There comes a time in every corporate lawyer’s life when your parents completely lose track of what you do for a living. Mine came around Christmas 2006, when my mother asked me what I had done recently at work, to which I replied: “I just closed the Chicago Millennium parking garage concession for Morgan Stanley Infrastructure Partners.” She stared back at me with an utterly blank look. All that expensive education and my son is working on parking garages!
About this time last year, the mayors and finance officials of Los Angeles, Pittsburgh, Indianapolis and Hartford, Connecticut reached the same conclusion. Each launched a process to privatise their off-street, and in some cases on-street, public parking on the basis of a long-term concession. They had seen Chicago do it twice, successfully, and concluded that a city should focus on core services. Leave parking to the people who do it better, and at the same time raise some much-needed funding. In the case of Los Angeles and Pittsburgh, the proceeds of a parking concession would address looming fiscal crises. The rationale was persuasive, even compelling. Advisors were hired, data rooms were prepared, Requests for Proposals (RFPs) were issued and bidders flocked. But after months of effort and millions of dollars in pursuit, preparation and negotiation costs, three of the four deals were pulled, voted down by city council.
A proven model exists, and bidders will insist on it.
Everybody’s asking, ‘what went wrong?’ I was involved in those deals, so I can’t comment. But that’s the wrong question anyway. The right question is how do you get it right so there will be more parking deals in the future?
First, get the politics right. Not in a partisan way (it’s difficult to conceive of an honest ideological objection to a parking concession) – but in implementation. Municipal governance is messy, noisy and often antagonistic. Privatisation of a public asset, even one in a sector that is predominately private to begin with, like parking, needs to be explained and sold to the public in simple terms. For example:
• The city has not done as good a job in operating public parking as the private companies that already compete with it. Look at the condition of municipal facilities, and the city doesn’t have the funds to improve them.
• Municipal parking rates are well below market rates and operate as a subsidy to the adjacent businesses. Given current fiscal conditions, that is not appropriate or sustainable.
• Concession parking rates will be regulated by the city. The private concessionaire will not be able to exploit a monopoly position and gouge the public.
• An on-street parking system is a utility, like electricity or gas distribution, which have always been privately owned and operated. It will be regulated in a similar way with regard to pricing and service delivery under the concession agreement. Private companies can be trusted with power stations and gas pipelines, so why not parking meters?
• Service will improve. The private concessionaire will be subject to detailed operating standards and required capital expenditures to modernise, rehabilitate or replace worn-out facilities. At no cost
to the city.
• The proceeds will be invested in specific capital projects or programmes that are core functions. This will not be a slush fund for the mayor.
These aren’t the only arguments, and maybe not even the best arguments, for every city. But the point is: make the right arguments in a public outreach campaign before a process is proposed to city council.
And then bind the city council to the process in advance through an ordinance that in effect pre-approves the transaction. This is not as complicated as it sounds (look at Florida or Puerto Rico and their public private partnership legislation). The main policy objectives of the concession would be stated in the ordinance in terms that provide flexibility to the city’s negotiating team and encourage innovative ideas from bidders. Don’t allow the city council to negotiate the terms of the deal. I also believe a reserve price – a realistic reserve price – should be included in the ordinance. I know this view is not universally shared. But it manages expectations on the buy and sell sides and provides directional guidance
Secondly, propose realistic concession terms. There is, fortunately, a form of concession agreement for “brownfield” infrastructure assets that has been in use for several years now. Each deal will have its peculiarities arising from local law or asset economics, but (to mix my metaphors) the basic architecture of the contract is in a broad sense “one size fits all”. I have been involved in all of the parking deals that have been launched so far, and I’ve closed two of the three that have been closed. I can tell you that departing too far from that basic contractual architecture is a waste of time. On the sell side, you will have to endure a relentless push-back towards – and apologies for using a hackneyed phrase – the market standard. And for good reason. This form of concession agreement maximises value while imposing a balanced public utility-type regulation on the concessionaire.
The main features are:
• The consideration is paid up-front. I appreciate the very legitimate debate about splitting the payment between an up-front payment and a revenue share over the term of the concession, especially following the closing of Indianapolis’ parking concession last year. But in most cases, I do not believe revenue sharing is the best approach for the city. Setting aside the basic unfairness of allocating all downside risks to the concessionaire and taking away whatever very limited up-side there is in these deals, why exchange a certain up-front payment for long-term revenue risk? Rates are regulated, so it’s not as if the concessionaire is going to earn a windfall. It’s interesting that, Indianapolis aside, most concessions that have a revenue sharing concept set the level at which it applies sufficiently high that it is essentially window dressing.
• The concession term is 50 to 75 years in duration. Valuations of parking concessions are basically discounted cash flow exercises. Terms that are too much shorter than this range leave money on the table; longer terms aren’t really meaningful in net present value terms.
• Ensure that the concession conveys an infrastructure asset. This means that the concession ensures that the barrier to entry for competitors is very high or that the city has a financial disincentive to operate, or to license other private parking companies to operate competing parking facilities within specified geographic boundaries. This is one of the most heavily negotiated, and most misunderstood, provisions in the concession. It is also one of the biggest value drivers. In most cases, it will make much more sense for the city to capture the up-front value associated with providing meaningful competing parking action protection rather than protect itself against theoretical future costs that it will have the ability to avoid in any case. If parking demand increases to the point where additional facilities are in fact necessary the concessionaire’s claim for compensation will take into account the impact of the competing facility on utilisation.
• The city takes the risk of all material adverse governmental action within the state. This means city, county and state action. The argument that the city cannot control what the county or state government does is specious and value destroying. The city has been paid in advance. The concessionaire is operating a regulated asset in an unregulated environment. Its private competitors can pass through the increased costs of adverse governmental action – such as compliance with a change in law – to users in a way the concessionaire cannot because of rate regulation in the concession. A private competitor can respond to governmental interference in the public parking business by exiting it and building condos or a shopping centre on its property. The concessionaire is stuck. The notion that the city should be able to keep its up-front payment while the concessionaire suffers without a remedy is not tenable and when proposed is met with a collective eye roll and then firm resistance from the bidders until the city withdraws it – consistent with every concession deal that has closed, here or abroad.
The theme underlying all of these provisions is maximising value against balanced and predictable regulation in the concession. There is a sliding scale of value destruction corresponding to the extent of departure from these principles. Not to mention the time wasted. A proven model exists, and bidders will insist on it.
Kent Rowey is the head of the Americas Energy and Infrastructure group at Freshfields Bruckhaus Deringer in New York City.