National Infrastructure Banks are Proven Superior to

Public-Private Partnerships

By the Coalition for a National Infrastructure Bank                           Last Updated 8/20/22                                                 

This Brief makes the case that National Infrastructure Banks (NIBs) are historically proven to be superior to Public-Private Partnerships in building American Infrastructure.

There have been four proper National Infrastructure Banks in our nation’s history, starting with the First Bank of the United States created in 1791 by Treasury Secretary Alexander Hamilton, and ending with Franklin Delano Roosevelt’s Reconstruction Finance Corporation (RFC, 1932-1957), which lifted us out of the Great Depression and contributed to our victory in World War II. In all four cases, during the periods when these Banks were in operation,

·       American infrastructure spending expanded sharply;

·       Economic growth became supercharged, leading to better paying jobs, reduced income inequality, and a more productive private sector;[1] and

·       Expanded government tax receipts (from higher growth) meant that nearly all infrastructure loans were repaid, and the Banks either broke even or turned a profit.

Meanwhile, since the 1970’s, as the availability of public funding for infrastructure projects waned, [2] [3] [4] governments increasing turned to Public-Private Partnerships [5] to fill the financing gap. A Public-Private Partnership (P3) often involves a private entity financing, constructing, operating, and maintaining a public investment project, in return for a promised stream of payments (directly from government or indirectly from user fees), over the projected life of the project. In some cases, the private entity assumes ownership of the public infrastructure.

Proponents of P3s make the case that private companies can finish projects more quickly, cheaply, and innovatively than governments can, although there is no clear evidence of this over the long run. At the same time, P3s have exhibited serious disadvantages, including: [6] [7]

·       Higher project costs (resulting in higher public costs) on account of:

Ø The need for private investors to earn a rate of return (upwards of 7-10 percent) – far greater than the government's bond rate – in exchange for taking on various forms of risk (e.g., for delays and/or cost overruns) associated with complex infrastructure projects.

Ø The tendency of for-profit companies to maximize their revenue (a conflict of interest), especially as the public services they provide are natural monopolies to begin with.

Ø Examples of privatized utilities getting around monopoly price-gouging rules, and substantially raising user fees.[8] And

·       Contract problems, associated with:

Ø Long contract lengths that may not be sustainable if the private provider is inept or corrupt, in which case bankruptcies[9] may occur, or local government may feel obliged to bring a project back in-house because of poor service provision or escalating user fees.[10]

Ø Real-world limitations on the degree to which risks for delays and cost overruns can actually be transferred from the government to P3 concessionaires. Examples are projects in difficulty, and contracts containing ambiguities or limitations clauses that end up being litigated in court.[11]

Ø Non-compete clauses,[12] such that jurisdictions cannot make improvements near or within P3 projects, if that would siphon off revenues from the P3 entity. And,

Ø Lack of technical capacity by public officials to formulate and manage sufficient oversight over complicated infrastructure projects.

Possibly the most serious drawback of P3s, however, is that they have NOT stepped in to fill the infrastructure financing gap. The American Society for Civil Engineers (ASCE) estimated in their 2021 Report that $6.1 trillion is needed over the next ten years to repair our nation’s infrastructure, of which $2.6 trillion is currently NOT funded ($1.2 trillion is not funded for surface transportation alone).[13] Meanwhile, only about 1.5% of the country’s infrastructure projects are financed by private capital, despite banks having plenty of liquidity (cash on hand) to fund them,[14] and despite multiple Federal programs to promote such lending (see, for example, the Box below on the Transportation Infrastructure Finance and Innovation Act (TIFIA) Program). If P3s could have financed critical infrastructure projects over the past 60 years since the RFC was wound down, they would have done so already.

The above observation is echoed by the House Committee on Transportation and Infrastructure, in a 2014 study of P3s, that concluded: “… given the limited number of high-cost, complex projects, P3 projects have the potential to address only a small portion of the Nation’s infrastructure needs.”[15]

Rather, the proven alternative to P3s would be a new National Infrastructure Bank[16] to lend to public agencies for infrastructure they own. Such a public bank – to build public infrastructure – was done successfully four times before in our nation’s past. That Bank would simplify lending procedures, and provide technical support, in order to keep all public investments in public hands. It would have the scale and technical expertise to rebuild infrastructure all across America. Moreover, it could work closely with existing P3s, such as airport, transit, and port authorities, to provide all of the critical funding that is sorely missing from today’s financing strategies.

