The failure of the proposed $2.5 billion lease of Chicago’s Midway Airport to reach a financial close this past April may be a setback for U.S. airport privatization, but it certainly doesn’t spell doom for private-sector infrastructure investment as some critics have suggested.
Like anything else involving significant capital, infrastructure privatization deals are proving to be more difficult to finalize in the current credit crunch and recession than they were a year ago, but they are still happening. For Midway, many analysts blamed the size of the consortium’s $2.5 billion bid, considering it excessive (given the airport’s limited growth prospects) and difficult to finance at a time when debt markets are still very risk-averse.
A deal that would have required, say, 30 percent equity and 70 percent debt a year ago may well require 50 to 60 percent equity in today’s debt markets. That was likely more equity than Citi Infrastructure Investors—the primary investor for the project—was ultimately willing to put into this one deal, especially as it considers a bid for London’s Gatwick Airport, which has much better growth prospects than Midway.
The collapse of the Midway deal suggests both positives and negatives for the future of U.S. airport privatization.
On the negative side, the inability to sustain Midway’s $2.5 billion valuation means other cities contemplating privatization may have to scale back their assessments of how much a lease of their airport could bring in. That may dampen enthusiasm in some places.
On the other hand, the failed Midway deal opens a critical slot for other airport privatizations. Federal law allows only one “large hub” airport to be privatized, and Midway had taken that position. Other hub cities may now have a shot at privatizing their airports.
For the other areas and airports that have privatization proponents—such as Austin, Hartford, Kansas City, Milwaukee, and New Orleans—there are still three slots in the Pilot Program for small and medium hub airports, so their prospects are unchanged.
Next, Chicago was able to pocket the $126 million it received as an earnest payment for the deal. This is conceptually no different from the earnest money prospective homebuyers put in escrow to demonstrate their commitment to follow through with financing. If the deal fails to close, the seller gets compensated for time and resources spent along the way.
Not only does Chicago get to keep the $126 million, but it can still revive the Midway lease when market conditions improve. City officials are reportedly considering a variety of strategies to bring Midway back to the market, with one involving the city issuing tax-exempt debt to make the deal more feasible.
Airlines on Board
Finally, a critical aspect of the Midway deal was that the City of Chicago figured out terms the airlines serving that airport were comfortable with. That is hugely important because prior to the Midway deal U.S. airlines had always opposed airport privatization. Those terms now remain as a template for others hoping to gain airline support for privatization plans.
Because the Midway deal was a high-profile transaction, its collapse received much attention, but it should not be misconstrued as a major setback for privatization. The underlying dynamics of infrastructure privatization haven’t changed.
State and local government budgets are going to be strained into the future, and policymakers will increasingly view privatization initiatives along the lines of Midway as a critical strategy for doing more with less.
Robert Poole ([email protected]) is the Searle Freedom Trust Transportation Fellow and director of transportation studies at the Reason Foundation. Leonard Gilroy ([email protected]) is director of government reform at the Reason Foundation.