Until recently, infrastructure was not a political or financial entity; it was regarded as a bureaucratic necessity to drive growth. However, neoliberal dominance in recent decades has led to the privatisation and unbundling of state-led infrastructure. Leasing or selling infrastructure assets to for-profit entities provides cities initial large cash sums from the concessionaire while relieving their duties to operate a crucial service. Whereas Adam Smith believed infrastructure was a sovereign responsibility beyond the capability of private capital, private-public partnerships (P3s) are predicated on the assumption the private sector is best equipped to efficiently deliver infrastructure services to the benefit of the paying citizen. Infrastructure networks tend to be monopolistic-a city typically only has one water utility or transit agency, so privatisation does not necessarily force concessionaires to behave competitively. American cities have entered P3s less savvily than their European counterparts. Particularly in the wake of the 2008 financial crisis, several cities privatised infrastructure a means to keep taxes low and generate immediate revenue. Under the leadership of Mayor Richard M. Daley from 1989-2011, Chicago pioneered many P3s.
In an ideal world, infrastructure would be provisioned as-needed through a transparent and democratic planning process. It would be funded through bonds and taxes levied on the rich under the stewardship of ethical leaders and competent bureaucrats. However, Donald Trump is President of the United States, and abandoning the neoliberal approach to infrastructure financing does not appear at the top of any political agenda. His vague infrastructure plan (2016) alludes to increased private sector involvement in the building, operating, and financing of infrastructure. Bearing this reality, this paper will employ as a case study a “bad deal done badly” (Illinois PIRG 2009), the City of Chicago’s 75-year lease of 36,000 on-street parking meters to a consortium headed by Morgan Stanley Infrastructure Partners. Over its 3-generation life, the contract will yield billions in revenue to a private company, and has profoundly reconfigured basic governance functions of the City. Rather than protect the public interest, the terms force the City to become the concessionaire’s insurer and lobbyist. After evaluating the contract terms, the paper proposes better methods for cities in the United States to form P3s for infrastructure privatisation.
Infrastructure Financialisation and Privatisation
Neoliberal governments drive the twin efforts of infrastructure financialisation and privatisation. Financialisation, described by O’Neill (2013), entails “commercialisation to the extent that [it] generate[s] competitive returns for private investors, a reconfiguring of the infrastructure’s design to match a financial product’s characteristics.” In order to accomplish this, assets are privatised through outright sale or leases to concessionaires. Privatisation conflicts with O’Neill’s characterisation of infrastructure as universal asset, and transforms the citizen into customer of a for-profit company who pays market rates for crucial services. Privatisation is often accompanied by rate increases, despite supporters’ claims that the private sector’s efficiency can save “customers” more money.
Contracts governing these arrangements are dense and often contain similar language despite diverse types of infrastructure (toll roads, water, parking meters) being privatised. Portions of Chicago’s infrastructure privatisation contracts, such as parking meters and a toll road, contain identical language and were written by the same consultants. While politicians and the public tend to focus on the most visible aspects of these arrangements, such as up-front payments and contract length, modified legal structures in which the government acts on behalf of the concessionaire are often obscured. As the case study will demonstrate, financialisation grants “financial markets, institutions, and elites gain greater influence over economic policy and outcomes” (Davis and Walsh 2016).
Background: How Not to Form a Private-Public Partnership
In the wake of the 2008 financial crisis, the city of Chicago was in dire straits. The 2009 budget had a deficit of $500 million. Mayor Richard M. Daley, who led the privatisation of the Skyway toll road and 4 parking garages, championed privatisation as a way to receive a large up-front sum and claimed the private sector was best equipped to manage the parking meter system. Consultant William Blair & Co. was paid $4 million by the City to advise on the bidding process and estimated value of the system. This service was provided through a no-bid contract, and the $1 billion valuation was the only estimate the City sought. Various independent estimates, including the Inspector General (2009), believed the true value to be anywhere between $2-5 billion. Interestingly, the winning bid, a consortium named Chicago Parking Meters (CPM) consisting of Morgan Stanley, was also a client of William Blair & Co. Morgan Stanley and William Blair & Co. had both advised the City in other privatisation projects, a conflict of interest blithely dismissed by City leaders.
