Sunday, August 22nd, 2010

Parking Meters and the Perils of Privatization

Last week I taped a segment for a film project on privatization. For some reason, people keep seeking me out to be the guy that will take an anti-privatization point of view. That always puzzles me because I’m generally favorable to it. I’m a big fan of the Chicago Skyway and Indiana Toll Road leases, which were clearly grand slam home runs. Chicago pocketed over $100 million from a privatization of Midway that didn’t even go through because the winning bidder couldn’t line up financing and had to forfeit their deposit. $100 million just for running an auction has to be the all time greatest ROI in the history of privatization. The recent Indianapolis water company “privatize to yourself” transaction was a pretty good deal I thought.

The fact that I cite all these long term infrastructure lease deals as examples of privatization, and that this is what everyone typically thinks of regarding it these days, shows how much things have changed in this field in just the last couple decades. Think back about 15-20 years ago and the types of deals privatization pioneers like Stephen Goldsmith did. He’s now a deputy mayor of New York City and formerly a Harvard professor, but then he was mayor of Indianapolis. Goldsmith undertook 80+ privatization deals. His approach was rooted in a conservative vision of good government where he believed that by subjecting what was formerly a government monopoly service provider to competition from the marketplace, he could reduce costs and improve quality of service. While as a moderate Republican he had free market sympathies, he wasn’t acting out of some innate hostility to government. In fact, he allowed the government employees who were already providing the services to bid on them, letting them up to propose how they would go about doing it if freed from the previous rules that tied them down. And those employees actually won some of the deals.

In retrospect, I think you’d have to classify this as a success. Some of these deals were criticized, and anytime you do 80 of anything you’re probably going to run into problems. But because these deals were periodically rebid, vendors had to stay on their toes and if they screwed up they could be sacked or replaced at the next tender, which happened on a regular basis. The risk was manageable, the benefits clear.

This is a very different type of privatization than the infrastructure leases above. Those deals aren’t about bringing competition to bear on service provision at all. They’re about jackpots. They are about substituting one monopoly service provider for another, and splitting the resulting monopoly rents between the government and the private sector. Rather than being rooted in a vision of how to improve government services, these deals are about how to generate cash from under-performing assets. It’s an investment banker mindset, not an operator mindset.

That’s not to say they are bad, as the examples above show. But they are very different. One of the biggest differences is that unlike Goldsmith’s deals, these are extremely long term contracts, often 50-75 years. This makes them very risky undertakings. If you sign a bad deal, the consequences are much more severe. Also, these deals generate large up front payments. Because of that, particularly in an era of financial crisis for our cities, there is an enormous structural incentive for mayors who operate on a four year election cycle to grab that pot of money, even if it means signing a bad deal.

The Chicago Parking Meter Lease

Which brings us, of course, to perhaps the most controversial privatization deal of recent years, the Chicago parking meter lease, which continues to generate negative press for the city. A recent provocatively titled Bloomberg piece, “Morgan Stanley’s $11 Billion Makes Chicago Taxpayers Cry,” had this to say:

Morgan Stanley, Abu Dhabi Investment Authority and Allianz Capital Partners may earn a profit of $9.58 billion before interest, taxes and depreciation, according to documents for a $500 million private note sale by their Chicago Parking Meters LLC venture. That is equivalent to 80 cents per dollar of projected revenue. Standard Parking Corp., which runs 30,000 spaces at the city’s O’Hare and Midway airports, earned 4.84 cents on that basis last year, data compiled by Bloomberg show. The deal illustrates how Wall Street banks, recipients of more than $300 billion in taxpayer bailouts in the worst credit collapse since the Great Depression, are profiting from helping states and cities close record recession-induced deficits by selling bonds and leasing public properties.

Oddly for a financial publication, this piece ignores the time value of money. But I think it’s fair to say that it’s likely Morgan Stanley got a very good deal on these meters. They closed this deal about the same time the Midway one fell apart. The fact that financing was readily available in tight market for the parking meters while it was impossible for Midway tells you everything you need to know about the relative merits of those deals financially.

But even if Chicago didn’t extract the last penny of value out of the parking meters, so what? It’s highly unlikely you are going to win huge in every deal. In fact, the more of them you do – and Chicago has done several – the more likely you’ll encounter a loser. Chicago got massively overpaid for the Skyway and Midway, and on a portfolio basis I feel confident the city is still a net winner from privatization on a cash basis even if it theoretically could have gotten more for the meters.

