It’s Official: Chicago Parking Privatization a Massive Rip-Off

City parking meters are a gold mine, and in Chicago, Morgan Stanley is rolling in parking riches. Secret
company documents leaked to reporters show the company will rake in a 70 percent profit
margin this year
from its $1.15 billion, 75-year lease of Chicago’s parking
meters. This profit is on top of the millions Morgan paid to buy new, high-tech
meters. The good times will keep on rolling for investors: In 2010, after another meter
price hike, Morgan expects to make monthly profits of $4.8 million, roughly 55 percent
higher than in 2009.

Last December, Streetsblog estimated that the Chicago
deal would cost taxpayers "several hundred million to even a billion dollars in
foregone parking revenue." Using the latest Morgan numbers, privatization
expert Roger Skurski told reporters
his "conservative estimate"
— Chicago could have earned about $670 million more by holding on to
its meters. Back in June, before Morgan’s revenue was known, Chicago’s
inspector general estimated the city could have gotten $2 billion in revenue, or $850
million more than it did from Morgan, had it raised rates and kept meter revenue
to itself.

Streetsblog has been following the Chicago parking
privatization closely because it is the poster child for all that can go wrong
with Public Private Partnerships, or PPPs. The basic idea behind a PPP is that
the government leases public transportation infrastructure — say a bridge,
highway, airport, or parking meters — that can generate user fees. In exchange
for the fees, a private investor pays the government a large upfront fee or
assumes the cost of improving the infrastructure. PPPs are popular in Europe, especially at
airports.

Sustainable
transportation advocates should care about PPPs for
a number of reasons. First, politicians and bureaucrats are captivated
by the
fantasy that PPPs are the ultimate free lunch, generating billions in
transportation investment at no cost to the taxpayer. President Obama’s
euphemism for PPPs is "creative financing."

In New York, state
officials
have repeatedly presented a PPP as the way to raise billions for the
astronomical cost of replacing the Tappan Zee Bridge. This is dangerous
thinking. PPPs do inflict a cost, and it’s a big one. Huge amounts of
revenue that could be directed to
public transit, or crucial road and bridge repair, is instead going to
Wall
Street.

The second concern is that PPPs allow public officials to skew
the public planning and review process and put private profit before public
benefit. A private investor has
tremendous leverage over what gets built if they are the government’s main
financing option. The investor’s goal is
to make money, not to produce the greatest public benefit over many decades.

Despite the latest revelation, Chicago is only
beginning to recognize the inherent problems with privatizations.
According to
the Times, Alderman Scott Waguespack introduced
a measure that would require an "independent third-party valuation" of
major
asset lease proposals before any future privatization deal is
completed. The
legislation would require "a comparison of public retention and private
leasing
over the life cycle of the agreement." This could serve as an important
safeguard, but so far, the measure only has 12 co-sponsors among the
council’s 49 other
members.

  • david vartanoff

    Success! Private entity manages to ‘steal’ public dollars legally. Isn’t the point of government the return of wealth extorted from workers to the unproductive bankers? Seriously, anyone who expected an honest deal here was missing the point of the exercise. Pols who cannot or will not arrange to tax those who actually have money use these ‘lottery’ payoff frauds to plug budget gaps while giving away public assets for decades.

  • pat

    Moral outrage might be the wrong stance to take on this issue. This is valuable information. An experiment in PPP happened in Chicago and now we have the results. The results tell us that much more revenue is available to municipal governments from parking and that there is a huge opportunity for greater efficiency in management. It also shows that investment in technology produces significant returns. So instead of an incipient feeling that PPP might not be the best thing for government, we have actual evidence. Generally, strong negative emotions won’t serve your interests as well as a clear-head analysis of a situation.

  • pat

    Also there is always the hope that Morgan Stanley will choke its own revenue stream by discouraging driving through increasingly higher rates in an attempt to maximize profit. They are probably smarter than that though

  • Moral outrage might be the wrong stance to take on this issue.

    i agree completely.

    i wish these liberals would just stop their bellyaching. if it wasn’t for the magnanimous Mr. Daley and his beneficent partners, Morgan Stanley, the taxpayers of Chicago would never have known that they were sitting on a gold mine. and think, they’ll be able to start captializing on that gold mine in a short 75 years — that’s only 3+ generations — their great great grandkids will regain control of the parking meters. sheesh — you’d think a polite ‘thank you’ was in order. guess not.

    in other news, i think a Streetsblog Chicago could have stopped this crime from happening. where art thou, oh Streetsbloggeth of Chicagoeth???

  • patrick

    I dislike wallstreet as much as the next person, but I’m with pat.

