Electricity Markets

Ditto Outlines Opposition To Using Legislation To Encourage Public Facility Privatization

American Public Power Association (APPA) President and CEO Joy Ditto on July 14 wrote to President Joseph Biden in opposition to using infrastructure funding legislation to encourage the privatization of public facilities.

“In general, privatizing public projects reduces local control, increases costs by providing a higher rate of return for investors, and, contrary to the perception, does nothing to increase project funding, which ultimately comes from residents of the community,” wrote Ditto in the letter. “As a result, while communities should consider all alternatives when assessing their infrastructure, the federal government should not tip the scales of those decisions by favoring privatization,” she said.

Ditto highlighted her concern over “the troubling bipartisan, bicameral interest in the federal government paying states, counties, and cities to sell their roads, bridges, and utilities to raise short-term cash for other infrastructure repairs. This so-called ‘asset recycling’ arguably failed in Australia – just four out of 16 Australian states and territories participated, and the program ended with unspent funding – and has failed to take off elsewhere.”

Ditto said in the letter that a comprehensive review of objective, data-based analyses “shows that up-front costs of privatized projects tend to be higher for several reasons, including higher transaction costs and higher financing costs. These analyses also find that real value of privatization is the extent to which the seller can shift risks onto the buyer, and that shifting those risks -- which can reduce later profits -- can be quite difficult to do.”

Lackluster results “may be driving declining public interest in privatization of infrastructure globally,” she wrote. Ditto pointed out that since 2006, the number and dollar value of new privatized projects has fallen by more than 70 percent in Europe, according to the European Investment Bank. Outside Europe, the number and dollar value of privatization projects in 2019 were roughly half what they were in 2012, according to the World Bank.

“Conversely, private investment in U.S. infrastructure made through the purchase of tax-exempt municipal bonds has rebounded since 2011: more than $2 trillion in new investments in the last decade and $300 billion in 2020 alone. Most municipal bonds are held by retail investors, such as retirees, union workers, and average American workers with 401k plans, who receive a rate of return commensurate with the relatively low risk.”

Privatizing public facilities “will not get the private sector ‘off the bench.’ Often, privatized project financing comes from investors purchasing private activity bonds instead of municipal bonds. And, insofar as overseas investors or private equity firms are providing a new pool of financing, they are replacing traditional investors, but demanding a much higher rate of return,” Ditto said.

“Likewise, one governor recently defended a privatized express lane project saying it will 'cost the state nothing.' But, of course the ‘state’ itself never pays for anything, people do through income taxes, sales taxes, and user fees. Privatizing a public facility doesn’t change that, except perhaps to increase the costs paid as I discussed above.”

Ditto said she takes it “as good news that it appears that in discussing asset recycling, policymakers are not discussing the sale of federal assets, such as the Power Marketing Administrations (PMAs) and the Tennessee Valley Authority (TVA).”

The costs to run the PMAs and TVA are paid by customers and not the federal government and none of the costs are borne by taxpayers. “Furthermore, there is no factual evidence that selling the transmission assets of the PMAs would result in a more efficient allocation of resources. Rather, it is much more likely that any sale of these assets to private entities would result in attempts by the new owners to charge substantially increased transmission rates to PMA customers for the same service they have historically received,” Ditto wrote.