Eyeing Federal Infrastructure Windfall, Private Equity Courts Public Utilities

When flash flood warnings interrupted a monthslong spring drought in Fayetteville earlier this summer, crews kicked into gear, putting up road signs and roping off intersections. Sudden flood response has become second nature for the North Carolina city, which sits by the Cape Fear River on a rolling territory once carpeted in swampy wetlands.

Now, even a few days of heavy rain can overwhelm pavement in low-lying Fayetteville, triggering creek swelling and storm drain overflows.

Other basic infrastructure is in disrepair too, said D.J. Haire, a city councilmember. A lack of signal lights and inadequate street lighting have caused frequent car crashes in his district.

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Last year, Louisiana-based Bernhard Capital Partners (BCP), a private equity firm, came to city leaders and offered them a fix. BCP had $750 million available for the city to finance these and other overdue improvement projects. They would also invest in economic development programs, such as business incubators and training programs at Fayetteville State, a historically Black university.

In return, BCP requested a contract to operate the city’s water and power utilities for the next 30 years, and keep the profits. 

“Many of these municipalities really don’t need to be in the business of operating utilities,” BCP co-founder Jeff Jenkins explained in a phone interview with the Prospect. “Bringing a private investment opportunity to these types of communities can really bolster and empower, especially underserved communities.”

Lawmakers are torn over the offer.

“They came looking for Fayetteville. We didn’t go looking for them,” Haire said. In talks with BCP, the council has been skeptical, he added, but each member finds district investments hard to pass up. “Everybody had questions, but everybody could use improvements, also.”

Fayetteville wasn’t the only town to get a call. BCP has approached dozens of low-income cities across the southeast, proposing to pour a reported $15 to $20 billion into municipal utilities projects in the region. The upfront capital could pay off with billions in profit over the next several decades. And while BCP’s cash would likely come at a premium, compared with low-cost municipal bonds, it could help finance projects the federal government has neglected to fund.

Private equity is seeking to capitalize on the one-off spending spree in President Biden’s infrastructure plans.

The overture is part of a public asset bonanza investors anticipate, amid much-needed federal investments in roads, bridges, and climate resilience. Private equity is seeking to capitalize on the one-off spending spree in President Biden’s infrastructure plans, using environmental violations and crumbling buildings to make the case that municipalities can’t manage their own assets.

One encouraging sign for private equity: talks over an infrastructure bill in Washington have included allowances for public-private partnerships (P3s), where companies manage new infrastructure assets. If federal dollars are shaved down enough, if the final P3 language is sufficiently business-friendly, or both, the forthcoming infrastructure package could mean open season for private-sector entrance into municipal utilities.

Jim Bernhard’s Disaster Response Business

Eyeing stormy Fayetteville from Baton Rouge, Jim Bernhard Jr. may have noticed that North Carolina now lives at a permanent low boil.

Before launching BCP, Bernhard built a pipe-fabrication business into a disaster response company, with sprawling holdings in chemicals, energy, and procurement. The Shaw Group, at one point the largest company headquartered in Louisiana, grew into a defense giant and oil-and-gas infrastructure specialist that simultaneously won contracts to clean up oil spills and fix fracking sinkholes on the Gulf Coast. Shaw was even brought in to help the CDC respond to the 2001 anthrax scare.

After Hurricane Katrina, the Shaw Group was awarded nine-figure contracts by the Defense Department for emergency relief services, such as levees and housing assistance. It skipped the line to be awarded those deals: no-bid contracts were used to expedite cleanup, but watchdogs criticized them  as rife with favoritism. Along with Halliburton subsidiary Kellogg Brown & Root, Shaw came under criticism for hiring lobbyist Joe Allbaugh, George Bush's former campaign manager and former FEMA director.

In 2013, Bernhard sold Shaw to capitalize on the fracking boom then in full swing, investing in “energy services verticals, including midstream, downstream and power.” His new private equity shop, Bernhard Capital Partners, set out to make controlling or “toehold” investments in oil and gas infrastructure for southeastern states.

Now, BCP is among a group of alternative investors making wide acquisitions in municipal water and wastewater systems, and has begun courting publicly owned power grids. ( Brown & Root, the Haliburton offshoot criticized for no-bid contracts after Katrina, is today a member of BCP’s portfolio).

