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." Here 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, are 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.

  • J:Lai

    While it is too bad for Chicago that they gave away a valuable asset cheaply, I don’t really see a problem with these kind of arrangements.
    In fact, I think it is a good thing.
    When the municipal governments lacks the will or ability to charge the market price for something like parking, then by all means let a private entity step in to charge for it. The city may have mis-priced their asset in this deal, but at least the cost of parking will go up to a market rate. Even if the city gave away this concession for free, it would still be a good thing to have the price of parking increase.
    I wish that New York City would hire Morgan Stanley to collect parking meter fees, because the government is clearly never going to raise the rates as high as they need to be.

  • Josh

    I think J:Lai raises a good point above – it’s a shame that governments don’t have the political willpower to charge a fair price, and outsourcing that will can produce the same effects. The Chicago taxpayers are getting ripped off because the government did an excessively poor job of negotiating price, not because of the underlying PPP concept.

    (And that future taxpayers are getting boned even worse because of the lump-sum nature of the payment, but that’s a separate issue.)

  • BC

    The problem here is that public entities are too dysfunctional to do what the private sector can do without fear of voter backlash or pandering politicians. PPP’s wouldn’t really be necessary if the public would be willing to pay for public goods, but clearly we live in a time when people don’t see the benefit of investing in public goods. The only way to fix this problem is to fix the political system so that investments are made based on merit and users are charged the full cost of their consumption of a resource (be it parking, street space, CO2, etc.) In the meantime selling off public assets may be a necessary evil.

  • brent

    To J:Lai’s point- if a city is not charging market rates for parking, it means money is being lost. The public is subsidizing the motoring elite’s on-street car storage. At least Chicagoans got out of that predicament.

  • Larry Littlefield

    There isn’t just a transfer of value from the City of Chicago to Morgan Stanley. A large share of the money would be spent up front, with no lasting value. They have simply taken future revenues away from future city residents, back door.

    The current generation took an asset in inherited from the people of the past, and sold it out from under the people of the future. How could that be interpreted as anything other than generational theft?

    An asset? All assets they can get their hands up, perhaps culminating with the dollar’s status as a reserve currency.

  • Was the PPP put out for bid? Did any other investor make an offer that was competitive with the contract with MS?

    It would be one thing if this was a backdoor sole-source deal — but if MS put up more money than any other bidder, then by definition Chicago got fair open-market price for an asset.

    If MS figured out a way to make that asset more productive, then good for them.

  • AK

    @Drunk Engineer,

    The motion was passed with frightening speed. I don’t recall if there were many other bidders, but from the time an RFP was issued to the time the sale was made, I think maybe three months had passed. It’s not so much a product of “fair market price” as it is Daley and his rubber stamp city council being blinded by the shiny and rushing to make a sale without functioning as rational actors in an financial deal.

  • John Kaehny

    The contracting process was rushed and secretive and the city did a very poor job with the contract requirements. Morgan Stanley was given the concession based on a sealed bid, not a public auction. The concession was approved by aldermen who were not provided with the current value of future parking revenue incorporating the meter hikes in the concession schedule. So they did not understand how much they were leaving on the table. Mayor Daley would appreciate many of your comments. He has repeatedly pointed out that the aldermen rejected a much more modest meter hike the previous year.

  • Larry Littlefield

    Bottom line — in order to seize future revenues and spend them up front, they were willing to give up massive future revenues and sign a very bad deal. And then they greenwashed the whole thing.

    Why don’t we just turn over the National Parks the the Chinese? If they raise the prices high enough and do enough strip mining, travel will be discouraged and greenhouse gasses will be reduced. And the deal can always defer strip mining for 15 years, and require that those born before 1955 be allowed in for free.

  • Streetsman

    Agreed that the whole problem was the deal structure – there should have cap at which point J.P. Morgan and the city would be sharing revenues. This is quite common in retail leases. It’s hard to think of it as “lost” revenue because if not for the privatization deal, the parking rates never would have gone up in the first place. But in this sense, cities like New York are “losing” billions every year by not pricing parking at market rates.

  • Adam Wride

    Only problem I see here is that Chicago doesn’t share in profits.

  • Adam Wride

    Actually, after reading that nytimes article, the citizens of Chicago need to file a lawsuit against the company or their city management. That deal is crooked.

