December 5, 2008 6:06 PM
Chicago's $1.16 Billion Parking Meter Privatization 'A Watershed Event'
Posted by Brian Baxter
Earlier this week the City of Chicago announced a winning bid of $1.157 billion by a consortium led by Morgan Stanley Infrastructure Partners seeking a 75-year concession to take the city's parking meter system private. City council members approved the transaction in a 40-5 vote on Thursday and Mayor Richard Daley subsequently signed an ordinance effectively approving the deal.
For the Windy City, it was the latest in a series of public-to-private partnership (P3) transactions in recent years. In September the city announced a $2.5 billion deal to lease Midway Airport, the first privatization of a major airport in U.S. history. In 2005 the city privatized its Skyway Toll Bridge in a $1.83 billion deal.
The growing popularity of P3 deals is certainly no secret, but at a time when the flow of M&A and structured finance deals has slowed to a trickle, infrastructure finance could be the next big thing for hungry transactional lawyers. And some see this week's Chicago parking package--in addition to 35,000 meters, the deal involves several municipal parking lots--as a sign that P3 deals could become counter-cyclical.
"This [deal] is a watershed event in the P3 world," says Michael Smith, a real estate and infrastructure finance partner at Baker & McKenzie in Chicago. Smith, who represented several bidders that dropped out of the parking meter sweepstakes that began 11 months ago, thinks that other municipalities will take note of Chicago's haul from a transaction that is unique in its complexity.
While the private consortium is entitled to all revenues from the system, the city by law must retain its reserved powers. Those powers include revenue from parking tickets, the ability to decide which parking spaces will be metered, those meters' hours of operation, and the rates for those meters, says Katten Muchin Zavis Rosenman public finance partner Lewis Greenbaum, who serves as co-bond counsel to the City of Chicago.
Greenbaum was one of the lead lawyers on the deal for the city along with assistant corporation counsel James McDonald and a team of lawyers from Chicago's Charity & Associates and Milwaukee's Gonzalez Saggio & Harlan. (The city evidently likes to spread the P3 wealth around as former chief-of-staff to Mayor Daley and current Mayer Brown partner John Schmidt generally serves as the city's lead counsel on privatization deals, having done the Skyway and Midway Airport transactions.)
Greenbaum, who was assisted by Katten Muchin public finance partners Milton Wakschlag and Christopher Torem and tax planning partner Ziemowit "Jim" Smulkowski, thinks Chicago's parking meter privatization could provide a roadmap for other municipalities seeking to raise funds in tough economic times. It's a notion seconded by his colleague across the table.
"The municipal bond market is basically closed, pricing is terrible, and [local governments] are running out of borrowing headroom," says Kent Rowey, head of the U.S. infrastructure practice at Freshfields Bruckhaus Deringer in New York. Rowey, who represented Morgan Stanley on its winning Chicago bid, believes P3s are going to become more popular, particularly in light of the pledge by President-elect Barack Obama, a Chicago native, to rebuild the nation's infrastructure as part of an economic stimulus plan.
"I think Obama's transportation transition team is quite familiar with the P3 structure and I hope that's going to be a prominent feature of his infrastructure finance policy," Rowey says. "I can't imagine that you can develop a sensible policy that requires federal funding without a private finance component. There's a lot of equity on the sidelines looking for places to invest and infrastructure is usually a good long-term investment."
That doesn't mean municipalities are about to start selling off any public asset for a paycheck. While speedily approved, the Chicago deal has its detractors, including those who think the city will raise meter rates to please the private interests who cut the check.
Such opposition can prove formidable: In September, a planned $12.8 billion privatization of the Pennsylvania Turnpike was scuttled after the state's own Turnpike Authority opposed the deal. (Mayer Brown's Schmidt advised the state on the proposed 75-year lease of the 535-mile turnpike.)
As counsel to the lenders for the winning consortium on that deal, Rowey had a ringside seat to when P3 deals go bad. "It was unfortunate because a lot of time and effort went into that bid but things just got so politicized," he says.
To lawyers like Baker's Smith, letting politics scuttle such deals is shortsighted. Many infrastructure assets have lower earnings when they're operated as public entities, he says, noting that Chicago's parking meter system generated average revenues of roughly $19 million for the city when it was publicly owned, far less than the nearly $1.16 billion it made the city this week.
"If you've got underutilization to a certain degree--like earning $19 million on a $1 billion asset--then you're just wasting money," Smith says. "Even if the [private owners] raise rates over the next few years, the public is still capturing the value of its assets."
Smith says he's already heard from several municipalities--he won't name who--intrigued by Chicago's parking privatization. He intends to make the deal "Exhibit A" in his pitch to potential clients. "What's really going to be interesting is when you get to the second-tier cities like St. Louis, Louisville, Indianapolis, and Cincinnati," he adds. "Then you really have a huge market for this."
While P3 deals are common abroad--Spain's Abertis, Cintra, and Global Via and Australia's Macquarie and Babocok & Brown are principal players--Americans have yet to adopt them with the zeal of their international counterparts. Besides Freshfields and Mayer Brown, firms like Allen & Overy, White & Case, and Milbank, Tweed, Hadley & McCloy are striving to complete more P3 infrastructure projects stateside.
Rowey, who began doing large-scale infrastructure finance deals in the 14 years he worked in Freshfields's London office, is optimistic that Chicago's latest large-scale P3 transaction will encourage other U.S. municipalities to follow a similar path. This year he's already advised a Portuguese company, Brisa, in a $500 million privatization of Denver's Northwest Parkway. Now he's working for Florida's Department of Transportation on a planned privatization of a 78-mile stretch of Interstate-75 known as "Alligator Alley" that runs between Naples and Fort Lauderdale in the southern part of the state.
"Transactional work in these economic times is obviously under a lot of stress, but I think you're going to see a lot in infrastructure," he says. "This is a really interesting area of transactional practice."Make a comment