Privatizing Chicago
February 07, 2013  Emily Miller Better Government Association

Lurking behind talk of privatizing Midway Airport, by spinning off some or all of its assets or operations to investors, is the specter of Chicago's infamous parking meter deal — perhaps the most reviled City Hall transaction in modern Chicago history.

On the surface, Mayor Rahm Emanuel is taking great pains to assure the public that any Midway transaction will not be a sequel to the parking meter fiasco.

He asserts that no Midway compact will be struck until it's bathed in the sunlight of full disclosure. He has even appointed a blue-ribbon panel to "ensure transparency, integrity and thorough deliberation."

While such good intentions are welcome, the public's comfort level would be much higher if there were a law that established a clear set of rules to ensure an open, transparent and accountable process for every privatization transaction.

Unfortunately, the City Council, charged with keeping a watchful eye on such dealings, has not rallied to that important cause. The council has buried a proposed privatization disclosure act in the Rules Committee, where it cannot get a full public hearing.

The proposed Privatization and Accountability Ordinance was introduced by Ald. Roderick Sawyer, 6th.

The Better Government Association supports the spirit and intent of this proposed law because it creates a standardized, transparent and accountable process to use whenever the city wants to privatize any asset or service valued at $250,000 or more.

It strives to correct glaring inadequacies in the privatization process that gave us the parking meter debacle under the Daley administration.

For example, the city does not require that cost-effectiveness studies be performed to ensure that deals are financially necessary and sound. Nor does it require a public debate.

The proposed ordinance changes that by requiring a cost-effectiveness study that would be presented at a public budget committee hearing, providing time for public scrutiny and discussion.

The ordinance requires that, once the council approved a privatization deal, contracts will be awarded in a public, competitive bidding process to avoid conflicts of interest or other sleights of hand.

It also requires that vendors submit annual performance reports to ensure compliance with vendor standards.

These safeguards are important because Emanuel is open — some say eager — to privatizing public assets.

Residents must have a standard process they can rely on, and city officials must understand that they are being held publicly accountable for their privatization decisions.

The Privatization and Accountability Ordinance deserves a public hearing, but it won't get one if it's stuck in the Rules Committee, where it has languished since November.

In addition to the 32 aldermen who support the ordinance, public employee union AFSCME and the Illinois Public Interest Research Group in Chicago back the disclosure effort.

It's time for Ald. Richard Mell, 33rd, chairman of the powerful Rules Committee, to move the ordinance to another committee so there can be a real public dialogue about privatizing assets and services in Chicago.

What's the worst that can happen? We avoid another parking meter meltdown?

Emily Miller is the policy and government affairs coordinator for the Better Government Association.
Landing investors for privatized Midway will take keen navigational skills
Among the challenges:
Avoiding mistakes city made in its parking meter lease deal, and ensuring protections for customers and employees
March 24, 2013
By Jon Hilkevitch and Kathy Bergen, Chicago Tribune reporters

Midway Airport's short runways symbolize the challenge for Chicago to land a successful privatization of the Southwest Side airport: The approach must be almost perfect.

Mayor Rahm Emanuel sees a potential lease to private operators, who would effectively control the airport, as a way to extract millions of dollars from Midway to use for other infrastructure projects. That is only possible by participating in the Federal Aviation Administration's experimental privatization program

The main question is whether the city can structure a transaction that will avoid the mistakes of the long-term lease on the parking meters, widely viewed as a bad deal in which the city signed away decades of revenue for a short-term budget fix.

A second big issue is whether the city could land a deal that will produce sufficient cash to make a meaningful difference to the city's aspirations, without infuriating budget-minded travelers in the same way that the parking meter rate hikes have aggravated those who shop, dine and work in the city.

The challenge for potential investors will be to find innovative ways to generate more revenue from a well-run airport that doesn't have space to expand.

Observers question whether investors will value the deal as generously as they did the recently approved privatization of the underdeveloped airport in San Juan, Puerto Rico, where the growth potential is greater, or as investors did the first time Chicago tried to privatize Midway with a 99-year lease. This time, the city is offering a shorter lease — no more than 40 years — which gives investors less time to garner profits.

Lois Scott, the city's chief financial officer, said the city is conducting an in-depth exploration before deciding whether to proceed.

"It's my job to evaluate and see whether this helps our community or doesn't," she said. "Until we fully bake something, we don't know whether this has benefits for our community or not. ... And that means our taxpayers, it means labor, it means our employees out there, the airlines served there, the community residents around Midway."

This month, the city selected six potential bidders, and officials will spend the coming weeks sharing information with them about the airport's operations and the city's parameters for any deal. Within a few months, officials expect to decide whether to seek formal bids for a transaction.

If the city proceeds, Midway would be the first major U.S. hub to privatize.

What follows are some of the big questions on the horizon.

Why consider privatization?

Awarding a long-term lease to a private operator under the FAA program is the only way Chicago can divert revenue produced by airport operations to other purposes around the city.

Without such a move, "whatever happens at Midway has to stay at Midway — the rest of the city never benefits," Emanuel has said. If the city agrees to a deal, he said proceeds would pay down about $1.4 billion in Midway construction debt and help finance projects elsewhere in the city, whether modernizing schools or upgrading mass transit.