The controlling majority is the Abu Dhabi Investment Authority and includes Allianz Capital Partners, with LAZ Parking as the operator. The bank JP Morgan, whose then-Midwest Chairman is Mayor Daley’s brother, is also an investor. A 2017 CPM financial report lists 4 company members, 3 of which are “infrastructure partners.” These companies shifted their ownership shortly after the contract was signed, but the individual investors and funds comprising them are difficult to identify. One company, Deeside Investments, Inc. is a 49.9% owner and is itself half-owned by the Abu Dhabi Investment Authority and a mysterious company, “Redoma SARL, about which nothing was known except that it had an address in Luxembourg” (Taibbi 2010). This equates to Abu Dhabi investors controlling 30% of Chicago’s parking meters.
The 45-member City Council was forced to vote on the 279-page contract with 2 days to review, and were pressured to vote in favour because $150 million of a potential deal was pre-emptively allocated in the 2009 budget. Just 5 council members opposed it. The public had virtually no say, and only summaries of the contract were released for scrutiny. The deal was immediately maligned. The City’s Inspector General critical report faulted the undervaluation of the system, contract terms, failure to consider alternatives, and lack of deliberation. Weeks after Morgan Stanley and JP Morgan received $30 billion in bailouts from the federal government, CPM was awarded the 75-year lease. The next section addresses several contract features that compromise Chicago’s ability to govern and cost the City millions annually.
Costs and Clauses
Upfront Costs and Revenue
CPM paid Chicago $1.16 billion when assuming the 75-year lease. The Inspector General criticised this sum as nearly half of the system’s present-day value, but Mayor Daley insisted it was so crucial to filling budget gaps, the difference was acceptable. As operators, CPM was required to upgrade system technology, but the $1.16 billion was such a low payment, Chicago essentially paid for the upgrade themselves. The City is still responsible for parking enforcement and retains ticket revenues. However, CPM supplements enforcement to incentivise turnover and the City must compensate CPM “if the fine for a parking violation falls below a certain ratio in comparison to the hourly parking rate” (Illinois PIRG 2009).
CPM immediately quadrupled parking rates and began charging on Sundays; 35 million annual chargeable hours were added to the system. An increase in the City’s pre-privatisation, below-market rates was long overdue, but CPM retains all revenues from parking meters; there is no revenue-sharing for the City to reinvest. In the first year of the lease, CPM earned $80 million, $58 million more than the City’s 2008 metered parking revenue. None of it went to the City. By the end of the lease, Chicago motorists will pay CPM an estimated $12 billion in parking fees.
From an urban planning perspective, increasing parking rates is an effective intervention to encourage sustainable travel modes and earn revenue. However, CPM’s rate hikes were profit-driven, and contract clauses require the City to compensate CPM lost revenue for meters taken out of service for events like festivals or street maintenance. Chicago paid CPM $61 million in 2012 alone under this clause. Additionally, the City must furnish comparable replacement spots elsewhere or compensate CPM should the City permanently remove parking spaces. This requirement significantly hinders planners’ ability to add bike and bus lanes, bike parking, and other improvements to make Chicago less car-centric, “ossifying a particular configuration of the urban built environment” (Farmer 2014). Alderman Scott Waguespack, one of the few City Council members who voted against the lease, wanted to modify parking in his ward to best serve his constituents. However, upon submitting his plan to the Department of Revenue, he was told that his ward would owe over $600,00 to CPM for these changes, and he was forced to abandon the plan.
In the same vein of making improvements to the transport network and public realm all but impossible, a non-compete clause forbids building or improving any competing infrastructure. It guarantees CPM’s monopoly and contradicts the neoliberal belief that competition drives the private sector to best deliver infrastructure. Nonetheless, “the Contract states that ‘the City shall use its reasonable efforts to oppose and challenge Such action by any such other Governmental Authority…’ In short, the contract requires government to act as an agent or lobbyist for the private contractor – or pay for not making sufficient efforts” (Dannin 2009). Forbidding competition and implementing compensation largely keeps the street as-is and embodies a “specifically commercial view of controlling risk…by narrowing the potential uses of an infrastructure item” (O’Neill 2013). This forces the City to advocate for a private contractor’s interest rather than the public’s, or to make decisions based on avoiding penalties, which will be discussed in the next section.