  • John Kaehny

    Larry, I missed the “greenwashing” angle. Do you mean “green” as in enviro or dollar bills?

    There is a lot to say about PPP’s and another piece is forthcoming on how to avoid the mistakes of the Chicago deal when pursuing one. Perhaps this piece suggests too strongly that PPPs must rely on upfront or “one shot” payments. Of course they could have structured the deal to have a much smaller upfront payment and on-going profit sharing. But the political foundation of the deal was getting the max possible upfront, in the shortest possible time frame.

  • Larry Littlefield

    “Larry, I missed the “greenwashing” angle. Do you mean “green” as in enviro or dollar bills?”

    Greenwashing in that it was sold to some as a progressive policy, because it properly priced parking.

    Kind of like selling the Brooklyn Bridge as a way to get tolls implemented without the political objection of providing a revenue stream for the MTA — we can spend it all right now!

    Give the future a nickel, take a dollar away.

  • Larry Littlefield

    This reminds me of the asset stripping by the Russian oligarchs after the Soviet Union fell.

    After New York goes under, perhaps they’ll sell the schools and future New Yorkers will have to rent them, in addition to paying debt service and pensions, before a dime of their taxes goes to their children’s education.

    Eliminate the up front payments, and just have ongoing revenue sharing, and the pols lose interest in the deals.

  • Moser

    I think some of you guys are missing the point here that the gathering ex-post-facto backlash against the deal is worse than what city government would have seen if it had just jacked up rates a few times over a number of years. It’s a lesson in picking your poison to other municipal governments.

  • Jim

    This post shows a lack of understanding of basic finance. PPPs don’t mean a city is “losing revenue to Wall Street,” it’s receiving a larger upfront payment from the bank in return for giving up future revenue streams. This is in essence a loan secured by a specific infrastructure asset. If the asset is auctioned off competitively the city should come out ahead since banks now have an incredibly low cost of capital because they can borrow from the Fed discount window at zero. Additionally, they benefit if the asset is being mismanaged. The problem is not with PPPs — the problem is the asset was sold under a less than competitive auction.

  • Larry Littlefield

    “This post shows a lack of understanding of basic finance.”

    I understand basic finance perfectly well. The current generation of leaders has the highest discount rate in history. What’s yours?

    Mine is zero.

  • How much have the rates gone up?

    If rates had remained the same (probably if the city were in charge), how much money would we be talking about?

  • John Kaehny

    Moser raises a very important point that was discussed in the previous two posts. Chicago could have cut out the Morgan middle man and “bribed itself” with a much larger upfront payment, then used a portion of the $650 million to $1 billion above what it pocketed to pay for visible community improvements like streetscapes, bus service, library hours — stuff the average person would notice. Motorists would still be irate about higher meter rates, but at least they and their neighbors would see more immediate benefit. Cities know how to monetize future revenue streams via bonding. If a massive one shot of 75 years of meter money is the goal, Chicago could have done it without Wall St collecting half of the new revenue.

  • Nicole Gelinas

    I have a new report (linked below) on how to do PPPs and how not to do PPPs. The Chicago deal would fall under the second category.

    To name just two reasons, the term is way too long (meaning mistakes made in favor of the concessionare are compounded over decades), and, any operational efficiencies are so small that they’ll likely be overwhelmed by the private sector’s higher debt and equity costs (including the equity requirement to make a profit).

    PPPs are just a government tool; they are not a panacea. And as John says above, PPPs do not eliminate, or even much reduce, governments’ need to prioritize infrastructure spending.

    In fact, the worst PPPs are often those that seem to save the government the most money; look at the London tube deal.

    http://www.citiesonahill.org/infrastructure/

  • Clarence Eckerson Jr.

    I’d like to thank Chicago for so massively screwing this up they will be a role model – hopefully – for the rest of the U.S. who are considering doing anything like it here forward.

  • Jim

    Larry — you are right, politicians have an immeasurably high discount rate which is why this deal is a no brainer under any circumstances. However, that makes them no dumber than your average American household!

  • Ian Turner

    Indeed, the business models of businesses such as Rent-a-Center are predicated on taking advantage of households’ unreasonably high discount rate.

  • Jeri

    This massive ripoff is nothing new to Chicagoans. Mayor Daley and his friends have been conducting these types of ripoffs for years in order to feed a cash hungry machine run on waste and corruption.
    Its the perfect kind of deal for a man who doesn’t care at all about future generations.

