Home > Uncategorized > Private-Public Partnerships, Based on User Fee Paradigm, Seen as Solution to Deferred Spending

Private-Public Partnerships, Based on User Fee Paradigm, Seen as Solution to Deferred Spending

The NYTimes today has a lengthy article in its Business section describing how many cash-strapped town and city governments are using Private-Public-Partnerships (PPP) to address deferred maintenance issues like decayed water systems, deteriorating roads, and other big-ticket items that face themas a result of failing to raise taxes in a timely fashion.

Here’s how a PPP works. The city contracts with a private equity firm who then arranges for the vast sums of money to be spent fixing the failed system. To regain their money and earn a profit, the equity firm turns over the operation of the “fixed” system to a private company who, in turn, collects money from the end users of the system. The problem is that in the end, the fees charged by the private company are often much higher than the baseline costs because profits need to be made on two levels: the equity firm and the private firm. In explaining how the system works, the Times used Bayonne NJ’s water system, where K.K.R. was the private equity company, Suez was the private water contractor, and end users had rate increases of roughly 28%. But the good news?

In a statement, a K.K.R. spokeswoman said, “Our partnership has provided Bayonne residents with better service, modernized technology to detect leaks and conserve water, improved infrastructure and safer conditions for workers — all without a tax increase or public expenditure.” 

Needless to say, this is a conservative politician’s dream solution to the infrastructure problem: avoid increasing broad-based progressive taxes while passing the costs along to end users and simultaneously rewarding the billionaire investors who contribute to their campaigns. Furthermore, the notion of using private funds appeals to those who believe “government is the problem”:

Proponents of the public-private partnerships, citing recent studies in Canada and Europe, argue that private businesses operate more efficiently than governments do and that this translates into cost savings for citizens. And private equity firms, lacking technical expertise in how to manage infrastructure, often team up with private water companies.

Private businesses may, indeed, operate more efficiently than governments, but governments don’t need to please shareholders by making a late profit nor do they necessarily need to seek “technical expertise” from another for-profit enterprise— they can hire staff members with expertise to oversee the water system instead of hiring staff members with expertise to regulate the for-profit enterprise who  just might cut some corners in order to make a profit.

Government can and should oversee and operate functions that serve the general public and they can and should pay for those functions through progressive income taxes instead of regressive property taxes and/or user fees. The consequences of shifting the entire burden of water costs to end users illustrates why this is the case:

In 2012, the year Bayonne struck its deal, water bill delinquencies led to 200 government liens against local properties, tax records show. That figure more than tripled the next year, the first full year under K.K.R.’s team. In 2015, the most recent year with data available, the number remained elevated, at 465.

And here was another feature of the bargain Bayonne struck: it guaranteed K.K.R. a fixed revenue stream no matter how much water was used by it’s residents. As a result, when residents limited their use of water to save money the rates went up to ensure that K.K.R. received the money it needed.

The net effect of all of this is to exacerbate the economic divide: the middle-class home owners in Bayonne are forced to pay ever-increasing fees to a private equity firm and a private water company whose shareholders are residing in affluence and, in all probability, drinking water from a well on their property. PPPs are the answer if an only if middle class families and end users of highways, airports, water, sewer, and— yes– public schools are willing to pay a user fee that lines the pockets of shareholders instead of a tax, which draws from everyone according to their means.

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