The Gates Group graciously supplied this article to both Parking Today and Parking Magazine. It ran in Parking in September. We felt it appropriate for our financial issue and our readership, so we reprise it here. Editor.
Europe, Australia and Canada have embraced a new model of public-private partnerships in recent years for parking and other infrastructure needs that unlock the equity in existing and planned facilities without sacrificing control of their operations.
Still, the United States has been slow to follow suit. Public and nonprofit organizations overseas have found success in the private sector in a variety of venues, such as parking, toll roads and airports.
But as declines in U.S. tax revenues and municipal and state budgets have become more commonplace, some notable case studies have emerged, and municipal and nonprofit administrators are recognizing new opportunities that not only improve immediate infrastructure issues, but also generate additional capital for any number of unrelated needs.
Many colleges, hospitals and municipalities in the United States are well-positioned to leverage their infrastructure assets, including parking, to reduce debt, preserve debt capacity for core services and increase balance sheet flexibility.
In a large-scale example, Chicago’s Millennium and Grant Park garage system, comprising four separate garages, was leased to a private organization last year.
In 2006, Chicago Mayor Richard M. Daley acknowledged that it was no longer in the city’s best interest to continue operating the nation’s largest underground parking system. The mayor put the four garages out for bid, and the investment division of Morgan Stanley came back with a 99-year lease proposal in exchange for a one-time, upfront payment of $563 million.
The City Council approved the deal, and went on to accomplish several objectives in the process. The city first retired its bonds and other debt related to the parking system, which totaled $208 million. A $120-million reserve fund was created to replace the lost $5 million in annual parking revenues. The remaining $235 million still is completely unencumbered, and will be used as the city pleases.
The Millennium and Grant Park deal is a significant example of turning public assets over to a private interest. Morgan Stanley has outsourced the operations, and the city plans to remain unengaged in the garages.
Public-private partnerships in the United States traditionally have included the restructuring of an asset’s operations. The resulting benefits have positively changed the opinions of many in the public sector. Institutions and municipalities today are well-positioned to take advantage of similar opportunities and, where applicable, still maintain control of their operations and further the integration with private partners.
An Increasing Need for New Capital Sources
State funding for schools and municipal infrastructure continues to erode. Combined with a national credit crunch, this has left many organizations with few options to address the growing need to fund badly needed projects. In response, more than two dozen states have enacted legislation that encourages public-private partnerships for infrastructure investment.
The University of Maryland, for example, was denied state funding for desperately needed dormitories last year. In response, the school put a portion of unused land out to bid to private developers to construct and operate new housing. The proposal carried several use restrictions to safeguard student interests well into the future. The arrangement provided the school with more housing, as well as lease revenue from the land agreement.
In many cases, universities, municipalities and hospitals can tap private funding through public-private partnerships, while maintaining control of their assets in the best interest of its users. In other cases, the organization can maintain ultimate control of their assets, even when a private partner is included in some or all aspects of operations.
Entering a Partnership
For a public-private partnership to be successful, certain conditions should be considered to maintain fiscal responsibility. Typically, assets under consideration should be user-paid, such as parking, transportation and various public utilities, where repeatable cash flow is generated. Additionally, in select cases, even new forms of cash flow, such as the introduction of paid parking, can be implemented. In all cases, the operations and infrastructure assets should fall outside the scope of the institution’s core mission, while staying integral to the overall services.
Most industry experts agree that monetizing revenue-generating assets, such as parking, is fiscally advantageous and responsible as long as the debt associated with those assets is retired.
Additionally, the balance or a portion of a balance can be moved into a rainy day fund or reserve to provide ongoing revenue to further support other capital projects or annual operating expenses.
When public-private partnerships are being reviewed, the interests of all stakeholders should be considered.
A college or university, for example, should maintain some control over its parking operations to ensure that they are operated in the best interest of its students, staff and faculty. Daily operations could be managed in-house or through an outsourced parking operator, while the college or university could still place rate and use restrictions.
Public-private partnerships can assume a myriad of forms depending on needs and objectives. The first step is to determine those objectives, as well as others that could be satisfied by an influx of capital.
A partnership can include various forms of ownership, development, financing and operations, with an organization retaining all, some or none of these terms and conditions. Absent these partnerships, the traditional approach has been to seek public or private financing alone, and let the organization assume all ownership and operations, but that hasn’t always been the best practice. Private partners often make recommendations and changes that benefit their public partner.
Interested parties also should consider the option of taking back an infrastructure asset when needed for a higher and better use. This is essential when strategic plans and institutional needs change. A parking facility might need to be expanded or even removed in 10 years to make way for other construction. That level of flexibility could be essential to an organization and is easily written into an agreement.
For organizations interested in leveraging their unpaid parking assets, converting to a paid parking system carries benefits beyond the immediate revenues. Even modest parking rates of $2 a day for users – less than the cost of a Starbucks coffee – can eliminate indiscriminate funding by non-users.
A private partner also can offer the latest technological advancements and service amenities, such as online permitting and debit card/credit card payment machines.
A New Perspective
The mayor of Chicago hopes to rebuild hundreds of acres of city parks, which might have been unrealistic had the city not unlocked the equity in its largest parking system.
The University of Maryland outsourced its dormitory construction and operations under conditions that certain standards and restrictions be maintained. This helps ensure the school’s reputation and quality of life for its students, while capitalizing on the value of privatization. The university was otherwise unable to secure state funding.
This alternative approach to public-private partnerships enhances private participation to help unlock equity in an organization’s assets.
R. Graham White III is chief investment officer for Gates Capital Resources, an affiliate of Gates Group Capital Partners. He can be reached at gwhite@gatesgroupcp.com.