  • da

    I think it was Ronald Reagan who said, “What’s the future ever done for me?”

  • Well, he certainly wasn’t the first. Did that man ever have an original thought?

  • Larry Littlefield

    Look, this is a three part deal:

    1) Raise parking fees to market rate. Fine, but the city could have done it itself.

    2) Transfer part of the value of future parking revenues to a Wall Street firm in a secret, no-bid deal. Standard practice.

    3) But here is the key. Take future revenues and spend them right now, cashing in an asset created by past generations who built this country up and selling it out from under future generations.

    Will the city of Chicago still have to maintain the streets in the future? If so, it will have an ongoing cost but no ongoing revenues — just like the MTA which will have to maintain the transit system (or more likely not) as future revenues go to the past maintenance of the transit system.

    The whole purpose of the deal was to allow today’s politicians to cash in the future. The rest is details and misdirection.

  • Wizard

    According to the Chicago Tribune, there were a dozen financial firms expressing interest in the Chicago meters. At the end of the bidding process there were two high bidders for the parking meters whose bids were less than 10% apart. This triggered the City’s “best and final offer” process between the two companies. Both re-submitted higher bids and the Morgan Stanley bid beat out their competitor by over 100 Million dollars. This doesn’t remotely sound like a “rigged” process.

    In addition to paying the nearly 1.2 Billion, Morgan Stanley then invested another 40 Million in new technology which was implemented in less than a year. While everyone is harping about the unprecedented rate hikes, one needs to remember that parking rates at nearly 23,000 of the City’s 36,000 metered parking spaces had not been raised in decades and were an astonishing low twenty-five cents per hour. When was the last time you parked at a meter in any of the top ten major US metropolitan cities and paid fifty cents for two hours parking?

    What everyone is also overlooking is a very important factor called risk. The City divested itself of all risk and cost associated with operating the parking meter system. For example, if gas prices shoot upward of $5, a very likely scenario given the 75 year term of the concession, driving will undoubtedly decrease. What impact will that have on the meter system? What will happen with $10 or $15 a gallon gas prices? Add risk mitigation to the savings in future escalating operating costs for equipment, maintenance, labor agreements, pensions, etc. and the City in my opinion made a very wise trade off.

    Let’s assume that the City could have done exactly the same thing as the private operator. They could have netted an additional 600 Million over and above the 1.2 Billion it received up front. Over 75 years that’s a theoretical 8 Million dollars per year that the City “gave up”. How does that stack up when one considers the risk? What is the value placed on betting that there will always be passenger cars in sufficient quantities to generate that kind of return for the next 75 years?

    Chicagoans love to moan about corruption, fraud and their crooked elected officials. It’s tradition and if they didn’t it wouldn’t be Chicago. Let’s face it; the local Chicago media bashes Daley at every opportunity. Just look at the last few months of headlines regarding the Olympics, the parking meters, Oprah and even the poor performance of their sports teams. When was the last positive news article about the Daley administration to come out from any of the Chicago media outlets? I’m hard pressed to recall even one.

    Let’s not throw out the P3 model with the Chicago bathwater.

  • John Kaehny

    Just to be clear, the “conservative” estimate that Chicago could have earned $670m more by keeping the meters, is the present value calculation. So, investment risk is priced into that. Accordingly, the net annual meter revenue Morgan will keep in future years is much more than $8m. I’d guess the main investment risk here to the Morgan consortium is that Chicago will seek to renege on the deal at some point, and it could turn into a big political and legal headache for investors. I’ve heard from Wall St sources that this is why at least one major firm did not bid on this deal. Also, this piece does not claim the bidding was rigged. Only that it was secret and opaque to the public and the city council. The public finance assumptions and considerations now being aired were never made explicit. Lastly, if oil and gas prices sky rocket, I’d wager the last place to be effected will be urban curb space. In Chicago, NYC, and San Francisco, the vast bulk of curb parking demand comes from commercial vehicles and local motorists, not commuters. Inner cities become more competitive and attractive as energy prices rise. Even with expensive energy there will still be plenty of people driving for transportation and to provide services in the urban cores.

  • Larry Littlefield

    You can see how they hook people in. They hook in groups like the Manhattan Institute with the privitization angle. They hook in environmentalists with the making drivers pay for their impact angle. But it’s all misdirection, and not worth arguing about.

