Tuesday, April 17th, 2012
I have been and remain a staunch defender of privatization done right, but done poorly it can be a disaster. It looks like we are seeing yet another example of this unfold in Chicago.
You are probably familiar with the now infamous Chicago parking meter lease. But prior to that the city had similarly leased parking garages downtown east of Michigan Ave. This transaction hadn’t done anything to raise concerns with me so far. I’m not sure why most city governments would be in the parking garage business in the first place. Put ’em up on eBay I say.
But as it turned out, the city, in order to goose its returns, had promised the vendor who leased the garages a monopoly on parking. Lots of privatization contracts have no-compete clauses in them that prevent the government from operating a competitive facility for the duration of the lease. I’m not sure that’s good public policy, but it’s not a slam dunk decision either way. But the Chicago garage lease goes far beyond that and promised that the city would not allow anyone to build a garage that was open to the public in the area where the leased garages are. Wow! In effect, the city rezoned the area by contract without telling anybody. (A legit rezoning would have required notifying property owners, etc. as well as getting aldermanic signoff) It looks like the previous administration once again sold off the right to set public policy to a third party – this time for 99 years.
Naturally this has come back to haunt the city. Morgan Stanley, which controls both the meters and the garages, has filed a $200 million arbitration claim against the city. They claim that the city allowed the developer of the Aqua skyscraper to open a parking garage to the public in a restricted area, and this has harmed the value of their lease. If true, this looks like a very straightforward breach of contract.
This new claim comes on top of a $13.5 million claim over the parking meters related to allowances for handicapped parking. That’s a particularly dangerous claim because it could be recurring and if annualized and adjusted for inflation would mean that Chicago would end up owing over one billion dollars over the lifetime of that contract!
Rahm must be going crazy over these deals he inherited. This is what happens when you sign deals that don’t get subjected to proper public scrutiny. The timing is also less than ideal for Rahm as he tries to get his infrastructure bank proposal approved by a skeptical city council.
The Chicago experience should definitely cause other cities to think hard about privatization. Privatization should be about competition, not contractually enforced monopolies. It should not unduly restrict the ability to change public policy to meet future needs. The term should be strictly limited (50, 75, or 99 years is ridiculous). Deals featuring large up front payments should be avoided where possible, and subjected to strict controls on spending the windfall if not. And the contractual terms need a thorough vetting.