Governments can use public-private partnerships (P3s) to reduce costs, improve operating efficiency, shed non-core functions, transfer risk, and fund critical infrastructure needs. However, a successful P3 implementation strategy is a complex undertaking that requires careful planning and a complete evaluation of costs and benefits.
The City of Chicago, Illinois, has negotiated three high-profile P3s that have generated billions of dollars in one-time asset lease proceeds. The Civic Federation, an Illinois-based fiscal policy research organization, has developed an eight-point checklist for evaluating these P3s. The checklist assesses whether transactions make use of maximum benefits, mitigate potential problems, are accountable to stakeholders, include effective oversight, and use proceeds prudently. It can be adapted for use in other jurisdictions by taxpayers, financial managers, and elected officials as P3s are considered.
CHICAGO'S SKYWAY, PARKING GARAGE, AND PARKING METERS
The Skyway is a 7.8-mile, six-lane toll bridge. In 2004, Chicago approved a 99-year concession agreement for a $1.83 billion payment with a private firm. The city enforces operating, maintenance, and transportation safety standards, and Chicago police patrol the bridge. The concessionaire is responsible for operating and maintenance costs and collecting revenues. It can raise tolls up to prescribed limits. (1) The city allocated $855 million in proceeds to retire debt, $500 million to a long-term reserve fund to generate ongoing interest income, $375 million to an eight-year annuity for operations, and $100 million for human service programs. (2)
In 2006, the City of Chicago and the Chicago Park District concluded a $563 million, 99-year lease of four downtown parking garages with a financial services firm. (3) Chicago wanted to shed responsibility for the garages because fee revenues had been insufficient to pay for debt service, forcing the use of other revenues. (4) The city used $216 million in proceeds to retire existing debt and pay closing costs. The Park District used $122 million for capital improvements, $120 million to establish a reserve to generate ongoing interest income, $35 million for park reconstruction, and $70 million to pay off debt. (5)
In 2009 the city negotiated a 75-year lease of its metered public parking system, receiving $1.15 billion for 36,000 meters. (6) In most Chicago neighborhoods, rates rose immediately from twenty-five cents per hour to $1 an hour and will increase to $2 an hour in 2013. Meter rates downtown increased from $3 to $3.50 an hour, which increases to $6.50 an hour in 2013. The large rate increases, compounded by meter failures in the initial days of the contract, generated an enormous public backlash. (7) Transaction proceeds were initially allocated for a $400 million reserve to generate ongoing interest income, a $325.9 million five-year annuity to fund operations, a $326.3 million discretionary budget stabilization fund, and a $100 million fund for human service programs. (8)
A CHECKLIST FOR EVALUATING P3S
How can stakeholders assess whether a P3 proposal is a cost-effective, efficient mechanism that protects the public interest? The Civic Federation has used the following eight guidelines to review Chicago's experience with three major P3s.
Does the Government Have a Formal Policy Regarding P3s? Governments should adopt a formal P3 policy to provide a framework for evaluating and entering into these arrangements and how they will use transaction proceeds. This could be a stand-alone policy on the issue of large-scale P3 concessions, or it could be included as part of a broader alternative service delivery policy. (9) The policy should be publicly discussed, approved by the governing body, and made available to stakeholders. (10) Chicago has not approved a policy for P3 adoption or the use of proceeds. (11)
Have All Potential Costs Been Considered? Governments need reliable data on service delivery costs so they can make informed decisions about P3 transactions and assess performance over time. (12) A cost analysis must consider direct and indirect...