Costs of Privatization Hidden in Plain Sight

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This is part three of the series Infrastructure Privatization 101: The Evolution of Building Big Things. Parts one and two appeared earlier.

Privatization is often sold as providing higher quality services and infrastructure at lower cost. In fact, important costs are regularly overlooked. In other words, services and infrastructure have been privatized, even though keeping them public is the better choice.

Chicago Privatization and its Costs

Chicago’s experiences with privatization make a textbook case for not deciding to privatize without carefully identifying costs. By failing to do so, Chicago has found itself locked into bad deals that will last for three to four generations.

Consider Chicago’s Parking Meter deal. It was approved after the aldermen were given two days only to digest the 686-page document. They voted overwhelmingly for the deal because they believed they had no alternative means to pay for basic city needs.

According to the Huffington Post, a 2009 study by Chicago’s Active Transportation Alliance found:

. . . that every potential project on a street with meters, including bus rapid transit, bicycle lanes, sidewalk expansion, streetscaping, pedestrian bulb-outs, loading zones, rush hour parking control, mid-block crossing and temporary open spaces are dictated, controlled and limited by parking meters,” the report reads. “These restrictions severely limit innovative planning for bicyclists, pedestrian and transit users.”

In other words, anything that promoted less driving and, more important, less parking at parking meters owned by the private contractor, would cost the city money.

Over time, the public would come to understand that its diminished control of its streets would be matched by the bad finances of the deal the city had so hastily signed on to. The city had leased its parking meters for about 10 percent of what the deal was worth. A 2010 Bloomberg News story observed that “Chicago drivers will pay a Morgan Stanley-led partnership at least $11.6 billion to park at city meters over the next 75 years, 10 times what Mayor Richard Daley got when he leased the system to investors in 2008. . . . Chicago gave up billions of dollars in revenue when it announced in 2008 that it leased Morgan Stanley its 36,000 parking meters . . .”

Chicagoans soon learned that the parking meter contract was the gift that kept on giving . . . to the private contractor, that is. The contract’s Adverse Action (AA) right meant that any action that prevented parking at the meters – for example, when a sewer was repaired or a street fair was held – would require the public to reimburse the contractor for its lost parking meter revenue. That may seem fair, but the contract’s AA rights gave the private contractor rights to parking meter revenues far greater than the rights the City of Chicago formerly had. When street repairs were needed, Chicago received less parking income, but the private contractor was entitled to revenue when street repairs or fairs interfered with parking.

The Adverse Action rights, which were discussed in Part 2 of this series on privatization, provide revenue to private contractors, but at the public’s cost. Governments other than Chicago have to deal with Adverse Action claims. These rights, which are regularly found in Article 14 of infrastructure contracts, are included in other contracts, including lottery privatization contracts.

Overlooked Privatization Costs

Other important costs caused by infrastructure privatization are easily overlooked, because of the length of the contracts, their impenetrable language and the need to think through how the contract terms would affect people, communities, investors and budgets. Not recognizing these as costs makes privatization more likely.

First, consider whether it matters that the cost of Adverse Action claims would mean fewer or no community street fairs. That may make people sad, but is their loss a cost to the public? It would be easy to say no, because those civic losses are not easily converted to money.

On the other hand, neighborhood events that bring people together promote community cohesion, pride and resilience, and provide more than just a pleasant time. Losing those events can degrade or even eliminate resources that support strong communities. Strong communities are attractive places to live, while losing neighborhood cohesion can lower quality of life and lead to deteriorating neighborhoods, declining home values and increasing crime. So, perhaps, these are costs that should be included in a privatization cost analysis – but they generally are not.

Second, recall that Chicago privatized its parking meters because it was having severe budget troubles. As it turns out, privatization has made basic city maintenance more expensive. Anything that shuts down the privatized meters requires the city to pay AA compensation to the contractor for lost parking fees.

Before signing the Parking Meter contract, Chicago’s budget for sewer and water main repairs did not include the additional costs of paying Adverse Action claims. Now AA compensation must be added to the cost of repairs. That means less money is available, including less money to make repairs. That budget pinch may force the city to defer maintenance and repairs, to defer repairs or replacements past the useful life of the current infrastructure, or to take other cost-saving measures that are not optimal.

Question Time

There are so many important questions Chicago’s leaders failed to ask. They did not ask for a complete explanation of how the private contractor’s Adverse Action rights would affect Chicago during the 75 years the contract would run. In fact, most people who do not work in the privatization industry would also not know what to ask.

There are two solutions. One would have been provided had the Surface Transportation Authorization Act of 2009 (STAA) been enacted. That bill included an Office of Public Benefit to provide guidance – including guidance on privatization. [starting at p.228] In fact, if we want a democracy and not a kleptocracy, private contractors ought to have a legal obligation to fully disclose costs created by privatization – including identifying and assessing costs that are not easily quantifiable – and to explain them in plain language.

Meanwhile, Chicago has bought itself trouble by opening a new public parking garage that charges less than the nearby privatized garages. No surprise, the private garage contractor has claimed $200 million of Adverse Action compensation and sued the city for breach of its parking garage privatization contract – not in a court, but in a private forum that is closed to the public.

It may be that hard-boiled Chicagoans just shrug at this imbroglio, but we should all be asking what is the cost to the public and democracy when not only deals, but litigation, are done out of public view?

If an accurate assessment of the costs of privatization includes litigation concerning the meaning and enforcement of the contracts, shouldn’t those costs be assessed before signing a contract?

If those assessed costs are to be accurate and useful, then some agency or department must be given that responsibility, its employees must be paid, and those costs included on the public’s side of a comparison of privatization’s costs. Responsibilities of that sort were also to have been part of the STAA’s Office of Public Benefit.

At least, the people of Chicago are fortunate in their inspector general. In 2012, he provided a summary of the complex minefield of rights and obligations created by the Chicago Parking Meter privatization. For example, the city retains some rights to control the location and number of parking meters, including adding additional meters. However, exercising those rights requires care and ongoing consultation with the private contractor. Failure to do so can result in a costly process of determining whether the city has violated the contract and, if so, what penalties are to be imposed.

According to the inspector general’s report, “In other words, the City may not use its power to establish metered parking fees to encourage the public to use . . . public spaces instead of concession [privatized] metered parking spaces, for instance, by charging significantly lower fees for other or reserve metered parking spaces than for nearby concession metered parking spaces. Adverse Action claims can lead to large financial costs to the public, and those costs can cause the public to lose important aspects of life in their communities.”

In short, the world of infrastructure privatization has rainbows with pots of gold for industry insiders. The government leaders who are supposed to represent the public must depend on industry insiders to advise them and trust that they will be given good advice, including advising against the deal, despite the success fee’s incentives to get a deal.