Chicago’s Parking Fiasco Fails to Stem Calls for Privatization of Infrastructure

» As the United Kingdom encourages investors to pony up billions of pounds for its High-Speed 1 route, Chicago’s sell-off of parking assets comes back to bite.

Who knew an investment in public infrastructure could be so profitable? Or rather, are government entities being bamboozled out of the value of their own property?

About two years ago, Chicago Mayor Richard Daley sold off the rights to 75 years of his city’s public parking meters for $1.15 billion to a partnership of private companies led by Morgan Stanley. Mayor Daley pushed the city council to approve the deal, since it would mean a huge cash infusion into a municipal government facing large budgetary shortfalls. And he argued that putting the parking system in the hands of private enterprise would bring in market-based pricing, essential to improve the circulation and distribution of automobiles in the city’s downtown, but impossible to implement because of a lack of political will.

Bloomberg News, however, revealed last week that the private partnership that bought up the spaces expects to generate at least $11.6 billion in revenues over the course of the contract — producing a potential profit of $9.58 billion, twice what some anti-Daley city council staffers predicted in 2008 the city would lose by selling off the meters (an amount that at the time was considered outrageously high). Chicago, meanwhile, has virtually exhausted the initial funds it received from the deal, having done little to adapt to its local government funding shortfalls.

This situation should put a chill in the spine of those who believe that privatization of public infrastructure will benefit the public pocketbook. And it should be a lesson for politicians who advocate balancing the budget in the short-term through the sale of assets that generate income over the long-term.

Yet the City of Chicago continues to consider the leasing out to private corporations of its Midway Airport. Major candidates running for mayor in Toronto are actively discussing the possibility of privatizing parts of that city’s transit system.

And on the other side of the world, Britain’s new conservative government is hyping the lease-off of the 68-mile High-Speed 1 rail line completed in 2007 at a cost to the government of £6 billion. On Tuesday, between two and six investors submitted their final bids (currently undisclosed) for the 30-year concession that officials expect to bring in between £1.5 and 2 billion, enough to aid the cost-cutting government in reducing its deficit.

Evidence from Chicago suggests that if investors are willing to put up £2 billion now, they are likely to make several times that amount over the course of the contract. In other words, by selling off the rights to High-Speed 1, the British government may get a big boost immediately but find itself yearning for more funds several years out. What makes this agreement particularly galling is that the U.K. already had to bail out the (private) constructor of High-Speed 1 and if the private operation that runs the line eventually faces financial difficulties, the government will likely have to do something similar again, just as it has done repeatedly since the recession began.

That’s because when it comes to public infrastructure, the public seems always to take in the losses even as private companies reap out increasing profits.

Moreover, by agreeing to lease out the line, the government basically abandons any hope of using the program for the benefit of the greater good. Granting control of the infrastructure to a profit-motivated enterprise basically ensures putting existing operators in financial trouble. The infrastructure owner seems likely to demand high usage fees, and these may make the provision of low fares more difficult. Is this in the general interest of the public?

Nonetheless, I do not want to suggest that there can be no appropriate role for private entities in the construction and management of public infrastructure. But it may make more sense to keep for-profit businesses involved only on secondary elements of a project, not have them get directly involved in the transportation element.

And in defense of the City of Chicago, Mayor Daley was likely right when he suggested that only in privatization would the city ever see increasing parking fees. But that fact strikes at the heart of the issue: selling off public infrastructure is too often a response to a lack of political will to get what is needed done.

In Chicago’s case, a politician who has won every mayoral election since 1989 claims he wouldn’t be able to assemble support for raising parking rates, so he would prefer handing out profits on meters to a private group than pushing for his cash-poor city to take the same difficult step. In the U.K., an unwillingness to consider other revenue sources forces a debt-ridden government to sell off its most valuable assets rather than milk them for all they’re worth.

For the average person, privatization probably won’t appear to have changed matters much. But the money they spend parking their cars or taking the train will be going into private hands, not public ones.

Image above: Flyover for High-Speed 1 at Ashford Station, from Flickr user Elsie esq (cc)

29 Comments | Leave a Reply »
  • eldondre

    seems to me like the problem is twfold
    1)they didn’t get enough from the sale
    2) they sold it for the wrong reasons.
    Pittsburgh at least is attempting to use the money to plug it’s pension gap rather than a short term budget squeeze (pension gap is a long term problem). whether they can adequately address 1 remains to be seen. It hardly seems likely parking meters and garages will need to be bailed out.

