U.S. policymakers in Chicago, Indianapolis and elsewhere have recently begun to unlock value trapped in a neglected treasure: municipal parking assets. This might not seem like a hot topic, but for investors seeking new places to park capital, creative partnerships to invest in and manage city parking garages, meters and lots are increasingly attractive.
Parking is a historically commercial activity that governments have partially captured. And in many cities the public sector is competing alongside the private sector to provide parking. Therefore, it makes sense that innovative policymakers are seeking to leverage commercially viable assets and shift their role in parking operations to an eager and competitive industry. And institutional investors, pension funds and the like are increasingly interested in investing in public infrastructure assets like parking, lured by a drive for steady returns (typically in the 10-14% range) amid the post-recession flight to quality.
American automobile ownership slowly proliferated in the early 20th century, and by the 1930s, cities began to face traffic congestion. In 1935, a private company installed the first Park-o-Meter, charging motorists five cents an hour to park in Oklahoma City's downtown business district. New private meters successfully promoted higher turnover of parking spaces, satisfying the needs of retailers and customers who wanted access to them.
Over the next decade over 140,000 meters were installed across the nation. Unfortunately, innovation was subsequently stymied as the public sector assumed increased ownership and operation of parking assets, including meters, street-level lots and garages. The private parking market didn't disappear; it simply calcified under public sector capture. But now it's being reborn.
Today, the private sector is partnering with governments to deploy disruptive technology, from real-time parking meter sensors accessible via smart phones to variable pricing that more accurately values spaces. Meanwhile, investors are starting to pour capital into government-owned parking infrastructure.
Chicago was the prime mover in the U.S. parking privatization market under former Mayor Richard Daley. The city received an up-front $1.1 billion payment from a Morgan Stanley-led consortium in 2009 for the right to maintain, operate and collect revenue from 36,000 city parking meters over a 75-year concession (lease) term.
The deal also facilitated capital investment under private sector management, something that would have been difficult for the cash-strapped city to achieve. The concessionaire has replaced the original batch of mostly coin-based meters with a streamlined system of modern meters with multiple pay options, and the entire system will be overhauled and meters replaced roughly once a decade, all on the concessionaire's dime.
Tangible benefits aside, the deal remains controversial. A rocky transition to privatization in the early weeks of implementation started things off poorly, creating some brief, but very visible, operational gaffes long since resolved. Also,some critics have claimed the city got "ripped off," a myth that's become urban legend despite many experts' conclusion that the $1.1 billion price was on target.
City officials spent much of the upfront payment closing budget deficits during the recession instead of investing it in infrastructure or something else with long-term value, a fiscally irresponsible move (though a separate policy decision from the privatization itself). Meanwhile, other aspects of the partnership, such as the way the lease handles compensation to the vendor related to city street closures, remain an ongoing subject of contention.
However, naysayers tend to ignore the benefits of the deal, which extend beyond the capital investment, new technology and more consumer convenience. For example, a 2011 IBM study surveyed over 8,000 commuters in 20 global cities, measuring things like amount of time spent looking for parking places and inability to find parking places. Chicago came out on top, besting global competitors like Los Angeles, London, Madrid, Shenzen, New Delhi and others.
Indianapolis followed Chicago's lead in 2010, opting for a 50-year lease of the city's 3,700 parking meters in the downtown and Broad Ripple areas. In contrast with Chicago, Indianapolis received $20 million up front and an estimated $300-600 million share of annual revenues over the course of the agreement. Notably, the city's share of revenues is being reinvested in infrastructure near the source of revenue (i.e. money from meters will go to improve the area around the meters, not used elsewhere or for other purposes.) The concessionaire has also been deploying parking sensors and wayfinding technology to help drivers locate vacant spots, in addition to apps that facilitate remote meter feeding.
This month, Ohio State University officials announced plans to adapt this model with a groundbreaking new application in higher education. University officials selected a $483 million private bid to operate the school's almost 36,000 parking spaces for 50 years. Pending trustee approval, the University will direct the majority of concession proceeds into its endowment to support its core academic mission for decades to come to supplement declining state appropriations. The up-front payment is projected to increase the University's endowment by $4.9 billion over the lease term.
New York City is exploring yet another evolution of the approach, announcing this month that it would seek bids for a private management agreement for over 80,000 metered parking spaces. However, in contrast to Chicago et al., the City is not seeking a long-term lease, but rather a contract in which a private manager guarantees certain minimum levels of annual parking revenue to the city, in addition to accessing cutting edge parking technology.
Municipal parking assets haven't been fully released into a free and competitive market, but innovative policymakers are finally unlocking value they've been sitting on for years. Meanwhile governments retain legal ownership of core assets, and important controls on things like meter rates and operating hours, for the duration of these agreements.
The increasingly relevant question in parking—and in public policy more broadly—is this: what other public infrastructure assets hidden in plain sight offer similar privatization opportunities?
Harris Kenny is a policy analyst and Leonard Gilroy is the director of government reform at Reason Foundation, a Los Angeles-based think tank. Gilroy and Kenny edit Reason Foundation's Annual Privatization Report 2011, available at www.reason.org/apr2011. This article originally appeared here on Real Clear Markets on June 21, 2012.