In addition to the above-described clauses and charges that disproportionately benefited the concessionaire, the contract altered the way the City’s parking was governed. Ashton (2016) describes privatisation, particularly in P3-heavy cities such as Chicago, as “governance-in-motion,” in which such contracts are not stand-alone arrangements but rather “a complex process of constructing the powers and capacities necessary to produce value from urban infrastructure.” Both he and Dannin describe the institutional entanglements and changes affected. For example, the ordinance authorising the lease “amended the Municipal Code to subordinate the Commissioner of Transportation to the Department of Revenue…[and] exempted the Department of Revenue and its agents (which now include the Morgan Stanley-led consortium) from oversight by other City agencies…”. The lease also “allow[s] the contractor to charge Chicago for taking actions adverse to the private contractor’s receipt of its expected revenues” (Dannin 2011).
Former Cook County chief financial officer H. Woods Bowman said “The argument in favor of selling public assets is that a lot of the assets aren’t tied to the core functions of the government, or that there are cost inefficiencies associated with them…Parking [policy] ought to be a core function of the city, and there are no appreciable operating efficiencies to be gained here.” By moving the Commissioner of Transportation under the purview of the Department of Revenue, the latter gained the authority to operate the parking meter system. This is emblematic of the “splintering” of networks described by Graham and Marvin (2001), in which infrastructure’s overlapping functions are divorced from each other as separate private entities gain control of them. The Department of Transportation can no longer account for 36,000 on-street parking meters in the comprehensive transport planning of the city for the next 3 generations.
The deal not only rearranged the hierarchy between the Transportation and Revenue Departments, and the relationship of the City to private contractor; Ashton (2016) also describes the rushed obscurity of the City Council vote as not just bad politics, but a fundamental shift of power to the executive (Mayor Daley) “at the expense of legislative, judicial and other administrative powers.”
A Better Deal
Despite 2013 renegotiations under Mayor Rahm Emanuel, the City of Chicago remains bound to its parking meter contract until 2083. CPM will likely earn about $11.6 billion, with none of it returned to the City for reinvestment. CPM is expected to make back its initial investment next year, with 63 years remaining to profit. Chicago will continue to be penalised millions annually in accordance with the above-described clauses. None of the $1.16 billion payment from CPM to the City remains. American cities will continue to enter into infrastructure P3s; this section suggests several mechanisms while forming a P3 that better serve a City’s public interests and protect government autonomy by avoiding pitfalls such as compensation and non-compete clauses.
The parking meter lease is not a mega transport project in a traditional sense, but its execution was susceptible to common errors many suffer in their planning stages. One of the tenets of sound P3s is that the private sector absorbs most of the risk. However, the crux of the CPM contract was the City assuming financial risk. The clauses detailed above guaranteed CPM revenue at the expense of the City regardless of future transport planning initiatives or changes in motorist behaviour. Chicago could have secured a better deal for its residents and coffers had it adhered to the following practices when structuring its contract, or simply could have not leased the parking meters at all.
Priemus (2010) details faulty decision-making strategies that confound mega projects to the mercy of political and market dynamics, and Chicago’s leadership fell victim to most of them. Chicago did not protect itself against the private sector’s superior entrepreneurship, creativity, and risk-awareness. The lease of the parking meters was seen as an opportunity for cash to stymie budget shortfalls; it was not analysed as a transport or spatial project, so a comprehensive risk assessment never occurred. Had the City administration involved relevant agencies (or any agencies) besides their private consultant, some of the risks would have been apparent. Rather than the City act as CPM’s insurer via compensation events, any diligent City risk analyst would have recommended that CPM purchase insurance to guarantee their revenue. An analysis into what a lease of a public asset should entail would have addressed what the functional requirements of the meters as part of the street network were and defined in more detailed scope of CPM’s rights to the operation of the system. It likely would have challenged the entire concept.
