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The Perils of Privatization – Episode 9 of the Building Local Power Podcast

| Written by Nick Stumo-Langer | No Comments | Updated on Jan 12, 2017 The content that follows was originally published on the Institute for Local Self-Reliance website at https://ilsr.org/the-perils-of-privatization-episode-9-of-the-building-local-power-podcast/

Welcome to episode nine of the Building Local Power podcast. For full transcript of the podcast click here.

In this episode, Chris Mitchell, the director of our Community Broadband Networks initiative, interviews David Morris, a co-founder of the Institute for Local Self-Reliance and the director of the Public Good initiative. The two discuss the climate surrounding privatization in our economy and how the incoming Trump administration will bolster these efforts nationwide.

Morris delves deep into the history of public infrastructure including explanations of how our language around the subject has changed over the years, privatization in other countries, and hope for the future.

“In the late 19th century, 75-85% of all water and sewer utilities were owned by the private sector, and it turned out that that was a disaster in part because they were managed very poorly and in part because they only wanted to serve wealthy people,” says David Morris. “Today, 75-80% are owned by cities and counties, and they have been running them very impressively ever since.”

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Here’s David’s reading recommendation for those interested:

Sapiens: A Brief History of Humankind by Yuval Harari, Harper

Be sure to read up on some of David’s other work, as well as a previous Building Local Power episode David was interviewed for:

If you missed the first episodes of our podcast make sure to bookmark our Building Local Power Podcast Homepage. View the full transcript of the podcast, below.

Full Transcript of Podcast:

Chris Mitchell: David, welcome back to the office. I hear that the ownership of local water systems is switching. Just tell me the statistic that you just told me.
David Morris: Well, over the last century, I mean the late 19th century, 75%, 85% of all water and sewer utilities were owned by the private sector. It turned out that that was a disaster, in part because they were managed very poorly and in part because they only wanted to serve wealthy people. Today, 75% to 80% are owned by the public sector. That is, cities and counties took them over and have been running them very impressively ever since.
Chris Mitchell: Well, that’s how we’ll kick off this episode of Building Local Power in which we’ll be talking about who owns our infrastructure and the movements that are fighting about whether it’s going to be public or private. I’m Chris Mitchell. I do the broadband type work for the Institute for Local Self-Reliance. David Morris is back with us. Welcome back, David.
David Morris: Thank you very much. I appreciate being back.
Chris Mitchell: David is a co-founder of the Institute for Local Self-Reliance and runs our Public Good initiative, in which he thinks a lot about privatization. Let me just start by asking you why do you think so much about privatization?
David Morris: I mean, privatization almost by its very definition means that something is proprietary. It means that something is not accountable inherently. It means that something is driven by selfishness. It’s driven by greed. It’s secret. That’s what privatization means. In fact, the original kind of Latin verb form is private, which means to tear apart. Public, on the other hand, is based on cooperation and openness, and it’s sometimes aspirational, but in essence it is accountable to the voters, so it’s a completely opposite way of doing things. We have in this country, over the last century, increasingly accepted the fact that public work should be owned by the public and for the common good, and in the last 20 years we’ve begun to reverse that, that guiding principle.
Chris Mitchell: I get the impression this is not a discussion that would have been held 150 years ago, right? I mean, before that the water system, the electricity system, the roads, all of these things are creatures of the last 130 years more or less.
David Morris: They’re not creatures. Public, the public sector, they’re creatures, but we had roads in the early part of the 19th century, they were privately owned roads.
Chris Mitchell: Right. I guess I was thinking of the kind of roads we have today. We did have those roads, you’re right. We had privately owned roads back then, and we have a long history even of privately owned ferries and bridge crossings and things like that presumably.
David Morris: That’s right. When we built the interstate highway system in the 1950s, it was built without toll roads. It was clearly a public works project. Now under the new kind of infrastructure plan that Donald Trump and the republicans have, we will have a public infrastructure that’s almost entirely owned by the private sector and will be based on tolls.
Chris Mitchell: From an infrastructure perspective, the conversation really started to change in what? The 80s, the 90s? I guess one place to start might even be this whole thing, public works. In my lifetime I never really knew what public works was because I came of age at a time in which that term fell out of fashion. I think the Clinton administration really popularized this term infrastructure. I just wonder if that triggers anything for you in terms of the importance of language and how we call these things.
David Morris: Oh, absolutely it does. It was Ronald Reagan in the early 1980s that began the process of privatization, and we all remember that in his inaugural address. His key phrase was, “The government is the problem, not the solution.” He firmly believed that, but it was Bill Clinton, that’s correct, and Al Gore that essentially embraced privatization from a liberal perspective. Yes, they changed the language. You don’t hear the word public works any longer.

