The Indiana Toll Road lease is an example of privatization done right. A break-even-at-best highway was improved with wider lanes and electronic toll collection, while the state collected $3.9 billion to spend on critical infrastructure.
Not every privatization goes so well. In my new Manhattan Institute report, “The Lessons of Long-Term Privatizations,” I contrast Indiana’s successful toll road lease with Chicago’s disastrous parking meter lease, drawing out the lessons of how to do privatization right.
Chicago’s parking meter lease was a disaster is almost every way. It was approved with almost no debate and in just three days. The transition was a fiasco: meters overflowed with quarters and jammed. The city took all the money up front, which put a hole in all future budgets where the parking meter revenue used to be. It then frittered away the money papering over budget deficits —including money earmarked to replace the old revenue stream — leaving it with nothing to show for meter rates that have more than quadrupled in many places.
Beyond the deal’s structural flaws, Chicago set itself up for failure by choosing to privatize its parking meters in the first place. Parking rates need to respond dynamically to neighborhood conditions, not be fixed in a contract for 75 years. The city might even want to turn metered parking spaces into something else entirely, like pop-up cafe space, car-share parking, or a bus lane. Chicago hamstrung its ability to change public policy on its streets, and this is already having an effect.
Cities also must bag meters frequently — for street fairs, parades, special events and construction. So to make up for the lost revenues, the city has to pay compensation to the company that leased the meters. This is millions of dollars a year in Chicago.
Indiana’s toll road, on the other hand, is a much less dynamic asset, and therefore a prime choice for privatization. Toll roads are fairly static: the state was never considering turning the toll road into a park, for example. Also, tolls roads almost never close, so there’s very little compensation to pay. In Indiana it’s only happened once: during a flood.
Unlike Chicago, Indiana’s deal was preceded by robust public debate. It wasn’t just rubber-stamped. The transition to the new vendor was smooth. The toll road had never made money for the state so there were no revenue streams to lose. The state used the $3.9 billion it gained to finance critical highway projects, many of which never would have been completed otherwise.
The vendor did go bankrupt. But far from showing it was a bad deal, this proves that they simply overpaid. They lost, but Hoosiers won. Indiana kept the money, and the toll road continues to operate smoothly.
Indiana has struggled to finance highways since the lease money ran out. But it was never supposed to fund highways forever. Financing 10 years of highway construction with mostly out-of-state money — two-thirds of the tolls paid came from out-of-state vehicles — is an incredible deal.
Indiana shows how to do privatization right. Chicago shows how to do it wrong.
The obvious question is what this means for Indianapolis’ 2011 parking meter lease.
To its credit, Indianapolis identified and fixed many of the problems with Chicago’s deal. There was a public debate over the lease, which I participated in. The transition went smoothly. The money was invested into infrastructure. And the revenue-share structure of the deal preserved and enhanced the city’s future revenue streams.
But the same core problems of any parking meter lease still apply. The city’s take from the deal has fallen far short of expectations. That should surprise no one. This is in part due to compensation payments that are an essential part of parking meter leases.
For example, when the city took parking spaces away to roll out Blue Indy, this required compensating the vendor for lost profits not just today, but for decades into the future. This will happen any time the city wants to do something with a parking space other than use it for metered parking.
Virtually no cities have followed the lead of Chicago and Indy in leasing meters, for good reason.
Given that the number of meters in Indianapolis is small and the city retained a future revenue stream, the harm from this deal will be limited mostly to the city making a lot less money than it thought it would. That’s not ideal, but as Chicago shows, it could have been much, much worse.
Renn is a senior fellow at the Manhattan Institute and author of the report, “The Lessons of Long-Term Privatizations.”