CHICAGO – A political landscape marked by anti-privatization sentiments may have left Chicago Mayor Rahm Emanuel little choice but to drop the city’s bid to lease Midway International Airport after one of only two remaining bidders pulled out, market participants said.
One of the basic tenets in any public-private partnership –whether it involves construction of a new publicly-owned infrastructure project or lease of an existing public asset -- involves stakeholder support.
“A fair and open competition is very valuable especially when trying to explain a deal to the public and can provide political shelter in cases where it’s down to one bidder, but it can be awkward to proceed with only one,” said Richard Norment, executive director of the National Council for Public-Private Partnerships.
“It could be a reasonable offer and proper price but you have the politics to deal with and with just one bidder it makes it harder to make your case,” especially in Chicago which “muffed” its 2009 parking meter system privatization, Norment said.
Emanuel’s administration’s Thursday abruptly halted efforts to lease the city’s south side airport as final bids were being prepared. The decision came after one of only two remaining investment groups dropped out. Emanuel announced in December the city would explore a lease under a federal pilot program, resurrecting an effort first undertaken by his predecessor Mayor Richard Daley.
Daley’s $2.5 billion, 99-year deal fell apart in 2009 after the credit markets tightened following the financial crisis. Emanuel’s initiative included stiffer deal terms geared toward making it more palatable to a City Council and public still upset over the troubled $1.15 billion 75-year parking meter lease.
“The companies did not meet that bar and could not make an offer that would meet what taxpayers deserve,” said the administration’s spokeswoman, Sarah Hamilton.
The city has not ruled out eventually taking a third stab and would not say whether it would formally relinquish the single hub slot under the federal program that allows for the privatization of up to 10 airports. The city had faced a Dec. 31 deadline last year to decide whether to go forward.
“The mayor has been clear that he will not move forward on Midway at this time. If it were to be considered in the future, it would have to be done with the mayor’s same approach that ensures the long-term interests of taxpayers and residents are protected,” Hamilton said Monday.
“We have no comment until we receive a formal communication from the city,” Federal Aviation Administration spokeswoman Marcia Adams said Monday.
A local government research group that backs the idea of privatizating non-core assets under fiscally prudent terms said the city’s decision made sense politically. “We were pleased that the city pursued the lease, and it continues to be potential option, but we also recognize that the political and public perception of such alternative service delivery projects have been greatly influenced by the missteps of the parking meter lease,” said Chicago Civic Federation President Laurence Msall.
“They didn’t have a competitive field of bidders to make sure they were getting the best and most reasonable price nor secondary candidates should the chosen bidder” fail to perform under the lease terms, he said.
The city could have proceeded even though its defense would have proved tricky, one P3 specialist said.
“You don’t know if you have a good deal until you have one and can weigh it against the benchmarks,” said Robert Poole, director of transportation policy at Reason Foundation. “But I can understand how the politics worked out there.”
The city sought to limit any deal to no more than 40 years, structured as a management and land lease. It included labor protections and followed a revenue-share model to provide an ongoing source of funds that would grow over time, along with an upfront payment. The use of proceeds on city operations would have been barred. The operators also were to have taken responsibility for funding police and fire services at Midway. A special review panel was charged with reviewing the process ahead of a City Council vote.
In March, Chicago narrowed the field of bidders down to six from its 16 initial responses. The bidding process had recently been narrowed down to just two private consortiums. It was unclear how the field had narrowed so sharply.
Macquarie Group Ltd. and Ferrovial SA, which had formed the Great Lakes Airport Alliance group, was readying a fully financed bid for more than $2 billion in upfront and annual payments. The other group – a partnership between Investors Industry Funds Management and Manchester Airports Group Plc – was finalizing a bid but struggling on valuation to get to a targeted price that would be competitive.
Credit Suisse and Mayer Brown LLP were the city’s lead financial and legal advisers.
The deal’s value to bidders faced other limitations. The airport is landlocked, considered already well-managed, and because the dominant carrier is low-frills Southwest Airlines, limited opportunity is seen for high-end concessions.