You hear the word infrastructure, which is a very neutral word that essentially means, well, we have to build something and maybe the private sector can build it and run it just as efficiently. Whereas the word public works says, we have to build something for the common good, whether it’s a park, whether it’s a school, whether it’s a road, whether it’s a sewer system, and therefore it has to be structured and organized in a certain ways. The construction itself is the same. You’ll be using the same materials, the same technology. It’ll be occupying the same place, but who will be accountable to and who it’ll be owned by are very different.

Chris Mitchell: The idea of who it’s accountable to I think is really important. I think we can come back to that, but one of the things that always rises to the top in privatization is the motivation of those who claim they’re just supporting privatization because it will be more efficient and less costly; that if you contract this stuff out rather than doing it in-house, tax payer dollars will be saved, there will be innovation, something magical will happen, and these public services will be delivered in a better way in some way. How do you respond to those claims?
David Morris: One can respond empirically and one can respond theoretically. Empirically, it’s false. Empirically, the studies that have been done indicate that the private sector, when it runs things like waterworks and sewer works, charges more than the public sector and when the public sector takes back, as it has in a number of cases, their water system or the sewer system, the prices go down. That’s empirically.

Theoretically, it makes sense that that happens. It makes sense because the private sector, especially if it’s private equity, which is sort of a new phenomenon in the public works field, private equity has a return of 8% to 18% that they require, so you have this enormous profit requirement. The private sector borrows money at one and a half to two times the cost of money to the public sector, and so you would expect that it would be more costly all things considered.

As for innovative, you don’t really find an enormous amount of innovation from the private sector. You don’t find that enormous amount of innovation from the public sector as it is. I think that we would all agree that if you’re going to have any innovation or cost reduction, it would come from competition. The thing about public works is that almost always they’re monopolies. In fact, when you sign a privatization agreement with one of these firms, you often guarantee that more revenue flow and you put in a non-compete clause, which means if I, as an investor, build a road, under the contract the state cannot build another road that competes with my road. It is astonishing. In terms of competition, it’s not going to be the motivating factor for them to keep their costs down or for them to innovate.