Here are some Additional Articles on P3s:

As Pa. municipalities sell water systems to for-profit companies, consumers are left paying the price | Pittsburgh Inquirer Editorial Board, Aug. 18, 2022. It is irresponsible for local governments to peddle these valuable public assets and leave customers at the mercy of businesses who are all but guaranteed to jack up their bills. Years ago, former Gov. Ed Rendell floated a proposal to lease the Pennsylvania Turnpike to a private company. It was a bad idea that fortunately did not gain traction and fizzled out. Now, an even worse idea is taking hold in towns across the state: selling off public water and sewer systems to for-profit companies. It does not take a financial wizard to figure out that this will not end well for consumers. But that has not stopped local governments from moving forward with what can only be described as an irresponsible sale of a valuable public asset. In April, state regulators approved a $235 million sale of York County’s public wastewater system to Pennsylvania American Water. The deal provided the county a one-time cash infusion to close a budget gap, while also freeing itself from the future maintenance of its water system.

In fact, the deal is crafted in a way to buy elected officials time before the public realizes what hit them. American Water can’t raise rates for three years. But after that, rates can go up by nearly 50%. In other Pennsylvania towns that sold off their water and sewer systems, the bills are already coming due. Five towns where Aqua recently purchased municipal water systems were hit with the following percentage rate hikes based on households using 4,000 gallons a month: Limerick Township up 98%; New Garden up 90%; East Norriton up 73%; Cheltenham up 69%; and East Bradford up 47%. [Plus Middleton PA up 50%.] Bucks County is pushing to sell its public sewer system to Aqua Pennsylvania for $1.1 billion. If approved, residents in Bucks County will see their bills jump from an average monthly rate of $48 to $88, with rate hikes to kick in immediately.

The War Over Public Water in Pennsylvania, By Hadas Their (The Nation), August 8, 2022. Residents are uniting across political lines to battle corporations attempting to privatize their water systems. Since the Progressive Era, when many of the nation’s waterworks were municipalized, access to water has mostly been kept in public hands. In the US, only 10 percent of people get their water from private companies, and only three out of 100 rely on private companies for wastewater treatment. A report in Water Policy found that the average bill for customers of private water companies is 59 percent higher than that of public utilities in the country’s biggest water systems. But in Pennsylvania and New Jersey, the states where pro-privatization legislation has been most aggressively pursued, about a third of the population get their water from private companies. Not coincidentally, the country’s biggest water companies, Aqua America (part of Essential Utilities) and American Water, are headquartered in Pennsylvania and New Jersey, respectively. In 1997, Pennsylvania was the first state to pass a “distribution system improvement charge,” which allows water companies to raise certain rates without standard regulatory oversight. Then, in 2016, Pennsylvania passed Act 12, which authorized municipalities to sell their public utilities at “fair market value” (FMV), which bases the price not on expected cash flows but on what a knowledgeable buyer would be willing to pay. The act works alongside Act 11, passed a few years earlier, which allows water companies to recover the costs of acquisitions and investments by raising customers’ rates. This combination allows companies to buy out systems at inflated prices, then use the cost of the acquisition to justify rate hikes. Local politicians, meanwhile, can use the influx of cash to pay off debt or build new projects without having to raise taxes. Then, by the time the rates spike, the officials are out of office and the town’s value-generating public assets are gone.

“Affordability is going to be an increasing issue, because all of our water systems need upgrading,” said Mildred Warner, a professor of city and regional planning at Cornell University. “Investment needs are very, very great. That will cause higher user fees going forward, which will fall particularly hard on the lowest income quintile.” Even worse, she added, “if we unnecessarily inflate the cost of systems [as FMV legislation allows companies to do] before making the investments and upgrades that are needed,” once those investments and upgrades happen, user fees will have to go up again.