A private operator also may be able to find operating efficiencies, leaving more cash for airport improvements. Although Chicago spent $761 million on a Midway makeover, completed in 2003, a remodeling could ease congested lines leading to airline ticket counters and at the sole security checkpoint. And a private firm may offer a fresh approach to retail and restaurant offerings.

"Midway's concessions are appalling," said Steve Steckler, chairman of Infrastructure Management Group Inc., a Maryland-based consulting firm. "They look like an afterthought almost everywhere they were put in, like, 'Wow, thank God we found some space here.'"

A number of Midway patrons say they are fond of the airport, warts and all, and that any move toward privatization should preserve its strengths.

Michael Lupo, 30, who travels through Midway weekly for his sales job, said he "greatly prefers" Chicago's smaller airport, even though it could use aesthetic updates.

"Midway's much more efficient and easier to get in and out of than O'Hare," Lupo, a Lincoln Park neighborhood resident, said Friday at Midway.

He supports privatization, he said, as long as the airport layout, food pricing and other amenities that he believes make Midway an efficient airport stay the same.

Woodridge resident Frank Nusko said he flies through Midway as often as he can to avoid O'Hare International Airport, and he hopes Chicago officials think hard about any decision to privatize Midway.

"Midway's not as crowded, the flights are typically on time and the parking access is closer to the gates," said Nusko, 53.

"I would hope the privatization would be a smart business decision and not just for the money," he said.

Short of privatizing Midway, the city easily could hire a retail consultant to help upgrade offerings as the city is doing at O'Hare's Terminal 5. Also, Midway's construction debt will be paid off by airport revenue, regardless of whether the facility is privatized.

So the big question is whether private investors and operators will be willing to pony up a sufficiently handsome sum for the right to operate the airport for as long as 40 years — enough to justify giving up most municipal control as well as the lion's share of airport income.

"Whatever the city did wrong on the parking meter deal, they don't want to do that again," said Robert Poole Jr., director of transportation policy at the Reason Foundation, an organization that generally favors moves to private enterprise.

City Hall says any deal would be radically different from the 75-year parking meter lease and from the city's first $2.5 billion, 99-year Midway privatization deal, which collapsed in 2009 when the credit markets seized up. In addition to a shorter lease, the city says it must share in airport revenue during the life of the lease and would insist on consumer protections for travelers as well as job protections for existing Midway employees.

"This is extremely different from what we've done in the past in the city — it's different in probably every single element," Scott said. "We've looked at our history and what we did right and wrong in the past and tried to focus on what was the feedback."

Sen. Dick Durbin, D-Ill., urged caution in a recent letter to the Department of Transportation.

"When a unit of government proposes to turn over publicly funded transportation assets to private operators, we need to ask hard questions," he wrote, citing potentially higher costs for travelers, and lower wages and benefits for airport workers, among other issues.

What is the likelihood that a deal will emerge and win approval?

Many of the world's most prominent private airport investors and operators have asked Chicago to weigh their qualifications as potential bidders on a Midway deal, a recognition of the airport's solid business model and an indicator of renewed appetite in the financial markets.

Whether that interest translates into a lucrative deal for the city depends on how much bidders are willing to invest in a landlocked airport with relatively modest growth potential.

Midway, occupying only a square mile of property, will never regain the title it held in the mid-20th century as the "world's busiest airport," nor will it ever be able to accommodate the largest jetliners.

But a privatization agreement could lead to operational changes that smooth the flow of arrivals and departures, opening the door for increased flights, according to aviation industry experts, who cite successful capacity expansion in previous airport lease deals worldwide that did not involve adding runways.

The dominant air carrier at Midway, Southwest Airlines, has given its approval to Chicago's bid to investigate possible privatization. The carrier has good reason to make adjustments to flight schedules to help increase the number of passengers traveling through Midway.

Southwest, whose cooperation is needed on any deal, stands to benefit in other ways too. It likely will push for and receive long-term protections from steep escalations in landing fees, rents and other charges at Midway, said Stephen Van Beek, who has been involved in negotiating privatization deals in his role as chief of policy and strategy at LeighFisher, a management consulting firm.

Chicago's first attempt to privatize Midway drew a deal valued at $2.5 billion, or 28 times operating income. This multiple was considered high at the time, and a number of observers question whether this type of valuation will be achieved or exceeded on a second try, given the city's desire for a shorter lease, ongoing revenue sharing and greater operational control.

"The issue really winds up being ... 'What is it worth to a private guy?' And that depends on what kind of authority the city will give to make changes and what it mandates him to do," airports expert David Plavin, former president of the Airports Council International-North America, said in a recent interview.

How will travelers and consumers be affected?

Midway's selling point to travelers is the perception of getting more bang for the buck.

It is among the fastest-growing budget airports in the U.S., in part because it provides a low cost overhead for airlines. For dominant carrier Southwest, this is key — it allows the airline to pass on some of those cost savings to customers.

So it will be crucial for Midway's landlord, whether it continues to be the Chicago Department of Aviation or it switches to a private operator, to protect that identity.

This will pose a challenge.
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