Chris Mitchell: One thing that they do do is they pay a lot less, right? This is one of the sources, I think, of the claims that the private sector may be more efficient, is that they will take a person who is getting a perhaps living wage, a wage that is above the norm in the private sector, who’s working for the public sector, they will fire that person. They will replace them with someone who will work for less. That’s a dynamic that they will point to in terms of their cost savings, and also fewer benefits and things like that. Is that right?
David Morris: Yes, that’s correct. There’s two responses to that. One is a response from the public perspective, which is that those employees of the local infrastructure works or public works are local people. They are local residents. They’re our neighbors. Are we essentially saying, now you’re paid a living wage, but we want to pay three cents less per month on our water bill, and therefore we’re going to force you into a lower wage and maybe into foreclosure and delinquency and the like. I don’t think if people put that to a vote that they would want that to happen.The second thing that happens is that you get worse employees. On average, if a investor takes over a water utility, it fires about a third of the workers, which means the other workers are working harder. If you pay workers less, you get workers that are less trained, and so you tend to get sloppier work or you get poor customer service. I mean, you sort of get what you pay for. Either from a moral perspective, if you will, or from a customer service perspective, it’s very harmful.
Chris Mitchell: Do you have any examples that come to mind from where a community has engaged in privatization and then regretted this decision? It turned around and come back to hire those people back and make it public again?
David Morris: Evansville, Indiana. Durham County, North Carolina. Gary, Indiana. Houston, Texas. Atlanta. All those sold, essentially, their water utilities or sewer utilities, and then they bought them back and they lowered their prices. We don’t have a word. You know, we have a word for nationalization, but we don’t have a word when a city takes back its public works, but Europeans have. Nationwide it is called the remunicipalization movement and that makes sense because we’re talking essentially about a local movement.
Chris Mitchell: Right. Actually, we’re seeing this in Boulder and our colleague John Farrell has written about that. Actually, you’re right. Municipalization is the word that they use in the case there with the electric utility. Here in Minneapolis we’ve seen this with the IT services for the City of Minneapolis, which they thought would be better privatized. I believe that one of the things that they realized afterward was the different incentives. When you’re a private company running a help desk, your incentive is to get the person that’s calling you to hang up. It’s not necessarily to solve their problem; it’s to get them to hang up. If you’re a local government with a problem and your help desk has an incentive of just trying to get you to hang up, that’s not a very good situation to be in.
David Morris: No, it’s not. Now, the public sector is responsible too here. I said earlier that if you have a public works, it’s accountable. It is accountable, but who is it accountable to? Because it turns out that if you raise my water rates, I throw you out of office. What happens is that local officials that want to get elected do not increase their water rates or their sewer rates or their parking meter fees. As a result, that infrastructure runs down. The pipes begin to leak. Then the less you maintain, the higher the price that you’re going to have to pay. Often, what you find is that these privatization efforts spur from a city being unwilling to go to its citizens and say, “I can ask you to pay more now or I can privatize this, and the other firm is going to ask you to pay a lot more than.”They’ve been very reticent to do that, so this, it works both ways. The public sector can borrow money at a longer term at a much lower rate. The public sector knows what’s going on locally. The public sector is accountable, but the public sector, it turns out, is a coward and that elected officials are not willing to go to people and say, “Look, we need to maintain this system.” The best example was the parking meters in Chicago. The parking meters in Chicago were such that they were run down. I can’t remember. 20%, 30% of them didn’t even work and so they sold them, and because they wouldn’t raise the parking meter fee. They sold them and the fees literally overnight tripled, but it wasn’t the responsibility of the city anymore. Yell. You want to yell? Yell at that investor. Yell at the bank that now owns it.
Chris Mitchell: One of the things that I want to bring into this, I think, is experience. You talked about a bit about water systems. I just wanted to bring this out. You have experience in terms of governing a body of a water utility, so this is not something where you’re just romanticizing them. You actually know how this works.
David Morris: Yes. I was on the board of directors. We called ourselves commissioners of the Saint Paul water utility, a city run water utility, which is one of the finest utilities, if I say so, in the country. It’s meticulous in its efficiency and it is innovative. Yes, I have a good experience, but I also know that on that commission I was a citizen representative. There was also a city council representative. The city counselor, and I will remember this meeting to the end because I said, “Why don’t we raise the rates, you know, slightly so that we can invest in technologies that will be … make it more efficient and reduce the water consumption overall?” and the city counselor said, “You know, once we raised the rate a penny and I got phone calls.” A penny and I got phone calls.
Chris Mitchell: It’s interesting that you make that point because I’m a Saint Paul resident on a house in Saint Paul. I say I own a house. I love that. I own my house, the one house that I live in and that I own, my wife and I. Our water bill is so low. It’s just astonishing to me, frankly, how … I don’t want to say anything negative about people who are in very tough circumstances and paying their bills, but when you look at the value of getting unlimited free water, fresh water to your home, the amount that my wife and I pay it’s just … I can’t believe how little it is, frankly.I think that’s a credit to how well it’s run, but one of the things that I think some people point to is where it’s not working as well. Where they have a utility and they would like to change it and they feel that it’s not accountable, but maybe they’re a minority at the ballot box. People are voting on different issues and things like that. I think there are times where people have this frustration. They just feel like it’s not as accountable as they want it to be.
David Morris:  I think that’s true. Very few people like government. We hate the national government. We’re not quite sure about the state government. We tend to like the local government, but we always have complaints, and we need a process by which those complaints are considered and dealt with, and if they’re correct, that there corrections that occur. You do have bureaucracy at the local level. Yes, but the question then is whether the solution to that is to make changes internally or is this solution to that giving up control of the system? I think that the evidence is that giving up control of the system means that the next time you want to complain, you’re complaining to the Suez, literally, the Suez water company, which now owns your system, and good luck to you.
Chris Mitchell: I think that raises a final point that I want to make sure that we make. That is, the impact of this when you have not just private ownership, but this is generally absentee private ownership, right? It’s not like all these cities have their own private company with a guy who lives in the city or a woman lives in the city owns it. We’re talking about massive multinational corporations in many cases. In my business in broadband we talk about how frustrating it is that money that I pay on my bills leaves my community and goes to Philadelphia. Here we might be talking about money that’s going to Germany or anywhere else in the world, so there’s a real impact on local dollars because these are utilities everyone is paying into this. If the money is leaving the community, that’s kind of a big deal.
David Morris: It is a big deal. Now what we’re seeing is these private profit making companies are giving away to private equity firms. Private equity firms are a strange little beast and they could care less about your community. Private profit making firms might be in there for five years, 10 years, 20 years. Private equity firms want to flip it, and so they will come in and they will own it, and within a few years they will sell it, so they’re not there for the long run at all. That’s a problem.
Chris Mitchell: Right.
David Morris: I think that the Republican, because I think it’s not just Donald Trump, the Republican proposal for infrastructure financing is a very serious change in American historical strategies. There was a time in the 60s and the 70s where if you wanted to build a sewer system, the government paid 90% of it, the federal government paid 90% of it. Then they paid 50% of it. Then they paid 20% of it, but they understood that they would come in to make grants to cities.

