The term “privatization” invariably sets off bells for liberals, but occasionally it pays dividends for governmental entities and their taxpayers.
The city of Chicago appears to be cashing in on the privatization of its parking system. The initiative has enabled the city to extract large up-front payments from parking concessionaires, modernize its parking system and launch a form of “congestion pricing” aimed at reducing the parking crunch in downtown Chicago.
David Zavattero, deputy director of the Chicago Department of Transportation, described the five-year-old parking effort during a workshop last week at the University of Minnesota’s Humphrey Institute of Public Affairs.
Zavattero said the city launched the effort in 2006, soliciting proposals to modernize four downtown parking garages and awarding a 99-year lease for $563 million.
Two years later, he said, the city did the same thing with 34,500 on-street parking meters and 18 metered lots with another 1,240 spaces. It ultimately awarded a 99-year lease for $1.56 billion.
Zavattero said the city went the privatization route because it “lacked the resources” to modernize and effectively manage its parking facilities. The city gave up with revenues from parking, but gained the upfront investment in new technology and the rewards that go with it.
Parking meters
The story of the parking meters is particularly interesting. Within three years, Zavattero said, all of the city’s “dumb” parking meters were replaced with more than 4,600 “smart,” solar-powered pay boxes at a cost of more than $40 million. The pay boxes can handle the fees for up to 15 parking spaces and the rates can be changed via wireless technology.
“That would not have happened in the absence of the concession system,” he said.
In conjunction with the new meters, Zavattero said, the city implemented the first increases in metered parking rates in two decades.
He said the city was divided into six zones and a rate schedule was established that will raise rates by 2013 to amounts ranging from $6.50 per hour in the Chicago loop to $2 per hour in more remote neighborhoods. Prior to 2009, the rates at most meters were 25 cents per hour.
Zavattero acknowledged that the changes were not well received by the public. “Thank God we don’t have capital punishment” in Illinois, he said.
However, he said the objective of the higher rates, two-hour parking limits and better enforcement was to bring the rates more into line with off-street parking, free up more on street-spaces for short-term parking and reduce the amount of street-clogging traffic by motorists in search of parking.
Zavattero said the new parking rates also may have contributed to an uptick in transit use, though it has no supporting data at this point.
To avoid creating any huge holes in its operating budget, Zavattero said, the city put $400 million of the upfront payments into a reserve fund and is drawing $20 million a year — approximately the same amount it had been receiving in meter revenue. The city also continues to receive the fines from parking violations.
Wireless technology
Zavattero said Chicago uses wireless technology to reduce rates at some parking meters during non-peak hours. However, thus far, city officials thus far have resisted the idea of employing a system of “dynamic pricing” to change rates depending on demand — similar to the variable rates on the “MnPass” lanes on I-394 and I-35 W in the Twin Cities.
That’s such a hot political issue that Chicago actually rejected a $158 million federal grant for congestion relief in 2008 because it included a dynamic pricing component.
The nation’s the boldest parking experiment, called SFpark, is now under way in San Francisco.
Sensors have been embedded in 7,000 on-street parking spaces and in 15 city-owned ramps to track when and where parking is available. Sensor data is uploaded wirelessly to the SFpark data feed, making this information available to the public via this website, smartphone applications and eventually text message and 511.
The system allows SFpark to adjust meter prices based on demand to encourage drivers to make trips in off-peak hours and to use parking lots and garages. The goal of these pricing adjustments is to have at least one parking space available on every block,
Such technology may not have widespread application in the Twin Cities. However, it could eventually be beneficial in congested areas such as the Minneapolis entertainment district and the University of Minnesota campus.
As Zavattero pointed out, “The technology is there. The economic theory is there. We know we can influence people’s behavior through pricing.”
I don’t know, Steve — I think we need to be a little more skeptical. Privatization is all the rage — Pennsylvania is actively looking to sell the revenue stream of its tool roads, if it hasn’t already. There are others.
But I fear it could become a cash grab in which the politically connected reap huge long-term benefits while government entities in effect sell their seed corn for a modest short-term gain.
Look at the math you just laid out. You say Chicago was getting about $20 million a year from its parking meters. Yet it couldn’t find $40 million to do the modernization itself? I find that unconvincing.