The Real Problem: Policy Risk

The problem with deals like the parking meter lease is that they aren’t like buying a stock, which is an entity with a purely financial purpose, and where if you screw up the worst thing that happens is that you lose money. They’re a lot more getting married. And if you marry the wrong gal – particularly with no option of divorce for 75 years – the consequences are a lot worse than a bad stock pick.

I’ve long said that most of the critiques of the Chicago parking meter lease are overblown. They’re good fodder for gotcha journalism, but not much more. But even so, this deal, and any deal like it, contains serious fatal flaws.

The main problem with the parking meter lease is that it locks the city into a particular policy structure on parking for the next 75 years. In order to get someone to pay $1 billion up front, you have to give them certainty as to the quantity, location, hours, and rates of the meters. All of these matters are thus written into the contract. In effect, Chicago has irrevocably set public policy with regards to parking for the next 75 years.

This might not matter for something like a toll road. Firstly, unlike with parking, there’s a track record here of successful deals. Second, tolls roads by design are built to stand apart from the territory through which they pass. They are purposefully isolated. This is one reason so many urbanists hate freeways. If you get something wrong on a freeway, you affect it but not necessarily everything else to a great degree.

But with on street parking it is very, very different. Parking spots are the curb lane of your streets. Your streets are the primary public space in your city. They are intimately connected with everything that happens in the city, which is one reason parking policy is so politically controversial. On street parking – in contrast to garages, which are very different – is a fundamental and integral element of urban planning policy. In effect, these deals aren’t about just parking spots, they are assigning a property right interest in the biggest component of public space in the city to a private monopoly that doesn’t have the public’s best interests at heart. The city of Chicago has ceded a portion of its urban planning powers to a private company.

I’ll show some of the consequences of this momentarily. But first I’ll address the response that the city hasn’t given up the right to anything, but still retains all of its powers it always had. That might be legally true, but de facto these powers can’t easily be exercised. I noted earlier how all of the parameters of parking policy are specified in the contract. They can’t be changed without paying the vendor to hold it harmless. According to published reports in the Reader and elsewhere, this isn’t even based on actual loses, but on a penalty schedule in the contract that assumes nearly 24 hour meter occupancy. This means if the city wants to change policy, it has to pay dearly for the privilege. Being broke, it can’t afford to. Alderman have already been told they can’t exercise their previous prerogative power to change parking hours in their wards because of this.

The essence of a monopoly is collecting rents. Everyone thinks of the public’s quarters here when it comes to leases. But part of the monopoly is on policy, meaning that the vendor is now in a position to extract even further rents from the city to change policy. I believe this is one reason these vendors desire such long term deals. They believe there is even more future value to be extracted through penalties and inevitable re-negotiations.

I actually cited that as a benefit of the toll road leases. The city in effect bought a hedge against changes in future conditions as part of the deal. For a relatively standalone asset like a toll road, that’s a good thing. For an integral part of the city’s public space, it’s catastrophically bad. This is because management of public space is, along with public safety, schools, and taxation, one of the single most important factors contributing to the attractiveness of a city as a place to live and do business. In an innovation era, in an era of ever more rapid change, locking yourself into a fixed policy for public space for decades is a terrible mistake.

Imagine the world 75 years ago (1935) or 50 years ago (1960). Those people could never have foreseen what our cities would be like, what the challenges and opportunities of our urban spaces would be today, what the technology would be today, etc. How likely it is we’ll know what we need even 10 years from now?

Unfortunately, one doesn’t even need to hypothesize about the negative fallout from this. It’s already visible.

New York’s Pop-Up Sidewalk Cafes

It’s no secret that New York is today’s leader in urban transportation design. Under Transportation Commissioner Sadik-Khan, they’ve launched a revolution in public space management, and have brought huge innovation and positive change to New York’s streets.

Here’s a small but great example. Some of New York’s sidewalks are too narrow to permit sidewalk cafes. So what do you do? Well, the Architect’s Newspaper reports on an experimental solution using pop-up sidewalk cafes. I believe this idea may have actually been borrowed from San Francisco, but it involves re-purposing some parking spots on a seasonable basis for a temporary sidewalk cafe installation. Here’s a picture:

It’s a nice solution, and an attractive design I might add. NYC went from concept to implementation in just one month. Now, maybe they are possibly losing some meter money from space removal. But at least it is only actual loses, not Chicago’s fantasyland liquidated damages. And with tomorrow’s dynamic pricing systems (see below) it might not lose anything. Also, while tampering with parking is always a sensitive matter, they were able to move quickly because, among other things, they don’t need to coordinate with a leaseholder on the spots. Everyone knows time is the enemy of the deal, and so many innovative ideas never happen because they hit resistance and end up in the too-hard pile. New York hasn’t created a barrier to continued innovation and improvement in its streets. As Transportation Commissioner Sadik-Khan put it, “Inventions like this help make our streets into destinations and improve the quality of life for the thousands of people who live, work, and play in Lower Manhattan.”