Now the current privatization proposal is that a private firm would put up 20% of the money as equity, 80% would be borrowed and the federal government would give them an 80% tax credit against that 20% that they had put down. Governments can use tax credits, so in essence this means that this is going to be privately owned. The public sector could build it themselves, but they’re not going to get any incentives to build it themselves and that means that you could end up with literally a majority, maybe even a vast majority in certain sectors, of our public works programs becoming private works programs.

Chris Mitchell: I’ve seen a lot of head-scratching over this because it might make sense if it was 50 years and we were building out brand new things, but it’s not like we’re going to build a new bypass around the Twin Cities. It’s not like we’re going to build a whole new water system. A lot of the infrastructure spending we need in this country is on updating existing things. Do you have a sense of how this is going to interact? Because I don’t get the sense that these investors are looking to just invest in the Saint Paul water system. They’re trying to build something new that they can then extract maximum profits from.
David Morris: They do want to just invest in the Saint Paul. These are sunk investments and why not buy them? In Missoula, Montana, which is, by the way, because of a quirk of historical circumstances the only city that doesn’t own its own water company, a group bought it for, I think it was $30 million and sold it for $300 million about 10 years later. There’s enormous profit to be made from flipping these types of investments.
Chris Mitchell: This money that’s going to be made available, you’re saying it’s going to be buying existing systems and maybe a promise to upgrade them, so in order for Saint Paul to figure out how we’re going to benefit from this infrastructure package, if it rolls forward, we have to figure out what to sell off, basically?
David Morris: Oh. Yes, that’s right. Exactly. If it wants to benefit from it. What you have often in these privatization agreements is that you sell it and then the private, the investors give you, you being the city government, $50 million, $100 million, $200 million upfront. Now upfront is a wonderful thing from a city government, especially if you happen to be a city counselor who’s going to only be in office for two years, and so you take that money and you use it to pay down your debt. Your credit rating tends to be increased and suddenly then the rates increase, and everybody is screaming at the private company, but it’s upfront money that is what makes local governments salivate about this.Under these 80% tax credit, you could certainly have a lot of upfront money that is paid to … Let’s call it a bribe to city officials. Often, if they’re put up for a vote by the citizens, call them customers, if you will, they reject it. New Jersey just changed their law. Illinois, Pennsylvania. This is in the last three years. They’ve changed their law so that they can bypass a vote on this by the local citizenry. We’re talking about something here which is not popular by the local citizenry and we’re now talking about a federal program which is a massive subsidization, but only to privately owned infrastructure.
Chris Mitchell: Wow. It’s a sobering thought, but I’m hoping that you have a reading suggestion which will be more entertaining, enlightening, positive, leaving us with a little bit more hope than perhaps we’re sending at the ebb of this conversation right now.
David Morris: Yes, and it has nothing whatsoever to do with infrastructure or public works. I thought people might be interested in a book called Sapiens by Yuval Harari, an Israeli writer. It’s an astonishing book. It’s a book that goes from Prehistory to post-human, if you will. He essentially traces the development of humanity and makes these insights that are remarkable, and so I recommend it to people. For example, he talked about how 100,000 years ago there were several human species. There was erectus, there was Neanderthal, there was of course Homo Sapiens. There was a bunch of us really running around. And that we had the same brain size and the like.100,000 years ago the Sapiens in East Africa tried to invade or tried to migrate into the Middle East where the Neanderthals already were and got the crap beat out of them. 30,000 years later the Sapiens migrated again and destroyed the Neanderthals, and then took over the world. The question is, how did that happen? What happened? According to Harari, he said that it’s that language, certainly, the development of language, and the development of cognitive ability, but the essence of that was the development of gossip. He said that gossip is essential if your group becomes more than a small clan because you need to know what your neighbor is doing, who’s trustworthy, who’s not trustworthy. You need to know about the human relationships that are going on.