So the city sells 99 years of parking revenue to a private contractor, who immediately finds the needed $40 million for to modernize the meters — and then raises rates by a factor of 40!!!!
I’m all in favor of smart moves to ease the congestion problems in center cities. But it seems to me that the city of Chicago could have implemented a congestion pricing system and done the meter upgrades itself.
Instead, it took the easy way out and grabbed the short-term money.
John, I agree with you. Chicago chose to sell an expensive commodity (parking) very cheap in order to avoid making a long-term investment in the city (buying new meters with new tech).
Good article. But the story doesn’t tell half of the the scandal of Chicago selling out its parking meter system to foreign investors largely “sovereign wealth funds.” About 49.9% of the Chicago Parking Meters, LLC is owned by a group headquartered in Abu Dhabi. Journalist Matt Taibi write about this in his “Griftopia.” Privatization is bad enough. I agree with John @#1 above. But shouldn’t we be a little more concerned about the fact that the entities buying our infrastructure are foreign investors? Should Prairie Island be owned by the Arabs and the Chinese?
Wall Street has been the primary beneficiary of these transactions as the sellers/lessors seem to receive consistently poor advice when monetizing such assets.
This is not an article. It is a news release issued under the guise of an interview/article. A news article would have investigated and reported on all the points made by #’s 1, 2, 3 and 4.
Minnpost, do you plan on following up with the some real information?
I’m haven’t yet spent the time reading the sources cited in the post linked to below, but a blogger I follow covered the Chicago parking privatization effort in great detail and raised another serious concern:
The lease terms require the city to compensate the holding company that manages the metered spots for any reductions to on-street parking.
Perhaps the follow-up article could investigate this concern in addition to those raised by other comments above.
Here is the post from the Urbanophile blog:
http://www.urbanophile.com/2011/12/06/three-years-down-72-more-to-go-on-chicago-parking-meter-lease/
I obviously was unaware of the controversy surrounding the privatization of parking in downtown Chicago. Policy experts at the Humphrey Institute brought the speaker to campus for a symposium and this issue was not mentioned.
The larger issue — and one I have written about before — is how we manage and price parking, and whether we continue to subsidize it at the expense of transit and other modes.
No less an employer than the state of Minnesota provides 7,500 parking spaces at or near the Capitol at deeply discounted rates — just $30 a month for surface parking. How does transit compete with that?
However Chicago funded the modernization of its parking system, this initiative lends itself to new dynamic pricing strategies that reduce congestion and promote greater transit use.
The problem with the “greater transit use” argument is that we don’t have a reasonable transit system here in the Twin Cities metro area.
Some places, it’s just fine to hop in the car and go to a parking lot. Other places, not so much. If you live in Plymouth, great. Rosemount? Good luck.
And North Minneapolis? Don’t even get me started.
I completely agree that parking is heavily over-subsidized here. However, until we build out a transit system that works for everyone, it’s not realistic to expect that higher pricing for parking will lead to a mode shift. More likely, it will lead to those on the edge losing their jobs.
It’s hard to disagree with any of the comments (#1-#8) completely.
There ain’t no such thing as “free” parking, as numerous studies have demonstrated. A “free” parking space anywhere, whether downtown St. Paul or in Maple Grove, is being subsidized by someone, somewhere. Because of that, I think it’s probably not possible to compete with $1/day parking rates for state employees around the capitol.
As a relative newbie, I find David’s (#8) argument pretty persuasive. If we want people to use transit more, and use parking fees as the motivator to get the public to make that shift, there has to be a viable transit alternative. At the moment, I don’t see one.
Here in the far northwest corner of the city, there are lots of buses, but they don’t go places I want to go, for the most part, and in the rare instance when they do, I have to transfer 2 or 3 times to reach the destination. A 10-mile trip takes 2 hours, each way. That’s not a reasonable tradeoff to taking my car, at least not yet.
I’m also on board with Jon Erik Kingstad about foreign ownership. One of my mental questions as I read the article, and before I got to the comments, was “If they’ve privatized this, who is the private operator? Who’s making the profit?” I’m not at all comfortable with foreign entities owning our infrastructure.