    What matters most of all is that this is yet another example of a generation that inherited the United States from those who came before selling it out from under those coming after. That was the real motivation, and the real decision. End of story.

  • Ian Turner

    John is correct, the greatest risk to Morgan Stanley is that the deal will be changed unilaterally sometime in the future, a la AIG bonus scandal. And indeed I’d say this risk is very likely to materialize, once the institutional collapse that Larry is talking about takes place. It’s a question of how soon that happens.

  • Larry Littlefield

    “And indeed I’d say this risk is very likely to materialize, once the institutional collapse that Larry is talking about takes place. It’s a question of how soon that happens.”

    Tell me, how much moral obligation do you feel toward New York’s “moral obligation bonds?”

    The state constitution says all borrowing has to be approved by referendum; otherwise, future legislatures and people would be burdened by the past. So the judges appointed by the politicians came up with a ruse — money could be borrowed as long as the funds to pay the debts were appropriated annually by each state legislature, thus not being an actual long term liability. They called those moral obligation bonds.

    I feel no moral obligation. Put them at the top of things to cut. Does that mean more can’t be borrowed without a referendum? Go ahead, make my day.

    And speaking of which, I’m not sure we should be paying back the three bond issues that WERE passed by referendum with a promise of the Second Avenue Subway, until we actually get the subway.

  • Jason A

    “What everyone is also overlooking is a very important factor called risk. The City divested itself of all risk and cost associated with operating the parking meter system. For example, if gas prices shoot upward of $5, a very likely scenario given the 75 year term of the concession, driving will undoubtedly decrease.”

    This is why I have no problems with governments leasing off the airports for long-term deals. No way will air travel be supported at its current levels in 75 years. That’s a bet against the future I’d gladly take.

    But I largely agree with Larry. This quote is astonishing, if not welcome for its candor:

    “The people own the asset to be used today for this generation of people and not for 2050″

  • Jim

    Larry — you keep talking about the current generation selling out future generations, and frankly the Chicago deal is a drop in the bucket compared to the federal deficit. But, the problem is use of proceeds. If Chicago were to use proceeds to invest in additional infrastructure I think the deal makes sense if they got the right price. Sadly, I don’t think that’ll be the case. Anyways, don’t hate the structure, hate the players.

    Also, forgot to mention this before, but zero cost of capital is equally moronic to an infinitely high one. Hard to imagine, but there is such a thing as over investment and China is driving 100 MPH towards their own day of reckoning. You might enjoy this report (the China report):

    http://www.pivotcapital.com/research.html

  • Ian Turner

    Jim,

    I don’t think there is any infrastructure on offer with a 75-year lifetime, but please correct me if I’m wrong. Note that the NYC subway doesn’t count, as pretty much the entire system has been replaced at least once during its lifetime.

    Cheers,

    –Ian

  • Larry Littlefield

    “If Chicago were to use proceeds to invest in additional infrastructure I think the deal makes sense if they got the right price. Sadly, I don’t think that’ll be the case.”

    If it weren’t the case that a majority of the money would be used in the first two years, there wouldn’t have been any interest in doing the deal. That was the whole point. And it isn’t just this decision or the federal debt, it is almost every decision for nearly 30 years, getting particularly bad after 1992 in NY State and 2000 everywhere.

    “The people own the asset to be used today for this generation of people and not for 2050.”

    Those who are age 30 today will be age 80 in 2050, and in need. What’s going on isn’t a perpetual government policy to favor senior citizens over the young, who have other advantages. It is a disadvantaging of generations born later that will hit hardest when they themselves are old.

    Look at this week’s issue of The Economist. What to do about the soaring cost of entitlements? You take anything from those at or near retirement, of course, so you have to take things from younger generations. How about raising the age of eligibility for Medicare, to “encourage people to work longer.” Doesn’t The Economist understand that no one will hire a 55-year-old because of their health care costs, but they will hire a 65 year old because they get Medicare?

  • Kaja

    > No way will air travel be supported at its current levels in 75 years. That’s a bet against the future I’d gladly take.

    Do I need to point out that they aren’t your odds to decide?

    You will be dead in 75 years, and therefore you have no natural sovereignty over the state of the airports in 75 years. You’re making decisions for the future, before the future is born; they have no recourse once if they are screwed.

