Last week, City of Chicago Inspector General David Hoffman issued a report casting a critical eye on the troubled rollout of Chicago’s parking meter privatization initiative:
City officials did not consider alternatives and ignored long-term consequences in an effort to solve short-term budget problems when they agreed to the $1.15 billion deal in December, according to the 43-page report. The 75-year lease to Chicago Parking Meters quadrupled parking rates in some neighborhoods, causing an outcry from residents.
The city’s financial team did not properly estimate the value of the city’s 36,000 meters before the lease was approved, said Inspector General David Hoffman, who added the deal was worth at least $2.13 billion.
“There was a substantial difference between the price that the city got from this and what it was worth to the city if it had kept it,” Hoffman said.
Chicago Mayor Richard Daley’s chief of staff, Paul Volpe, called the report “misguided and inaccurate” and Hoffman’s $2.13 billion price tag “ridiculous.” Such estimates should take the meters’ risky nature into account, he said.
“For instance, there were no combustible engines 75 years ago. Fifty years ago there was no such thing as a parking meter,” Volpe said. “So to assume there’s no technological advance that will change the use of on-street parking meters for 75 years to come is simply naive.”
Independent experts told the city the meters were worth between $650 million and $1.2 billion, Volpe said.
Hoffman’s full report is available here. The report raises a number of issues that are beyond the scope of a blog response, but I’d like to explore two key themes below.
First, a large section of the report is devoted to estimating the potential value of the parking meter system to the city if it were to have remained under public operation (assuming the same rate increases). Hoffman includes a variety of calculations assuming different discount rates and revenue scenarios to conclude that the parking meter system was worth approximately $2.13 billion to the City over the life of the 75 year deal and that through privatization, the City effectively received about $974 million less than the system was worth to the City.
Digging into the report, however, it becomes clear that when accounting for all scenarios, Hoffman calculations of the new present value of the system fall within a wide range of $1.16 billion to $4.25 billion. While this doesn’t automatically undermine the analysis in and of itself, it does suggest caution against definitive statements of potential value given the wide range of possibilities.
But even if one assumes that Hoffman’s preferred valuation is accurate, it still needs to be understood that his analysis is far from an apples-to-apples comparison. The key question that needs to be asked—and has yet to be done so thus far—is this: could the City of Chicago have actually raised $2.13 billion in the private capital markets for a monetization of its parking meter system? It’s not good enough to take a known—the $1.15 billion the city received through the lease—and compare it to a hypothetical value divorced from the reality of the market. It’s one thing to assume a certain value; it’s another thing entirely to actually translate that hypothetical value into real money.
I think it’s extremely unrealistic to believe that the city, even assuming the same parking rate increases over time, would have been able to top the private sector bid value the city received at the time they received it. Remember that the parking meter concessionaire won the bid in December 2008 and completed the financial close before taking over the system in February. To assume that the city could have done better keeping the system in-house would require a tremendous leap of faith—the city would have had to go to skittish investors at a time of extremely tight municipal credit markets (remember, governments were finding it very difficult to issue new debt at the time) and somehow convince investors that it could both modernize its meter system AND operate the parking meter system much more efficiently than it has ever actually proven able to do. Either one of those assumptions would be questionable on its own; assuming both seems like a stretch of reality.
And Hoffman fails to adequately factor in the extremely potent issue of risk transfer into his valuation. While one might assert that the discount rates and revenue scenarios used in the analysis factor in some downside risks, it fails to meet the rigor of the types of explicit risk transfer valuation that we see in value-for-money/public sector comparator models we’ve seen refined for years in the UK, Canada and elsewhere. We know from experience that the value of transferring risk from the public to the private sector is often considerable and generally works to significantly reduce the implied value of the system if kept under public sector operation. This is essentially the thrust of Paul Volpe’s comment above.
Did Hoffman’s analysis take into account the risks that in 75 years, people may not even be driving anymore? Today, from the city’s viewpoint it matters little—the concessionaire took that risk when it paid $1.15 billion for the rights to operate the system. Had the city kept the system, it would have also kept that risk, and had it somehow been able to pull off a mythical monetization deal along the lines described above, it would have still kept that risk. After all, if people stop using the parking meter system over time, then the city would be stuck trying to cover the debt service on a $2+ billion bond issue without the revenues to support it—and then guess who would have made up the difference? That’s right: taxpayers.
In a way, it’s ironic that Hoffman failed to do an adequate risk analysis since the report advocates that the City develop a rigorous, systematic process for reviewing proposed PPPs and undertaking a true apples-to-apples, public vs. private sector analysis (such as the aforementioned public sector comparator model used widely overseas). PSC-style analysis incorporates a heavy focus on valuing the risk implications for either party and would have offered a much more credible analysis.
In saying that, in effect I’m agreeing with one of Hoffman’s key conclusions in the report: “The countries with the most experience with PPPs have developed standardized approaches to compare public and private provision of services. In order to safeguard the public interest, it is imperative that Chicago do the same if it considers a PPP in the future.”
Chicago certainly has more experience than any other US city right now in leasing government assets, but that doesn’t mean it can’t improve its process. I’m not of the opinion that the city’s process is “broken”—the Skyway and parking garage leases have proceeded smoothly with little public opposition, for example—but best practices in privatization teach us that a rigorous, standardized approach to PPP project evaluation is key to the sustainability of a privatization program. As I noted the other day, the State of New York is making this a central piece of its new state PPP program, for example.
Unfortunately, it often takes a tricky project or two before the lightbulb comes on. For example, after attracting severe media scrutiny over the troubled rollout of a massive state IT contract, former FL Gov. Jeb Bush developed a new Council on Efficient Government midway through his term to reform state procurement and require standardized scrutiny of all privatization projects. He did this precisely because he wanted to see privatization succeed, and he astutely realized that the often thorny politics of privatization can overshadow the associated policy management benefits. To that end, he launched a process to help de-politicize the discussion and keep it focused squarely on value for money in the delivery of services.
Chicago appears to be in a similar position now, and the city can use the parking meter rollout as a means to developing a better PPP mousetrap. Otherwise, the collapse of the Midway deal and the troubled parking meter deal stand to threaten the political viability of future city PPP initiatives. Given what the city has been able to achieve thus far by extracting trapped value from city assets—getting government out of non-core business enterprises, paying off debt early, investing lease proceeds for longer-term budget relief—it would be a shame if worthy future initiatives collapse unnecessarily under the weight of toxic politics.