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Intro: "Following its disastrous foray into the housing market, Wall Street's latest earnings scheme is as close as your kitchen sink."

Workers in Michigan protest water privatization. (photo: Grand Rapids Institute for Information Democracy)
Workers in Michigan protest water privatization. (photo: Grand Rapids Institute for Information Democracy)

Wall Street Took Our Homes, Now Our Water

By Kate Fried, Food & Water Watch

27 August 12


ood & Water Watch Analysis Reveals Wall Street's Hold on Municipal Water Systems

Washington, D.C.-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. your social media marketing partner


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+34 # DPM 2012-08-27 09:56
Take a look at what happened in Bolivia. Our government may want to take note, too.
0 # Nominae 2012-08-28 20:27
Better stop looking to "our government" for solutions. How well has that worked out so far ?

How about supporting scientists investigating heat-free water desalination ? This will be much like supporting engineers who created carburetors that got up to fifty miles per gallon, but when we become sufficiently desperate, we will have more courage to actually act.

Heat-free desalination is under study all over the world, so maybe we can "beat the banks" to a solution that they can't keep cover and quiet soon enough.
+27 # independentmind 2012-08-27 09:58
Just ask some of the municipalities in Italy and other European countries about doing business with the Banks!
+42 # MidwestTom 2012-08-27 10:16
Wall Street will do to water what they did to cable television. John built the initial cable system and got rates approved by the State Public Service Commission; he then sold to Ann who had to borrow money to buy it and pay interest to the bankers,since her interest was a cost of doing business she was allowed to raise the rates; Ann then sold to Steve who had to pay even more, and therefore had to raise the rates again; finally Steve sold to Comcast who again raised the rates due to the increase in interest cost.

If we allow John to buy the local water system, the same cycle will be repeated. Do not privatize the water systems.
+27 # LeeBlack 2012-08-27 10:30
Combine this with the water poisoned by fracking and good water will be more expensive than gold.
+7 # jlg 2012-08-27 11:04
There was a time when public-spirited professionals, a lot of them Engineers, used to take pride in running water companies as public authorities - I knew several of them in the UK's Thames Water Authority of 40 years ago. Now those who 'know the price of everything and the value of nothing, aka 'bean counters' have taken over in so many parts of the world, allowing greedy asset-strippers to ruin the public service. How long must we wait, if "this too shall pass" - and what will follow?
+1 # BradFromSalem 2012-08-28 06:48
Those engineers no longer work for public utilities. Pick up any Right Wing rag they call a newspaper. If you read them exclusively or non critically, you would think any government employee making more than poverty level is a hack. The engineers all leave for private enterprise because they are forced by an ignorant public to forsake raises so that we don't have to raise taxes on rich people. The Right Wing is stripping all the talent away from government so that the only place to turn is to private enterprise. Taxes won't go up to pay the additional cost of having someone else perform the work that government used to do. Just the fees, you want water; go fetch it yourself or pay a fee. A market based fee, so its gotta be better, right?
Oddly enough, this is the model followed by Willard in MA. Look at the Health care plan from MA, it supplies additional business to private enterprise. In THAT he is very consistent.
+12 # cordleycoit 2012-08-27 12:19
We have our water wars in the West and they get killingly nasty. California once sent ditch marshalls into Gunnison County and the simply vanished. Private companies try and buy up the most senior water rights and sell the water back to the unwitting and dim witted towns that sell out their water.It's mainly the high growth cities like Colorado Springs and Aurora but the corporations are moving quickly. The corporations can then resell the water to mining interests and the miners foul the water rip out the mountains and move on. Of course the mountains and forests are simply commodities.
+10 # WolfTotem 2012-08-27 13:42
Are you even so sure that the profit motive is foremost when it comes to control over food and - even more so - water supplies?

Ultimately, control of essential needs is a means to total control of populations.

The way we're all headed, there will be water wars. (Maybe all the more so, and sooner rather than later, after fracking...) With these players in on the game, heaven alone knows what we and our children may soon find ourselves facing. They could lay siege to humanity and come out of it owning us all, body and soul.

Keep Wall Street et al. well away from controlling essential services and commodities!
0 # mdhome 2012-08-28 16:59
Anyone thinking it will be cheaper or better when the profiteers own the water need to have their sanity checked.

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