  • John

    As far as I can see, this worked out great. It sounds like everyone got what they wanted: the city got about as much money as they would have been able to charge for the parking, the private businesses that take it over make a windfall which they earned by brinigng in market-based pricing models the city was unable to implement, and parking in Chicago is no longer artificially subsidized! It sounds like a win win win for everybody involved, and it definitely sounds like it will be easier to get a parking spot in Chicago henceforth.

    I’m sure this blog was happy when San Francisco moved to congestion-based pricing for its street parking, how is it suddenly a bad thing if Chicago called in Morgan Stanley to do it?

    • tebici

      Exactly what I was thinking. The city isn’t missing out on any money if it was incapable (politically at least) of squeezing that profit out. The city might have better off if they’d arranged a profit sharing agreement. It seems like the lesson of this is privatize, but keep a chunk of the back-end.

  • Ned

    I’d say the deal was hardly a “fiasco” for Chicago, though it is turning into one for Morgan Stanley’s infrastructure fund that bought the concession. Perhaps the article noted that MS had to pull a $500mn bonds issuance to refinance the project three weeks ago because of lack of investor demand. Seems even with $11.6bn in revenue over 75 years, investors still aren’t biting.

    • allen

      If investors are barely nibbling, then how is this such a steal?

      Well, duh. Investors usually aren’t dumb. They know a 75 year revenue project is about as meaningful as literally rolling a handful of 8-sided dice. They know there’s a lot of factors that could lead to reducing their likely revenues (let alone profits).

      Of course this being Chicago one has to wonder what sort of backroom deals went on that lead to the contract.

  • @John
    Because afaik in San Francisco the public will see the extra money, whereas in Chicago the extra money goes into private hands.

  • Danny

    “Evidence from Chicago suggests that if investors are willing to put up £2 billion now, they are likely to make several times that amount over the course of the contract.”
    Sorry Yonah, but the only “evidence” we can get from the Chicago experience is that Chicago politicians settled for far too little because they didn’t do their homework and they didn’t open the bids to multiple contractors. There are plenty of outsourced models that work (The US Forest Service has been doing it for years without any of the side effects that people predict), but the government has to do its share of the work in order to not be taken advantage of.

    • steve

      Is that right? Or do you think that unscrupulous politicians did their home work and noticed they could sell it to their friends who would make lots of cash and subsequently help float their future political campaigns.

      Sorry if that sounds cynical.

  • Marooned in Chicago

    I’m not sure why this is even news. It’s actually typical for the Democratic machine here in Chicago and Washington DC…spend, spend, spend without any hope of paying the bill.

    Of course they have already exhausted the funds. The city has been controlled by corrupt one party politics for decades. They don’t care about anything but feathering their own nest.

    This is one former Democrat who cannot stand the incompetent government that Chicago Democrats provide.

    But wait, isn’t the lack of funds from the asset lease somehow related to George Bush?

    • DBX

      Piffle. The federal deficit soared under Reagan and Bush jr; Clinton left a surplus. The difference between the two parties is that the Washington Democrats tax and spend, while the Republicans borrow and spend. The Republican model cannot go on; not unless we’re willing to torpedo the world economy by stiffing China and South Korea on all the money they’ve loaned us.

      As for Daley, he’s been in flight from liberal Democrats since he was in college. He’s a conservative Blue Dog democrat, cut from the same cloth as those who believe tax cuts reduce the deficit, and that the sun rises in the west. It’s worth noting that state legislative and city council Illinois Democrats are like national Republicans — borrow and spend. Every major tax increase in Illinois has been passed by Republican governments, responsible Republicans like Richard Ogilvie in the 1970s and Jim Thompson in the 1980s, not the freak show we have now.

  • Sean

    Marooned, you need a little history lesson. Reagan and Shrub both oversaw the intentional explosion of government debt when the economy wasn’t in the toilet, which is even more atrocious than a deficit caused by a steep recession.

    Spending without paying the bill is rampant among both parties.

  • D. Rock

    A lot of you must not be Chicagoans or familiar with the machine here. Parking in Chicago has generally been the domain of wards whose aldermen are mob-influenced. Parking under Millennium and Grant Parks was that way; and, that was the reason Daley eventually sold it off: it rid him of a dangerous connection with the least risk to himself. Don’t believe me? Go talk to people who work for the city parks.

    Parking meters were the same way: an all-cash business with no receipts and very nebulous control. My bet is that Daley took what he could get because Pat Fitzgerald has been indicting politicians left and right in hopes of tracing something back to Daley. Couple that with the fact that Morgan Stanley had trouble selling revenue bonds on the parking receipts (as noted earlier) and I think Daley made a rational decision.