It’s not going to be impossible for Chicago to do this, but it is going to be harder. Maybe pop-up cafes are doable. But what about large scale BRT deployment? Or the bicycle boulevard I’ve proposed on Monroe St. as a way to safely link the west side to the lakefront through the high traffic barrier of the Loop? It isn’t hard to see how the meter deal puts a major obstacle in the way of all these things, financially if nothing else.

Dynamic Pricing

The other tragedy is that Chicago has locked itself into a parking policy at just the moment that we’re on the cusp of a revolution in on-street parking management. Just as we understand congestion is a result of underpricing, and that we can use dynamic pricing on tollways to optimize the use of that resource, dynamic congestion pricing is coming to parking. Based on the recommendations of professor Donald Shoup, San Francisco is rolling out high tech meters like this one that will enable it to dynamically change pricing in order to maintain 80% parking occupancy at all times:

The beauty of this approach is that it not only ensures that limited parking spots are used in the most economically efficient way possible, it also depoliticizes parking rates. Rather than setting them arbitrarily, or only once and nearly forever through a lease, San Francisco is basically telling the public “you tell us what the rate ought to be.” Like eBay, the value of a spot will depend on actual consumer demand, not government fiat. Who would have thought that the greatest bastion of the free market in parking would end up being San Francisco? This is an example of what modern technology is letting us take out of the ivory tower and into the real world.

There will no doubt be kinks to work out. But that’s why it’s good SF doesn’t have to deal with a private leaseholder. And even further down the road policy might change again. What’s more, none of this actually prevents San Francisco from issuing revenue bonds against its meter proceeds (which it has done in the past), nor does it prevent contracting out management of the system, enforcement, etc.

Again, this isn’t even about money. It’s about being able to better manage one of key assets of the city – its public space on its streets.

The lesson is very clear: maintain policy flexibility, particularly when it comes to these types of services. San Francisco and New York are positioned to step on the gas here, while Chicago is going to have to figure out how to deal with the consequences of its meter lease.

Lemmings Off a Cliff

Given the paucity of successful case studies for meter privatization, and the cautionary tale out of Chicago, one would think that cities would be hesitant to follow the same path. But apparently not. Lots of cities are considering this. Indianapolis just this week signed a 50 year deal for its meters. I’m sure they would say it’s completely different than the Chicago one. And I’m sure they couldn’t have failed to learn something from the Chicago fiasco. But in its essentials, at least based on media reports, this deal has the same basic characteristics as the Chicago one. Indianapolis is selling a 50 year property right interest in its public space, including virtually all of downtown, to a private company. And they’re doing it for a comparative pittance of only a $32 million lump sum. (The revenue share component does not necessitate a 50 year deal). At least Chicago got $1 billion for their trouble. What’s that story again about Esau and a bowl of soup?

I think about Indiana’s failed FSSA privatization. Gov. Daniels took some heat for this deal, obviously. But here’s a guy that has tried to advance the ball. Occasional failure is the price of innovation. If at least a few of Daniels’ ideas didn’t work out, I’d argue he wasn’t doing nearly enough. I don’t blame him at all for trying a new idea an in fact I think he ought to be admired for the political courage he’s exhibited in making the case for the new in a conservative state like Indiana.

But guess what, when the FSSA deal didn’t work, he was able to re-evaluate and cancel it. While some people who receive services from them no doubt experienced the downsides of this, in the long term, Indiana wasn’t harmed. But imagine if the state had signed a 50 year deal in return for a large up front payment. And when the deal went sour it had already spent it all and the state was so broke it couldn’t afford to cancel the deal even if it contractually had a termination clause? Indiana would have been in for a world of pain.

Cities would be wise not to put themselves in the situation to let that happen to them. Daniels understood the difference in risk profile between the FSSA and the Toll Road, and he contracted appropriately. Parking meters are closer in risk profile to the FSSA.

What Would Goldsmith Do?

Some local political bloggers claim a cabal of Goldsmith-era people are running the Indianapolis government behind the scenes. That sort of inside politics stuff is beyond my pay grade. Given that Goldsmith was the last Republican mayor before the current one, it would make sense that Ballard hired a few of those people, just like President Obama hired many folks from the Clinton administration.

