Public-Private Partnership Case study—Chicago Skyway, Illinois

Elle Y. WangPhD student

School of Public PolicyGeorge Mason University

June 18, 2013

For 2013 IPF Conference in Politenico di Milano

Outline

• PPP in the U.S.• Financial Structure• Review of Performance and Risks• Lessons for Policy Makers• Conclusion

Background

• Public-Private-Partnership (PPP) in the United States– Challenges in galvanizing financial resources to revamp old

infrastructure projects• High-profile project bankruptcies• Federal and state budget crisis

– Learning from best practices of PPP in Europe and East-Asia• American Recovery and Reinvestment Act (2009)

US Definition of PPP• Public-private partnerships (P3s) are contractual agreements

formed between a public agency and a private sector entity that allow for greater private sector participation in the delivery and financing of transportation projects (US DOT-Federal Highway Administration)

• Explorative Period – 25 States have PPP-Enabling Legislation– Since 1998, the US Department of Transportation's TIFIA (Transportation

Infrastructure Finance and Innovation Act) has become a major source of loans and loan guarantees for transportation PPPs throughout the country

US DOT-FHA

PPP quickly adopted in the U.S. infrastructure industry, particularly in transportation sector

Figure 2: Public-Private Partnership Investment in the U.S. Transport Sector

Figure 1:

Source: Macquarie Infrastructure Group 2008 Annual Report

Map of Chicago Skyway, Chicago, Illinois, United States

Introduction

• The Skyway started operating in 1959, but significantly unused during the next fifty years.– Operated and Maintained by the City of Chicago Department of streets

and Sanitation under financial loss– In 2002 and 2003, the Skyway enjoyed a record revenue from motorists

tolls– In 2004, the City of Chicago issued a Request for Qualifications (RFQ) for

long-term lease– After international competition, Skyway Concession Company Holdings,

LLC (SCC) won the contract

Significance• Only toll highway in IL not operated by Illinois Toll

Highway Authority• First long-term lease of an existing public toll road in the

U.S.• The agreement between SCC and the City of Chicago

was the first privatization of an existing toll road anywhere in the U.S.

The PPP Partners

• The Public Sector: The City of Chicago Department of Streets and Sanitation

• The Private Partner: Skyway Concession Company Holdings, LLC– SCC formed specifically for the purpose of leasing, O&M– 55% by Cintra Concesiones de Infraestructuras de Transporte, S.A.– 45% by Macquarie Infrastructure Group/Macquarie Infrastructure Partners

• On January 24, 2005, SCC paid $1.83 billion lump sum cash payment to the City of Chicago

Financial Structure• The original financial structure, backed by toll receipts, was

comprised of $458 million of Cintra equity, $397 million Macquarie equity, and $948 million bank loans.

• The project went through subsequent refinancing immediately and the new financial structure was the following:

Cintra/Macquarie equity--$510 millionCapital accretion bonds--$961 million (21-year maturity; 5.6% interest rate)Current interest bonds--$439 million (12-year maturity)Subordinated bank debt--$150 million

Financial Structure Cont’d

• The original lenders include:– Banco Bilbao Vizcaya Argentaria– Santander Central Hispano of Spain– Calyon of Chicago. – Citigroup also joined as a lender in the refinancing process (Aug

2005)

• SCC finances are privately audited by Deloitte.

Financial Structure Cont’d

• In addition, the project also involved bonds in financing.

– Before PPP took place, the Skyway involved revenue bonds, and defaulted hundreds of millions of bonds due to insufficient net revenues to cover bond payments.

– After drastic measures to increase toll revenue, in 2000, Fitch ratings upgraded the Skyway revenue bonds, series 1996 from “BBB” to “A-”.

– The bonds carry an insured ‘AAA’ rating, which recognizes Skyway’s promising outlook and helps attract private partners to bid on Skyway Concession.

