Ed Navarro, a North Miami Beach architect, couldn’t hold back his anger at an April 3 city commission meeting. “The Romans invented plumbing over 2,000 years ago,” he thundered. “You guys are trying to make it seem that purifying water and pumping water is some amazing new invention, and we need an amazing new corporation to do it.”
“This is not a political rally,” Mayor George Vallejo interrupted.
“How can we have respect for you when you show no respect for us?” Navarro shot back. Vallejo then instructed police to usher Navarro out of the room.
By the end of the evening, the City of North Miami Beach, population 43,000, had voted 4-2 to begin negotiations with CH2M Hill, a private supplier, to transfer to it the operation of the water plant that serves nearly 200,000 residents of several South Florida cities. By May, the City finalized the deal, granting CH2M $190 million in contracts over the next 10 years. The transfer of management will force 80 union workers to reapply for their jobs. Despite vociferous opposition from residents and a brief FBI investigation into the deal, the City has plowed forward, with City Manager Ana Garcia praising the commissioners for “the courage it takes to challenge the status quo.”
Critics argue that privatization of public assets like water systems leads to job loss, a decline in service quality, and an increase in waste. Whether through acquiring ownership, assuming management duties, or financing deals with an equity stake, private companies extract a layer of profit that would otherwise be plowed into providing services. “Why would we…hand some dollars away to Wall Street or a private company?” asked Donald Cohen, executive director of In The Public Interest, an anti-privatization watchdog. “And give them control over the asset for 30, 40, 50 years?”
Privatization backers, who use the more politically palatable phrase “public-private partnerships” (or P3s), counter that these arrangements operate more efficiently, saving taxpayers money. But even if that were true, privatization contracts can lock cities and states into inflexible long-term deals, straining local budgets and eating away at democratic control.
The Trump administration has offered a lifeline to P3 enthusiasts, from family consigliere Jared Kushner’s privatization-friendly White House Office of American Innovation to a proposed infrastructure program that would facilitate toll roads and P3 deals nationwide. He branded the first week of June “Infrastructure Week,” both an attempt to deflect from cascading White House crises and a signal to financiers that the barn doors were flinging open. If Trump is successful, more cities like North Miami Beach will put public assets up for sale.
Anyone with access to the American Society of Civil Engineers’ latest report card knows that the United States desperately needs to upgrade its roads, bridges, dams, electric grids, mass transit, airports, inland waterways, and more. The ASCE estimates a whopping $5.2 trillion infrastructure funding gap between now and 2040, the consequence of decades of deferred maintenance and a general antipathy to filling that hole through progressive taxation. But tragedies like the recent bridge collapse in Atlanta highlight the exponentially greater costs of emergency repairs, compared to routine upkeep.
Private corporations are almost always involved in public infrastructure. “Local cities have crews for basic repaving, but that’s 1 percent of what gets done,” said Kevin DeGood, director of infrastructure policy at the Center for American Progress. Everything else involves the private sector, including much of the design and all of the construction. While there are some dedicated funds, for the most part, federal, state, and local governments issue tax-exempt municipal bonds to pay for infrastructure projects. If you have a state or local pension, or are invested in a mutual fund, you’re probably financing a piece of the nation’s infrastructure.
Incidentally, this makes the Trump administration’s theory—that it must use tax incentives to lure investors into infrastructure deals—downright strange. Municipal debt, already laced with tax benefits, is a $3.7 trillion market, up over tenfold since 1981, according to the Securities and Exchange Commission. Investors enthusiastically purchase muni bonds. In general, infrastructure suffers from a gap in public resources, not an unwillingness for private actors to get into the game.
But some investors want more than just plain-vanilla bonds; they want ownership stakes in public works projects. Private-equity firm Blackstone has built a $40 billion war chest, with half of the money coming from the sovereign-wealth fund of Saudi Arabia, for infrastructure investment. Larry Fink, CEO of BlackRock, the world’s largest asset manager, wrote in his annual letter to shareholders that federal spending alone cannot meet US infrastructure needs. “Substantial expertise must be dedicated to bring projects to market in a format appropriate for institutional investment.… These projects must deliver competitive returns and that will often require efficiencies that can only be achieved through private ownership.”
Fink hints at what private investors see in infrastructure: the chance to control a natural monopoly. Most Americans don’t have the choice of two pipelines feeding water to their house, or two expressways to commute to work. With little competition for services, investors can target users for increased costs without public recourse. And that price gouging is what creates the competitive returns that private-equity holders expect to extract from infrastructure-related investments. The Federal Highway Administration cites annual returns on P3 equity of between 8 and 14 percent, far more than can be made from a municipal bond.
But while investors turn a tidy profit, cities and states pay dearly. For example, Food & Water Watch estimates water privatization costs governments between 50 to 150 percent more than municipal-bond financing. Often that gets passed onto ratepayers in their monthly bill.