Municipal leaders oppose plans to privatize sewer system as Bucks County Water and Sewer Authority weighs $1.1B Aqua bid, By Emily Rizzo, Updated Jul. 24, 2022. Bucks County is taking major steps forward in its plan to sell its public sewer system to Aqua Pennsylvania for $1.1 billion — which, if approved, would be the largest privatization of a U.S. public wastewater system. But municipal leaders are voicing opposition to the sale, and some are coordinating actions to pressure the Bucks County Commissioners to keep the system public. The sale process was behind closed doors for months until it finally became public knowledge in April. And BCWSA commissioners added an official vote on the sale negotiation to their agenda during the July 13 regular board meeting — taking many by surprise. The Bucks County Association for Township Officials (BCATO) — which is made up of supervisors, managers, tax collectors, and auditors, and serves as a voice for Bucks County townships — released a letter on July 15 to the Bucks County Commissioners opposing the sale. “We recognize there are benefits to privatization, but they largely exist where the water or sewer utility was not well managed or lost key staff, developed compliance issues, and became overwhelmed. This is clearly not the case here,” the letter reads.

When Private Equity Takes Over a Nursing Home, By Yasmin Rafiei, August 25, 2022, After an investment firm bought St. Joseph’s Home for the Aged, in Richmond, Virginia, the company reduced staff, removed amenities, and set the stage for a deadly outbreak of COVID-19. When St. Joseph’s Home for the Aged, a brown-brick nursing home in Richmond, Virginia, was put up for sale, in October, 2019, the waiting list for a room was three years long. “People were literally dying to get in there,” Debbie Davidson, the nursing home’s administrator, said. The owners, the Little Sisters of the Poor, were the reason. For a hundred and forty-seven years, the nuns had lived at St. Joseph’s with their residents, embodying a philosophy that defined their service: treat older people as family, in facilities that feel like a home. Typically, Little Sisters’ facilities have been sold to nonprofits. “But the pandemic and the lockdowns of nursing homes made it difficult,” Sister Mary John said, of securing a buyer. In the spring of 2021, an offer materialized from the Portopiccolo Group, a private-equity firm based in Englewood Cliffs, New Jersey. Within two weeks, management laid out plans to significantly cut back nurse staffing. Some mornings, there were only two nursing aides working at the seventy-two-bed facility. A nurse at the home, who spoke on condition of anonymity for fear of retribution, told me, “It takes two people just to take some residents to the bathroom.” No longer did the kitchen serve an eclectic variety of main dishes: turkey tetrazzini, salmon with lobster sauce, or Reuben sandwiches. Now residents were commonly given an option of ground beef. Some days, the kitchen was so short-staffed that the dining hall wasn’t set up, and residents took meals alone in their rooms. The attentiveness of the nursing staff plummeted. Betty Zane Wingo, a ninety-four-year-old resident, went several months without having her hair washed. A resident who suffered from a severe lung disease told me that, one evening, her oxygen tube slipped out, and it took an hour and a half and a call to 911 to get it plugged back in. Several family members told me they called the nursing station to express concerns but that no one picked up. On morning shifts, the home’s nurse aides now changed briefs so saturated with urine they’d turned brown.

Since the turn of the century, private-equity investment in nursing homes has grown from five billion to a hundred billion dollars. The purpose of such investments—their so-called value proposition—is to increase efficiency. Management and administrative services can be centralized, and excess costs and staffing trimmed. In the autumn of 2019, Atul Gupta, an economist at the University of Pennsylvania, set out with a team of researchers to measure how these changes affected nursing-home residents. They sifted through more than a hundred private-equity deals that took place between 2004 and 2015, and linked each deal to categories of resident outcomes, such as mobility and self-reported pain intensity. The data revealed a troubling trend: when private-equity firms acquired nursing homes, deaths among residents increased by an average of ten per cent. At homes with fewer direct-care nurses, residents are bathed less. They fall more, because there are fewer hands to help them to the bathroom or into bed. They suffer more dehydration, malnutrition, and weight loss, and higher self-reported pain levels. They develop more pressure ulcers and a greater number of infections. They make more emergency-room visits, and they’re hospitalized more often.

Infrastructure Summer: One Deal Forward, One Deal Back, by David Dayen, July 29, 2021. Joe Biden got exactly what he wanted on Wednesday: a bipartisan deal on infrastructure that he could analogize as akin to the transcontinental railroad and the interstate highway system, and something that “signals to the world that our democracy can function, deliver, and do big things,” as he put it in his press statement. Taken by itself, the bipartisan bill is a nice starting point for public-sector reinvestment. It comes out to $550 billion over the next five on a variety of projects, offset by a batch of almost comical revenue ideas, which are fortunately more half-baked than actively harmful.