But perhaps rather than listening to what old Goldsmith hands have to say, better to just look at what Goldsmith himself does – or, more importantly, what he’s not doing, which is signing a long term lease for Gotham’s parking meters. He runs their Department of Transportation, so this is clearly in his scope of responsibilities.

Yes, I’m aware that Goldsmith defended the Chicago parking meter deal. And I agree with virtually 100% of the article he wrote. The vast majority of the complaints about Chicago’s parking meter lease are much ado about nothing, and he explains why. But he did not address the matter of policy risk that I discuss here.

I’m sure he’ll be looking at parking in New York. There’s no doubt that parking in NYC is, as it was in Chicago, grossly underpriced. Fixed pricing for parking is on the way out. As for parking garages, I’m not sure why government is in that business anyway, since it’s clear that private enterprise will spend their own money to provide that service. I have no principled objection to the involvement of private enterprise in the management of on-street parking, which is clearly long overdue for a shake-up. I think there’s plenty of scope for contracting things out, issuing revenue bonds, etc.

But I’m confident that if he looks in detail at leasing New York City’s meters, the policy risks inherent in it will become very clear. That’s doubly true in New York, where public space innovation has played a key role in moving the city forward in recent years. I’ll be very interested to see how he addresses it. If anybody can figure out a way to structure a good deal around parking, Goldsmith is the guy. If he does a major parking deal in New York, then that’s a structure I’d advise anyone to take a hard look at and consider implementing. Until then, a long term parking meter lease should be a no-go zone for cities.

Who’s Your City?

One of the things about so many of the policy fiascoes of the past is that they tended to get universally applied, thus didn’t generate competitive disadvantage. Most cities had their share of urban renewal boondoggles, for example. But what happens when a bad policy trend hits, but only some cities go for it? We might get an example of it right here.

In the future there might be two kinds of cities: those who who sold off a long term property right interest in their on street parking – which is to say, in the most important component of their city’s public space – and those who didn’t. And make no mistake about it, no matter what anyone might claim about these meter leases, the long term sale of a property right interest is what they represent.

I won’t claim this is going to be the difference between urban success and failure. But it will make things more challenging to innovate, and keep up with best practices, in public space. It’s sort of like running with ankle weights and a 25-pound weight strapped on your back. It doesn’t mean you can’t finish the race, but it does put you at a competitive disadvantage. While a place like Chicago can probably handle it, lots of other cities are still struggling mightily to attract residents and investment to their urban cores. Why create gratuitous problems for yourself? Deals like this are one reason why, despite the fact that I believe Indianapolis has higher potential, I have said that Columbus, Ohio is likely to be the better performer in coming years.

Again, it’s an era of ever more rapid change and ever tougher competition. We have no idea what the world is going to be like 5, 10, 25 years down the road, much less 50 or 75. Anything that locks cities into a particular policy framework for the long term for areas where there isn’t a strong track record of success poses a high risk. I would strongly advocate that cities avoid entering into long term on-street parking leases until successful models have been developed and have proven themselves through shorter term, successful contracts.

Post Script

I haven’t examined the Chicago meter contract personally in depth and I’m not a lawyer in any case. If you’d like to, however, a copy is online here. My scan of it indicates that the city could change parking policy if it desired (it’s a “reserved power”), such as to implement dynamic pricing or some such, but only if it results in a net financial gain to the vendor. Otherwise, the city has to pay up (it’s a “compensation event”). This is what I mean when I talk about the ability of the vendor to extract even more downstream revenue through its ownership of that property right when the city needs to change policy. It’s amazing what the contract considers an adverse event. It even includes reducing the threshold for booting!

23 Comments
Topics: Public Policy, Strategic Planning, Technology, Transportation
Cities: Chicago, Indianapolis, New York, San Francisco

23 Responses to “Parking Meters and the Perils of Privatization”

  1. Danny says:

    Prepare to have this post be the least linked blog post in your history of blogging. People aren’t interested in reasoning, they want a confirmation of their bias.

    Excellent overview of the real risks of privatization, as opposed to the fantasies that anti-privatization ideologues spout.

  2. Alon Levy says:

    On the contrary, Danny. It actually provides a lot of confirmation when a generally pro-privatization blogger criticizes a privatization scheme, providing new grounds to oppose the deal.

  3. idyllic indy says:

    Great post. You’ve again managed to eloquently demonstrate examples of why such a lease is not the panacea it appears to be to those with a short-sighted view of public policy.

