This post is part of an ongoing series that will feature Questions and Answers to commonly-asked questions in mobility management.
Question: Our city is considering selling or leasing its owned parking garages and onstreet parking as some other major cities have done. What are the pros and cons of this strategy?
Answer: This approach, often generally termed “Public-Private Partnerships”, “P3” or “3P”, has been very popular and generally successful in elsewhere in the world, but it is still relatively new to the U.S.
Politicians may see selling off major revenue-producing assets as an innovative way to generate a bucket of cash to fill budget deficits, generate capital for a new project, or to satisfy supporters who push for better management (read: privatization) of public assets. However, there are questions that should be asked first before plunging headlong into the privatization pool.
Discounts to the Net Proceeds from the Sale
First, what is going to be done with the cash, assuming any is generated? Plowing the money back into other public infrastructure is one thing, but expect fierce debate if the dollars are going to plug temporary budget holes or to provide entitlements or programs that benefit a narrow range of people.
(Please note this is not a blanket endorsement or condemnation of such entitlements or programs, just a warning that such discussions may become heated, based on the experiences of other communities.)
Second, how much money is actually going to be generated? The equation is much more complicated than applying a “multiple” to an “EBITDA” (Earnings Before Interest, Depreciation and Amortization). Indeed, there are several concerns here. . .
Typically, existing debt, such as bonds, used to finance the infrastructure must be paid off, or “defeased” prior to any transfer of ownership. There might be penalties or even legal obstacles to an early payoff in bond protocols. These costs must be deducted from the net anticipated from a sale. In some cases, this problem can be avoided with long-term leases or concessions instead of an outright sale.
Next, the present and future condition of the asset must be considered. For example, if a deck is in need of renovation, expect the purchase price to be discounted to allow for repairs. Maintaining the future condition of the asset is often a primary tenet of P3 deals.
A municipality may also want to ensure that future generations of citizens utilizing the facility enjoy a higher level of service than is currently provided or that the market wants to provide in the future. Again, a reduction of purchase price can be expected for this trade-off.
Enhancing the Sale Price
Of course, a private entity may recognize the opportunity to increase revenues over existing levels, enabling it to pay a premium over current rates of return. There are hidden costs and missed revenue opportunities in many operations that a new operator can exploit for gain, including customer fraud, employee theft and poor management.
Another question: Who is going to control the operation? The more control the seller insists on (e.g., rates, hours of operation, free parking allowances, etc.), the less money an asset sale or long-term lease will generate.
A less constrained private operation may be able to experiment in such areas as peak demand pricing and modes of operation (e.g., going from exit cashiering to pay-on-foot). Fewer constraints usually equal more net proceeds.
Experiments Can Go Awry
However, such an operation will be somewhat insulated from community concerns. That may bode trouble for politicians as well as the community.
This was a concern in the sale of the onstreet parking assets in Chicago, which left the operator free to make significant changes, often with little or no input from the public. Outcries over aggressive citation issuance and price changes forced an embarrassed political class to intervene and demand contract changes. Some of this was achieved, but at a high financial and public relations cost.
Summary of Advantages to Asset Sales and Leases
There are advantages to asset sales, which is a term used loosely to describe various privatization strategies such as outright sale, long term concession, and sale with leaseback. Besides the aforementioned bucket of cash, the positives often include:
- Insulating the political system – Privatization removes the ongoing, day-to-day stress of managing operations. It also frees the operation from artificial political constraints. For example, voting on rate or policy changes are minefields for politicos. Officials must balance their fiduciary duties with concern for public dissatisfaction. But a group of unhappy citizens can morph into an effort to turn elected or appointed officials out of office, so the less decided, the better. In a privatized system, for example, if rates must be increased to maintain the financial health of the system the operator takes the most heat.
- Reducing red tape – Since private organizations typically feature flatter management hierarchies, decision-making can be streamlined. Private managers can react more quickly to changes in the market, saving time and money.
- Improving efficiency – Privatization will bring in the new blood of experienced and aggressive real estate and parking professionals. A market-based management approach may be more sensitive to customer concerns and provide enhanced service and product offerings.
Summary of Downsides to Asset Sales and Leases
One of the downsides to be considered is the long-term or permanent loss of control over a major civic asset. This might seem acceptable now, but might not be if community circumstances and needs change in the future. For example, if a city is attempting to lure a major development, it no longer has a “parking card” to play. Some cities have addressed this by capping rate increases, setting operating policies and procedures and allowing the city to “reclaim” spaces, albeit at market rates.
Another concern is replacing the budgeted revenue stream that the deck might have generated; in the recent case of Chicago, part of the sale proceeds go into an investment fund that will hopefully generate enough revenue to offset the previous net the city was generating from its operations.
Also, consider the human cost: existing employees might be displaced, jobs lost, and/or wages decreased. Many asset sales and leases merely require the new operator to interview existing employees. Requiring the new operator to hire existing employees or setting specific, minimum hiring targets will likely dilute the net proceeds.
While these are just a few of the major considerations in this issue, the question of asset sales is one of both opportunity and challenge.
(Want more information? Please check out our forums. If you have comments or suggestions, please share your experiences and ideas with us and other professionals visiting our site. Add your comments below – if Comments are “on” – or by contacting us directly here. This post was adapted from an article previously published in magazine or website format. The author retains all second serial and electronic rights. This work has been updated, edited and is distributed by the H2H2H Foundation with the express permission of the author.)