There are few municipalities as busy leasing out their infrastructure assets as the City of Chicago.
One issue that constantly seems to be holding back other cities from following its example is fair value. They ask: if we lease our essential infrastructure assets, are we getting fair compensation for the cash flows we are giving up?
A partial answer to this question is: you're not giving up cash flow. You can continue to earn the same cash from the upfront payment that buyers provide you for your asset.
That's precisely what the City of Chicago did when it sold its Skyway toll bridge to a Macquarie-Cintra consortium in 2004 for $1.83 billion. It took $500 million of that upfront payment and put it into a permanent reserve to earn interest.
At the time of the deal, the city was earning between $20 million to $25 million a year in revenues from the Skyway. After the deal, the amount of money it was earning in interest on the permanent reserve deposit was approximately equal to that amount, according to the city's former chief financial officer, Dana Levenson.
“What we did was a capital-for-capital exchange. This is what I call the elegance of the transaction,” Levenson said.
The city is employing a similar strategy with the $1.2 billion it received from Morgan Stanley Infrastructure to operate its metered parking system for the next 75 years: $400 million will be set aside to earn interest approximately equal to what the city was receiving by running the operation on its own.
So the city exchanged cold hard assets for the same amount of cold hard cash that they were yielding year after year – in addition to hundreds of millions above the amounts placed in reserve.
Those excess funds, meanwhile, go toward a combination of debt reduction, social programs and other budget priorities.
In an era of ubiquitous budget shortfalls at all levels of US governments, one would think that this strategy would sell itself.
It doesn't precisely because cities don't yet think of these types of transactions as capital-for-capital exchanges.
The task for investors, then, is to not just give cities cash but also to educate them on how they can prudently manage it to their benefit.