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June 4, 2009 4:33 PM

When P3 Deals Go Horribly Wrong

Posted by Brian Baxter

Back in December, we called Chicago's $1.16 billion parking meter privatization a watershed event for public-to-private partnership deals.

Now that transaction is in the news again but for all the wrong reasons--malfunctioning meters, outraged citizens, angry politicians, and a consumer fraud investigation launched by Illinois attorney general Lisa Madigan.

A team of lawyers from Katten Muchin Rosenman, Chicago's Charity & Associates, and Milwaukee's Gonzalez Saggio & Harlan served as counsel to the city on a 75-year concession for the parking meter system reached with a consortium led by Morgan Stanley Infrastructure Partners, which was advised by Freshfields Bruckhaus Deringer U.S. infrastructure practice head Kent Rowey.

At the time, the deal's detractors claimed that the city would raise meter rates to satisfy the acquirer's interest in making more money from the meters. Completing the deal was crucial to Chicago closing a half-billion budget gap with the privatization proceeds. But the problem that's emerged has been in the transition to the expected--and implemented--higher rates.

"Somehow everybody missed  the fact that if you raised the parking rates and you didn't do anything about the existing meters, then [those] meters would get overwhelmed," says one lawyer familiar with Chicago's parking meter problems. "The rates went up significantly, and instead of needing a quarter or four quarters [to park], you needed eight quarters. And that overloaded the meters."

Within a matter of weeks, huge numbers of meters all over the Windy City were overstuffed with coins and faltering. The uproar from an unruly populace focused attention and pressure on the politicians who had approved the privatization.

Chicago Mayor Richard Daley admitted in May that the privatization transition process had been botched. On Tuesday, Chicago's inspector general David Hoffman released a report stating that the privatization was a "dubious financial deal" that should have netted the city at least $2 billion.

On Wednesday, still stinging from public criticism of the parking meter escapades, the city council met to approve a new ordinance imposing a 15-day review period for future asset-lease deals. The investigation commenced by state AG Madigan, who has higher political aspirations, has the private buyers lawyering up with their own politically connected counsel.

Morgan Stanley Infrastructure Partners has retained Winston & Strawn senior chairman James Thompson, a former governor of Illinois. Hartford-based LAZ Parking, a parking management firm hired to run the city's meter system, has tapped former Mayer Brown chairman Tyrone Fahner for counsel. (Fahner, a former Illinois AG, was appointed when Thompson served as the state's governor.)

Mayer Brown is the firm that Chicago has turned to for several past privatization deals, such as the $1.83 billion lease for the Skyway Toll Bridge in 2005 and a $2.5 billion concession for Midway Airport unveiled last September.

The P3s have been good business for the firm, with partner John Schmidt, a former chief-of-staff to Mayor Daley, telling The American Lawyer in April that up to $3.5 million in fees could be generated for Mayer Brown if the Midway deal closed. (The deal later collapsed when financing evaporated amidst the economic crisis, but a penalty provision negotiated by Mayer Brown lawyers still netted the city a breakup fee of $126 million.)

Both the Skyway and Midway deals featured more elaborate transition periods for city-owned assets moving to private control. None of those spoken to by The Am Law Daily for this story, albeit all of whom were lawyers, believed that the legal advisers on the transaction were to blame for the problems plaguing the parking meter privatization process.

Katten Muchin public finance partners Lewis Greenbaum, Milton Wakschlag, and Christopher Torem, and tax planning partner Ziemowit "Jim" Smulkowski advised the city on the deal. (Greenbaum, who is co-bond counsel to the City of Chicago, declined to comment.)

The city and LAZ Parking now are installing an electronic collection system--similar to the Muni-Meters seen on the streets of Manhattan--to replace Chicago's antiquated parking meters. Electronic collection systems have also been more effective in raising rates--apparently people are far less irritable when not forced to carry fistfuls of change around.

But some P3 lawyers are worried that Chicago's meter mania may impact other planned privatizations. The City of Los Angeles has hired DLA Piper as it considers privatizing its own parking system.

"This could have a little bit of spillover to other [P3] possibilities," says one infrastructure lawyer, who requested and received anonymity. "But hopefully a lot of people recognize that [Chicago] is somewhat of a unique situation. Maybe they'll see this and say, 'Well, there's one mistake I won't make.'"

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