How American municipalities can learn from Parisian mistakes

April 25, 2012

Across the nation cash-strapped municipalities are considering the sale of their public-utility systems. These moves are intended to raise cash and rid the municipalities of expensive liabilities such as debt service and pension obligations. But officials considering this approach might do well to look to France and other nations that are rapidly moving in the opposite direction with a “remunicipalization” of their utility systems. In 2010, Paris, in the best known case of remunicipalization, ended contracts with the world’s two biggest water service companies, Suez and Veolia, bringing an end to their 100-year private duopoly. The reversal of a century-old practice in Paris was an acceleration of an international movement away from private control. Per

In the 1990s many countries privatised their water and sanitation services, particularly in the [hemispheric] South, as a result of strong pressure from neoliberal mindset governments and international financial institutions, to ‘open’ up national services.

The promises that privatisation would improve the provision of drinking and wastewater services soon faltered. Many of the privatised operations quickly began to show weaknesses as they missed targets for expanding and upgrading networks, introduced excessive tariff increases alongside connection fees which were unaffordable for low-income families. Management activities were not transparent and accountable. As a result numerous contracts with private operators were terminated often following popular unrest. Many cities, regions and even countries have chosen to close the book on water privatisation and instead embarked on remunicipalisation or renationalisation of water delivery

It’s easy to see how U.S. public officials facing substantial budget issues might consider privatizing their public systems. Reuters’ Joan Gralla wrote yesterday about the possible lease of its sewer plant by New York’s Nassau County. County officials have been using the system as a piggybank and had raided $200 million of reserves to plug a county budget deficit. Now the system is financially broke, and the officials are pushing to lease it off:

A long-term lease of Nassau’s Sewer and Storm Water Finance Authority, outlined in September by Republican County Executive Edward Mangano, has drawn interest from Severn Trent Services, Veolia Environment VE SA and United Water, a unit of Suez Environment Company SA.

However, it is not clear if and when any lease contract might be approved.

State control board officials and Democratic legislators have criticized the proposal. Credit agencies say public assets – from roads to parking garages – should not be leased to private companies if the cash raised from them just papers over deficits.

About $115 million of the money raised by a long-term lease of the sewer system would be spent closing deficits in 2013 and 2014, according to Fitch. It views this strategy “negatively.”

Philadelphia is moving ahead with a sale of the Philadelphia Gas Works, one of the nation’s oldest municipally owned utilities. A report prepared for the city by the investment firm Lazard (page 16) says it’s likely the city will not see any substantial cash benefit from the sale but will instead be able to repay bonds issued for the utility and discharge the pension obligations of the employees. What Philadelphia will give up in exchange is an opportunity to continue providing low-cost energy to its residents as an enormous supply of natural gas from hydraulic fracking in Pennsylvania’s Marcellus Shale region comes online. In a city with a substantial number of people who live below the poverty level, the utility is perfectly positioned to create economic stability by remaining public and a non-profit entity. The economic stability provided by Philadelphia Gas Works could be a vital foundation for long-term urban revitalization for the city. From

With more than 500,000 commercial, industrial and residential customers and 84 percent saturation of residential heating in the City of Philadelphia, PGW is the nation’s largest municipally owned natural gas utility.

Natural gas is transported to PGW by two direct interstate pipelines, but PGW also operates a liquefied natural gas facility to meet peak day and winter requirements. The facility’s dual 12-story tanks store over four billion cubic feet of natural gas and have remained among the country’s largest since they were constructed in the 1970s. It has saved customers more than $2.5 billion in the last 35 years.

Selling older and irreplaceable public assets does gain short-term cash for cities and counties. But losing control of valuable public assets for decades is not necessarily the best way to serve the public. These deals need to weigh the economic interests of all stakeholders. U.S. public officials might want to jet over to Paris to visit with officials there before they make any final decisions on privatizing public works.

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