‘The Business of Being Essential’

Municipal utilities are natural monopolies, offering guaranteed cash flow with a captive customer base. Public electric grids frequently reinvest ratepayer dollars in routine upgrades. Some payments flow back to the city, which may also enjoy reduced-cost services for facilities like libraries and schools.

“We are in the business of being essential,” reads a Bernhard Capital banner in a trade publication for infrastructure investors. A Bernhard executive elaborates within: “Where there is long-term revenue through utility bills, user fees, tolls, or rent, there are opportunities for the private sector to finance new infrastructure.”

Rather than buying public systems outright, private equity firms have preferred concession agreements, a kind of long-term lease.

In the classic concession model, a third party operates its own business on city-owned property, such as canoe rental at a lake or a food vendor at a ballpark. But new concession agreements were pioneered with the privatization of transportation and water services, where private equity firms take over management from frequently debt-laden cities, in exchange for upfront payment.

In 2004, Chicago Skyway became the first major U.S. toll road to be privatized when then-Mayor Richard Daley signed a $1.8 billion agreement for a 99-year operational lease of the bridge. Infrastructure investors credit subsequent roadway leases with revealing “the enormous latent value in U.S. transportation assets.”

Similarly, water and wastewater systems in Bayonne, New Jersey, and Middletown, Pennsylvania, have struck concession agreements with water giant Suez and private equity firm Kohlberg Kravis Roberts.

Jenkins of BCP singled out Bayonne as a success story for the concession agreement model.

“Bayonne’s done really well. I don’t think they’ve had to raise rates, I think they’ve managed the utility very well,” Jenkins said. “They’ve taken capital in and invested it in other parts of the community.”

In fact, city officials promised residents a four-year freeze on water costs, but rate hikes followed shortly after the deals were signed. Since Bayonne entered the concession agreement in 2012, water rates have risen nearly 50 percent. Some residents have fallen so deep into water debt that the city is placing liens on homes for non-payment.

Although private equity deals often involve flashy ribbon-cutting ceremonies and projects politicians can point to as progress, they often leave unglamorous maintenance spending to the city.

“You’re always going to have inflationary increases,” Jenkins said when asked about the rate hikes. “I don’t think there’s anybody whose rates have just stayed flat in the last ten years, across the country.”

Agreements to put water, airports, and roads under private control often sour, because private firms guarantee investors that they will meet threshold profit targets. In Bayonne, KKR and Suez had guaranteed investors an 11 percent rate of return, and raised prices to keep up. 

Although private equity deals often involve flashy ribbon-cutting ceremonies and projects politicians can point to as progress, they often leave unglamorous maintenance spending to the city. KKR and Suez gave Bayonne $150 million upfront, but required the city to put in $157 million over the life of the contract to upgrade the water system, with yearly payments for infrastructure repairs. Added to the rate hikes, Bayonne’s mayor said, that became increasingly burdensome.

Still, cities considering public-private partnerships for infrastructure say the need for short-term capital is dire enough that they’re willing to enter the agreements. And the local leaders who ink these agreements are frequently no longer in office when the downsides become apparent.

Development Opportunities in Climate-Battered Cities

North Carolina is weathering more storms that shatter conventional probability estimates and strain the region’s precarious industrial pollution management.

Within the last five years, the state has seen two so-called “500-year floods,” as climate heating makes storms more frequent and severe. When Hurricane Florence roared ashore in 2018, hog manure lagoons overflowed. A natural gas cooling dam was breached. At coal ash ponds run by Duke Energy, an investor-owned utility, enough coal-burning byproduct spilled to nearly fill an Olympic swimming pool.

Residents acutely see the need for infrastructure investments, Fayetteville Mayor Mitch Colvin told the Prospect. “Iconic businesses” shuttered after Florence, he said. Colvin recalled Ben Washington and his wife, who operated a renovated grocery store and pharmacy in an area with few medical resources. The store was forced to shut down permanently after the storm, he said. Adequate culverts—a highway drainage system—might have kept them in business, he reflected.

Private equity sees itself as the solution to these problems. “In many cases, these utilities are the best economic development tools cities have,” said Jenkins, the BCP co-founder. “If you build a new Amazon factory or warehousing facility or data center, the first thing they need to understand is, where’s the power, water, and wastewater coming from?”