    Was it the best for Chicagoans? No, but it was the best for Da Mare.

  • DBX

    Daley does not want to tackle either of the two big special interests in his base — public employee unions and politically-connected contractors (mostly in the services and construction fields). So there wasn’t really anything left for him to cut because he’d already roped off those above interest groups. He took a gamble that flogging the parking meters for a firesale price would patch what he thought was a one year crisis. Turns out it’s a structural crisis. And the political class in Illinois has no answers to it. We have pension schemes that promise the earth and aren’t paid for, our government has bills it can’t and won’t pay and is many months in arrears, and even a city as rich as Chicago can only take so much abuse. A responsible Illinois government would double the state income tax and close the pension schemes, requiring new hires to go 401k. But the Illinois government we’ve got is so fearful of change that leaders of both parties campaigned against a constitutional convention precisely because it might threaten those constitutionally-protected but unfunded pensions for powerful public sector unions. We have unions with the best paid bus and subway drivers in the country that refuse to give up four percent raises even if it means massive layoffs; we have a government that won’t pay its bills and would rather sell assets on the cheap to the politically connected than change its ways. Where do we turn?

  • eldondre

    Ten years ago we were still 15 years from SS going bust and talking about lockboxes full of IOU’s as if it were real money, which ishow we got there. I take there are a lot of idealists on here. as a Philadelphian, I can tell you there’s nothing more naive than saying “if the city charged it, it would benefit the public.” if you really believe that I’ve got a bridge I can sell you. the Parking authority here is run by the same family that lost Republican control of the city in 1954. Parking authority revenue is way up, yet there has been no benefit to citizens, unless of course, you got a patronage job at the PPA. People have been warning about this structural crisis for decades but they were always written off as nutcases or extremists…now everyone’s surprised that they didn’t see this coming when they stocked the government with crooks and sycophants. And look at Pitt’s deal, the public will have to pay higher rates but I don’t see any compromise on the public sector union side? In Philadelphia a councilmember sleeps with his aide and pays her $90k a year plus benefits. the bridge tolls have been subsidizing political pet projects and padded contracts for years, now the bridge needs maintenance and they’re broke.

  • J

    John is right, Chicago made the right choice.

    If it wasnt for the sale, meters would have been at the same price now as they were before, and Chicago wouldnt have been anywhere near 1 billion in revenue.

    It’s easy to say “with backbone, the city could have raised the price”. Tell that to Oakland, which DID raise their meter prices and was forced to lower them due to a revolt.

    People are irrational when it comes to parking. The solution is to remove it from politics, where it can be used to pander, and give it to private business which can make the right choice and not have to deal with the consequence. I doubt anyone said “I wont be using morgan stanley services due to the $6 parking meters”

  • jon

    What needs to be done in these privatization deals is to have a deal done where any profit after a certain point is shared between the public and the new private entity. In Chicago if for example the annual profit was greater than say 50 million annually, the city would get X% of that additional money. This way everyone has an interest in things being done well. The private company can increase the rates, while the city has an opportunity to make more money than they would have otherwise.
    Since the losses on these deals are always socialized, at least some of the profits can be as well. It won’t always work, and the government may still be left on the hook like for HS1, but at least there is the chance of everyone getting a little taste, to use a expression Chicagoans know very well.

  • Tom West

    I always have two questions to ask when selling off public assets is proposed
    1) If it’s making a profit, why should we sell it?
    2) If it’s making a loss, why would anyone buy it?

    Also, Chicago could always increase property tax for parking spaces…

  • Aaron Brown

    Maybe I’m missing something, but not many people have brought up the PRESENT VALUE of this stream of future revenues. Comparing $11.6bn over 75 YEARS to $1.15bn today is nonsense.

    I’m not saying that Chicago definitely didn’t get screwed, but pretending that Morgan Stanley will make $9.5bn in profits is ridiculous.

  • FG

    I have problems with selling off bits and pieces of our infrastructure (i.e. the Skyway) to foreign companies (aka the French, who I have no problem with). It makes us like Argentina in the early 1900′s – thinking that they lived in a prosperous society and then realizing that they weren’t nearly as wealthy as they thought they were. I foresee an ugly future if we don’t stem this now.

    The increase in parking fees did however free up parking spaces and has probably helped businesses. Even the park district which has separate metering (if any) is going to start charging for parking, encouraging transit use to the lakefront especially, though some Aldermen, one L. Hairston of the 5th Ward are using their “menu money” (discretionary fund all Aldermen get) to pay for free parking in the parks as a voter appeasement.