Any big fiscal transaction like this inevitably, it seems, ends up on Wall Street, which does not, I’d argue, have the long-term welfare of Chicago (or San Francisco, or any metro area) at heart. Wall Street, as has been repeatedly demonstrated, primarily has the long (and short) term interest of Wall Street at heart, and in line with more than one comment, ‘twould seem that cities fairly consistently get poor financial advice in situations like this.
I encountered “smart” parking meters around the state capitol building in Denver this past summer – they’re quick and convenient to use – but I don’t know if Denver sold its parking system to some private entity to pay for them, or, as seems more likely, is replacing “dumb” parking meters with “smart” ones on a piecemeal, or even neighborhood, basis. Parking is just as scarce in the heart of downtown Denver as it is here in St. Paul and/or Minneapolis, and even at the “dumb” meters, the rate there was $1/hour years ago, before I moved here. This summer, the “smart” meter was charging me $1.25/hour, and limiting the time I could pay for.
For what it’s worth, I like the idea of congestion pricing, and would prefer that city parking systems remain under city control. It’s going to be difficult for even a legendary Chicago alderman to hold someone in Abu Dhabi accountable for a parking meter glitch.
The title of this article is:
“What happened when Chicago privatized its parking system.”
But after getting a number of critical comments the author states:
“I obviously was unaware of the controversy surrounding the privatization of parking in downtown Chicago.”
I don’t even know what to say about that, other than if I was Mr. Dornfeld I probably would have just pulled the article and started over.
What happened in Chicago is an unmitigated disaster. The city just got a bill from the private company for $13.5 million dollars. What for? To cover the cost of the revenue lost when people with handicapped permits park at meters for free for one year. That’s in the contract.
http://chicagoist.com/2011/12/19/laz_parking_bills_city_for_street_c.php
When there were Enron-induced roving blackouts in California some years ago, little mentioned was the fact that there were no such blackouts in Los Angeles. Why? Because the electric utility was owned by the City of Los Angeles. The magic of the marketplace is not always a magic bullet, and the sale of municipal assets should be approached with a jaundiced eye.
I have read with interest the article and all the comments. I am very curious that the article cited Pass Lanes with regard to variable rates. I read an article many years ago that it would take 9 years to complete I-394 & it was built to handle less cars.
When I questioned it, I was told that it works in other cities. I don’t know about that, but the purpose was to encourage ride sharing. However, they did not take into consideration that many downtown workers cannot use ride share. If a single mum receives a call from the school that her child is sick,and she doesn’t have a car to get there, what does she do. I was in that position & know many others who felt the same. I did not partake in ride share nor did I have the money to pay what they are asking to ride as a lone driver.
The city planning in the Twin Cities and surrounding suburbs is totally pathetic. I moved here in 1974, thought it then & think it now.
I think Steve’s article does a nice job of identifying the two economic facets of public parking. The management of meters and short term parking contracts is straightforward and unfettered. It matches the typical nature of products that are produced and traded efficiently in the private goods market.
The city retains the ownership of the parking spots and the ability to use pricing to influence transportation choice. This gives government officials, as representatives of residents, flexibility in managing the public good.
Whether the financial agreement with the private investors was struck at market rate is hard to determine as so few similar arrangements are available for comparison; whether the contract was written to cover handicap parking properly is a detail to work out; whether foreign investors should be able to own American infrastructure is yet another topic.
But the fact that a private enterprise was able to move in quickly, change out all the hardware to a system that is more convenient to users and generates more income, should confirm to all that some products are managed most effectively in the private goods market.
The reason critics go crazy when you talk about privatization are very simple. In every case the state sells valuable public assets at bargain basement prices. The proceeds of these sales are one-time chunks of money that get dumped into otherwise broken budgets as one time fixes.
In this case, a $2 billion asset ($20 million x 99 years) was sold for a mere $500 million dollars. This is a 99 year lease, typical, but they guarantee that these assets cannot be recouped without costly court battles.
The private company didn’t do anything that the parking authority couldn’t have done, they raised rates, and they raised them more than they needed to to fund the changes they made. The private sector is not NEEDED to make these changes. Someone said here that the real beneficiaries are Wall Street investors, and that’s absolutely true. What did the people of Chicago get? New meters and higher rates. That fancy system for reporting empty parking spots sounds cool, but in practice it likely will not deliver the promised results, in fact it sounds like it will create more distracted drivers tooling around Chicago streets.
