City Government and Greg Ballard and Downtown parking and Government & Economic Development and Government and Privatization and Transportation, Distribution & Logistics

City vendor may get $1.2B from parking-privatization deal

August 28, 2010

A private company pays to install hundreds of electronic parking meters. Customers pay a higher rate for the first time in 35 years but now can pay with credit cards. The city collects $400 million over 50 years to repair crumbling streets and sidewalks.

Everyone wins, right?

ballard-greg-mug Ballard

The pitch from Mayor Greg Ballard’s administration is compelling. But a proposed deal to sell the city’s parking meters to Dallas-based Affiliated Computer Services Inc. has the city giving up more in the long run than is immediately apparent in the talking points.

The private contractor likely will collect at least $724 million in revenue over the life of the proposed deal, based on an IBJ calculation using city revenue projections that are more conservative than those used by ACS. Under the more optimistic scenario, the company could collect as much as $1.2 billion.

Less clear is how much of the revenue would be pure profit for ACS, the Xerox-subsidiary company the mayor picked this month from among several bidders seeking to help the city unlock hidden value in its parking assets.

IBJ.COM EXTRA
For a map of planned changes to parking meter rates, click here.

The deal, which still requires City-County Council approval, calls for the city to cede control of about 3,650 metered parking spaces in exchange for a $35 million upfront payment for new streets and sidewalks, upgrades to the city’s meter system valued at $41 million, and a minority share of future meter revenue.

The city would get 20 percent of revenue up to $8.4 million annually, and 55 percent above that threshold. Revenue from newly installed meters would be split 50-50.

ACS declined to disclose its revenue or expense projections—including how much it plans to invest in new electronic meters or how much it will pay to manage the collection of parking fees and fines from violators.

Executive Vice President David Amoriell would say only that ACS hopes for a 10-percent annual return on its investment. Based on the city’s valuation of ACS’ investment, that would amount to $7.5 million a year and a profit of roughly $300 million over the 50-year term.

Projections differ

ACS—which is partnering on the deal with two local firms, Denison Global Parking and Evens Time—estimates all its investments and shared-revenue payments over 50 years would provide the city with $400 million.

The company based the estimate on historical data and from “25 years of industry expertise,” said Chris Gilligan, an ACS spokesman. He declined to provide the data used to reach the estimate, but said the city’s estimate of $41 million for new meter technology is in the “ballpark.”

“Our success is linked to the city’s success,” Gilligan said. “We own all the expenses for this project going forward, including maintenance, capital expenses and upkeep.”

The city’s own revenue projections for the parking meters show the deal yielding a figure closer to $233 million over 50 years, before factoring in the $35 million payment and ACS’ investment in new meters which would be replaced every 15 or so years.

The city’s model would result in $724 million—or 76 percent of the total revenue—going to ACS. If the city collects $400 million instead and the split remains the same, ACS would rake in at least $1.2 billion over the 50-year span.

A chunk of the city’s revenue take would continue to reimburse the Indianapolis Metropolitan Police Department for parking enforcement expenses. In 2009, about $2 million from meter revenue went to reimburse IMPD. That’s roughly the amount the city estimates it would collect annually from the revenue share each of the first 10 years.

The city had been earning about $750,000 per year, after all expenses, from parking meters and violations.

Fierce competition

For the city, the deal is part of a larger effort to shift the burden of paying for infrastructure away from property taxes and toward user fees.

The status quo was not a compelling option: The city’s adviser on the deal, Morgan Stanley, estimated the meters would generate just $37 million over 50 years with no upgrades or rate increases. Morgan Stanley’s fee on the deal is estimated at $1.5 million.

“We did this in the long-term interest of the city,” Ballard, a Republican, said in an interview. “We got a short-term bump but also a strong revenue stream for the future.”

Deputy Mayor Michael Huber said the city doesn’t need to know how much ACS stands to profit from the agreement, only that it makes the most sense for taxpayers.

“In a procurement deal, all we try to do is make the competition as fierce as possible,” Huber said.

ACS emerged from a field of 16 initial bidders, with a hybrid model that is vastly different from the parking-meter deal in Chicago in which Mayor Richard Daley agreed to a 75-year meter lease for a one-time payment of $1.1 billion. ACS was not involved in that deal, which is controversial because of rapid-fire rate increases and the $9.5 billion the private companies who leased the meters stand to profit.

Huber says the city learned from previous deals, opting to insist on both upfront cash and a share of future revenue.

ACS will not be allowed to raise rates until it installs meters that accept credit cards. Meanwhile, the city retains the right to create off-street parking for economic-development purposes and may close up to 6 percent of the meters at a time for special events without a penalty.

The deal also gives ACS exclusive naming rights for the parking system and the ability to sell advertising on the new meters, along with the role of providing neighborhood parking permits that could encourage more people to use metered spaces. The company is not required to divulge its costs or profits on the deal.

