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The Lessons of Long-Term Privatization: Why Chicago Got it Wrong and Indiana Got it Right

Posted by Content Coordinator on Friday, July 29th, 2016

MANHATTAN INSTITUTE

By Aaron M. Renn, Senior Fellow

Executive Summary

In the U.S., privatization traditionally referred to the use of private businesses to deliver public services, such as garbage collection, landscaping, or municipal transport. Local or state governments awarded contracts to provide the services after competitive bidding; the goal was to improve services and/or reduce costs.

Today, cash-strapped cities and states are selling or leasing government assets, particularly transportation infrastructure. Because the goal is to raise cash, the revenue streams generated from, say, toll roads are attractive to potential buyers.

The sale or lease of such assets can be beneficial to the public; but the long-term nature of these deals makes them potentially far more risky than contracts to run bus service or repair city-owned vehicles. Get privatization right, and the gains can be substantial; get it wrong, and the financial consequences can last decades.

Cities and states contemplating asset privatizations need to answer two basic questions: (1) Which public assets should be considered for privatization? and (2) What are the right ways to privatize? Two recent privatizations, in Chicago and Indiana, illustrate the importance of answering these questions correctly.

In late 2008, the Chicago city council approved a long-term lease of its parking meters in return for a $1.2 billion payment. The deal is almost universally regarded as a catastrophe. “This was a bad deal for our city and a bad contract for our residents,” says Rahm Emanuel, Chicago’s current mayor. “The city should never have done this deal. Period.”

In 2006, Indiana approved a long-term lease of the Indiana Toll Road in return for a $3.9 billion payment. This lease, however, is largely heralded as a success. “It was the best deal since Manhattan for the beads,” says former governor Mitch Daniels, “except this time the natives won.”2 What made Chicago’s deal so good and Indiana’s so bad?

This paper explains several key differences in how the leases were done, including: the way they were approved; how the transition to private operation was managed; the way the proceeds of the lease were spent; and the way the leases affected government budgets and future revenues. These factors involve “process.” But there is another, no less important, lesson for city and state governments. Even had Chicago better managed the parking-meter deal, the lease would still have been a grave mistake: parking meters and other similar public assets have attributes that make them unsuitable for long-term privatization.

manhattan institute - parking meters

I. Introduction: A Tale of Two Privatizations

Chicago’s Parking-Meter Debacle
In 2004, Chicago leased its city-owned Chicago Skyway Toll Bridge for 99 years for $1.83 billion. The deal was considered a win. Hoping for another, the city leased several downtown parking garages in 2006 for 99 years, in return for a payment of $563 million.

Chicago next turned to parking meters and Midway Airport. The city developed both these deals in 2007 and 2008. In September 2008, amid the U.S. financial crisis, the city announced its deal for privatizing Midway, which was promptly approved by the city council. The Midway deal ultimately fell apart, as the winning bidder failed to line up financing.

In December 2008, Chicago Parking Meters LLC, a Morgan Stanley–led investment group, won a 75-year concession to control and operate approximately 36,000 parking meters throughout Chicago in return for a $1.16 billion lump-sum payment. The lease required the company to install new multi-space kiosks for parking payments and to accept credit cards. The concessionaire also was empowered to write parking tickets, though Chicago retained the revenue. The city retained advertising and naming rights over the meters. Chicago also agreed to a non-compete clause that prohibited it from opening off-street parking lots that would compete with meters—unless the rates in the lot were at least three times those of the meter rate in the area.

In a lopsided vote, the city council approved the lease on December 4, 2008. The deal closed in early 2009 but almost immediately ran into trouble. The company initially increased rates in the Loop, the core of Chicago’s central business district, by a modest 17 percent (though parking rates would rise from $3.50 per hour in 2009 to $6.50 per hour in 2013). However, parking rates in other parts of the central business district doubled almost immediately and rose even higher elsewhere in the city.

Indiana’s Toll-Road Lease
Mitch Daniels was elected governor of Indiana in 2004. During his campaign, he learned that the Indiana Department of Transportation’s (INDOT) list of programmed projects vastly exceeded the state’s financial resources.

After entering office, Daniels commissioned a study that revealed a $1.8 billion funding gap over the next decade. INDOT then developed a program, “Major Moves,” that included only projects that could be paid for. The projects were selected via a scoring and public-input process. The result: many major projects were pushed off more than a decade and were de facto canceled.

In the meantime, the Daniels administration investigated more than 30 potential ways to address the funding gap in its highway plan. Likely inspired by Chicago’s successful Skyway lease, Indiana undertook to lease the Indiana East– West Toll Road, a 156-mile highway across the northern edge of the state.

The East–West Toll Road, like many others, was conceived and built in the pre-interstate era and was opened in 1956, the same year the Federal Aid Highway Act was enacted. Today, it’s part of the interstate system as I-90. By 2005, it was a break-even operation and still carried $200 million in debt.

The East–West Toll Road flowed directly into the Chicago Skyway and was, in effect, the Skyway’s only source and destination of traffic. This meant that it had leverage over the Skyway, which had recently increased tolls; unsurprisingly, the firms—led by Spanish infrastructure developer Cintra and Australia’s Macquarie Bank—that led the consortium that won the Skyway lease also won the Indiana Toll Road lease.

The Indiana Toll Road Concession Co. paid the state a lump sum of $3.85 billion for a 75-year concession. The consortium was required to implement electronic tolling and invest in upgrading and widening portions of the toll road. And it had to maintain certain levels of service in rural and urban areas.

Download full version (PDF): The Lessons of Long-Term Privatization

About the Manhattan Institute
http://www.manhattan-institute.org/
The Manhattan Institute for Policy Research is a leading voice of free-market ideas, shaping political culture since our founding in 1977. Ideas that have changed the United States and its urban areas for the better—welfare reform, tort reform, proactive policing, and supply-side tax policies, among others—are the heart of MI’s legacy. While continuing with what is tried and true, we are constantly developing new ways of advancing our message in the battle of ideas.

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