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August 22nd, 2012

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

Investment bankers and other major financial players are increasingly interested in taking control of water and sewer services across the United States. Private equity vehicles are armed with more than $100 billion for infrastructure worldwide. Although most deals in the U.S. water utility market have involved existing private sector companies, a number of fund managers anticipate that the ongoing fiscal crisis will drive some governments to privatize their water infrastructure. To make that prediction a reality, major financial interests are backing various government proposals that facilitate privatization and private financing of public infrastructure.

This is an alarming development. Private equity players typically focus on short-term profits and may seek to flip assets after driving down service quality and driving up prices. Households and businesses could end up paying more for inferior service.

Key findings: 

  • There have been only half a dozen sizable private equity takeovers of water and sewer services in the United States, but four new deals were nearing consummation or awaiting regulatory approval in 2012. (See Table 1, page 4.)
  • Major financial firms are promoting large, complex and risky privatization deals, which essentially act as high- interest credit cards to finance budget shortfalls and infrastructure projects. Cash-strapped governments lack the bargaining power and know-how to properly negotiate these deals.
  • Private equity players have targeted annual returns of at least 12–15 percent.
  • Private equity players usually flip assets within a decade.
  • Private equity takeovers tend to be highly leveraged and risky.
  • Private equity players are notorious tax avoiders and evaders. In the last five years, for example, the Carlyle Group made more than $4 billion in profit but paid an effective income tax rate of only 2 percent.
  • Private equity takeovers restrict transparency and accountability. 

Cash-strapped communities can instead explore public-public partnerships to reduce the cost and enhance the performance of their public water and sewer services. The federal government can support public sector utilities by providing a dedicated source of funding for the Drinking Water and Clean Water State Revolving Funds and by reauthorizing the Build America Bonds program.Given the risks and costs associated with privatization, governments should not transfer control of their water and sewer services to investment bankers or other private

A renewed federal commitment and responsible public management of our nation’s water and sewer systems are the best ways to ensure safe and affordable service for all.