CHICAGO — Faced with aging infrastructure and a pledge to not raise taxes, Indianapolis Mayor Greg Ballard wants to use public-private partnerships to raise new revenue that could fund water and sewer upgrades and other citywide projects.
Ballard’s proposals include some form of privatization of the water and sewer systems, the leasing of parking meters, and the possible privatization of the board that oversees sports venues and the city’s convention center.
The city is first looking at its water and sewer systems, which are in need of $4 billion in upgrades over the next 15 years. Officials estimate the projects would require rate increases of more than 400%. But merging the two systems under a new owner could generate enough savings to ease future rate increases and generate an up-front payment that could be used for other infrastructure upgrades, Ballard aides said.
At the heart of the water and sewer proposal is the mayor’s belief that tax-exempt financing remains the best model to finance large capital costs. To retain access to the tax-exempt market — and avoid refinancing the water and sewer systems’ combined $1.4 billion of outstanding tax-exempt debt — Indianapolis is expected to tap a nonprofit public group to acquire and merge the two utilities.
The city has not released a formal valuation of the system. It is working with Citi as its financial adviser and Baker Daniels LLP as bond counsel on the water and sewer transaction. Officials said they will likely announce within the next two months their choice for the offering.
The Indianapolis-Marion County City County Council and the Indiana Utility Regulatory Commission would need to approve the transaction.
Indianapolis is also considering following Chicago’s recent example by entering into a long-term lease of its parking meters. Other public-private partnership possibilities include leasing its downtown parking system of garages and lots and management of its sports venues and convention center.
The privatization efforts will define Ballard’s first term and the results could serve as a model for other cities facing massive sewer and water upgrades required by the U.S. Environmental Protection Agency.
A former Marine, writer, and local businessman, Ballard took office Jan. 1, 2008, after shocking political observers with the defeat of Mayor Bart Peterson. He won on an anti-tax, anti-debt platform amid dwindling revenue. He repeatedly described the city’s infrastructure as “failing.”
“We’re feeling the economic challenges as much as anyone, but we’re also in a better position,” said Michael Huber, the city’s director of enterprise development who heads up its P3 efforts. “Part of the reason is, there’s a certain willingness to be creative and engage with the private sector.”
The decision to privatize the water and sewer departments comes as Indianapolis faces a total of $4 billion in water and sewer system upgrades. A big chunk of that is tied to a 2006 consent decree with the federal government requiring significant improvements to the sewer system.
Last July, the city issued a so-called request for expression of interest aimed at companies interested in improving the systems and mitigating future rate increases. Ballard was expecting a dozen or so responses. Instead, the city received 24 responses.
“Our challenge is to find creative alternatives to pay for the necessary upgrades to our basic infrastructure while maintaining our competitive cost structure relative to our peer cities in the Midwest,” the city said in its REI. “In this regard, we cannot rely on increased tax revenue from citizens or higher fees from our ratepayers … especially during challenging economic times.”
Indianapolis’ water system was privately owned for years before the Peterson administration purchased it for $550 million in 2006. Both the water and sewer utilities are privately managed, and the managers — French-based Veolia Water Indianapolis LLC and United Water Resources Inc., respectively — have each responded to the city’s REI.
The current favorite among those that submitted proposals is rumored to be Citizens Energy Group, a nonprofit public charitable trust that currently runs the city’s gas utility and is the third-largest municipal gas utility in the country.
If Citizens acquired the systems, it would consider merging them with the gas utility. As a nonprofit public trust, Citizens issues its own tax-exempt debt, and could take over existing city and water debt without needing to refinance it into taxable debt, Citizens noted in its response to the city’s REI.
Citizens said it could issue traditional tax-exempt bonds as well as tap the state’s revolving fund loan program and consider new types of bonds created under the federal stimulus act.
“These municipal financing vehicles can provide approximately 100-200 basis points in additional cost savings not available to [investor-owned utilities] or infrastructure funds,” Citizens said in its bid. “We expect that Citizens’ lower cost of capital will not only save the city and customers of both systems in any acquisition financing, but also provide meaningful cost savings on the financing of the significant projected capital expenditure program.”
Published reports noted last year that Citizens offered the city around $200 million for the utilities, but that figure is now considered low. Huber said Indianapolis would abandon public-private partnership efforts if the prices are not right, but added that he sees a solid market for public-private partnerships.”
“Certainly you want to make sure that you’re creating a long-term value for the taxpayers, and not just trying to make short-term gains,” he said. “But I still see a pretty strong P3 market out there. We have so many bankers and operators approaching us with different financial ideas. It suggests there are still people willing to take some risks.”
The international credit crunch last year put a severe damper on P3 efforts. Chicago was forced to shelve its proposed privatization of Midway Airport after the winning bidder could not raise the capital needed to make its $2.52 billion up-front payment. As credit has loosened, some market participants believe the market is ripe for new deals, but others warn that governments might have to wait to obtain the best price.
Responses to the city’s RFQ on the parking system are due in mid-March, and officials hope to select an operator within a few months, Huber said. The city has hired Ice Miller LLP as bond counsel and Morgan Stanley to advise on a possible parking lease deal.
A consortium led by Morgan Stanley’s infrastructure investment group won the bidding on Chicago’s parking meter lease. It paid $1.14 billion for the 75-year lease deal that closed last year.
While Chicago has dipped into its up-front payments to fund operating costs, Ballard plans to use the money to fund capital improvements across the city, Huber said.
“We’re hoping that both transactions, by creating efficiencies and savings, will let us create a substantially larger capital fund for general improvements for streets, sidewalks, and parks,” he said. “We’re trying to save money on rates and make our parking more efficient, but we’re certainly also trying to achieve hundreds of millions in savings [on capital expenditures].”
Local media and watchdog groups are keeping a close eye on the privatization efforts. But while protesters in Akron, Ohio, forced that city to drop its plans to lease its sewer system, opposition so far in Indianapolis has been muted. That’s partly because details of the proposals remain unknown, according to a senior member of the Indiana Sierra Club.
“This mayor has inherited a lack of maintenance in a lot of the city’s operations, and he’s faced with trying to come up with creative ways to finance improvements,” said Glenn Pratt, a member of the Sierra Club’s executive committee and the founder of a citizen’s group that keeps an eye on the sewer system.
“We think the city needs to maintain control over their future, and the idea of totally selling [the water and sewer systems] is not anything that we would be a big supporter of ... But we’re just trying to find out what the heck is going on, what is being proposed.”
Meanwhile, the city continues to consider responses from companies interested in operating the Capital Improvement Board. The CIB, which runs the city’s convention center and sports venues — including the new $800 million Lucas Oil Stadium — has suffered recently from operating deficits.
The city received “a substantial amount of local and national interest,” Huber said, and continues to discuss options with the CIB for its future.
Former Indianapolis Mayor Steve Goldsmith, a popular political figure who served in the 1990s and now teaches at Harvard University, was one of the country’s earliest proponents of P3s. Ballard, in a recent interview with the libertarian Reason magazine, said he is hoping to advance the legacy.
“Given where we are in this economy, it’s really forcing us and a lot of other cities to look and ask, what’s next?” Ballard said. “Mayor Goldsmith did a lot by outsourcing the management of wastewater, for instance, and saved a lot of money. Now we’re looking at the fundamental structure of the ownership of our water and wastewater utilities and saying, can we do something even more substantial?”