‘Sizable payoff’

The city’s deal is the first of its size in the country to include a revenue share and likely will be watched closely by other companies eager to break into the parking-meter privatization business, said Cezary Podkul, editor of InfrastructureInvestor.com, an industry publication.

Hybrid infrastructure deals that involve upfront payments in addition to a share of revenue are likely to be more “politically feasible and popular,” he said, than deals such as the infamous sale of Chicago’s parking meters. Port privatization deals in Oakland, Calif., and Baltimore have used a hybrid structure, and parking-meter deals pending in Pittsburgh and Los Angeles may follow suit.

“A lot of people fear if you’re just leasing something you’re selling the proverbial family jewels, but if you have a revenue share it feels like you’re getting more,” Podkul said.

He said it won’t be easy to determine whether Indianapolis got a good deal since there aren’t a lot of transactions to compare it with and ACS is unlikely to disclose financials. An internal rate of return of about 10 percent would be reasonable considering the risk ACS takes that, over time, people may lose interest in parking or living in parts of the city that have meters.

The Indianapolis deal, even if it doesn’t prove a financial windfall for ACS, positions the company to compete for what could be a “huge wave” of similar deals coming to market.

“I would imagine ACS wouldn’t do it if they didn’t get a sizable payoff,” Podkul said. “If 20 percent of the contract is $400 million, there’s no doubt in my mind it’s a lucrative deal to them.”

Flexibility lost?

The mayor is making a mistake by turning over so much public space to “a private monopoly that doesn’t have the public’s best interest at heart”—and locking in the deal for 50 years, said Aaron M. Renn, author of the urban-planning blog Urbanophile.

Renn, a supporter of most local privatization deals including the Indiana Toll Road lease and water company transfer, said the parking-meter sale as proposed would tie the city’s hands on urban planning for years to come. If the city wants to remove a parking meter, it would have to reimburse ACS for the value of that meter for the remainder of the 50-year period.

Unlike single-purpose entities like utilities or toll roads, the value of street real estate is flexibility, Renn wrote in an e-mail. No one in 1960 would have envisioned the Indianapolis Cultural Trail—a project that very well could not have happened had Mayor Ballard’s predecessors sold off parking assets.

Renn suggests the city should consider issuing revenue bonds against future meter proceeds so it can upgrade the parking system on its own, while retaining flexibility for the future.

“The parking meter lease isn’t just about privatizing a service, it is about selling a 50-year property right interest in the city’s streets,” Renn wrote in an e-mail. “It’s fundamentally a long-term real estate ground lease on the city’s public space. It assumes that we know today what the best use of that real estate will be decades from now.”

Huber said the city did consider selling bonds to upgrade the parking-meter system, but there were complications. The city would have had to create a new entity whose revenues would secure the debt, and such a sale would raise only about $20 million for infrastructure improvements.

He noted that the deal has built-in flexibility to allow for projects such as the Cultural Trail and a planned pedestrian corridor on Georgia Street between the Indiana Convention Center and Conseco Fieldhouse.

Reasonable rates

Nobody wants to pay more for parking, but the improvements to the system will be well worth annoyances over higher prices, said Fred Laughlin, a vice president with the not-for-profit Indianapolis Downtown Inc.

Under the ACS deal, rates would double in some areas to $1.50 an hour by 2012, before rising with inflation in the following years. Meters in certain areas would be outfitted with rates that change based on how long you stay in a space, mirroring the way some garages--including those at Circle Centre mall--charge for parking.

Hourly parking rates would have been at least $2 per hour had they followed inflation over the years, Laughlin said.

The city also will begin charging for parking on Saturdays, and parkers will have to feed meters until later at night in some areas, including until 11 p.m. in Broad Ripple. Some of the upfront payment to the city could be used to build a new parking garage in Broad Ripple, which ACS also would manage.

Laughlin said ACS’ experience should help increase the system’s profitability, bringing in more revenue for the city, and generate more turnover for the city’s parking spaces, which would benefit retailers downtown and in Broad Ripple.

The competitive bidding process ensures the city got a fair deal, he said.

“Obviously, it is a for-profit company and they are attracted to the project because they think they can make a profit on it,” Laughlin said. “I don’t begrudge them making a reasonable profit on it.”

Melina Kennedy, a Democratic candidate for mayor, says the city should set a long-term plan for public transportation before selling its parking meters.

She’s also surprised the current mayor has chosen to do business with one of the subcontractors to IBM on the failed FSSA privatization effort, which the state is now litigating.

Kennedy doesn’t understand why city officials seem to be in such a hurry to close the deal.

“A lot of questions need to be answered,” said Kennedy, a former deputy mayor under Bart Peterson. “I’m all for potentially creative solutions, but we need to be careful when we’re talking about 50 years—it’s hard to say what our transportation system will look like, and I want to make sure the city is protecting the ability to be modern in the sense of urban planning.”•

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