Financial Structure Cont’d

• Under concession terms, SCC issued Rule 144 A senior secured floating-rate bonds totaling $1.4 billion in two series.– Series A in $439 million due in 2017– Series B in $961 million due in 2016

• The bonds were purchased by:– Citigroup Global Markets, Inc.,– Goldman Sachs & Co,– Macquarie Securities (USA), Inc.,

• Ratings of the bonds:– AAA by Standard&Poor’s Rating Service– Aaa by Moody’s Investors Service

Partners’ PPP Experiences

• Overall, both the public and the private partners demonstrated high-level of willingness and capability in implementing the PPP project. – The Cintra-Macquarie consortium placed such a high bid that showed

confidence in the Skyway PPP project. – The city government used the upfront leasing payment to invest into public

services and to offset residual debts

• After the Skyway PPP experience, the city of Chicago launched two other P3 projects, and the three P3 projects provided nearly $3.6 billion for Chicago residents and taxpayers– An underground parking system– A metered parking system

Allocation of Private Investment

As promised, the Skyway deal proceeds were allocated as follows:• $500 million for a long-term reserve fund (27 percent)• $375 million for a mid-term annuity that will serve as a rainy day set-aside to smooth

the effects of economic cycles on the city’s fiscal position (21 percent)• $100 million to fund quality of life investments in city neighborhoods, including

assistance programs for needy residents, affordable housing and homeowner programs, job creation programs, and facilities and programs for school children and senior citizens (6 percent)

• $463 million to refund existing Skyway debt (25 percent)• $392 million to refund long and Short term debt and to pay other city obligations (21

percent)

Criticism

• Critiques of the allocation of private investment by the city of Chicago– Sponsors from transportation industry expressed concerns

that no specification was made to invest the funds in transportation facilities.

– Critiques were also concerned that the state governments would have little power of preventing the private concessionaries from raising tolls.

Implication

• Major potential downside is that the city government does not specify any basis for intervention in the concessionaire’s rights to set tolls.– The Skyway is the only toll highway that is not operated by Illinois Toll

Highway Authority.– From 2004 to 2017, rates can still go up 2.5 fold for cars and 3.5 fold for

commercial vehicles.– By 2017, the compound average annual toll rate increase will be 7.3% over

13 years and 10.1% per year since 2005. – The price for peak times can be 40% greater than maximum rates allowed as

long as the price during off-peak times is discounted.

Implication on Toll Rate• The Current Toll is as follows:

• The next toll rate change took place on January 1st, 2013, and the rate will again increase.

Implication on Traffic Flow

• Since the completion of construction work on the Skyway in 2011, the overall traffic flow is positively impacted.

• The following table presents an overview of revenue and traffic changes in recent years:

Fiscal Impact

• Upon signing the Skyway leasing agreement in 2005, Chicago enjoyed multiple credit rating upgrades and a stable rating outlook. – In 2012, Moody’s affirmed Aa1 letter of credit-backed ratings of the City of

Chicago General Obligation Variable Rate Demand Bonds, Series 2002B-3 and 2002B-5.

– Moody’s also gave Aa3 underlying rating for Chicago’s GO bonds.

• Recently, the State of Illinois is experiencing an abysmal fiscal crisis and holding the second-lowest credit rating.

Risk Analysis• During the Skyway Concession period, the public will keep facing

contingent risks:– Hiking toll fares– Service performance– Environmental risks– Potential credit risk

• SCC could also be subject to certain liabilities, claims, and commitments in the ordinary course of business. – The ongoing financial and budgetary risks– Insurance for property and casualty risks

Lessons for Policy Makers

• The Skyway PPP project would be considered a relatively successful public-private-partnership because the initial goal—transferring risks and collecting capital—set by the city of Chicago was obtained.

• The project attracted foreign investment in such large volume, which also benefited the US economy.

• The transaction process was transparent and fair, and the private partners to provide good services and safety

• The city also allocated the capital gains in public service

Conclusion• In a nutshell, under the right conditions and with transparent

processes, public sectors can consider privatization of public transportation assets.

• The winning bid for the Skyway project also proved ample international interests in US transportation P3 projects.

• Certain policy issues should be promptly addressed in PPP, such as: – loss of public control over toll rates, – loss of public sector revenue streams, – channeling toll proceeds away from transportation purposes.

• Policy makers also need to be realistic about their real financial gain/loss over the long-term lease since it is very difficult to calculate present value of a 99-year lease.