Following up on my colleague Bob Poole’s post yesterday on the cancellation of the Midway Airport privatization, I think it’s worth highlighting one other notable aspect. As the Chicago Tribune notes, the city gets to keep the whopping $126 million earnest payment from the winning bidder:
Gene Saffold, [Mayor Daley’s] chief financial officer, said the city will be able to keep $126 million in earnest money put down by the winning bidder to secure the transaction, so “it wasn’t a total loss.” […]
Meanwhile, the city will set to work formulating a definitive plan to spend the $126 million down payment. Saffold said $40 million would go toward shoring up the budget this year and in 2010, and some will go to unspecified public works projects in the city’s neighborhoods.
This is conceptually no different than the earnest money prospective homebuyers put in escrow to demonstrate to sellers their commitment to follow through with the financing of the deal. By demanding some upfront “skin in the game,” sellers are simply adopting a risk mitigation strategy to incentivize the buyer to: (a) put in a serious, viable offer, and (b) follow through to the financial close. This way, the seller transfers an important risk to the buyer—if the buyer can’t ultimately close the deal, the seller gets compensated for their time and resources expended along the way. Time is money, after all, and by choosing to go with Bidder A’s offer, the seller has now foregone the opportunity to pursue other potentially viable bids.
So now Chicago gets $126 million, despite the deal not going through. And on top of that, it still has an airport that it can bid out when market conditions improve. This is yet another real strength of the public-private infrastructure partnership approach—even when a deal falls apart before closing, the public partner still gets to tap the benefits of risk transfer.