“PPPs” & Parking - Change is Under Way

May, 2009

The United States is undergoing a fundamental change in the way it finances, delivers and operates major transportation infrastructure projects. In order to address the effects of population growth, the severe and worsening shortfalls in state and municipal budgets for public works and the declining performance of transportation networks after decades of undercapitalization and mismanagement, jurisdictions around the United States are relying increasingly on new methods of project procurement known as “public-private partnerships” (or “PPPs”).
PPPs are based on contractual models developed during the early 1990s, and are structured so that a private entity, rather than a public agency, is responsible and financially liable for improving and maintaining public infrastructure, such as roads, transit facilities, or schools. In the last several years, municipal parking systems in particular have received considerable interest as candidates for PPPs. As readers of this publication know, the City of Chicago leased its metered parking system for $1.2 billion dollars in February of 2009. The proceeds of the lease will fund infrastructure improvements and support financial stability for the city in the years to come. Following Chicago’s lead, a number of cities, including Detroit, Los Angeles, and Pittsburgh, are also evaluating PPPs for their on-street and off-street parking assets.
Why Parking PPPs?
Generally there are three reasons. First, cities are acutely feeling the effects of the economic down turn, and need to address their immediate fiscal needs by looking at an array of municipal assets, including parking systems, for possible monetization. In these uncertain times, PPPs offer cities a solution to regain their financial footing. A lump sum payment in connection with a lease or a revenue-sharing arrangement with a private operator (sometimes called a “concessionaire”) can create an annuity to fund long-term liabilities, reduce deficits and avoid credit rating downgrades that could be fatal to a city’s services and programs.
Second, compared to PPPs for other infrastructure assets, leasing a parking system to a private business is politically more feasible. Since private enterprise already plays a significant role in the operation of parking systems, many corporate names are well recognized by the public, and system users are generally comfortable with the concept.
Third, and most importantly, PPPs for municipal parking have clear public benefits beyond addressing the immediate financial needs of local governments. When properly structured, a long-term lease realizes superior monetary value for the locality, promotes long-term stewardship of the asset and heightens accountability for performance in ways not possible under the public sector model. Here’s how:
• Superior Monetary Value. A long-term lease can realize more monetary value for a city than conventional municipal financings, such as public bonding against parking revenues. As economists and financial experts note, the parking asset is worth considerably more in the operational hands of the private sector because the private sector has economic incentives that drive performance. Since a privately operated parking asset creates more value than the same asset under public management, a concessionaire and its investors are prepared to pay more for the right to operate the asset than lenders are prepared to lend against the same asset if managed by government.
• Promoting Long-Term Stewardship: Under a long-term lease, the private sector agrees to fund a multi-year capital investment plan for the parking system. The agreement ensures that critical investment in the system is continuous and not subject to the gamesmanship of annual budget negotiations and the short-term decision-making imposed by election cycles. A lease transaction thus assures a steady commitment of capital to maintain the asset, including funds for technological upgrades that improve efficiency and convenience for users.
• Heightened Accountability. A long-term lease also heightens accountability to the public. The lease establishes highly detailed, transparent and enforceable plans for private sector performance and creates remedies in favor of the public in the event the private sector fails to honor the specifications established by the lease, including termination of the agreement. In a well-structured PPP, the public clearly has more recourse against a concessionaire than it does against a public agency that is not subject to any binding agreement for performance and cannot be removed for its failure to perform.
• Risk Transference: A long-term lease enables a city to receive today a payment for revenue streams that may never materialize during the “out years” of the lease. For example, under Chicago’s lease of its metered system for 75 years, the city accepted a lump sum this year for cash flows that may or may not be generated decades from now (who knows how we’ll be travelling in 50 to 75 years?). In this way, Chicago’s lease astutely assures value capture for the city and is a prudent hedge against “mode shift” from automobiles to other means of transportation and changes in travel behavior generally over the long-term.
What the Critics Say
Critics of PPPs claim that public agencies can achieve the same benefits as the private sector. But the critics disregard the fundamental difference in how governments and businesses behave, and the impact each model has on value, accountability and the transfer of risk.
Critics suggest, moreover, that the private sector realizes value from what is essentially monopoly pricing of the system, and that the users are vulnerable to price-gouging. In a PPP, however, the rates charged for parking are strictly regulated by the terms of the lease agreement or, as in the case of the Chicago lease, the rate-setting power is retained by the city.
Lastly, critics paint a bogyman of the “for profit” operator. Somehow, it is suggested, the public interest is compromised by reliance on businesses, rather than government agencies, to deliver infrastructure to the public. But the claim overlooks that we routinely rely on regulated network utilities to provide electricity, water, telecommunications, freight rail transportation and other essentials, and that we have seen substantial gains in efficiencies within those sectors over the last several decades. In contrast, over the same period, we have seen chronic undercapitalization of infrastructure maintained exclusively by government agencies – a function of the political cycle and not of agency leadership.
Is there a greater role for private enterprise in public infrastructure? Many city officials think there is. For reasons of sound public policy, PPPs for parking facilities will likely become the norm over the next several years.
David Horner is Senior Counsel with the law firm Allen & Overy LLP in New York City. He previously served for three years at the U.S. Department of Transportation as Deputy Assistant Secretary for Policy and Chief Counsel of the Federal Transit Administration. His email is David.Horner@allenovery.com.