Reconstituting the State: City Powers and Exposures in Chicago's Infrastructure Leases

Special issue article: Financialisation and the production of urban space

Urban Studies1–17� Urban Studies Journal Limited 2014Reprints and permissions:sagepub.co.uk/journalsPermissions.navDOI: 10.1177/0042098014532962usj.sagepub.com

Reconstituting the state: City powersand exposures in Chicago’sinfrastructure leases

Philip AshtonUniversity of Illinois at Chicago, USA

Marc DoussardUniversity of Illinois, USA

Rachel WeberUniversity of Illinois at Chicago, USA

AbstractIn the 2000s, cities across North America began leasing existing infrastructure to global invest-ment consortia. Previous evaluations of infrastructure leases focus on the lack of transparency ofthe privatisation process and the terms of the arrangements negotiated by the public sector andthe private concessionaires. In this research, we argue that such approaches fall short by failing toinvestigate the significant repositioning of the local state relative to financial markets produced bytheir involvement in major asset lease deals. We develop this argument through a case study ofthe institutional transformation of the City of Chicago, the US’s most aggressive instigator ofinfrastructure asset leases. Even as the concession agreements seemingly protect the City fromthe claims of investors, creditors and counterparties and provide it with new powers, theyenmesh the City in a set of financial relationships that expose it to liabilities not accounted for inlease agreements and create an institutional bias towards managing the collateral effects offinancialisation.

Keywordsfinancialisation, infrastructure, infractructure privatisation, municipal finance, state restructuring

Received August 2013; accepted March 2014

Introduction

On the surface, infrastructure privatisationwould seem to represent yet another case ofcities acting as handmaidens to financial cap-ital. Starting with the $1.6 billion lease of the

Corresponding author:

Philip Ashton, Department of Urban Planning and Policy,

University of Illinois at Chicago, 412 S. Peoria Street,

Chicago, Illinois 60607, USA.

Email: [email protected]

at UNIV OF ILLINOIS URBANA on April 27, 2015usj.sagepub.comDownloaded from

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Chicago Skyway in 2005, private investorspurchased the rights to collect a wide varietyof income streams from existing (‘brown-field’) US infrastructure assets, including air-ports, toll roads, and parking garages. By2010, the 50 pending deals in North Americawere valued at between $35 billion and $40billion (The Economist, 2010). These dealsare typically led by the infrastructure fundsubsidiaries of global investment banks(Lawrence and Stapledon, 2008), which prizethe long-term potential for cash flow growthpresented by infrastructure (Page et al.,2008). Joining forces with an operating part-ner, they assemble a portfolio of assets thatare ‘stapled’ together and then sell shares inthem to a range of institutional investors,including hedge funds, pension funds, insur-ance companies, and their own holding com-panies (O’Neill, 2009; Zhang, 2008). Theyalso employ advanced structured financetechniques to extract value from their acqui-sitions, including interest rate swap deriva-tives and ‘sweep’ capital structures thataccelerate returns to investors and enhancetheir profile as profitable financial securities(Ashton et al., 2012; Bel and Foote, 2009).By presenting these financial engineeringstrategies as proprietary, investors deliber-ately position them as outside the realm ofpolitics (Allen and Pryke, 2013).

Critical perspectives on these deals, andthe underlying financialisation processes theyrepresent, often focus on the lack of trans-parency accompanying deal-making, theabsence of public participation, or the degreeto which the concession agreements appearto ‘give away the store’ by committing thepublic sector to extremely long leases (often75 to 99 years), aggressive toll rate increases,or diminished competition (Baxandall, 2007).Alternately, critics construe long-term assetleases as the disembedding of urban infra-structure from its local context in support ofglobal financial circulation (Torrance, 2008).Accordingly, they focus on the deal-making

process and its outcomes: the specific provi-sions and terms of the contract or ‘conces-sion agreement’ (cf. Clark and Evans, 1998).Most conclude that deals result in a dimin-ished scope for local autonomy.

In this paper, we examine these deals froma different perspective, emphasising the com-plex public–private networks through whichlocal states produce and subsequently man-age flows of value from privatised infrastruc-ture assets. Drawing on the case of the Cityof Chicago, which pioneered the large-scaleasset lease in North America and continuesto pursue privatisation in various guises, weargue that infrastructure leases require amobilisation and reconfiguration of statepowers – mobilisation rewarded, in part, bythe enhanced fiscal and political capacitythat accompanies them, however temporarilyor contingently. At the same time, the verynature of urban infrastructure makes theflow of value from these assets uncertain,thereby transforming value into a proble-matic to be managed or governed over thelife of the transaction. In our analysis ofthree infrastructure concession deals exe-cuted in Chicago from 2005 to 2008, weargue that high pay-outs rewarded the City,and obligated it to re-orient a broad range ofstate activities towards managing both eco-nomic and non-economic determinants ofvalue flows to investors. The deals thus cre-ated new kinds of exposures for the City,ranging from those emanating from specula-tive behaviours on the part of the lessee andthe inherent fragility of the deal’s financingmechanisms, to those resulting from the sud-den monetisation of day-to-day public sectoractivities, such as zoning and traffic mitiga-tion. Privatisation transactions thus entanglethe local state and a broad range of investors,creditors and counterparties in a longer-termprocess of generating and managing the eco-nomic value of privatised infrastructure andits uncertainties beyond the terms and timingof the deal itself.