Given this, why would any locality sign up for privatization? First, privatizers promise efficiencies in exchange for these returns. That could mean innovation and new technology, or it could mean job cuts, shoddier materials, and inattention to upkeep, none of which necessarily reflect the public interest. A study of water systems by Cornell University’s Mildred Warner found no cost savings whatsoever from privatization.
More important, privatization matches a political tendency for short-term thinking. “When you look at Rialto,” said Kevin DeGood, referring to a Southern California city that sold off its water system to a private company, “the driving factor was not water. The mayor wanted to rehab the Rialto airport.” That P3 deal brought $76 million in up-front money to the city for economic development and water-system improvements. It was effectively an off-balance sheet loan, a way to fulfill campaign promises without asking voters to pay higher taxes or shoulder more debt. Roughly one in every six dollars of federal, state, and local spending goes to private companies, according to a 2014 estimate by Donald Cohen of In the Public Interest.
But that cash infusion can come at the cost of relinquishing control to private interests that pull out profits over decades, whether the project remains worthwhile or obsolete. Of course, by that time, the politician who made the deal has long since ran his last election, and cannot be held accountable for the consequences. For example, Chicago’s now-legendary 75-year contract to lease parking meters to a private consortium includes “make whole” payments, regardless of usage. This makes it financially impractical to institute carbon-reduction programs like bike or rapid-transit bus lanes, or even shut down streets for local parades or festivals.
Similarly, state leaders waived fees on the Indiana Toll Road to evacuate flood victims in 2008, but then had to pay private investors $447,000 in lost revenue. Other “non-compete” clauses ban roadway improvements within the vicinity of P3s, protecting private profits at the expense of local benefits.
P3s take equity stakes, but don’t account for citizen equity. Denver’s proposed P3 to expand Interstate 70 widens a section of road that cuts through low-income Latino communities, spewing contaminated exhaust fumes and stirring up contaminated soil in neighborhoods. The city now faces a civil-rights investigation that could derail the $1.17 billion project.
In 2006, the Texas Department of Transportation hired Spanish firm Cintra to build, operate, and maintain a section of state highway 130 between northern Austin and San Antonio for 50 years. The P3 suffered from inflated ridership projections and severe maintenance problems. Bad pavement generated rough terrain on the 85 mile-per-hour road, and precipitation runoff from the impervious road exacerbated residential flooding in the city of Lockhart.
By 2016, lacking toll revenue to cover debt, Cintra filed for bankruptcy, the latest in a slew of P3s to go broke. The Pocahontas Parkway in Virginia, the Indiana Toll Road, and the South Bay Expressway in San Diego county are just a few of the many P3 bankruptcies in the past decade. In early June, Indiana had to take over the I-69 highway after the P3 went belly-up with the project half-finished. Owners usually take most of the losses in these cases, but taxpayers can be left paying off bondholders and undertaking maintenance they thought the private company would handle.
These and other failures have created a privatization backlash, as policy-makers wonder whether the costs are worth it. Missoula, Montana, recently grabbed its water system back from a private-equity firm in a lawsuit, part of a growing trend of remunicipalization; from 2000–13, private water companies lost 169 contracts. Even Republican governors like John Kasich have rejected privatization deals.
But Donald Trump could put the P3 industry back in business, the way Ronald Reagan did through his President’s Commission on Privatization, or Bill Clinton did with his National Partnership for Reinventing Government initiative (which was largely about capping government head counts, thus forcing outsourcing to private contractors to staff critical functions). Trump announced that his son-in-law would lead the Office of American Innovation, seen as a stalking horse for privatization. “Jared Kushner doesn’t know anything about providing public services,” said Donald Cohen of In the Public Interest. “He’s going to look at metrics, how few employees can we have.” Indeed, the president has already floated privatizing air-traffic control, handing it over to the influence of large airlines, at the expense of smaller carriers and airports.
Trump’s main plan would give tax credits to private investors to take equity stakes in projects nationwide—in other words, P3 deals. What would get built would inevitably be tied to what can reap the highest returns. A bridge connecting a wealthy suburb, where users can afford large tolls, makes more sense than a sewage upgrade in a rural hamlet or inner city. Places needing infrastructure the most would be the least likely to get upgrades. Plus, luring investors with P3s would likely detract from municipal-bond financing, merely shifting money around rather than providing new infrastructure funds.
Worse, the administration has floated “asset recycling,” a concept brought over from Australia that would encourage cities and states to sell off public assets, with the proceeds going toward new infrastructure. “The bigger thing you privatize, the more money we’ll give you,” explained Gary Cohn, head of Trump’s National Economic Council. Asset recycling didn’t even work in Australia, as an In the Public Interest report found; typically, private investors acquired the assets cheaply, starving local governments of lifetime revenue. And the only localities winning new infrastructure are the ones that have assets worth selling; dilapidated communities likely don’t get the help.
Clearly, the White House is ready to privatize. The special assistant to the president for infrastructure policy, DJ Gribbin, was the managing director for major P3 dealmaker Macquarie Capital. And Trump’s budget proposal cut public funding for infrastructure overall, making federal dollars even more reliant on P3s. The fact that some of the biggest investment firms interested in P3s have CEOs serving on Trump’s economic-policy forum suggests that the whole policy is a conduit to sell off the public commons to Trump’s buddies.
