When Public Assets Go Private

Published on November 04, 2009

Privatization is the transfer of both managerial control and the benefits and risks of operation from a public to a private party, said John Schmidt, partner at the law firm Mayer Brown and counsel to the city of Chicago in the privatization of the Chicago Skyway toll road, which runs from the city to Indiana.

“If it happens the way you hope it will, you get a better quality of operation with a private party who has with more experience and a higher level of motivation, and the public entity is able to recover its capital investment in that asset and use it for other public purposes,” Schmidt said during a panel at Gleacher Center on November 4. The event, sponsored by the evening and weekend student-led Government and Policy Group, was moderated by Mark Zmijewski, deputy dean and Leon Carroll Marshall Professor of Accounting.

The United States is a “late comer” in the practice of privatization, which is common in Europe and much of the rest of the world, Schmidt said. “The Chicago Skyway transaction was really the first major privatization of a major existing piece of U.S. infrastructure. Most of the major European toll roads are privatized. A large share of major airports are privatized. The Lisbon and Prague airports are being privatized, and Rio recently announced it plans to privatize its airport in anticipation of the 2016 Olympics.”

In a political framework, privatization is an opportunity to shift risk and reward within a government sphere in a positive way for the officer holders, said Andy Shaw, executive director of the Chicago-based Better Government Association and a former political reporter for WLS-TV in Chicago.

“It’s a wonderful way to avoid direct taxation,” Shaw said. “For example, you sell the Skyway or the city’s parking meters and you provide the officials involved in the transaction with a huge pot of cash, which enables them to run government for a period of time without having to go to the taxpayers directly. But you end up going to them indirectly and essentially switching to a user fee.”

Parking meters do not operate to make money, but rather to encourage turnover of parking in congested areas, said Paul Sajovec, chief of staff for Chicago Alderman Scott Waguespack of the 32nd Ward. “When you cede control over those rates to a private entity, you lose the ability to control that process,” Sajovec said. “This has removed our ability to manage parking in our neighborhoods. If you look at it as purely a revenue-generating asset and not why it exists in the first place, you miss the larger context.”

On the other hand, the lease of the Chicago Skyway was a “perfect storm” of a situation that made sense to privatize it, he said. “The city backed into owning the thing in the first place because it was defaulting on its bonds,” Sajovec said. “Not a lot of city residents use it, and there is a competing route you can take if you think the rates are too high. We don’t have any qualms about the Skyway lease, but we do have issues about how quickly the money is being expended.”

In order to transfer well to privatization, public assets should have three primary characteristics, said Dana Levenson, managing director of The Royal Bank of Scotland’s North American infrastructure banking business. Levenson served as chief financial officer for the city of Chicago during the long-term lease concession sales of both the Chicago Skyway for $1.83 billion in 2005 and the Chicago Downtown Parking System for $563 million in 2006:

• They should be quasi-monopolistic, if not monopolistic.

• Their market should have high barriers to entry.

• Their services can be delivered as well, if not better, by the private sector.

“I would also add that the smaller the universe of users for any particular asset, the easier it is politically to go through the privatization process,” Levenson said. “That speaks to the issue of how people might respond to the privatization of water service. However, they might not care as much if waste water were privatized.”

The student-led Government and Policy Group organized the panel because public-private partnerships are likely to become a very significant issue over the next 30 years, said Jeremy Ebie, a student in the Evening MBA Program and co-chair of the group. “Some of us, including me, are interested in this as a profession,” Ebie said. “I’m also interested in this as a policy issue. The needs for infrastructure are huge.”

                                                                                                                        Phil Rockrohr