    I may think my neighbor is an idiot for spending 30% of his income on beer instead of savings; but it is not my money to decide-with. Similarly, maybe the airports will in fact be useless in 2090; it’s still not your call to make.

  • PCC

    What riles me up most about this deal is that now Chicago will NEVER have a great network of complete streets. We no longer have control over how we use our public space. A lot of really cool ideas — new bikeways, traffic calming, expanded bike parking, expanded plazas or sidewalks, new bus routes, rapid buses — now have to wait for our great-grandchildren. To add insult to injury, the new parking operators started ripping out the old meters without consulting anyone, and now the city will have to spend millions of dollars replacing the lost bike parking!

    And sure, “outsourcing political will” was accomplished here at a huge price (at least $1B), but do keep in mind that all the political blowback has fallen squarely on the mayor’s shoulders. Meanwhile, other cities have adopted market-rate parking pricing without mass citizen revolt. In fact, I was working with my city councilmen on a Parking Benefit District proposal for my neighborhood; they were so amenable that they even introduced legislation to start changing the rates, but all that quickly died when news of this deal hit. Market pricing was coming, and soon — and it would have been more locally responsive than what the flat-rate pricing that LAZ charges.

  • Jim

    Ian, the lifespan of a potential infrastructure project has little bearing on the economic benefit it provides. For example, you might build a “bridge to nowhere” in Wasilla, Alaska with a 100-yr lifespan that never justifies itself from economic standpoint while a much-needed traffic light pays for itself in a few months. Besides, the present value of money past 30 years in the future is negligible — the Chicago deal could’ve been for 200 yrs and it wouldn’t have changed the dollar amounts involved by much.

  • Ian Turner

    Jim,

    The point that I was trying to make is that if you take 75 years of revenue and spend it all up front, then in 50 years time you will be (a) without infrastructure, as the stuff you built is all beyond its useful life, and (b) without revenue which you could use to build new infrastructure, because you spent it all 50 years previous. Thus, even if you spent all the money on infrastructure, it doesn’t make sense to grab money from 75 years in the future and spend it now. The only exception I can think of is if you are damned sure that the result of your investment today will result in future economic growth that you could then tax to build more infrastructure. But the risks of screwing that up are so great that its extremely rare such bets should not be left to the private sector.

    The nature of compound interest, which you rightly point out, means that when you steal money from the future in order to spend it today, you are doubly screwed because tomorrow’s money is not worth nearly as much today as it would be tomorrow. In 75 years, a dollar of parking revenue will turn out to have bought just 5 cents of infrastructure.

  • Ram Gouda

    These people who support the “raising of parking rates in order to be at a “normal” market rate fail to see one frkkin thing.
    The streets and meters are owned by the taxpayers and should be used accordingly.
    When the city sells off a citizen owned asset and then pays it’s own poorly managed bills and management of the citizens systems- not to mention corrupt run systems- it is a failure o the entire purpose of government.
    Please- this is a gross misuse of a citizen owned asset and is a total fAilure of government.
    The other thin you’re missing is that the government is supposed to “work for it’s income” and provide efficient services for the people and with the peoples taxes. The problem is that now all that revenue-taxed illegally and taken from the hardworking people- needs to be put to productive use
    also whatever happened to “working for it’s living” in the government system?
    Shouldn’t he business of government be run “like a business” Instead of like a street gang? Stealing from the working stiffs and passing the waste along to the corrupt chicAgo system is the first thing that’s wrong. Now they are stealing from people who have to actually work for a living and now lining the greedy asses pockets on wall street. I don’t know which could he worse. They’re both corrupt in different ways and are both ethically and morally bankrupt. Down with both of them. We need to break these meters again like when this first started. It’s a criminal tax on us all and now produces no benefit except to pay daleys corrupt debt bill. WTF? Are you people retARded?

  • Ian Turner

    I rate this troll 1 out of 5. It was better than the one we got over New Year’s, but only just. You did well to try to start out with something simple and then head toward something outrageous, but more subtlety is needed to make it work. Please study the Old Masters some more before returning.

    Thanks,

    –Ian

  • I don’t think that’s a troll, Ian, I think it’s a crank. Do you have ratings for those?

  • Ian Turner

    Definitely hard to tell the difference between a crank and a bad troll. Either way, there is no honor in incompetence: A bad troll fails at rhetoric while any crack fails at reason.

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