Further to: Chicago and the “on street” deal

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Further to: Chicago and the “on street” deal

I have heard from a number of sources that are within the City of Chicago and close to this deal.

Let's review the bidding:

The City of Chicago is in financial trouble. They 'sold' for the next 75 years, an asset that is currently bringing in $23 million a year in revenue, but of course costing them a substantial amount to run. The quote from my source goes like this:

This is a good story you need to write about as Cities are struggling to make payroll we have just created a long term reserve fund, shored up our budgets for 5 years, created a rainy day fund and secured meter replacement revenues for 75 years.

 

So the city got $1.16 billion up front to cover current operating expenses for the next five years, and will take back, in 75 years, a system that has new equipment. But what did they leave on the table.

They would have collected $1.725 billion over the next 75 years assuming no rate increases. With the rate increases they have now in place (quadruple next year, double again in 2013) they would take in almost 7 billion dollars, and that's assuming that they use the same processes in place today and assuming there will be no rate increases beyond those in the next 75 years.

We can assume there will be some increases in the next three quarters of a century and that technology will be in place (probably by the end of 2009) to greatly assist in upgrading collection processes. I think we can safely assume that the new equipment, people, and rate increases will bump the income about 50%. So over the next 75 years the on street parking operation for the city of Chicago will take in about $10 BILLION.

The consultants for the city say that the $1.725 is a good, fair price. The Morgan Stanley group feels that there is a lot of investment up front that needs to be done and a LOT of expense here that doesn't quickly show up when you look at the current operation. Fair enough.

I have no problem with Morgan Stanley, Laz parking, et al. They are in business to make money and will do so. More power to them. They will also offer the city of Chicago an upgraded parking operation and most likely much better service than can be offered by the public sector.

My concern is simply that the asset is gone, and in five years the resulting payment to the city will be gone, and for the next 70 years the city will not have the income off that asset. This isn't a PPP (Public/Private PARTNERSHIP), it's a fire sale. There is no ongoing partnership involved here.

My sources tell me that the city left a lot of money on the table when the Grant Park Garages were leased last year, and it looks to me like they did so again.

I think what might have happened is that public sector egos got in the way. It seems to me that we may be watching a scenario play out based on this philosophy :

"We really do a great job at running parking and are collecting the maximum possible (at least within in structure we have to work) so there may be a little more out there to squeeze out of the parking operation, but giving that little bit up is OK since we will bail out the city financially, keep out pet programs running, and someone else will have our headache."

It doesn't occur to politicians that it's possible that private, profit driven businesses can run their operations so much more efficiently that the amount of money generated is bumped by a factor of 10.

Or, maybe they are so stressed in Chicago that short term solutions are the only way out.

I'll be musing on more this in the next few days –

I still must be missing something. The numbers just seem too far out of skew.

JVH

John Van Horn

John Van Horn

2 Responses

  1. Wonder what kind of language is in these lease deals that protects the private sector? Is there any guarantee that the City won’t change traffic patterns or that the streets and sidewalks will be maintained to a certain level, or is there anything that would prevent the City from putting a “congestion charge” or roadway toll of some sort in place? What happens if there is some catastrophic economic event or other occurrence that causes a huge drop in the amount of traffic? I agree that the City possibly left money on the table, but there are literally hundreds of risk factors that could drastically change the market that the private operator is taking a chance on.
    At the end of the day somebody will be saying they should have structured the payment differently, but we won’t know for sure who it’s going to be until that day actually comes. For the private operator they are the only ones at risk until they’ve recouped all of their investment plus whatever % of interest they’ve assigned as the carry factor, and that will take years.
    The numbers are staggering anyway you look at it.

  2. I will be interested to see what you have to say after thinking a few more days on it. It does seem unprecedented in scale of terms of the lease and the scope of the work. If I have missed something let me know, but what stake in revenue does the city retain?

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