By the way, we’ve got new fancy meters all over Minneapolis, we didn’t privatize the system in order to get them did we?
I don’t think it is a question of whether a government can handle the parking meters but rather a question of which marketplace – the private or the collective – is the most effective. Governments can own road construction companies to repair publically owned roads. The fact that we choose not to do this is the US leads me to believe there is consensus that private markets are more efficient at the task.
Similarly I don’t think that private markets can be effective in, say, public safety. I have yet to hear of an example of where a private enterprise has been hired to stamp out crime in a neighborhood where the collective market is not actively engaged in safety oriented activities.
Steve, I suggest you consider a follow up article that compares the Chicago system to the San Francisco system. In SF, they were able to accomplish an even more advanced system without privatization and I believe they used the revenue for additional street related improvements. The Urbanphile’s critique mentioned in #10 is quite valid and I have heard it echoed from people I know living in Chicago who follow urban issues.
Another problem with the Chicago privatization not mentioned before is that it severely restricts the City’s ability to change the design of its streets – such as adding curb bump outs, changing parking to bus-only lanes or using a parking space for cafe tables, etc. The City has to negotiate every change with Chicago Parking Meters, LLC. These changes are difficult to begin with, but having deal with the financial implications of changing a parking contract only makes them much, much worse.
Chicago squandered over $1.5 billion from the sale of the parking garages and parking meters by using the proceeds to balance the City’s operating budget. Today, there is nothing left, thanks to Mayor Daley’s refusal to address Chicago’s out of control spending to support its bloated work force and the exceptionally generous benefits.
By selling capital assets to fund everyday operating expenses, Daley saddled future generations with significantly higher parking rates.
In Los Angeles, Mayor Villaraigosa tried to pull a similar stunt, but fortunately, his Chicago style financial stunts were not implemented.
Victoria #15,
I would say that comparing the public sector and private sector as “markets” distorts their functions. Most of what the public sector does is not market activity, they don’t “sell” license plates for example, or food inspections. Markets imply profitable outcomes, public sector activity is not profitable. I think the public sector and it’s assets are best thought of as a collective investment that pays off in ways other than dividends.
The consensus you refer to has been real, but it has been based on the myth of private sector efficiency which has been sold by Democrats and Republicans for decades now. That consensus may be changing now in the aftermath of the financial collapse. The banking sector was supposed to be the gold standard for private sector efficiency yet can’t even locate titles on millions of mortgages. Meanwhile decades of privatized government services have failed to deliver better service or balanced budgets as promised. In many cases, such as the immigration services, services quality has decreased while cost have increased.
When governments contract out it’s not a market decision, it usually a resource decision. The question is for instance, if you’re going to build a bridge, do you create a dam building government entity from scratch, or do you hire an existing company? It may make more sense and be faster to hire the company than to re-invent the wheel. In other words, if a government is going to do something it doesn’t normally do, or something new, for one time, it may make more sense to contract it out.
In the case of privatized existing government programs or public assets, it usually makes little sense to privatize. This are things the government normally does, and has been doing for decades in most instances. What we’ve seen with private and charter schools, parking administration, health care, privatized toll lanes etc. is that we don’t better service from the private sector, sometimes we get worse service, and we usually get more expensive service.
Paul-You seem to contradict yourself when you say activity from the public sector produces dividends but is not profitable. I have to pay taxes on dividends from investments in the private sector as the IRS views them unequivocally as profit. That erroneous term, non-profit, has mislead us for generations. The classification should really be: Not for the profit of any one individual, but absolutely and inextricably profitable to the group.
Markets occur when there is competition for goods and services traded amongst individuals. If you ask an experienced fundraiser for a foundation to predict the amount they will receive in donations from each of their sources, I am confident they would be able to give you numbers with a certain degree of certitude. It then appears they understand their market for philanthropic giving. Markets exist. They are available to be studied by those interested in evaluating the choices people make.
I agree with the gist of your last paragraph. We have, as a people, been careful to select the goods we agree to provide to all citizens. So our government is the administrator of our most valued public goods like education, national defense and public health and human services.