    I wonder how the Indianapolis lease would be affected by a future plan to develop something similar to the Cultural Trail. Obviously, as you point out, a concern would be the next innovation, since, had this lease been drafted before the Cultural Trail was planned, it probably wouldn’t have foreseen it.

  4. the urban politician says:

    Aaron, I haven’t studied Chicago’s parking meter deal, and I am not aware that you have either.

    I basically agree with your post. It’s a good argument.

    That said, without having read the deal none of us will know what kinds of flexibilities were written in the contract. One person in the know told me that the city is allowed to remove privately owned street parking as long as it replaces those spots elsewhere in the same ward. Allowances such as this may be contained throughout Chicago’s parking meter lease, for all we know.

  5. the urban politician says:

    One other thing I’d like to add,

    Aaron failed to mention that this privatization deal was initially meant to link with a Federally-funded BRT trial program in the city of Chicago, which was in line to receive over $150 million to initiate. The city had ambition to create a citywide BRT network if this trial was successful.

    That deal fell through because the city missed a key deadline. Point is, if you’re going to discuss the merits and negatives of the Parking Meter lease, in fairness we need to include all aspects of what the deal was supposed to entail. I think the prospect of a well-designed, well-run (I would hope) citywide BRT network in exchange for much higher street parking costs can arguably be seen as a worthwhile investment going forward.

  6. Marco says:

    There is a real feel of betrayal with the new meters in the city of Chicago, a feeling that the public domain has been violated. It is confirmation of a long standing Chicago tradition of mistrust of authority, that somehow someone connected is making out while you pay for it. Its not the meter machines themselves, but the shady deal, the army of private ticket writers like a plague of locusts who do nothing to stop your windshield from getting smashed by thieves while they write a ticket to boot. Its that the citizens are now profit centers. 2 years ago you would have to circle the block for an hour to find a parking spot in the Gold Coast along Clark Street on a nice summer afternoon. Saturday I saw a handful of cars on a half mile stretch and literally hundreds of empty spaces. I dont think all these people just went and found parking garages. Something deeper has happened and it might just be people refusing to come downtown anymore. The city has a crossed a line and the people have had enough.

  7. samizdat says:

    Take a look at water system privatization around the planet, and it’s not a pretty sight. Evo Morales in Bolivia is President of that country because of water privatization. Water is a human right, and the three or so companies, worldwide, which control this “market” are doing everything they can to control it, right down to proposals to tax private cisterns, essentially levying a tax on rainwater. Privatization to me means firing the original workers, then hiring them back at lower wages to do the same job, with the balance going to the highest executives in the company, without making improvements to the infrastructure and often stripping maintenance budgets in order to increase the FY bottom line. In addition to higher costs for water, the water quality has often gone down the drain when private companies take over. Privatization is just another way that corporate entities strip the public sphere of value, and transfer that value to the corporate bottom line. In other words, the rich get richer…again. And we find ourselves, the public, forced to suck at another teat of the corporate monster, using a system which our tax dollars built, for us, so that we would escape the very thing which many municipalities are now so eager to embrace, without foresight: the predation of the public by corporate entities. I see no value to the public in privatization. Penny wise and pound foolish, as the saying goes. Plenty of “value” for our bidness friends, but jack for us. Human life no longer has any value in the hands of a corporate player. That is the bottom line. And it always will be, unless corporate charters are written (and occasionally revoked) to enforce a social returns clause.

  8. Chris Barnett says:

    samizdat, I must differ with your water argument. But first, I will circumscribe my argument with a caveat that it applies to the developed world.

    Food is an absolute necessity for life, yet we do not make it a public good under government control. (We provide welfare benefits for those unable to provide food and other essentials for themselves.)

    Water is similar to food: It costs a lot of money to locate a public supply, to extract and contain the water, to treat it, and to distribute it to households and businesses. Quite simply there is a massive investment in water systems, and that amount of capital must earn a return.

    Because it falls from the sky, people think water’s free and should be free or extra-cheap.

    Yet potable water is a limited resource. It is wasted not because people or corporations are greedy or evil or stupid, but because its price is too low…and so there is constantly “pressure” on water supplies.

    If people will pay $3.99 for 24 0.5-litre bottles of water at the grocery, then this implies a price of about $1.25/gallon in the market. At home I pay about 2 cents per gallon to Indianapolis Water.

    Do you know anyone who uses bottled water on his/her flowers or lawn, or to wash clothes or dishes?

    I didn’t think so.

  9. the urban politician says:

    Marco,

    I don’t know what downtown Chicago you’re spending time in, but the one that I visit quite frequently does not suffer from “people not coming downtown any more”.

