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Collapse of Midway Deal "Not a Setback for Privatization"

MuniNet Guide Interview with Reason's Leonard Gilroy

Leonard Gilroy
April 30, 2009

The City of Chicago and Midway Airport made headlines when Mayor Richard Daley proposed a $2.5 billion deal to lease the airport to a consortium of investors from the private sector back in 2007. But in mid-April, city officials announced that the proposed transaction had met its demise.

Many fingers are pointed at the troubled economy as the reason the Midway deal fell through. But Leonard Gilroy, Director of Government Reform at the Reason Foundation and editor of the foundation's Annual Privatization Report, cautions against rushing to judgment. “Deals can fall apart even in better economic times,” he says. In the interview that follows, Mr. Gilroy shares his thoughts on the Midway transaction, as well as current trends in public-private partnerships.


MuniNet: In your opinion, does the collapse of the Midway deal foreshadow a declining trend for public- private partnerships?

Gilroy: Because the Midway deal was a high profile transaction, it received a lot of attention, but I don't believe it should be misconstrued as a major setback for privatization. It is the "nature of the business" that deals tend to fall apart from time to time. Not all proposed transactions are completed as planned; sometimes the terms change and sometimes the deals break down completely. In many instances, a transaction that looks plausible today may face unforeseen obstacles six months from now.

In the case of Midway Airport, the consortium's inability to raise the capital blocked the successful completion of this transaction, but that’s not to say that other privatization deals will face the same fate.

Like anything else that involves significant capital, public-private partnerships are proving to be more difficult to finalize in the current credit crunch and recession than they were six months ago, but we're still seeing infrastructure deals come to financial close. As the credit crunch continues, we could expect things like lower bids for infrastructure assets, higher debt costs, or lower debt-to-equity ratios (i.e., a higher cash contribution from the private sector relative to the debt they incur in each deal), but I don’t see this as a serious setback for the partnership concept or the potential of the asset class in the market.

MuniNet: Was the $2.5 billion price tag too high in light of today’s recessionary economy?

Gilroy: That's difficult to answer. There are certainly some market analysts out there who felt that $2.5 billion was an excessive bid given the airport’s limited development potential, but at the same time, many others expected the deal to reach financial close.

What we're hearing from the finance community is that during these tough economic times, it's a lot easier to see smaller-scale deals (i.e., less than $1 billion) through to completion. However, if all the pieces fall into place, including securing sufficient capital, then even bigger ticket deals can still come to the market.

Though the analogy isn't one hundred percent parallel, the privatization of a public infrastructure project (like a bridge, toll road or airport, for example) is somewhat akin to buying a home. The mortgage crisis plaguing today’s market may make it harder - although certainly not impossible - for potential homebuyers to secure credit. But while the rules have tightened, the door hasn’t closed. In fact, current economic conditions have, in many cases, provided great opportunities.

MuniNet: You mentioned that public-private partnership infrastructure deals are still coming to the market today. Can you offer some examples?

Gilroy: In March, the $1.8 billion I-595 expressway reached financial close, and this vital project in Fort Lauderdale can now proceed. In February, Texas announced two new large-scale road concessions in the North Tarrant Express and the New LBJ Freeway projects, two congestion-busting megaprojects in the Metroplex region. In these two projects, the private partner is bringing roughly $5 billion to the table to facilitate $6 billion worth in road improvements. Interestingly, the Dallas Police and Fire Pension Fund is a 10 percent equity partner in the deals, further illustrating how pension fund investors are taking an increasing interest - and in this case, a direct stake - in similar partnership opportunities. (Note: these deals have not yet reached financial close.)

You also have a number of states and localities pursuing public-private partnership initiatives to modernize and improve the operation of seaports. The Commonwealth of Virginia recently received an unsolicited $8.9 billion bid from an Illinois firm to take over operations of the state's ports authority. Portland is currently tapping private dollars to expand its port, and Maryland and Alabama are considering similar initiatives, among others.

Last, a number of cities are currently developing partnership proposals on the social infrastructure and "quasi"-infrastructure front (i.e., parking meters, convention centers, and the like). Los Angeles is perhaps the most prominent, and it’s currently exploring privatization of parking meters, its convention center, and its zoo.

MuniNet: Is there a silver lining to the Midway deal falling apart?

Gilroy: There are a few silver linings. First, the City of Chicago was able to keep the $126 million that it had received in earnest money, and it can still take Midway back to the market in the future and try again. Another positive outcome is that it opens a critical slot for other airport privatization deals. The federal Airport Privatization Pilot Program only allows privatization of one “large hub” airport, a slot that Midway had taken until the procurement was cancelled. With that slot now open again, many large city airports are likely revisiting the prospect of airport privatization.

Last, the Midway experience offers a valuable blueprint on how to structure a deal to get the airlines' buy-in, a necessary precursor to privatization under the federal rules.

MuniNet: Do you believe that the privatization of public infrastructure projects is still a viable option for states and municipalities?

Gilroy: Two very significant indicators are pointing in the direction of more partnerships on the horizon. First, global capital and public pension funds are still moving into the infrastructure space - $180 billion have been raised worldwide in infrastructure equity funds over the last several years - so infrastructure continues to be viewed positively by the investor community. Second, policymakers in a number of states (e.g., California, Arizona, Nevada, etc.) and cities (e.g., Los Angeles, New Orleans, Pittsburgh, etc.) are either developing specific privatization projects or are busy modernizing their statutes to facilitate more of these partnerships.

The underlying dynamics of public-private partnerships haven'’t changed. State and local government budgets are going to be strained into the future, and public-private partnerships are going to be increasingly viewed as a critical strategy for doing more with less.

This interview was originally published on MuniNetGuide.com.


Leonard Gilroy is Director of Government Reform


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