If Trump wants to see the pitfalls of a privatization agenda, he could merely travel a couple hours south from Mar-a-Lago on Interstate 95.
North Miami Beach’s Norwood water-treatment plant is a major source of revenue, serving a region with almost five times as many customers as city residents. The plant has earned awards for water quality; as recently as 2015, Mayor Vallejo praised its efforts.
But that same year, Director of Public Utilities Jeff Thompson found what he called “decades of neglect” at the plant. A subsequent independent review by the Eisenhardt Group recommended outsourcing facility management to the private sector. Critics, including plant employees and members of the local Public Utilities Commission, blamed the city for intentional lack of investment and reduced staffing. “It’s on the city workers somehow that the system has fallen into disrepair,” said a spokesman with AFSCME Florida. “If you’re a journalist, and the newspaper is not making money, is that on you?”
City commissioners voted last year to seek qualifications from private firms. Three major private water companies—French firm Veolia, Wade Trim, and CH2M—had their qualifications approved. But in an unusual twist, North Miami Beach exclusively negotiated with the top-qualified firm, CH2M, rather than seeking multiple bids to compare costs. “That’s atypical, I’ve never seen it anywhere else,” said Mary Grant of Food & Water Watch, an expert on water privatization.
CH2M was already under contract, through a subsidiary, to provide operations and maintenance services at the plant. The company also conducted an assessment of the plant and wrote its master plan. “CH2M was one of the consultants who recommended privatizing,” said Jorge Aguilar of Food and Water Watch, one of the opponents of the deal. Unsurprisingly, CH2M then won the very contract it had recommended the City issue.
As for plant workers, they could lose benefits under CH2M immediately, since the City’s contract with AFSCME expired in 2015. The CH2M contract calls for $2.4 million in annual savings in labor costs starting in year two. And with a fixed fee for operations and maintenance, CH2M can extract profits and deliver long-term cost savings only by cutting corners. In a survey of 10 water-outsourcing deals, Food and Water Watch found that private water companies reduced the workforce by 34 percent on average, often through not hiring replacements when workers leave. (The city is promising no job loss, though an FAQ does admit they’ll transition workers from city pension to a 401(k) plan).
Water rates also typically go up. A study of the 500 largest community water systems saw private companies charging 59 percent more for service. Rates in Bayonne, New Jersey, jumped 28 percent after a private-equity firm took over the system in 2012. Rates in Rialto, California, rose 68 percent since their privatization deal. In Coatesville, Pennsylvania, rates more than doubled in four years.
Even in North Miami Beach’s backyard, troubling lessons of water privatization emerge. CH2M runs the water system in nearby Pembroke Pines, which the Florida Department of Health said carried unsafe levels of trihalomethanes. In a less-than-reassuring response, a CH2M spokeswoman would only tell The Miami Herald that “the facts are different from what’s been reported.” In the city of Cocoa, another CH2M plant was investigated last year after “taste and odor” complaints about its water.
Privatization proponents say rate increases reflect how artificially low costs were previously due to underinvestment. And North Miami Beach leaders insist the city would retain total control over the plant, including rate-setting through the Public Utilities Commission.
But this is a dodge. If the City has to deliver a contractually obligated sum, and current rates won’t cover the cost, the only options are raising rates or backfilling with general fund revenues, an unsightly political prospect. “In practice you’re not going to do that,” said Kevin DeGood. Plus, the scant details thus far suggest that CH2M would be allowed to bill the city on a cost-plus basis for capital improvements, creating an incentive to drive up costs. The favorable terms show how there’s no “free money” in privatization: Somebody will eventually have to pay for the investment.
North Miami Beach privatized its sanitation department a couple years ago. Mayor George Vallejo is himself under criminal investigation in a public corruption case, and a whiff of scandal has hovered over the privatization bid. The Public Utility Commission wouldn’t even sign off on the deal, because it didn’t get the paperwork until days before the final vote.
City residents at the public meetings couldn’t understand how the same city councilors who insisted that there was no alternative to repair the run-down facility but privatization could have allowed it to fall into such disrepair. “I just feel like it’s a sad day when public servants admit that a public utility has been allowed to decay,” said resident Dawn Grayson in April, “but to add insult to injury, you’ve decided to surrender a public resource over to a for-profit enterprise.”
But the council agreed to the negotiations in April, and quickly handed over plant management to CH2M Hill in May, in a raucous meeting featuring ejections from the meeting room and repeated shouting. “Every time you do something bold and significant, you’re always going to have people afraid of change,” Mayor Vallejo said over the crowd. “I’m voting yes because I care about my kids.”
Mubarak Kazan, a local resident, summed up the community’s thoughts about the matter in a direct statement to Vallejo: “You seem to be the godfather for privatization.” Vallejo cut him off.