“Frankly, Midway is not as attractive a proposition without room to grow,” Poole said.
The city sought to portray the airport as a strong investment. A record 9.6 million passengers boarded planes there in 2012. It generated $157 million of operating revenue in 2011 and an additional $36.9 million of passenger facility charges. Since 1997, the city has invested nearly $1 billion at Midway, limiting the need for near-term improvements.
In Chicago, the P3 best-practices doctrine carries all the more weight because of unrest over the parking meter lease. The council approved the deal at Daley’s behest just a few days after receiving details, the private operators botched the initial operations, and rates have skyrocketed. Daley exhausted most of the proceeds to balance his last few budgets and the city’s former inspector general issued a report saying the city got a bum fiscal deal.
Defenders of the deal have pointed out that the system needed upgrading, there was little political will to jack up rates, and the final price represented a fair market valuation of the system.
The meter deal has also caused headaches for Emanuel’s administration because it requires the city to compensate the private operators for meters taken out of service. Lease revisions approved earlier this year eased those terms but the city was forced to provide concessions in exchange.
The decision to renew the Midway lease initiative was driven by improved market conditions, broader investor interest, and Puerto Rico’s successful lease this year of San Juan’s Luis Muñoz Marín International Airport for $2.6 billion in upfront and revenue sharing payments. The city also has significant infrastructure funding needs with state and federal help lagging.
Proceeds from an upfront payment would have gone to retire the $1.4 billion of Midway bond debt, with annual payments to have been used to fund city infrastructure. State legislation previously adopted limited use of most of the proceeds to infrastructure or for pensions.
Chicago’s bonding capacity is stretched and it’s struggling with nearly $20 billion in unfunded pension obligations and a $600 million contribution increase looming in 2015. The pension woes and other challenges drove a recent three-notch downgrade in the city’s general obligation rating by Moody’s Investors Service to A3.
“A Midway lease could be revisited because of the city’s very large and unmet infrastructure and operations support needs,” Msall said.
Given the narrow field, the political environment, and the constraints imposed by the city, Chicago’s decision to scrap the lease effort doesn’t reflect on P3 efforts elsewhere in the U.S., market participants said. Demand on the issuer side for alternative financing and investor interest are fueling growing interest.
While the city loses out on a steady new revenue stream, the decision spares the administration from a pitch to win council approval that some believe could have been complicated by other recent political developments.
Emanuel’s administration has faced questions over the vetting process for its former comptroller Amer Ahmad after his recent indictment on federal corruption charges tied to his tenure as deputy treasurer in Ohio.
The city’s chief financial officer, Lois Scott, who has steered the Midway privatization and would have been the city’s point-person before the council, has borne the brunt of questions in local published reports because she was among those who recommended Ahmad.
Scott’s former financial advisory firm, Scott Balice Strategies, had pursued work with the Ohio Treasurer’s office and advised the office on a October 2010 bond sale for $208 million. While the connection was known in public finance circles and was not surprising given that Scott’s firm did work with many large Midwestern issuers, it has been the subject of questions in local media.
Questions might also have arisen over reports that Ferrovial-Macquarie had hired a lobbyist with ties to the husband of city Aviation Commissioner Rosemarie Andolino and concerns over accusations that Ferrovial had been engaged in union-busting.
Midway carries ratings in the single-A category. The City Council had previously approved a Midway refunding but it’s been on hold.
City officials did not answer questions about any costs it might have incurred during the privatization process for reports, consultants or advisors.
In an Emanuel-authored op-ed piece that was published in the Chicago Tribune this week, the mayor outlined his reasons for pursuing the Midway lease and decision to scrap it. “I am a firm believer that, in both the private and public sectors, competition is good. In the public sphere, competition forces bidders to offer their best services and lowest prices, ultimately improving performance and saving taxpayers millions of dollars,” he said.
He said he pursued the deal because “Chicago is facing huge structural deficits and must explore any avenue that promises new sources of revenue without raising property or other taxes. The Midway partnership promised a source of revenue for badly needed infrastructure improvements, from schools to public transit.”