Another model for privatization implodes

April 29, 2013

Concerned Residents Confront Carlyle Over Sludge Dumping*

I’ve written numerous times about how public private partnerships (PPP) are often a bad deal because they privatize profits and socialize risks. A perfect example of this is the bankruptcy of privately-held Synagro Technologies, which contracted with municipal governments to treat raw sewage and then spread it on farm fields. Reuters reports:

Carlyle Group LP’s (CG.O) Synagro Technologies Inc filed for Chapter 11 bankruptcy protection on Wednesday with a plan to sell the business to a Swedish private equity firm for $455 million.

Synagro, the largest recycler of organic waste in the United States, has agreed to a sale to an investment fund associated with EQT.

Carlyle’s infrastructure fund had borrowed heavily to take Synagro private in 2007 in a $772 million deal.

What happened? From Reuters again:

The 2007 deal that took Synagro private left it vulnerable when municipalities cut spending on wastewater treatment and other environmental projects in the aftermath of the 2008 financial crisis.

The company manages byproducts of waste water treatment, converting the residual matter into fertilizer and alternative fuels. The company is the largest in the $2 billion U.S. market.

The company also lost two major contracts in New York City and Detroit. Synagro’s Detroit contract was mired in a bribery scandal that weighed on the public image of the company.

I did find evidence on the web that cities were continuing to do business with Synagro by outsourcing their municipal waste treatment. I found an equal number of citizen activist stories and complaints about the alleged danger to groundwater and public health from the company’s sludge disposal practices. This is a case where the profits are privatized to the benefit of Carlyle and the new Swedish buyer, while losses are possibly being socialized.

Municipal entities will not face a financial loss from this bankruptcy, but what happens if the claims about groundwater or soil contamination from this process are true. Who will pay? Synagro is owned by a private equity firm, so there is no access to the deal documents.

Bloomberg has been in full-throated support of public private partnerships. Guest contributor, Peter Orszag of Citi, wrote this recently:

Partnerships between the public and private sectors cannot solve the entire problem of decaying and neglected infrastructure in the U.S. They do not represent ‘free’ money, and many have gone wrong. But done right, they can boost investment and help efficiently manage projects once they are in place.

Statements like this assume that the “private” or corporate side of the partnership has the same frame of ideals as governments. I suggest the corporate side of the transaction has only one prime motive – profit. Often shortcuts are the quickest way to boost it. The whole rush to privatize public assets needs to slow down and justify what exactly the public gains from outsourcing in these partnerships. Privatizing profits and socializing risks is what America is trying to move away from.

*On April 30, 2008, more than a dozen residents from small towns up and down the East Coast and environmental and health advocates traveled to the Carlyle Group’s Washington headquarters to demand that the company’s subsidiary, Synagro, start testing and reporting the sewer sludge it deposits in their communities.

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This is one of the worst reasoned columns that I’ve ever read. Synagro filed for Chapter 11, meaning that Carlyle’s equity investment is almost certain to be wiped out in its entirety. Carlyle lost money on the deal! How is that “socializing losses and privatizing profits”?

Posted by realist50 | Report as abusive