What’s the difference between a good deal and a good public-private partnership? Easy: a good deal doesn’t necessarily need both parties to win.
Chicago Parking Meters, which turns 10 this year, is a killer deal – for Morgan Stanley and partners Abu Dhabi Investment Authority and Allianz SE. For the city of Chicago, it’s a terrible one. As a public-private partnership, it’s a failure, a transaction so unbalanced that, as it enters a six-decade streak of mostly private-sector upside, it threatens to implode under the weight of public and political resentment.
There are many problems with Chicago Parking Meters, but it’s not hard to know where to start: the lion’s share of the blame lies squarely at the feet of Mayor Richard Daley’s administration. Forged in the thick of the financial crisis, Daley rushed through a deal giving away long-term revenue for a short-term budget fix. To make matters worse, he underestimated the assets being sold, ensuring this 75-year PPP got off to a rocky start, from which it never recovered.
The private investors’ role in this is a tricky question. On the one hand, the Morgan Stanley-led consortium had a duty to seek the best-possible deal for its investors. That’s its job as a fund manager – not to babysit city officials. It’s also worth noting its offer was the result of a competitive auction process, with Macquarie the underbidder. On the other hand, Chicago Parking Meters is so one-sided that it’s difficult to imagine the dealmakers thought much about its long-term sustainability.
That raises important questions about alignment of interests for what is a true intergenerational transaction. It’s clear that public officials hate it – Mayor Rahm Emanuel’s administration told us the “flawed” contract “shortchanged Chicago taxpayers”, while alderman (and prospective mayoral candidate) Scott Waguespack accused the private sector of “just milking the system” now that it looks set to recoup its money around 2021. Users might not be vandalising the meters these days, but we doubt their appreciation for the deal has improved much.
These questions are important because, while the Morgan Stanley-led consortium might be on the verge of making its money back, whoever comes next has to deal with all this pent-up risk. And it’s not like things can’t get any worse: the agreement’s ‘true-up payments’ – which compensate the private partner when parking metres are not being used – offer the potential for many future headaches, having already been the source of one legal dispute.
Why are we talking about Chicago Parking Meters almost a decade after the deal was done?
For a couple of reasons. Firstly, as we hit the 10th anniversary of Lehman Brothers’ collapse, it’s worth looking back and reflecting on that period. In that sense, Chicago Parking Meters speaks to a dealmaking mentality that has no place in infrastructure investment today.
Secondly – and more importantly – because we may be entering a period of increased privatisation in the US, thanks to the momentum created by the Trump administration’s talk of a $1 trillion infrastructure stimulus and increased awareness of the benefits of asset recycling.
For the latter to take off in the US, though, it is essential, as IFM Investors chief executive Brett Himbury put it to us recently, that “the first case studies are really good ones, where the voters and users of the assets see it as a very good thing rather than being in any way concerned about it. If that is not the case, and egregious private-sector capital gets in and upsets the users, it will put us back decades”.
Egregious private-sector capital is exactly how the users and city officials view the investors behind Chicago Parking Meters, even if, ultimately, it’s the politicians that failed the voters.
“The best thing is for the rest of the US to look at this and learn how not to do a deal,” Waguespack told us. On this one, it’s hard to disagree.
Write to the author at email@example.com. Are you an LP or direct investor? If so, please take a moment to take part in our Perspectives 2019 survey, where we focus on institutional investors’ approach to the alternative asset classes.