A few weeks ago, it looked as if much of the bill would be financed by selling off public assets and allowing investment firms long-term concessions of roads and water and power systems and whatever else they could land. The privatization agenda was extremely dangerous, and in my view enough to oppose the effort entirely. After significant pushback from the left, a good deal of the privatization schemes are gone. There is $100 million in "asset concession incentive" grants to help cities establish public-private partnerships (P3s). Some larger transportation projects will also be required to evaluate a P3 option, to ensure it’s given "a fair shot." Tipping the scales to P3s is bad news, and these measures give them a foot in the door. Portman-Sinema also extends tax-free "private activity bonds," (PABs), expanding them to broadband and carbon capture, and doubling the use of PABs on transportation. This is a tax giveaway to Wall Street investors. More distressingly, projects financed this way do not have to pay prevailing wage requirements under the Davis-Bacon Act.
 

Infrastructure 'bank' scrapped from bipartisan infrastructure bill over wage issue, by Susan Cornwell, Jul 28, 2021. A proposal for an infrastructure financing authority was scrapped from a bipartisan infrastructure bill after Republicans objected to a provision intended to lift wages, a Democratic source said on Wednesday. The proposal that was scrapped would have included $20 billion for a new bank to attract investment through private-public partnerships.

The Harms of Infrastructure Privatization: A Step Backward in Progressive Policymaking, By Joseph Stiglitz, July 26, 2021. This week, the White House and congressional negotiators are working to hammer out a bipartisan infrastructure framework—one component of the Biden administration’s laser focus on upgrading crumbling infrastructure and making essential, long-overdue public investments that would be of enormous benefit to the country. Specifically, the bipartisan framework lists several items as “proposed financing sources for new investment,” including public-private partnerships (P3s) and asset recycling. These proposals should be a cause for concern. In many cases, such measures are back doors to privatization—with public funds paying for projects controlled by unaccountable private firms whose primary motive is to increase their own profits.

Mystery Group Promoting Infrastructure Privatization Boosted by Toll Road Lobbyists, by Lee Fang, July 23 2021. Let’s Build Infrastructure is preparing to launch formally in Washington, D.C., next week with a six-figure advertising blitz focused on pressing lawmakers to use privatization, rather than taxation, to pay for the infrastructure proposals debated in Congress. The organization touts public-private partnerships and a process known as “asset recycling,” in which the government finances new construction and repairs by selling or leasing roads, bridges, water utilities, parking lots, and other infrastructure assets to private contractors instead of paying for them with public funding. The private operators in turn recoup costs by adding tolls or increasing user fees, such as water bills or parking fees. The new group, helmed by two former mayors, Republican Mick Cornett of Oklahoma City and Democrat Michael Nutter of Philadelphia, has published virtually no information about its supporters on its website or how it’s paying for the wave of television advertisements.

Eyeing Federal Infrastructure Windfall, Private Equity Courts Public Utilities, by Lee Harris, July 22, 2021. Last year, Louisiana-based Bernhard Capital Partners (BCP), a private equity firm, came to city leaders and offered to fix key infrastructure. BCP had $750 million available for the city to finance these and other overdue improvement projects. They would also invest in economic development programs, such as business incubators and training programs at Fayetteville State, a historically Black university. In return, BCP requested a contract to operate the city’s water and power utilities for the next 30 years, and keep the profits. Lawmakers are torn over the offer. Now, BCP is among a group of alternative investors making wide acquisitions in municipal water and wastewater systems, and has begun courting publicly owned power grids. ( Brown & Root, the Haliburton offshoot criticized for no-bid contracts after Katrina, is today a member of BCP’s portfolio).

Municipal utilities are natural monopolies, offering guaranteed cash flow with a captive customer base. Public electric grids frequently reinvest ratepayer dollars in routine upgrades. Some payments flow back to the city, which may also enjoy reduced-cost services for facilities like libraries and schools. Rather than buying public systems outright, private equity firms have preferred concession agreements, a kind of long-term lease.