    There was an article just last week with numbers showing that downtown attractions have actually seen an upswing in attendance this year, here’s the link: http://www.chicagobusiness.com/article/20100818/NEWS02/100819854/navy-pier-awash-in-visitors-sales-climb

    How are these people getting downtown? I don’t know, but perhaps they are using mass transit more, or perhaps they are choosing to carpool? Just because there are empty parking spots doesn’t necessarily mean the sidewalks, stores, and restaurants are empty..

  10. cdc guy says:

    Aaron, I especially wonder about parking meters in Downtown Indianapolis (Washington Street) being in the way of a future streetcar line. Is the City prevented from re-purposing its street ROW by the agreement? If so, it’s a bad deal.

  11. Lynn Stevens says:

    Put aside the feeling of betrayal and backroom deals that Marco speaks of and just the shock of the increased cost of parking meters that average citizens have felt, I guess you’d find most of your regular readers here sharing this lament that the deal restricts the city’s ability to manage its future in terms of wide swaths of public space.

    I wonder if you had secured a copy of the Active Transportation Alliance (fka Chicagoland Bicycle Federation) letter blasting the deal before they pulled it. Here’s the city’s response: http://www.cityofchicago.org/content/dam/city/depts/rev/supp_info/ParkingMeter/CityResponsetoATAReport.pdf

    I’m thinking of this issue in another context. There’s a proposal to put in an orchard on a major commercial artery in my neighborhood. I don’t think it’s a good idea; it’s a long term commitment; and the proposed structure of land ownership would keep it open space in perpetuity. As I was reading this, I was questioning myself, why I thought the orchard would foreclose urban policy in the future, but not, say, a building. As I type I think I’ve answered my own question. The issue is in the proposed land ownership (land trust); that’s what makes the difference.

  12. Alon Levy says:

    Chris, you’re missing two things about water privatization. First, water requires significant infrastructure, which is usually a public good. You can get food from many different sources, as long as there’s a public road for them to ship it to you; but water requires so much dedicated infrastructure that competition is pointless. Thus, the alternative to public monopoly is not competition, but private monopoly.

    Second, the specifics of the Bolivian privatization were especially nasty. Some towns were forced to sell wells that they’d built with public funds and effort, often at value far below what they then had to pay in metered rate. The original impetus for privatization was that the government was so inefficient the poorest people didn’t have running water, but the water rates were so high that after privatization the poor still didn’t get running water. The middle class was simply expropriated to maintain corporate profits.

    If you treat privatization as an ideology, then you’ll get poor results like this. If instead you treat privatization as a solution to some specific problems that may arise from public ownership then you’ll get much better deals. In the case of Chicago, no such problem existed; the city is not nearing bankruptcy and has not exhausted all other revenue-generating options, and there is no intention to raise parking rates that is blocked by politics. Furthermore, even if either issue were in play, the city could have engaged in short-term privatization on the model of the successes Aaron is touting from Indianapolis.

  13. Chris Barnett says:

    Alon, in the case of Indianapolis Water, it was for almost all of its history a freestanding, listed-stock private utility (Indianapolis Water Co.). The city bought it in 2001 or so when its former owner (NIPSCO) wanted to sell. Then they turned around and hired Veolia Water to run it under contract. Now they are “selling” it to a public charitable trust that owns the gas utility. So it’s a hybrid.

    I’d argue a bit with your contention regarding monopoly. Monopoly power in water service in Indianapolis arises from the municipality outlawing private wells and cisterns for domestic water supply in areas served by public water supplies; I would have an alternative to “city” water if I were allowed to drill my own well or if I could store and treat my own rainwater.

    I understand the outrage over private utilities operating on a monopoly basis in an area where the previous state of the art is hand-dug village wells, and intermittent supply of dubious quality. That’s why I specifically limited my argument to the developed world.

    I am also not advocating for or against privatization as an ideology. I’m arguing for using price as a means of preventing water waste, and as a means of creating a sustainable “public” (whether publicly or privately owned) water supply through return on the capital employed and proper maintenance and reinvestment.

    For water utilities, usually corporate ownership is better than municipal ownership at recognizing depreciation cost and reinvesment requirements…because they understand that the depreciation deduction is designed to generate cash for maintenance and replacement of always-decaying infrastructure.

  14. Alon Levy says:

    If you’re talking about Indianapolis, then I have no argument with you. I’m not familiar with the situation there, but I imagine it’s not the same as in Cochabamba.

