Some hits and some misses

In the context of public-private partnerships (PPP; P3), the state of Illinois and, more specifically, the City of Chicago, covers the full spectrum from a pioneering example to a case study in how not to privatise a public asset.

In 2005, when Chicago Mayor Richard M. Daley brokered the Skyway Toll Bridge transaction, Illinois became the first state to successfully pursue privatisation. The 99-year lease of the six-lane, 7.8 mile-long elevated structure that links downtown Chicago to neighbouring Indiana, brought in an upfront payment of $1.83 billion to the city from the winning consortium led by Cintra and Macquarie.

“People – for a variety of reasons – still feel very positive about the Skyway deal,” David Narefsky, a partner at law firm Mayer Brown whose practice focuses on P3 transactions, says. Those reasons include the fact that the proceeds were put to good use, paying off Skyway’s existing debt, funding reserves and social welfare programmes.

“Plus, I would say, people are happy with the road.”

What people are not so happy with is the deal Daley struck three years later with Morgan Stanley Infrastructure (MSI).

In December 2008, the City of Chicago accepted a $1.16 billion bid from MSI to operate, maintain and collect revenues from the city’s roughly 36,000 parking metres through to the year 2084. Between December 2008, when the transaction was finalised, and January 2009, when the concessionaire Chicago Parking Meters (CPM) took over, Chicago residents saw parking rates quadruple. To make matters worse, the older, first-generation metres were not equipped to handle the increased use, resulting in broken metres and parking tickets.

In addition, the lease agreement included a provision requiring the city to reimburse CPM for any lost revenue – known as ‘true-up’ payments – due to street closings.

Aside from being presented with a bill for tens of millions of dollars, city officials were also concerned about the ability to monitor the lost revenue. In May 2013, Chicago’s current mayor Rahm Emanuel renegotiated the terms, bringing down the amount CPM said it was owed from $49 million to $8.9 million, the amount the city had calculated. Emanuel also renegotiated the formula CPM would use to calculate true-up payments going forward.

“In any event, there were lots of issues from the time the transaction was implemented to the present day which causes people to be unhappy about the parking metre transaction,” Narefsky comments.

One of those issues includes the fact that the proceeds were spent by the time Emanuel took office in May 2011, having been used to plug the budget deficits of the previous three years.

Perhaps not as bad as the parking metre deal, but also partly responsible for blemishing the state’s P3 track record, are the two failed attempts to privatise Midway Airport, the second-largest airfield in the Chicago metropolitan area.

The first effort took place in 2008 when former mayor Daley awarded a 99-year lease led by financial services provider Citigroup for $2.5 billion. But as the Global Financial Crisis took its toll, Citigroup was unable to make good on its commitment.

Emanuel tried again in January 2013, this time offering a 40-year lease for the price of $2 billion. While marquee names were among the six short-listed bidders, all but a Macquarie/Ferrovial partnership dropped out of the bidding process.

In September 2013, the city terminated the process. Having just one bidder did not allow for a transparent and competitive process, which was a priority for Chicago’s current Mayor.

SECOND-GENERATION P3s

“A broader point to consider is that these long-term leases were the first generation of transactions. The current-generation P3s in Illinois have different structures, they’re really much more focused on greenfield assets,” Narefsky explains.

One such example is the South Suburban Airport which, if procured as a P3 – an option the Illinois Department of Transportation (IDOT) – is exploring, having issued a Request for Information (RFI) in early August – would be the first-ever greenfield airport P3 in the US.

“The idea of developing a third airport in Metropolitan Chicago has been on the drawing board for a long time,” Narefsky says. “I think the development of new airports, which usually require a lot of land acquisition, is a controversial matter because land acquisition is a controversial matter.”

As of mid-August, IDOT had paid $85.85 million for 3,857 acres of land.

“There’s always been a debate on how significantly this third airport is needed and who would be the primary users of the airport – commercial airlines or freight companies,” Narefsky notes.

The site for the airport is in Peotone, a suburb 40 miles south of downtown Chicago.

Questions about the need for a new airport seem justified considering that Indiana has already chosen a consortium teaming airport manager AvPorts and Guggenheim Partners to develop the existing Gary/Chicago International Airport, located in Gary, Indiana, just 30 miles south of Chicago.

It has not yet been decided whether the airport will be used for commercial flights or as a freight/cargo aviation hub.

“The South Suburban Airport idea seems to be a perfect case study for the need to coordinate regionally on infrastructure planning as there are both existing and planned airport projects – including in Gary, Indiana – that overlap with this project,” says George Bilicic, head of power, energy and infrastructure and head of Midwest advisory, at Lazard.

PLANNING AND PRIORITISING

For Bilicic, who also sits on the board of Chicago’s Metropolitan Planning Council, a non-profit organisation focused on regional growth and development, the reason P3s and privatisation in Illinois have foundered is due to the lack of political will, organisation and planning.

“There also isn't an effective process in place in Illinois to think about the priorities for capital allocation,” he points out. “In a resource-constrained state, some sort of system for more effective capital allocation ought to exist.”

Even in the case of the Illiana Expressway, a $1.3 billion toll road project linking Indiana with Illinois, which both states are procuring as a P3 having already announced short-listed candidates, questions have been raised about the appropriate allocation of capital.

According to Bilicic, one of the ways to address the state’s serious fiscal issues is to examine its pension plans’ investment strategies.

“The state should be looking at what returns these pension plans are generating, whether they’re adequate and whether they have the right fund managers or in-house investment talent.”

Reviewing the investment strategy should also include examining asset allocations and perhaps increasing funds allocated to infrastructure as an asset class.

“That could involve transferring state-owned assets to these pension funds at rates of return that might help the pension funding crisis but also otherwise be reasonable given the asset value. The state also needs an overall, well-considered investment plan for infrastructure where public policymakers can prioritise the allocation of capital to the highest-impact projects because the reality is that this is a state with very scarce resources that has to rehabilitate the equity side of its balance sheet and reduce liabilities,” he says.

Bilicic’s proposal brings to mind the Queensland Motorways deal that the Queensland Investment Corporation’s Global Infrastructure unit realised in April.
“This Queensland case study is a spectacular case study for Illinois. It’s the kind of idea that should be studied and potentially implemented as part of a cohesive infrastructure strategy for the state,” he says.

LOOKING AT THE BRIGHT SIDE

Despite the setbacks, Bilicic praises Chicago authorities for their willingness to think creatively and innovatively.

“The city remains a bright spot in this area [P3s], although what they’re doing may not be headline-grabbing projects,” he says.

An example is the Chicago Infrastructure Trust (CIT) that Emanuel created in April 2012 and which uses private capital to refurbish core infrastructure. To date, the CIT has prioritised the retrofitting of old public buildings to make them more energy efficient.

Another example is the 62-year lease the Illinois International Port District awarded the Broe Group for the Port of Chicago in July 2013. Under the terms of the agreement, Broe Group along with other investors will inject $500 million over the next decade to overhaul the port.

“I think there’s a misperception about the city that they’re not still active in P3s; but they are, it’s just not with high-profile activities,” Bilicic comments. “It’s an excellent governmental management team and they continue to think creatively.”