  • An interesting question:

    Does anything in the deal foreclose the future use of eminent domain to retake some or all of the parking meters in the future, should a future Chicago government deem it appropriate?

    • I’m pretty sure that if a company can prove that the government intended to sell high and then exercise eminent domain when prices fell, it would be deeply illegal. I don’t know what constituted proof, though.

  • Galls

    NPER=75
    PV=-1.15
    PMT=0
    FV=11.6
    I=.03

    How is this terrible and a rip off to the people of Chicago?
    If I was a betting man I would assume the economic benefits of market parking exceed the 3% opportunity cost which they never would have gotten in the first place do to political will.

  • allen

    “Bloomberg News, however, revealed last week that the private partnership that bought up the spaces expects to generate at least $11.6 billion in revenues over the course of the contract — producing a potential profit of $9.58 billion, twice what some anti-Daley city council staffers predicted in 2008 the city would lose by selling off the meters (an amount that at the time was considered outrageously high). Chicago, meanwhile, has virtually exhausted the initial funds it received from the deal, having done little to adapt to its local government funding shortfalls.

    This situation should put a chill in the spine of those who believe that privatization of public infrastructure will benefit the public pocketbook. And it should be a lesson for politicians who advocate balancing the budget in the short-term through the sale of assets that generate income over the long-term.”

    I’m not sure I get exactly why this means what you seem to imply. Yes, it would appear the city could be asking more. But there is no evidence that the city operating these are producing anything near those revenues let alone ever being capable of it.

    More so we’re talking about a 75 year projection. It’s pretty silly to take a 75 year projection is such an insanely uncertain shot in the dark that one would have a better chance of guessing the Super Bowl champs in 2020 than this being even 85% accurate.

    “Evidence from Chicago suggests that if investors are willing to put up £2 billion now, they are likely to make several times that amount over the course of the contract.”

    Fancy that, people willing to front a butt ton of cash today are looking to make a decent return over the course of many, many years.

    “That’s because when it comes to public infrastructure, the public seems always to take in the losses even as private companies reap out increasing profits.”

    Based on what? For example, when the Northwest Parkway went belly up, it was private investors and only private investors that lost out. Local governments involved in the toll agency didn’t have to pick up any slack and the asset was quickly re-sold to new investors.

  • I should have addressed this more directly in the article, but the fundamental point here is that the City of Chicago seems to have vastly underestimated the net present value of the parking system. According to a 2008 study (that I also mentioned above), the system is conservatively worth five times as much as it was sold for. The Bloomberg report seems to suggest that it is, according to Morgan Stanley estimates, worth 10 times more. In other words, the city’s decision-makers agreed to sell off a public asset at a much lower-than-market price.

    The bigger issue, though, is whether governments should be prioritizing a bump in immediate revenues instead of keeping a hold on infrastructure that is more profitable in the long-term. If you believe that governments are incapable of handling anything well and that democratic structures make good management impossible, that’s one thing. On the other hand, if you’re convinced as I am of the possibility that government can be effective, it’s hard to watch deals like this happen.

  • FG

    Part of the reasoning for the sale was that the city was too chicken to raise parking rates and would rather have the public mad at a private, foreign no less, company than at it, beyond anger at selling the meters off.

  • Yonah,

    Perhaps the city’s leaders underestimated the cash flows by a lot, but I do not agree that they underestimated the market price. As Ned pointed out, Morgan Stanley is having a hard time finding investors willing to pay as much as they did for the right to the revenue–even after the higher projections became known. No one is willing to pay a higher price, so in what sense is the $1.15 billion “less than market”?

    It should hardly be surprising that no one would be willing to pay more, because, as Aaron and Galls have noticed, the $11.6 billion is spread out over 75 years (!!!)–and, I would add, before taxes, depreciation, and interest. If you plug in the cash flows over time into Excel–$47 million in 2009, $1.43 billion between 2010 and 2020, and 10.4 billion after that–the IRR is only 9.6%. (This is based on the absurdly conservative assumption that there are no costs at all in maintaining or operating the system). That is not very high considering the magnitude of the risk involved. So the assets are probably worth more or less the price the city got–probably less–and nowhere close to 10 times more.

    As to the bigger issue: All Chicago was doing was borrowing money from Morgan Stanley in return for (risky) future cash flows. Whether that was prudent or not depends on how Chicago used that borrowed money. By all accounts they did not use it prudently, but that has nothing to do with the way they raised the money in the first place.

  • When it comes to parking, the money should go to the city.
    Melissa

  • Frank

    this is just like selling California to china. well doesn’t really matter since it is basically china over there with all the immigrants.

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