    The program proves that there’s tons more revenue available in parking if you are willing to charge market rates. It also proves that politicians are completely incompetent at maximizing the revenue and valuing parking meters. Morgan Stanley was able to increase revenue over 50% in 1 year. We should sign them up in San Francisco, without them we’ll getting parking meter rates changed when hell freezes over. We just need to work out a better deal.

    The project seems like a total success to me.

  • Andrew

    With Pat.

    Congestion pricing, anyone? Yet another aspect of driving that is ridiculously underpriced! It’s funny how vehemently anti-socialist this country can be, but driving seems to be subsidized more heavily than just about any other institution.

  • Richard

    The real question here is how to capture the value from parking meters, road space, etc without resorting to selling off public property. There is something to be said for the profit motive- after all, Chicago will now have market-priced meters. And politicians won’t have to roll back increases like the Oakland City Council did when faced with a chamber packed with rate hike protesters. But on the other hand, the City has now given away all control (and potential revenues) for a generation in exchange for a temporary budget boost. Where is the middle ground here? Can market pricing be sold to the public and implemented by politicians without giving total control to Wall Street?

  • patrick

    Chicago should have gone with a flat rate plus rev share. That way the city would have benefited from any rate hikes. They just made a bad deal.

  • Agreeing with most of the comments above.

    Politicians are experts at public opinion, business people are experts at perceived value.

  • And politicians won’t have to roll back increases like the Oakland City Council did when faced with a chamber packed with rate hike protesters.

    i hate democracy, too.

    The program proves that there’s tons more revenue available in parking if you are willing to charge market rates.

    the program ‘proved’ what everyone already knew — parking is vastly underpriced all over america. i suppose i could go jump off the Golden Gate Bridge and ‘prove’ gravity, too.

    there are cities and towns all over america who are doing performance parking, and they’ve done it without engaging in criminal conspiracies to transfer taxpayer money to private investors. this is not rocket science. no private investors were necessary, no crimes were necessary.

    But on the other hand, the City has now given away all control (and potential revenues) for a generation

    is that was 75 years is? a generation? are we Vulcans?

    There is something to be said for the profit motive

    no. no, there is not. it’s one of the most corrupting influences in society, and we shouldn’t tolerate it.

  • Paul

    After reading the article, I will say that the city of Chicago would have not made all that money the write up claims it would have. It’s always easy when one is looking at something in hindsight to say we would have been able to do it better. But I believe the fact is that Chicago would have never made as much money as the article said it would have. The minute the city would have tried to raise parking meter rates people would have cried out and killed the rate hike. It sucks that the city could have made more money, but the us tax payers are to blame. People want more services and don’t want to pay for them. Chicago was just trying to do all it could with this type of demand that has drilled a hole in its budget. Now we truly get to see the true cost of parking on the street in Chicago, which I don’t see as a bad thing.

  • Perry

    There are quite a few points here to discuss..

    First off, it is quite obvious that both the author AND the New York Times have a misconception of what the term “net revenue” means. Gross revenue means the amount of money you take in. Net operating revenue is gross revenue minus the expenses that you incur as part of being a business. At this point, it seems that the NYT and author believe that everything here is private profit, and there is some 70% profit margin, conveniently forgetting that the City of Chicago received a 1.15 BILLION DOLLAR CHECK upfront.

    Lets assume that the NYT data is correct, $58M in “Net Revenue” in 2010. Throwing aside many things such as interest or income growth to make it simple – they would need to spend EVERY dollar of that net revenue for the first twenty years or so to even pay back their initial $1.15 Bn investment with the City. But seeing as how we’re all familiar with how loans work, you can rest assured that the firms that put up this money borrowed a significant portion of it, and have to pay back those loans with a large interest portion. Its quite likely that 40 + years of operating revenue will go directly into paying down that initial investment.

    Second, the amount of revenue that Chicago would have made from their current parking scenario would be LESS than a third of 1.15 Bn over the seventy five year period. (taking into consideration that A)the previous streetsblog link said that the City hadn’t raised rates in 2/3 of the meters for over twenty years and B)a fairly standard estimate of discount rate)

    Those parking rates are set and don’t change because that is how local politics works. Assuming a hypothetical world where the City has the risk tolerance, political capital and actual capital to invest in running their parking as more of a business and then the will to pass substantial and regular parking rate increases to the level where they would equal or beat the privatization deal is akin to assuming that democrats and republicans in congress will all gather up with ponies and lollipops and pass bipartisan climate change, healthcare and budget legislation bills tomorrow. Too many important people will be worried about getting voted out of office and other political considerations for that to ever happen.

    But even more ridiculous is then setting that fantasy scenario as your “Baseline” for comparing whether the City is getting a raw deal. Its like being upset at McDonalds because they don’t have a vegan soy-portobello burger on menu. The anger and aspirations might be justified but frankly the place just doesn’t work like that.

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