From Crain’s Chicago Business:
Mayor Richard Daley says the city has reached a landmark agreement to privatize Midway Airport for $2.521 billion. The deal will net the city more than $1 billion, the mayor said, after paying off the airport’s debt. The bid came in at the low end of initial estimates by market observers when the city first reached an agreement with Midway’s airlines on the terms of a privatization deal. But given the current turbulence in the financial markets and a recent downturn in Midway traffic, landing a deal of this size has to be considered a “homerun for the city,” says privatization expert Robert Poole. “That’s actually more than I was expecting under current circumstances,” adds the director of transportation studies at Reason Foundation, a free-market think tank in Washington, D.C. “It’s a bet on the long term future of Chicago.” The winning bidder was a consortium called Midway Investment & Development Corp., consisting of YVR Airport Services Ltd., Citi Infrastructure Investors of New York and John Hancock Life Insurance Co. of Boston. Citi Infrastructure and the Vancouver Airport Authority each owns 50% of YVR Airport Services, which owns and operates 18 airports on three continents. [. . .] “As the first privatization of a major American airport, this transaction will provide unprecedented benefits for the traveling public, the airlines and the taxpayers of Chicago,” said Mr. Daley in a statement. The 99-year lease deal still has to be approved by the city council, the Federal Aviation Administration and the Transportation Security Administration. The city hopes to get FAA approval by yearend so the deal can be finalized shortly after that. The $2.521 billion would be paid upfront when the deal closes. Under state law, 90% of the net proceeds must be used for infrastructure improvements and to shore up city pension funds. The other 10% is unrestricted, but the mayor said it would not be used solely to balance next year’s budget deficit. [. . .] “That would only put off until next year the difficult decisions that must be made now,” he said. “It would only make our financial problems worse and I won’t do that. So, because we expect the economy to get even worse, we would be forced to make further spending cuts. It’s too early to speculate on the final plan, which we’re still developing.” [. . .] “This transaction will allow us to make much-needed capital investments while other cities and states have suspended infrastructure improvements,” said Paul Volpe, the city’s chief financial officer, in a statement. “This is a unique opportunity for Chicago.” For Southwest Airlines and Midway’s other carriers, the deal includes a 25-year agreement that caps landing fees below the current level for six years and then allows them to grow at the inflation rate, not counting the cost of food and energy.
So yet again, Mayor Daley is at the helm of another blockbuster privatization deal that will raise eyebrows and interest across the U.S. It’s hard to argue that there’s any other official in the country doing as much to advance privatization and public-private partnerships (PPPs) right now, and he’s showing that these aren’t partisan issues—they’re proven policy management tools (and Daley’s doing a lot of proving these days). And the fact that he announces a multi-billion dollar bid in the thick of the financial crisis says something extremely relevant—despite the financial turmoil on Wall Street, PPP mega-deals are still getting done in this climate. Having just attended a major PPP investor conference where the current market conditions were a central focus, there was a virtual unanimity that infrastructure PPPs are one of those attractive, go-to options in the “flight to quality” we’re seeing in the markets more generally (investments flowing to solid, safe, and tangible investments with steady returns and lower risk profiles, relatively speaking). That’s not to say that they’re entirely unaffected—nothing is in this market—but even if bids aren’t as high as they might have been or the tightening of the capital markets may make it more difficult, infrastructure PPPs are as attractive as before the crunch, if not even more so now. Back to Midway, my colleague Bob Poole has been the pioneer in the field of airport privatization and has written extensively on this issue, and Midway in particular. I’d recommend revisiting his section on air transportation in Reason’s Annual Privatization Report 2008, which discusses the Midway deal in more detail and in the context of global airport privatization. And in the “State and Local Update” section, I wrote a section that places Midway in the context of Chicago/Daley’s other groundbreaking privatization initiatives. “ Reason’s Annual Privatization Report 2008 “ Reason’s Aviation Research and Commentary UPDATE: See Bob’s thoughts on this announcement here.