman, Carey and Ma replaced Mark Florian, who is moving to First
Reserve Corp, a private equity firm specializing in energy, a person close
to the matter said.
Goldman itself raised a $6.5 billion infrastructure fund in 2006, and is
reportedly trying to raise a $7.5 billion fund.
Morgan Stanley raised a $4 billion fund in May. Global Infrastructure
Partners, a joint venture between Credit Suisse Group AG (CSGN.VX:
Stock Buzz) and General
Electric Co (GE.N: Quote,
Stock Buzz), raised a $5.6
billion fund the same month. Private equity firm Carlyle Group CYL.UL last
year raised a $1.15 billion fund.
And Kohlberg Kravis Roberts & Co KKR.UL, which is preparing to go public,
in May lured George Bilicic from Lazard Ltd (LAZ.N:
Stock Buzz), where he led
power, energy and infrastructure efforts worldwide, to run its own
Two of the largest specialists in the area are Australian: Macquarie Group
Ltd (MQG.AX: Quote,
Stock Buzz) and Babcock & Brown
Ltd (BNB.AX: Quote,
Schmidt, the Mayer Brown partner, said if the Midway transaction succeeds,
other airports could also go private, perhaps leading to “lower and more
predictable landing fees and terminal rentals for airlines, which certainly
That, he said, could bring the value of roads, bridges and airports that
could be privatized to half a trillion dollars.
(Additional reporting by Joan Gralla in New York and Elizabeth Flood Morrow
in Albany, New York, editing by Dave Zimmerman)