BCP says the combination of investments it will make directly in utilities, and the upfront payment to the city, which will go to fund development programs and rusting infrastructure, will lure business to cities like Fayetteville.

But critics argue that private capital is the most expensive way to fund infrastructure repairs, especially at a moment when municipal bonds are in high demand.

Customers of investor-owned utilities pay 11 percent more on average than those served by public power, according to the American Public Power Association, a trade group representing not-for-profit utilities. 

Asked about Bernhard’s advances, Sen. Elizabeth Warren (D-MA), a prominent critic of financial deregulation, slammed the firm’s aggressive courtship of publicly owned power and water systems. “We cannot allow Wall Street to take over our public utilities just so they can rake in profits while raising prices for customers. Private equity firms have taken advantage of working Americans for too long,” Warren said in a statement to the Prospect. 

Colvin said he wasn’t troubled by the possibility that rates would go up under a concession agreement. “If the utility stayed as is, it would eventually raise rates. I don’t know that that is something that deters from a concession,” he said.

The city is now working on assessing the value of its utilities. Although it is actively interested in Bernhard’s proposal, Colvin said, Fayetteville is shopping around. “You wouldn’t want to go with the first deal that you get.”

Electric Power With Little Sunlight

BCP denies that it would dramatically hike rates and insists that its plans match those of any other state regulated, investor-owned utility. “We want to make money just like Duke Energy does in North Carolina, or Exelon does in Chicago, or Florida Power & Light,” Jenkins said.

But critics of private equity concession agreements have more in mind than rent-seeking.

Public municipal utilities are attractive because they are largely exempt from broader regulatory oversight, meaning their privatization carries major transparency risks.

“Duke [Energy] can’t do anything without approval from state regulators. Municipalities have no such restrictions,” said Tyson Slocum, director of the Energy Program at Public Citizen. Rates of return for investor-owned utilities, like Duke, are regulated by state commissions to ensure that the profit margin is reasonable. “The assumption for the last century has been that a municipal utility does not require sustained oversight, because it is accountable to its citizens through its elected officials. If you’re doing your own thing at a muni, you don’t have to worry about state regulators coming in and doing an audit, questioning your decisions,” said Slocum.

Some cities have already hit snags. Bernhard was one bidder when Jacksonville solicited proposals to take over its municipal electric and water utility. A subsequent investigation found the Florida city may have violated sunshine laws in pushing for privatization against the public’s wishes.

Fayetteville’s public works commission is a member of ElectriCities, a nonprofit that manages energy for more than 50 public utilities across North Carolina, including multiple cities Bernhard has approached.

Drew Elliot, a lobbyist for ElectriCities, said the transparency concerns are not only matters of democratic accountability, but could increase the cost of capital—forcing private equity firms to charge higher rates than investor-owned utilities.

“Regulators offer shareholders some certainty that they will have a reasonable opportunity to recover their capital,” Elliot told the Prospect. With private equity, he said, “because it’s unclear what the regulatory controls will be to protect investors and customers, it’s unclear what the risk-rated returns will need to be to attract capital. As long as this is uncertain, it’s likely that [private equity] investors will want higher returns to balance the risks they face.”

BCP has pitched the lack of public oversight as a virtue of concession agreements, arguing that long-term leases are less likely to be held up by burdensome public permitting processes.

“Concession agreements can be easier to facilitate with a municipality, given there is not an outright sale of any underlying assets, which in some instances can require a public vote or in others stoke dissension among residents,” BCP explains in the investor trade journal. “Some jurisdictions require a vote by residents or referendum when public asset sales or leases are under consideration, regardless of the little public value they hold ... residents who are placed in a position to vote on such propositions may not fully understand these intricacies and instead focus on the potential loss of an asset.”

Furthermore, Bernhard’s vision for concessions involves routing them through an unsolicited bidding process. In states like Florida and Virginia, cities are welcoming unsolicited P3 proposals. Bernhard sees this trend snowballing, with more cities adopting procurement practices led by the private sector. “Formal public bidding processes create a rigid environment that disincentivizes innovative proposals,” BCP notes in its trade journal article.

Jenkins underscored Bernhard’s strategy of “being more flexible from a procurement standpoint, where maybe everything doesn't have to go through a full public bid process.”

Privatization Could Help Municipalities Access Federal Funds

The small, blighted cities that BCP targets are often laden with consent decrees, toxic cleanup sites, and lead pipes. That’s the point, said Jenkins. “Where things are going from an environmental perspective provides big tailwinds for us.”

