A Tale of Two P3s
CHICAGO – Chicago's first mistake in its much-maligned parking meter lease was its choice of asset.
That's one conclusion of a report released Thursday by the Manhattan Institute for Policy Research that looks at public-private partnerships and compares the details of two deals – Chicago's nearly $1.2 billion 75-year meter system lease and Indiana's $3.9 billion 75-year lease of the Indiana Toll Road.
The Indiana deal is held up as a model while the Chicago parking lease offers a roadmap of pitfalls to avoid.
"Getting long-term privatizations right starts with picking the right asset," writes Aaron Renn, a senior fellow at the research organization and author of "The Lessons of Long-Term Privatizations: Why Chicago Got It Wrong and Indiana Got It Right."
"Toll roads have a track record of success. Assets that have similar characteristics, such as airports, are also more likely to be good candidates. Parking meters, or anything related to city streets, are poor candidates," he writes.
Chicago's mayor at the time, Richard Daley, pushed through the lease will little time for city council review, the transfer of operations was botched, and motorists were shocked by skyrocketing rates. Daley tapped nearly all the deal proceeds to cover deficits in his last two budgets.
Lease terms that require compensation payments for meters taken out of service have proven costly to the city even following revisions struck between Mayor Rahm Emanuel and the operators.
In contrast, the transition to private operations went more smoothly with the Indiana lease and the original operator's bankruptcy has had little impact, while the proceeds went to fund transportation infrastructure.
It's important to choose the right asset, according to Renn.
Highways and toll roads are strong candidates as they are somewhat removed from daily residential life.
"The upshot of having these characteristics is that, after the decision is made to build them, highways and toll roads are only weakly related to other urban-planning considerations," the report says.
"These characteristics make highways and toll roads—and, by extension, similar public assets—good candidates for privatization lease: they are predictable, stable, and largely stand-alone. It's not likely, for example, that a state will want its road back in order to use it for a higher-value public good," the report says.
A parking meter system is more problematic because it is an urban planning and traffic management tool and the system abuts other public space such as streets and sidewalks.
"Unlike a toll road, parking spaces are intimately integrated with the functioning of a neighborhood. Parking spaces are a core part of the city's largest supply of public space—namely, its streets—and profoundly affect the adjacent properties," the report says.
Compensation payments built into the city's lease also have proved costly because the city must compensate its lease holder for meters pulled out of service, which has affected city planning. The local transit authority decided to move a rapid bus route in order to take out fewer metered spots.
"Assets whose privatization would result in having to pay regular, recurring compensation to the lessee as part of the ordinary business of civic life—such as offering discounted parking to the disabled or closing streets for special events—are probably best kept under the day-to-day management of municipal government," the report says.
In addition to looking at the factors that make assets either a good or bad candidate for a long-term privatization, the report considers the management of the lease process and key provisions.
While both deals were struck largely in private, the toll road lease received more public vetting as part of the legislative process. Then Gov. Mitch Daniels announced the deal on Jan. 23, 2006 and it was approved by lawmakers on March 14, 2006, largely with only Republican support.
The Chicago City Council had only three days to review the 500-page concession contract and little debate was conducted during a council hearing.
The city's rushed process created a public perception that the parking-meter deal was illegitimate, if not crooked, the report says.
Governments also must carefully manage the transition stage. The city's shift to pay boxes from individual meters was troubled because higher rates took effect before the installation of boxes, jamming the meters. Problems continued with the pay boxes.
The city's use of the proceeds to balance the budget instead of cutting services or raising taxes to erase red ink also hurt public perception because there's little now to show for the deal.
While the toll road was largely a break-even operation for Indiana, Chicago collected about $16 million in annual revenue from the meters. It established a reserve aimed at providing $20 million annually to make up for the lost revenue but it too was drawn on by Daley and generates only about $2.5 million.
"The lesson: governments should not impair future revenue streams in privatization transactions, and they should be skeptical of the long-term viability of revenue replacement reserve funds as a mitigation tool," the report says.
The lost revenue is a burden that comes in addition to about $11.5 million in annual compensation costs the city must pay the operators when it takes meters out of service for street work or special events.
In addition to revising some terms of the lease, the city council has also approved rules to govern further asset leases that would require an independent review and more public vetting.