  15. James says:

    Aaron my problem with this parking deal is that it was not discussed extensively, in public forums, including City Council. This administration has a bad habit of making back room deals without a proper forum to discuss major issues that affect our city. They continue to do what they think is best without serious public discussions. I know this is not always easy when you consider that most of the City Council is inept when it comes to setting good urban policy.

    What I mean by public discussions is lack of serious urban policy makers or analyst who could help them make an informed decision. This attitude by the administration, which also includes not having political debates during election years, really doesn’t serve the City well. Debates and public forums or discussions give the citizens an idea about what the candidate(s) want to achieve and how they plan to get from point A to B.

    I believe Mayor Daley has done a great job improving the attractiveness of the City, especially the central area but, Chicago as well as other cities have entered a new era. Big issues need smart thoughtful consideration in the future. I’m not saying the parking decision was wrong but, perhaps it could have been much better if others had given their input.

  16. Mike says:

    Another issue I haven’t seen discussed in regards to the parking meter deal is the use of streets for public events, e.g. street festivals, charity events, runs, etc. I’m fairly certain that the contract with Morgan Stanley requires the City to pay Morgan Stanley full parking meter rates anytime the streets are closed for such events. If that is the case, it may explain why several events formerly held on street and in the neighborhoods are now held in Grant Park – where no parking meters exist.

    A few that come to mind are the Race to Wrigley run in April and the Gold Coast Art Fair this past weekend, both with the names of the neighborhood they should be in, were held in Grant Park?! There are others that I’ve noticed this past year but can’t recall at the moment. Also, being a runner, I’ve noticed the registration prices of major road races (i.e. Chicago Marathon) have skyrocketed since the meter deal was announced – possibly to help the City offset the cost of shutting down the streets.

    I’m not certain that the changes to these events are results of the deal, but if they are, they serve as further proof that this deal has many unintended consequences that nobody predicted.

  17. Lynn Stevens says:

    Mike, yes, you’re right, the deal does include the city having to pay for parking whenever those parking spaces are made unavailable. Not only festivals (I’d love to see the price tag on the Chicago Marathon street closures!), but for any sort of road or other infrastructure work that requires prohibition of parking temporarily.

  18. Chris Barnett says:

    Alon, there is clearly a difference between public water supply in the developed world (where water is variously viewed as an input, a commodity, or a right) and in villages or small cities in LDCs (where a supply of safe, clean drinking water is commonly viewed as a “shared community resource”).

    Community values tend to prevent wasteful use of potable water in traditional societies. Those values are less present (or absent) in most modern urbanized societies and tend to be replaced with laws and ordinances that may or may not be enforced.

    In the developed world, full-cost pricing is the way to go. A full-cost price can stand in for the market-equilibrium price of a free market to provide proper allocation of the resource. My point all along here (and in my earlier “It Falls from the Sky” guest post) is that municipally-operated water systems have every incentive NOT to impose such a system. Privatized systems are more likely to do so.

    Even in a rural undeveloped village, economics explains what happens: to assure a reliable, consistent supply and distribution system, the “evil French multinationals” (Suez and Veolia) must charge a price that covers their cost. Replacing a subsistence supply (sometimes there’s water) with an assured supply (there’s always water) does come at a cost. Whether a micro-economy can support that cost burden is then the fair question; poor villages can’t.
    In this case, the private enterprise can deliver the goods, but the people can’t afford it without a subsidy. I am not knowledgeable in development economics, so I can’t say with certainty what the correct answer is under those circumstances. I suspect the right path is some kind of largesse from a charity, or subsidy from a national government.

  19. Alon Levy says:

    While you may be right about water in Indianapolis, in general there are cases where privatization can actually reduce supply. During California’s 2001 energy crisis, Krugman explained that under one reasonable model of inelastic demand and oligopoly, companies have an incentive to keep supply off the market to raise prices; this in fact turned out to have happened in California in the wake of wholesale price deregulation.

    In Bolivia, the situation was different. In many places, people were happy with their water supply; some village wells were perfectly reliable. The privatization was a diktat – not even from the central government, but from the World Bank, which threatened to withhold development loans if Bolivia didn’t fully privatize water. Subsidies would not have worked, because not only does Bolivia not have the money for them, but also private companies can raise prices in response to subsidies, unless there are price controls.

  20. Chris Barnett says:

    Again…I’m not a development economist and don’t pretend to understand the World Bank and IMF diktats. (In the US, there are price controls on utility monopolies.)

    Agreed: inelastic demand (demand that is relatively insensitive to price increases) and relatively small marginal supply can lead to exorbitantly high market-clearing prices. But that is not a feature of “privatization”, and it’s hardly original analysis.