When it’s a very small clan, what you need to know is, is there a saber-toothed tiger out there that’s going to eat me or where is the animals that we’re going to hunt? You know, that sort of outward oriented information. With gossip, you could have larger and larger communities, and so initially when the Sapiens went into the Middle East, it was groups of 20 fighting groups of 20, but then when they went in 30,000 years later, it was groups of 200 fighting groups of 20. These are the kind of insights and I strongly recommend it to people who are interested about us.

Chris Mitchell: That sounds interesting, and it fits with what we’ve done with communications and technologies, in that telephone originally, it was expected to be only a business use and then people started using it to gossip it was actually seen as sort of sin and an inappropriate use of technology. Certainly you skip ahead to today and seeing how Twitter and Facebook have dominated usage for how we use our media, it’s clear that there is something very social going on. Thinking of it in terms of gossip is something I had not thought of, or potentially the evolutionary advantages of, so that’s interesting.
David Morris: One of the nice things about gossip 50,000 years ago is that it was personal gossip. It might be terrible gossip, but it was one person talking to one person or three people or four people. Unfortunately, in 2016 gossip is one person talking to several billion people who don’t even know they’re being talked about, so there’s a difference in scale that we’re talking about, but the gossip originally is literally small town gossip, which some people feel might be harmful, but in this case was a matter of gathering information, who’s trustworthy, who’s sleeping with whom, who has stolen something and that type of thing, which was extremely useful to bond the groups. The other thing that Harari says that was the definitive of the cognitive revolution was that we began believing fictions, whether it was religion, nation states, whatever it turned out to be. We believe in fictions. Animals, other animals, do not believe in fictions, and so we created societies-
Chris Mitchell: By fictions I think you mean things beyond that you can readily sense, right? Imagine things perhaps.
David Morris: Are really things that don’t exist. I mean, nation states don’t exist.
Chris Mitchell: Right.
David Morris: Right? And religions don’t exist and we so made them up, but they became ways to bond larger and larger communities together because we all believed in the same fictions.
Chris Mitchell: Right. In some ways it’s actually … It’s almost creating something through shared belief.
David Morris: That’s right. That’s right. Exactly. The emphasis there is on shared.
Chris Mitchell: We face a threat from privatization and other sources, and building local power, but hopefully gossip will save us.
David Morris: If people gossip sufficiently I think that it might very well save us. You had started by saying that the people who are in favor of privatization essentially say the private sector is more efficient than the public sector. It’s more innovative than the public sector and why don’t we let them do it? They say it as if that’s an established belief system, which it is. It is the conventional wisdom. It just happens not to be true. What we need is that when someone says that to your neighbor or a city council or whatever, their immediate reaction isn’t to say, “Yeah. That’s probably true.”

Their immediate reaction is to say, “That’s false, and I know it’s false because how could you borrow money at one and a half to two times the cost and how can you have a profit of 10% when we don’t need a profit of and end up delivering it to us more cheaply? That doesn’t make sense. You’re going to have to prove yourself to me. I’m just not going to accept it as an article of faith.”

Chris Mitchell: I think this always comes down to, in my mind, the underpants gnomes of South Park. I’ll leave that as an exercise for people to find out what I mean by that, but the underwear gnomes have a three stage process for profiting. I think the uncertainty that’s in the middle stage is worth looking into for people who are unfamiliar with it. Judging from your look, you’re one of them. Thank you, everyone, for joining us. This has been another episode of Building Local Power. Please check us back in two weeks when we’re back with another discussion.
Lisa Gonzalez: That was David Morris, co-founder of the Institute for Local Self-Reliance, who now heads up our Public Good initiative. He and Christopher, director of the Community Broadband Initiative at the Institute, were discussing privatization of infrastructure and traditionally public services. This was episode number nine of the Building Local Power podcast. Check out more of David’s articles and interviews at ilsr.org, Public Good initiative. We encourage you to subscribe to the podcast and all of our other podcasts on iTunes, Stitcher or wherever else you get your podcasts.

Never miss out in our original research by also subscribing to our monthly newsletter, also available at ilsr.org. Thanks to Disfunction L. for the music, license through Creative Commons. The song is Funk Interlude. I’m Lisa Gonzalez from the Institute for Local Self-Reliance. Thanks again for listening to the Building Local Power podcast.

Audio Credit: Funk Interlude by Dysfunction_AL Ft: Fourstones – Scomber (Bonus Track). Copyright 2016 Licensed under a Creative Commons Attribution Noncommercial (3.0) license.