In the classic concession model, a third party operates its own business on city-owned property, such as canoe rental at a lake or a food vendor at a ballpark. But new concession agreements were pioneered with the privatization of transportation and water services, where private equity firms take over management from frequently debt-laden cities, in exchange for upfront payment.

However, agreements to put water, airports, and roads under private control often sour, because private firms guarantee investors that they will meet threshold profit targets. In Bayonne, KKR and Suez had guaranteed investors an 11 percent rate of return, and raised prices to keep up. City officials had promised residents a four-year freeze on water costs, but rate hikes followed shortly after the deals were signed. Similarly, water and wastewater systems in Bayonne, LA, New Jersey, and Middletown, Pennsylvania, have struck concession agreements with water giant Suez and private equity firm Kohlberg Kravis Roberts. Since Bayonne entered the concession agreement in 2012, water rates have risen nearly 50 percent. Some residents have fallen so deep into water debt that the city is placing liens on homes for non-payment.

Baltimore Voters Stand Up to Water Privatization, by Chuck Collins, November 8, 2018. In a rare instance of progressive preemption, the city's voters told private water corporations to leave them alone. One interesting local victory on Tuesday was a vote by the citizens of Baltimore to amend the city’s charter to prohibit the privatization of their water and sewer system. In a rare instance of progressive preemption, the city’s voters told private water corporations to leave them alone. “Private corporations have been circling Baltimore for years, ramping up efforts to pitch a privatization effort,” said Rianna Eckel, an organizer with Food and Water Watch and a member of the coalition that pressed for the charter change. “Baltimore has an aging infrastructure and is under pressure from the EPA to upgrade our system.” Corporate vultures like water conglomerates Veolia, American Water, and Suez were lobbying to take over the system, with Suez and its Wall Street partner KKR proposing a 50-year lease. Baltimore City Council president Bernard “Jack” Young had seen enough. He led a city effort to amend the charter. “He wanted to shut the door on this conversation so the city could work to address our water issues without the background static of corporate privatization,” said Eckel. The city council voted unanimously to amend the charter to protect public ownership, sending the measure to the city’s voters for approval. In August, Young told the Baltimore Sun, “I have always been a proponent of retaining our city’s assets, which is why I am completely opposed to the privatization of Baltimore’s water system. Access to clean and affordable water should be looked at as a basic right.”

Someone Is Buying Up Power Plants and Critical Infrastructure in 22 Countries. The Trail Leads to JPMorgan – a Bank Repeatedly Charged with Rigging Markets, By Pam Martens and Russ Martens: July 15, 2021. According to the Merger and Acquisition database at PitchBook, entities tied to JPMorgan Asset Management have been buying up energy and infrastructure assets around the world including solar power plants, wind farms, airports, water companies and the 120-year old El Paso Electric which provides electricity to approximately 437,000 retail and wholesale customers in west Texas and southern New Mexico. The acquisitions can be traced back to an entity called the Infrastructure Investments Fund (IIF). When IIF is seeking regulatory approval, as in the case of buying El Paso Electric, it contends it is not controlled by JPMorgan. But when JPMorgan is pitching the fund to institutional investors around the globe, the bank points out that 50 of the bank’s employees are actively engaged in the fund. According to IIF’s flipbook, companies in which IIF held a 100 percent control include Värmevärden, a heating company based in central Sweden; Summit Utilities, which owns natural gas distribution and transmission subsidiaries that operate in Arkansas, Colorado, Maine, Missouri and Oklahoma; SouthWest Water Company, which owns and operates regulated water and wastewater systems serving over half a million residential and business customers in Alabama, California, Florida, Oregon, South Carolina, and Texas. According to PitchBook, a subsidiary of SouthWest Water Company, via JPMorgan Asset Management, last year acquired the South Carolina wastewater utility operations of Ni Pacolet Milliken Utilities (Ni) from Pacolet Milliken, LLC. Ni owns regulated wastewater and water utility companies serving customers in South Carolina and Florida. Ni’s holdings include Palmetto Utilities, Palmetto Wastewater Reclamation, and Ni Florida.