    As I recall the 2001 California/Enron energy problem, the issue was an extended string of extremely hot weather and high demand. (I cannot remember now if reduced hydro production/supply was also an issue; the California grid gets a significant amount of power from Hoover Dam.)

    De-regulation of the peak generating capacity and the existence of a derivatives market (futures) probably set up the circumstances you cite: holding capacity back and/or previous speculative trades in futures by entities other than the utilities led to very high spot prices.

    Grid system administrators, facing an unprecedented peak load, had to either roll brownouts or pay whatever the independent generators asked.

    That is both the beauty and the agony of the free market. Watch the wheat market go through the same thing in the wake of the Russian disaster this summer. Other grains can’t be readily substituted in bread production (cornmeal baguettes, anyone?); marginal supply cannot be grown overnight.

    And back to parking. Public parking has typically been underpriced compared to private garages, but parking supply is finite. Hence a drive to “unlock hidden value” in the government asset.

    The price is loss of control; sometimes the “artificially low” rates have been for public-policy purposes (promote retail in a specific area), sometimes for purely political reasons (raising fees and taxes generates a lot of heat).

    In an era of “road diets” and rain-garden streetscaping projects, giving up control of the parking lane might force a city to “buy back” its own street in order to improve it. This aspect should be carefully considered in any deal.

  21. Jason Mann says:

    Aaron, excellent, excellent post. The ideological trenches people build around this issue–on both sides–can be very frustrating. While I generally support the Meter deal from the viewpoint of making people in their cars pay more, and I actually like the new technology for letting me use a credit car, what has always upset me was the loss for the City in exactly what you mention here. Kudos.

    I do have to correct one point the Urban Politician said about the BRT project. He’s sort of right and wrong–there’s a connection, but not exactly what he said. The BRT project was going to be funded by a Federal Grant that also required the City to implement congestion pricing, and the City’s proposal was to implement rush hour parking taxes on OFF-STREET (i.e., garage) parking. The problem was that one arm of the City was putting that paper-work together, another arm was putting the Meter deal together, and they both sort of came up at the same time.

    Who knows what happened, but my guess is that the Mayor made the decision to just go with Meter deal, since it was worth cash to him, and he let the garage deal (and hence the BRT project) die. He’s probably glad he did, because if both had been put in front of City Council, they may actually have revolted.

    He tried another day for BRT, and sure enough, there appears to be two projects out there I recently heard about, back in the works.

  22. Nathanael says:

    Extra thoughts on Chicago.

    Before the bad parking deal, Chicago was sitting on an extensive network of buses with bus stops, an extensive network of very wide multilane roads — and extensive alleys (so that additional bus/bike/rail/sidewalk space can be carved out without removing parking), and, of course, extensive train service on the ‘L’ and more on Metra.

    In other words, it’s still got resources; it can survive a serious error regarding part of the public space.

    Can most other cities survive such an error? Seems unlikely, as they don’t have the redundant resources. Cities with narrow streets are particularly endangered by this kind of sell-off.

    Regarding California’s energy “deregulation”, the fact is it was simply done very badly. New York “deregulated” successfully — the key is that you *cannot* just “set up a market” and let it go, you have to keep it under control.

    In New York, “deregulation” actually meant a hell of a lot *more* regulations: the pubic utility commission watches any potential market-cornering like a hawk and outlaws it pre-emptively, and there’s an agency responsible for spotting any grid peaks or overloads and issuing prices by diktat when that happens. As a result, nobody has been able to pull an Enron in New York.

  23. Nathanael says:

    “For water utilities, usually corporate ownership is better than municipal ownership at recognizing depreciation cost and reinvesment requirements…because they understand that the depreciation deduction is designed to generate cash for maintenance and replacement of always-decaying infrastructure.”

    I see no evidence that this is true.

    I live in an area with a small public, municipally owned water utility, and it is far better than your average corporation at recognizing the needs of maintenance and replacement of infrastructure. In fact, Bolton Point is considered a national *model* for how to run a water system; managers from other systems are brought on tours.

    They’re not afraid to raise prices, either, although prices remain low.

    Nearby, the City of Ithaca is fairly on top of things too, despite being a bit slow to renew infrastructure. It bought out a mismanaged private monopoly in the 19th century — one which had maintained the infrastructure at the minimum possible level allowing for massive wastage and even the spread of disease.

    Corporations these days are famous for deferring maintenance in order to juice short-term profits. The fact is that a well-run municipal operation is probably more able to handle reinvestment and depreciation. The caveat there is “well-run”, of course.

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