In defense of public-private partnerships

By Kent Rowey
July 24, 2013

Pitchforks raised, a mob of critics pounced on an article I wrote recently for the New York Times in which I dared to assert that the city of Detroit could have benefited from selling or leasing some of its infrastructure assets to private investors in return for large, up-front payments, a reduced debt load and a chance to improve public services under a more efficient, business-minded operating model.

My essay advocated a new wave of public-private partnerships (P3s) for U.S. cities — and I cited several prominent success stories, among them the Chicago Metered Parking System, which transferred 36,000 on-street parking meters to a concession run by Chicago Parking Meters LLC (CPM), a company backed by private equity investors. The 75-year contract, commenced in 2010, delivered $1.15 billion to the city and has been cited as a model for how to run a municipal parking enterprise.

Not so fast, say the detractors, including Reuters’ MuniLand blogger Cate Long. They carped that the article did not mention that I represented investors in several of the P3 transactions described, including CPM (even though my professional bio highlights my role in each of the deals – the Times has since updated the piece accordingly). More seriously, they claim that the CPM partnership has been an abject failure. “The city got ripped off, and continues to get ripped off each day because of this travesty,” said one responder. MuniLand’s Long called it a “municipal scam.”

In fact, this “scam” helped Chicago rank number one in the world for on-street parking in a 2011 IBM Global Parking and Transportation Survey. Among 20 major cities surveyed worldwide, Chicago drivers needed the shortest time to find a space, had the fewest tickets and fewest disputes over spaces, and suffered the least emotional and economic pain over parking, which as any driver will attest, is high praise. In its 2011 Annual Privatization Report, Reason Foundation noted that CPM’s “state-of-the-art maintenance system makes it one of the most sophisticated operations in the U.S.” Reason added, “The Windy City is now an international leader” in parking.

How did such accolades occur in so short a time? Perhaps it’s because CPM invested $35 million in upgrades, replacing the old single-space meters with 5,000 pay stations that accept credit and debit cards, feature an online refund option and provide 24-hour customer service. Drivers will soon be able to digitally feed the meters with their smartphones. The advent of CPM also helped to expose what the Chicago Sun-Times called “widespread disability parking abuses,” with “able-bodied people using relatives’ placards, fake placards and even stolen placards to park for free,” sometimes for days. The practice caused both the city and CPM to lose millions of dollars in revenue, leading to passage of Public Act 097-0845, which established strict criteria for free parking and to reduce incidence of fraud. Reason Foundation noted that under CPM, local residents and small business owners —  including those in Chicago’s ethnic communities — reported a marked increase in available spaces in their neighborhoods.

Chicagoans have benefited in other ways from public-private partnerships, including those involving the Grant Park parking garages and Chicago Skyway toll bridge. A report entitled “Examining Parking Privatization as a Fiscal Solution” published in Government Finance Review stated, “The money received in these deals has been used to pay off debt associated with building Millennium Park, improving the infrastructure of neighborhood parks, funding programs for low-income residents, settling budget deficits, and establishing a long-term reserve fund.” Noting the enormous expenditures needed to renovate the city’s troubled parking system, the report concluded that “Maintaining these garages would have become a significant burden on the city. Leasing the garages allowed Chicago to place the repair obligations on the private operator and free up capital for other projects.”

The hue-and-cry over my article illustrates a fundamental fallacy of those who would bash P3 deals — that they dupe cities to hand over crown-jewel assets to Wall Street barracudas. Nothing could be further from the truth. Municipalities retain control over the assets they lease and over any payments owed to the concessionaire over the life of the concession. P3s are subject to strict procurement laws — and any increases in fees are governed by strict regulatory approval.  Control over the underlying assets remains with the municipality. The concession contracts impose stringent performance standards on the operator which, if not performed, allow the municipality to terminate the concession. Many P3s also include a revenue share with the municipality.

What is certain is that most cities can’t provide the level of investment needed to create and maintain infrastructure and related services that are fit for 21st century usage. The professional management and innovative technology a private operator brings to public infrastructure is value enhancing. Meanwhile, it’s the investors who assume the risk in taking over delivery of services for many decades to come. Even then, returns on P3 investments are a far cry from the alpha earned on hedge funds, more in line with an investor-owned electric utility.

And there’s another point: P3 deals rehabilitate more than public conveniences. Often, the transactions deliver vital services for sanitation, transportation or healthcare. For a partnership structured to privatize the municipal water and waste systems of Bayonne, New Jersey — another deal in which I advised investors — the private capital used to fund the concession was critical in replacing decades-old pipes and meters. In this case, serious public safety concerns – including main breaks, contamination and boil water advisories — were addressed by a P3.

For Detroit, the die is cast. As a result of its Chapter 9 filing, the Motor City will have to sell some of its non-core assets to cover $18 billion in liabilities. Let’s hope that Detroit’s emergency manager is able to partner up with some patient, long-view investors willing to invest in the city’s future for generations. And may other strapped towns avert their own bankruptcies by welcoming more private investment in public infrastructure. For any U.S. city today not even to consider a P3 option would be the real scam.

PHOTO: Parking meters run by LAZ Parking for Morgan Stanley are pictured in Chicago March 18, 2009. REUTERS/John Gress

 

2 comments

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I am not convinced public-private partnerships are good.

Civil servants and elected officials are not necessarily good negotiators and may not have the business acumen as in the private sector.

When the private sector asks the public sector to help build a ball park or convention center, it is usually done to reduce the exposure to risk.

When the public sector does partner with the private sector, in these cases the risk should be equal and there should be benefits to the municipality like lower ticket prices.

What we do not want is the debasing of capitalism based on risk and reward.

That the private sector privatizes the profits and socializes the losses on the public sector.

The tax payer gets screwed.

As in our convention center in Lancaster, Pennsylvania.

Posted by Flash1022 | Report as abusive

If i was on the investors side off corse the P3 are an excellent deal,no risk and high gain.The problem is that high gain on one part is a high loss on the other and guess who will lose at the end.If Detroit goes by that path will end with more debt and without some of is good accets

Posted by hobbys7 | Report as abusive