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As organizations focused on safe and affordable water, we are concerned about the promotion of private activity bonds and public-private partnerships, as well as any regulatory change that would make CWSRF funds available to privately owned treatment works. These fundraising strategies all facilitate privatization of publicly-owned water utilities. From California to Georgia, privatization has proven to raise the cost of drinking water and sewage services and lower the quality of customer service.

Considering the track record of the private sector in providing water utility services, we believe that the gap between public infrastructure needs and public funding should not be used as a pretext to shift control of water resources and infrastructure from the public to private sector. There is no evidence that the private sector can truly deliver a better and more efficient service than the public sector. Taxpayer dollars should not be diverted from public utilities to support private investors.

Q. Will Public-Private Partnerships and lifting caps on Private Activity Bonds provide new financial resources for clean water infrastructure?

A. No. Both private companies and public utilities borrow money and recover their costs through rate increases. However, private companies face costs that public utilities do not. Besides making a profit, they must pay for contract and contract administration costs, third-party auditing, and taxes. As a result, private financing for infrastructure investment is more expensive than public investment. Relying on private capital raises the cost of infrastructure investment, without bringing in any new capital.

Moreover, an increase in tax-exempt bonds in the investment market requires other public bond issuers to raise interest rates in order to lure investors, raising the cost of fundraising for other local government priorities. Private activity bonds “crowd out” investment in other public sectors.


Q. Do private investors make needed investments?

A. There is no evidence that private investment in the water sector will result in needed investment in long-term infrastructure. Communities around the country that have experimented with privatization have found that the private sector has not solved their infrastructure needs. From Pittsburgh to Atlanta, and Milwaukee to Indianapolis, private companies have failed to deliver on promised investment.

Allocation of capital in communities with privatized water is based on a strategy that values short-term profit rather than long-term sustainability of infrastructure. However, the water business has one of the longest capital recovery periods of any industry. Investments made in infrastructure today will not pay returns for decades to come. Financial participation in the sector requires a long-term commitment to the consumers and communities. The public sector is far better equipped to invest for the long term than the private sector.

Further complicating the situation is the trend for private equity firms to purchase water companies. They have an extremely short horizon for making a profit for shareholders. What is the likelihood that a company with this type of structure will make a long-term investment in infrastructure?

Aqua America, Inc. Chairman and Chief Executive Officer Nicholas DeBenedictis described the problem at a conference in 2006: “There is concern that some of these financial buyers need an unacceptable amount of leverage to deliver the kind of returns that their investors expect - and in a shorter amount of time compared to the typical utility investment cycle. As a former regulator and someone who's been involved in these issues for more than 30 years, I am very skeptical about putting our precious water resources into the hands of financial entities that are highly leveraged and typically bring a short-term investment horizon."


Q. Does private investment support more efficient utility management?

A. A 2006 study of forty years of water and waste privatization by Mildred Warner, (Associate Professor, Department of City and Regional Planning, Cornell University), and Germà Bel, (Professor of Economics at University of Barcelona), found that there was no evidence for improved cost savings from privatization. Since utilities are generally a monopoly, there is no competition and, without competition, they found, the private sector was no more efficient than the public sector.


Q. Does private investment promote greener technology?

A. Installing non-traditional systems can be more expensive up front, but may provide more environmental and public health benefits and prove less costly in the long run. However, the demand by private investors for short-term profits creates a disincentive for investing in these technologies. In the United Kingdom, the emphasis on short-term payback on investments has created barriers to the installation of innovative and more sustainable infrastructure, such as distributed stormwater retention. Though investors with a short-term profit horizon may not be early adopters of greener technologies, the technologies often become less expensive to install as they are more widely used.


Q. What is the history of lifting Private Activity Bond caps in the waste management sector?

A. The only environmental sector for which there is a history of the caps being lifted off of Private Activity Bonds is in the waste management area. One negative result was that the new infusion of capital led to large, ineffective, expensive incinerators being built that redistributed mercury and dioxin widely through the air. Many of these incinerators became white elephants and had to be shut down wasting many millions of dollars.


Q. Should government give out low-interest loans to private investors?

A. It is illogical for taxpayers to subsidize private utilities that regularly send profits out of the local community to investors in distant places. Investing in a public utility means that money is reinvested into the communities that they serve.

Moreover, Private Activity Bonds, as a form of subsidy, represent a regressive step in the income tax system, since tax-exempt interest is primarily a benefit for taxpayers in higher income brackets.


Q. What do constituents think about national public investment in water infrastructure?

A. Most Americans understand the need for federal investment in water infrastructure. According to a recent poll conducted by Republican pollster Frank Luntz, 71% of Americans believe that clean and safe water is a national issue that requires dedicated national funding. As a matter of principle, the federal government should become a true partner with states and localities and pay for the necessary sewage and wastewater treatment systems to guarantee clean and safe water for future generations of Americans. The public is skeptical about private investment in essential water resources. Ninety one percent of Americans agree that ‘‘if, as a country, we are willing to invest over $30 billion dollars a year on highways and more than $8 billion a year on our airways, we certainly should be willing to make the necessary investments in our nation’s rivers, lakes and oceans.”


Q. Do private water companies merit a special tax break?

A. There is no reason that the private water industry should enjoy a special tax break. This would simply eliminate another source of revenue for the deficit-burdened federal government.