This week, the National Journal's transportation expert blog posed the question: What are the implications of the collapse of the Midway Airport (Chicago) privatization deal? Specifically, the National Journal's Lisa Caruso asked:
"Last month, the $2.5 billion deal to lease Chicago's Midway Airport to a private operator fell through because investors -- Vancouver Airport Services, Citigroup, and John Hancock Insurance Company -- could not secure the necessary financing. Had the deal gone through, Midway would have been the first major U.S. airport to be privately run under a Federal Aviation Administration pilot program that Congress created in 1997. What does the collapse of this potentially ground-breaking deal mean for future privatization efforts? Was the failure to raise private capital simply a casualty of the current credit crunch, or does it represent a larger setback for public-private partnerships to operate roads, bridges and other transportation assets, as well?"
This was a big deal because the public-private partnership bid was supposedly signed and sealed. The private partners simply had to deliver the goods (which means financing), and they couldn't. Fortunately, the city of Chicago isn't out, financially (they pocketed a $126 million cash down payment). But, the bigger question is what this event says for private financing.
Our own Bob Poole provides his insights here, concluding,
"The enduring significance of the Midway deal was that the City of Chicago figured out deal terms that the airlines serving the airport were comfortable with. That is hugely important, since prior to Midway, U.S. airlines had always opposed airport privatization. So the Midway deal terms remain as a template for others hoping to gain airline support for their own privatization plans."
However, I think Ken Orski's opening comments for the week are worth reading. Ken is more skeptical of the willingness of the private sector to step in to finance and operate public infrastrcutrue in the wake of the deal's collapse. He said so (before the collapse), and got an ear full from many in the transportation finance community. In his opening remarks, Ken reviews the status of the debate over private financing of public infrastructure and PPPs, and it's worth a read.
I think Ken's concluding observations are useful insights into the current state of the market:
"The weight of all this evidence, plus the arguments of many colleagues whose judgment I respect have caused me to reconsider my initial skepticism. I still think that future infrastructure investors will demand a more stringent test of the assets’ economic viability and profitability, but I no longer consider the collapse of the Midway Airport deal as a watershed event that marks a fundamental change in how private investors view infrastructure financing opportunities.
Of far greater importance, I believe, will be the future posture of our policy makers. In this regard, I have been encouraged by the statements of support from our congressional leaders, administration officials, governors and state legislators. On the other hand, the bills introduced by Senators Chuck Grassley (R-IO) and Jeff Bingaman (D-NM) (S.884 and S.885), if passed, could seriously undermine the market for toll road concessions and discourage private investment in highway infrastructure. (The first bill would create significant disincentives for state governments to lease highway assets by excluding lane-miles and VMTs traveled on "privatized highways" from apportionment formulas for federal highway funds. The second bill would substantially reduce the federal tax benefits currently available to "brownfield" toll road concessions by disallowing accelerated depreciation. How Congress reacts to the Bingaman-Grassley initiatives and how much active support (as opposed to simply rhetorical support) federal and state policy makers are willing to provide to public-private partnerships will be decisive in how private investors respond to future opportunities in infrastructure financing."