How cheap is too cheap?

The $1.15 billion, 75-year lease of Chicago’s parking meters to a group led by Morgan Stanley Infrastructure Partners has had long-reaching repercussions for subsequent attempts to privatise parking systems, even in cities and municipalities far smaller than Chicago.

In the wake of the privatisation, a report by the Chicago Inspector General argued that Chicago had “failed to calculate how much the parking meter system would be worth to the City over 75 years if it retained the system rather than leasing it”. The report estimated that the system would have been worth about $2.13 billion to the city, had Chicago retained control and adopted the same terms as the private operator.

On the face of it, the valuation of parking garages and meters may sound dry and uncontroversial. But it has cut to the heart of debates about public versus private ownership, and arguments about whether decisions to sell or lease public assets can be undertaken rationally in moments of crisis.

Pressure to sell

Harrisburg is one example of a city in which extreme fiscal stress has prompted the idea of selling assets, but assessing the value of those assets has presented considerable complexities.

The Pennsylvania capital is overseen by a law known as Act 47, which allows the state to declare certain municipalities to be financially distressed and help them to restructure their debt obligations and undertake other reforms.

An Act 47 report, released in June, recommended that Harrisburg sell or lease certain assets, including the city’s waste incinerator, which has created “crushing debt,” that has left the city “not in control of its own destiny”.

The report also recommended that Harrisburg lease or sell the city’s parking garages to private operators or to another public entity.

The idea of a parking concession in Harrisburg is not new. In 2008, former Harrisburg Mayor Stephen Reed and New York-based firm LambdaStar Infrastructure Partners agreed to a $215 million, 75-year concession of the city’s parking assets, though the plan was voted down in the city council later that year.

And earlier this year, LambdaStar, together with EQT Infrastructure, made a $140 million all-cash offer for the incinerator, conditional on also receiving the $215 million/75-year parking concession, or, alternatively, a $195 million/50-year concession.

But in May, Harrisburg Mayor Linda Thompson announced a new valuation of the city’s parking garages. The report, undertaken by consultants Wilbur Smith Associates for the Harrisburg Parking Authority (HPA), valued the city’s parking assets at $215.5 million for a 30-year concession term.

The concession valuation is based on a 30-year term with a return on equity of 9 percent and a debt service coverage ratio of 1.75, with no risk to the City of Harrisburg or the HPA, according to the Wilbur Smith report.  The report states that the model’s interest rates “are consistent with the recent capital market financing of the Chicago Parking meters by Morgan Stanley”.  When trying to assess the value of a sale, the report said “there is a lack of comparable transactions to benchmark debt costs for an outright sale”, but estimated a “proxy value” of about $259.1 million.

Thompson said in a statement that the new valuation could give the city “a starting point for discussion of potential lease payments for the entire system-wide parking concession moving beyond 2011”.

Wilbur Smith also undertook another analysis in 2007 in anticipation of a potential lease of Harrisburg’s parking systems, according to the 2011 report. But the 2007 analysis did not appraise assets, according to Richard Kotz, executive director of the HPA.

LambdaStar declined to discuss how the firm had conducted its assessment of the value of the parking assets.

Intangible costs

When asked to compare the LambdaStar bid and the HPA/Wilbur Smith valuation, Julia Novak, president of The Novak Consulting Group, the consulting firm which coordinated the Act 47 plan, says: “You are not comparing apples to apples in these kinds of proposals.”

Novak highlighted the fact that the HPA/Wilbur Smith valuation assumes tax-exempt non-recourse debt for the financing of at least some of the parking assets, as the HPA is a public agency associated with the City of Harrisburg, according to the report.

“The numbers are completely different if you are going to be looking at a private investor doing a financing versus a city or municipal authority,” Novak says.

But the Act 47 team’s purpose is to craft a solution to Harrisburg’s larger problems, and Novak says the Act 47 plan focuses on what the city needs to generate from a lease or sale in order to manage debt obligations and its overall fiscal situation.

“We are looking at the city netting approximately $100 million out of the transaction,” she says, adding that she is not sure how the sale or lease of parking assets would ultimately be negotiated, but “the shorter the lease while still yielding $100 million the better”.

There are also other considerations to take into account, ones that are not easily factored into any numerical valuation, according to Harrisburg City Controller Dan Miller, who has opposed the LambdaStar bid for the city’s parking garages.

Miller says parking can be used to entice businesses to settle in Harrisburg, and loss of control over the parking system may make the city less competitive.  The HPA report cited the city’s “commitment to parking” as one of the draws for private investment in Harrisburg’s central business district between the early 1980s and 2000.

“There is a huge intangible cost of selling or leasing or basically giving up the city's control of parking in downtown for 75 years,” Miller argued, adding, “I have never seen anybody quantify that intangible cost.”

Dire straits

Monetisation through a lease and leaseback arrangement is one approach that can be more “politically friendly,” according to E.M. de Windt, chief executive of Gates Group Capital Partners, an Ohio-based firm which was pursuing a $50 million, 25-year monetisation parking meters concession in New Haven. Under that arrangement, the city would retain control over the meters and essentially repay an upfront payment over time.

But the Gates proposal was voted down in a May meeting of the city’s Board of Aldermen. According to a live blog in the local newspaper New Haven Independent, one person present at the meeting described the deal as going to a “pawn shop”.

Yusuf Shah, chair of the Board of Aldermen Finance Committee and one of only two aldermen who voted for the monetisation, agrees that the lease was not ideal.

“We knew that the parking meters would generate over $2 million a year but we wanted to take that one-time $50 million [payment], given the situation that the city was in financially, and use it to plug some holes that we had in our budget,” Shah says.

“To put it bluntly, if we were not in dire straits at this particular point we would never have considered a deal like this,” Shah adds.

On that count, it seems that both de Windt and Shah see eye-to-eye.

“I don’t think anyone would say ‘We'd really like to do this’. I think it's a matter of necessity,” de Windt says.

He adds that municipalities need “creativity” to solve fiscal problems “in a way that avoids draconian measures”, and also argues that negative perceptions of private operators are preventing politicians and their constituents from having a rational discussion about monetisation.

“There is this perception that this is another Wall Street ploy to kick taxpayers when they’re down,” he says.  But de Windt also says he sees the policy debate around the value of concessions as “a legitimate issue”.

“It’s a very challenging time for state and local governments,” de Windt says. “And it’s not easy to make some of these choices. They are hard choices.”