Over 200 groups demand no water privatization in any infrastructure deal, By Marlee Kokotovic - July 2, 2021. Over 200 organizations are urging Congress against any kind of water privatization in any infrastructure deal. According to Common Dreams, the letter, sent to top Democrats and Republicans, was organized by Food & Water Watch, which has repeatedly criticized privatization provisions that the White House and members of Congress are considering for a bipartisan infrastructure deal that Democrats plan to pass alongside a broader reconciliation package. The letter states: “We, the undersigned 218 organizations, oppose the Bipartisan Infrastructure Framework that promotes privatization, and we urge you to reject it and water privatization in all its forms and fight for a bold, uncompromising infrastructure package that provides real federal funding at the level our communities urgently need… Water privatization has failed communities across the country and must be rejected in all its forms.”

Senators Want to Pay for Infrastructure With “Asset Recycling.” That’s Just a Fancy Term for Privatization. by Hannah Levintova and Noah Lanard, July 2, 2021. Last week, President Biden and a bipartisan group of senators announced a major deal on infrastructure, agreeing to $1.2 trillion worth of spending on roads, public transit, and utilities. The exact details of the proposal are scant, as are clear plans on how to pay for it. But a preliminary list of nearly a dozen potential financing sources included something called “asset recycling”—a fancy term for a type of privatization that has long enticed Wall Street investors, while bringing frustration to local residents who are often left footing the bill. The term “asset recycling” appears to have been coined in Australia in 2013. In recent years, institutional investors have pushed for programs like this in the United States, even raising billions to pursue infrastructure projects. That win-win framing made its way into the Trump administration, when National Economic Council director Gary Cohn championed a proposal to pay states and localities a bonus for selling off public infrastructure. “Take a project you have right now, sell it off, privatize it, we know it will get maintained, and we’ll reward you for privatizing it,” he told executives in 2017. Here’s a roundup of some of the places where asset recycling and privatization have caused a lot more problems than they’ve solved.

·       The Chicago parking meter deal

·       Water systems in Bayonne, New Jersey, and Middletown, Pennsylvania

·       Missoula, Montana’s water system

·       Indiana’s I-69 highway

  [1] The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War, by Robert J. Gordon, Aug 29, 2017.

[2] It’s Never Infrastructure Week – U.S. government investment spending is the lowest it’s been in 70 years. That’s probably too low. By Justin Fox, September 6, 2018.

[3] It’s Time for States to Invest in Infrastructure, by Elizabeth McNichol, August 10, 2017.

[4] Congress is supposed to decide how the U.S. spends money. Soon, it won’t be able to. By Eugene Steuerle, September 12, 2019. Chart indicates that the portion of Total Revenues available for discretionary spending fell from 65% in 1960, to 11% in 2019, and is expected to fall further to 8% in another 5 years.

[5] Public-private partnership, From Wikipedia, the free encyclopedia.

[6] Public-Private Projects Where the Public Pays and Pays, By Matthew Goldstein and Patricia Cohen, June 6, 2017.

[7] More states privatizing their infrastructure. Are they making a mistake?, By Brad Plumer,

April 1, 2012.

[8] Senators Want to Pay for Infrastructure With “Asset Recycling.” That’s Just a Fancy Term for Privatization. By Hannah Levintova (for Mother Jones), July 2, 2021.

[9] Lessons to be learned from bankruptcy filings in public-private partnership (PPP) projects in the United States, by Offei Adarkwa, Omar Smadi, and Ahmad Alhasan (Center for Transportation Research & Education (CTRE), Iowa State University), Volume 2 Issue 2 – 2017.

[10] See various surveys of public officials by the State and Local Government Review, a quarterly, peer-reviewed, academic journal on public administration.

[11] The Limits of Risk Transference Through Public-Private Partnerships, By Kevin DeGood, December 11, 2019.

[12] A Metro ‘Beltway Line’? Transit advocates say a new American Legion Bridge should leave room for rail. By Katherine Shaver, May 22, 2021.

[13] American Society of Civil Engineers’ 2021 Report Card for America’s Infrastructure.

[14] Filling the infrastructure financing gap, By Otaviano Canuto, Executive Director World Bank, 12/04/2017.

[15] Public-Private Partnerships: balancing the needs of the public and private sectors to finance the nation’s infrastructure, House Committee on Transportation and Infrastructure, September, 2014.

[16] Quick Summary of Legislation to Create a National Infrastructure Bank, by the Coalition for a National Infrastructure Bank, July 28, 2021.