A transparent process would have made known the web of conflicting client/adviser relationships between William Blair & Co, Morgan Stanley, and the City of Chicago, and fostered skepticism at the estimated values and contract terms. The mayoral administration did not seek any other estimates, and did not share any supporting math to City Council before the vote. The Inspector General’s report recommended in order to gain the most competitive edge, the City Council “commission a public policy think tank, an academic, or an independent office of City government to conduct an impartial analysis of any lease agreement and release this analysis publicly before the terms of an agreement are voted upon by the City Council.” Illinois PIRG suggests implementing an evaluation system similar to the one employed in the Australian city of Victoria, in which potential P3s are assessed through a series of tests to determine outcomes such as equity, accountability and transparency, and consumer protection.
Shorter Contracts with Revenue Sharing
The length of CPM’s contract with the City was one of the most criticised aspects of a most-criticised deal. Illinois PIRG advises that no contract should exceed 30 years given future uncertainty and tendency of risk to compound itself: a bad deal will only worsen over time. It also recommends including regular renegotiations every 5-10 years. The Inspector General’s report compared P3 lease lengths in Europe and reached a similar conclusion. It proposed an alternative agreement scenario in which the City entered a shorter lease, accepted a smaller up-front payment (between $300-400 million), split profits with the contractor, and still rectified its immediate budget shortfall. The Inspector General modeled 5 scenarios of varying optimism and discount rates over a 20-year lease with revenue sharing that would have earned Chicago between $302-687 million in its first 5 years.
The contract to lease the parking meters took nearly everyone by surprise. Neither the public nor City Council was aware the City solicited bids in November 2008. The Mayor called a meeting 3 days after the bid opening to approve the agreement, and announced the deal to the public the day prior to City Council’s vote. Beyond listing Morgan Stanley as the main investor, no other financing details were provided, and City aldermen were only supplied an 8-page summary before voting. Illinois PIRG asserts that legislatures must be involved in both “the decision to solicit bids under particular terms and the acceptance of a final deal. It is not good enough for legislators to approve the authority to solicit bids and then avoid being counted in terms of their position on a final deal.” The Inspector General recommended that City Council have 60 days to review any contract before bidding, and vote on accepted bids no sooner than 1 week after bid opening. This lends the process credibility, and a City legislature is less likely to permit the administrative reorganisation seen in this case study that weakens government autonomy to the benefit of a contractor. To guarantee full transparency, the public must be kept abreast of potential P3s and have an opportunity to ask questions and comment in hearings or other venues before any contracts are awarded.
“Infrastructure assets are becoming financial products as a result of current political economic frameworks, and this political economic restructuring is giving rise to a global infrastructure market and changing governance of infrastructure in cities” (Torrance 2008). Infrastructure P3s seem inevitable in a neoliberal, austerity-driven climate. Although it may be politically expedient to get large up-front cash payments and delegate operations to a private company, such arrangements can easily corrupt governance and compromise a City’s long-term interests. Through unscrupulous and hasty infrastructure privatisation, elected officials and bureaucrats surrender their “social and political accountability for the urban landscape” (ibid). Chicago’s 75-year lease of 36,000 on-street parking meters exemplifies such subjugation of a core urban function to a for-profit amalgamation of private investors. When P3s are executed responsibly, the private sector stands to profit from operating a public asset competitively and to a high standard; the public sector can enjoy a tightly-governed efficient outsourcing and continued cash flow.
However, the sheer length of this lease and clauses demanding compensation and non-competition for the parking meters limit the City government’s autonomy over its street network. This could have been prevented if Mayor’s office involved the City Council, general public, and an independent agency in transparent valuation and bidding processes. Instead, until 2083 Chicago is locked into a bad deal in which taxpayers, either through paying a meter or the City’s compensation payments to CPM, will enrich a consortium formed of foreign investors. The long-term consequences of limited transport planning latitude and government intervention on behalf of a contractor will be seen in the 64 remaining years of the lease. Whatever the outcomes, they must be considered in a broader analysis of whether American cities believe infrastructure networks are more valuable as a public good or private investment vehicle.
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