The twinned environmental and economic problems faced by cities like Fayetteville are meant to be addressed in federal infrastructure proposals. But lawmakers have insisted on revenue offsets—“pay-fors”—rather than deficit spending, potentially shrinking the overall pot. 

If infrastructure spending is too little, or if matching requirements for grants and loans are too burdensome, cities could choose to rely on private capital to stretch federal dollars.

One mechanism mentioned in the bipartisan bill has long been a Republican wish-list item: “Asset recycling,” which refers to selling or leasing taxpayer-owned assets to the private sector. Under asset recycling schemes, cities sell off current public works to finance new projects.

DJ Gribbin, a former top White House infrastructure adviser to President Donald Trump, is enthusiastic about the opportunity to privatize shiny federal assets like​​ airports, transit infrastructure, or New Deal–era power companies.

The Tennessee Valley Authority and Bonneville Power Administration, two federal energy agencies, are “historical aberrations,” Gribbin said in a phone interview. “The federal government doesn’t run power generation and transmission distribution. It’s not a traditional federal role. It would make sense to have those assets be run by a private company.”

For now, many things remain up in the air: infrastructure legislation design and implementation, the precise meaning of financing through “asset recycling,” and even the future of the bipartisan bill. But any asset recycling would likely be the opposite of a “pay-for.”

Since local governments are already free to privatize their assets, the inclusion of the term as a financing mechanism signals that in the final bill, “asset recycling” could mean giving not only permission but incentives for P3s—in other words, paying private firms to enter into what are already lucrative deals. During the Trump administration, Peter Navarro and Wilbur Ross actually suggested providing tax credits for P3s—a market that was already oversubscribed, with firms jostling for public works projects.

Meanwhile, private equity firms are sitting on record quantities of “dry powder”—funds ready to be deployed. The amount of capital waiting to be spent on infrastructure grew 235 percent from 2010 to 2020, according to Bain & Company.

But federal asset recycling, such as selling or leasing the TVA, is just one way infrastructure legislation could feed private returns.

If infrastructure spending is too little, or if matching requirements for grants and loans are too burdensome, cities could choose to rely on private capital to stretch federal dollars.

Bernhard is counting on it. 

“There's a huge reliance in that [bipartisan] bill on some of the money coming for investment from the private sector. And so the likelihood, and our belief, is there will be incentives, with additional grants matches in the bill for communities that do exactly the types of projects that we’re proposing,” Jenkins said.

Kevin DeGood, director of infrastructure policy at the Center for American Progress, told the Prospect there are direct and indirect ways that private equity stands to gain in the infrastructure spending spree.

Most directly, he said, the legislation could include incentives for asset recycling, such as making municipalities more competitive in grant programs if they’re able to cover some costs using private-sector cash.

Those are the sorts of explicit incentives BCP would like to see.

“If they took in private capital to make investments in their community, [cities] should get a greater match than others who did not, to leverage those private dollars even more,” Jenkins said of asset recycling incentives in grant bidding. “I can’t tell you it’s going to be in there, but there are a lot of folks in Washington who would like it to be.”

But even without explicit incentives for P3s, matching programs can also incentivize privatization. The federal government is agnostic about the source of a match, so cities can use taxes or bond issuances—or lump sum payments from concession agreements—to cover their share of a matched grant.

If the package shrinks in size, and grants become more competitive and conditional, cities like Fayetteville could become encouraged to monetize their assets for quick cash.

Either way, private equity is hopeful for lots of “deal flow”—many potential options to bid on.

Colvin, Fayetteville’s Mayor, says they’re looking forward to federal dollars, but it simply won’t be enough to cover the city’s $250 million stormwater problem. Leveraged with private capital, it could come closer to filling the gap. Colvin expects that they might get a $5 or $10 million grant for water, and could match it with funds from “recycling” the city’s utilities.

Since the concession agreement is a lump-sum upfront payment, Colvin pointed out, it becomes city money. “Once Bernhard closes the transaction, that money’s in our account.”

Haire, the city councilmember, remains skeptical. “I liked some of what I was hearing,” he said. But, “you had some councilmembers that wondered if this was really a true diamond in the rough, and what type of penalty or suffering in the long run would the citizens carry?”