Detrocalypse now

In 2011, Julia Novak delivered a report that told the hard truth about what privatising public infrastructure could — and couldn’t — do for debt-ridden Harrisburg, Pennsylvania. Three years later, on a mid-July morning in New York, Novak is “cabbing it” to a meeting in midtown Manhattan, talking about another US city under fiscal siege — Detroit.

“It’s a delicate conversation,” says Novak, head of the eponymous Novak Consulting Group.

Like Harrisburg, Detroit, which is $20 billion in debt, filed for ‘Chapter 9’ protection, setting the stage for the largest-ever municipal bankruptcy in America. Like Harrisburg, Detroit will privatise assets — and not by choice.

In the coming months, the plight of the ‘Motor City,’ as well as the fate of its infrastructure, will unfold, inviting opinion from public advisers like Novak as well as the private sector. Novak is right — it’s a sensitive topic. But for the industry, it’s downright perilous: Detroit’s a veritable magnet for over-promise, with a built-in reputational risk to public-private partnerships (PPPs; P3s). In Detroit, any future P3 is in danger of ultimately becoming an under-delivering P3.

“Detroit is a problem the private sector isn’t going to be able fix,” warns Nick Butcher, US head of infrastructure for Macquarie Capital.

‘A HOLISTIC PACKAGE’

Detroit functioned as a vital contributor to the economic development and cultural heritage of 20th century America and was long the epicentre of the automotive industry.

In the 1950s, the Detroit of popular imagination began an inexorable slide, brought on by population decline, joblessness, poverty, urban decay and graft. By the time emergency manager Kevyn Orr took over in March, ‘Motown’ counted more than 100,000 creditors.

Prior to Chapter 9, Orr mentioned selling off the permanent collection of Detroit Institute of Arts. Now, a sell-off of public assets is highly possible. However, the likelihood — as well as attractiveness or effectiveness — of P3s in present-day Detroit has divided the industry.

“I’m not sure that the Detroit filing is likely to have a lot of implication for P3s,” says John Schmidt, a partner with law firm Mayer Brown, in a recent teleconference.

Schmidt, counsel to the $1.8 billion concession of the Chicago Skyway Toll Bridge System, noted that Chapter 9, since its Depression-era inception, hasn’t been used often, though he conceded that large-scale privatisation could ensue in Detroit if the filing is approved.

“Once [a city is] in bankruptcy, it really has to start looking hard at what it can do,” he says.

To Novak — who points out that her Cincinnati-based consulting group is not involved with Detroit — privatising public infrastructure has to be a preventative measure, not a reaction after the fact.

“What we specialise in, called ‘asset monetisation,’ is a strategy to use before bankruptcy,” Novak says. Moreover, Novak stresses that asset monetisation is part of a “holistic package,” which would include renegotiating with organised labour.

WHAT IT ISN’T

Kent Rowey is an attorney who — like Schmidt — has advised on the monetisation of assets in Chicago. He’s a staunch defender of P3s, including the 2008 Chicago parking meter lease — a deal Rowey put together.

Today Rowey, who joined Allen & Overy last autumn, is defending a New York Times op-ed he penned arguing for asset monetisation in Detroit against criticism from “anti-privatisation zealots”.

“The message isn’t: do this as a one-off to raise cash,” Rowey stresses. “You do it as a large-scale reform of delivery of public services”.

Detroit could have avoided Chapter 9 via P3s, says Rowey, adding that they “should be on the table”.

Chris Voyce isn’t sold, however. “There’s a transactional risk,” explains the US head of PPPs for Macquarie Capital. He’s not the only one with reservations.