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From global circulation touncertainty and exposure

The term ‘financialisation’ connotes the

growing importance of the financial sector

and the intermediation of public and private

activity through finance. This body of scho-

larship emphasises the historical growth of

financial industries relative to manufactur-

ing and other services in OECD economies

since the 1970s, as well as a concomitant

shift towards finance-based profit generation

and the conversion of assets into liquid, eas-

ily tradable financial commodities (Epstein,

2005; Froud et al., 2006; Krippner, 2005).

Much of this scholarship focuses on finan-

cial markets and trading, and the rise of

institutional investors as a powerful force in

markets and market-making (Clark, 2000).These global changes help to establish the

context for individual cases of urban restruc-

turing, but the mechanisms integrating

urban-scale changes with the broad transfor-

mation of global markets remain murky

(French et al., 2011). One common approach

illuminates the local dimensions of financial

systems by examining shifting hierarchies of

financial centres (Marshall, 2013; Sassen,

1999) or the role of proximity in structuring

financial market activity (Jones, 2009;

Wojcik, 2009). A second examines banks or

financial intermediaries as private actors

capable of diminishing the authority of

states over economy and society (Strange,

1996) and exerting power over urban gov-

ernance agendas. For instance, Hackworth

(2002) scrutinises the ways in which ratings

agencies constrain local autonomy, arguing

that their gatekeeper role in municipal bond

markets allows them to increase borrowing

costs or deny credit for localities pursuing

projects that diverge from the disciplinary

norms of institutional investors.Another approach examines the produc-

tion of financial commodities, focusing on the

process whereby locally embedded assets –

characterised by their immovability and the

irreversibility of investment in them (Dymski

and Veitch, 1996) – are transformed into

streams of value that can be bought, traded

and circulated within financial markets. In

one study of recent trends in the financialisa-

tion of urban infrastructure, Torrance (2008)

examines the growing role of specialised

financial intermediaries in producing a mar-

ket for infrastructure leases (in her case, the

407 toll road in Toronto). She focuses on the

concession contract – an essential building

block of the financial transaction – as the

device that disembeds local assets and reor-

ganises their constituent elements within

external financial portfolios, ‘capturing the

value of a place while distributing the risk of

being invested in it’ (Torrance, 2008: 2).Torrance’s analysis resonates with other

studies of financial commodities, includingmortgage-backed securities and derivatives,commonly understood to dematerialise geo-graphic assets and circulate them within glo-bal financial circuits (Gotham, 2009).Further, it highlights the contradictions inthe process of transforming idiosyncraticassets into liquid financial instruments – forinstance, between the time-spaces of localvalue flows and those of financial markets(Pryke and Allen, 2000), or between thedifferential legal status of financialinvestors relative to municipal governments(Torrance, 2008).

However, the conceptual vocabularyderived from studies of financial markets andtrading emphasises speed, standardisationand circulation in global financial circuits,potentially mis-specifying financialisation asa process that unfolds ‘out there’. The intri-cacies of infrastructure concessions suggestwe need to broaden our lens to incorporatethe local dimensions of financialisation.Most notably, given the extensive role of thelocal state in producing these markets, theo-risations of financialisation at the local levelmust function as, or draw from, state theory.

Ashton et al. 3



Rather than reproduce ‘a false opposition’(Jessop, 2008) between external financialmarkets and the local institutions they sup-posedly subordinate, examining financialisa-tion as a policy project (Christopherson etal., 2013: 353; Pacewicz, 2013) uncoverslocalities’ construction of the powers thatallow them to work with, through or againstfinance. This approach might also treatfinancialisation as a recursive process,wherein individual privatisation events aremoments in a longer chain of state transfor-mation that actively engages public power toredraw ‘the spatio-temporal matrices withinwhich capital operates’ and to ‘render capi-tal’s temporal horizons and rhythms compa-tible with their statal and/or politicalroutines, temporalities, and crisis-tendencies’(Jessop, 2008: 191).

When focused on the emergence of finan-cial markets such as those that govern thesale of infrastructure assets, a broaderexamination of the local state relative to thetransaction – in its fullest sense as a form ofcollective action that involves multipleactors within a dynamic institutional setting(see Commons, 1924) – can usefully focuson the following three parameters to betterspecify local financialisation.

First, a transactional approach wouldrevisit the commodity itself, asking whichbroader powers and resources are deployedto produce the infrastructure asset as circula-table value for financial investors (see Sokol,2013). Localities do not merely respond toinfrastructure lease offers from global invest-ment banks, but build and operate complexframeworks to enable the realisation of valuefrom financialised municipal assets (Weber,2010). This includes the production of inputsnecessary to close the deals, such as legallyenforceable property rights (O’Neill, 2013),regulatory approvals or exemptions, andlocally specific knowledge about marketconditions. These frameworks may in turnrepresent significant shifts in the strategic

capacities of local government and involvemobilising a wide network of public and/orprivate agents to produce a stream of valuefor investors.

Second, a transactional approach wouldnecessarily assess economic value from atemporal perspective, scrutinising uncer-tainty as a critical transactional variable. Theincome streams from infrastructure assetscan only be realised over time and depend onpositive local spillovers in order for financialyields to flow to investors (Dymski andVeitch, 1996). In the case of transportationinfrastructure, these spillovers include chang-ing land use decisions, variable economicconditions, and the availability of competingoptions for drivers. These spillovers are oftenunforeseen, or unforeseeable, by a concessionagreement, and may lie beyond the conces-sionaire’s management capacity. A transac-tional approach, then, would ask how thatuncertainty is structured within the transac-tion – both in investors’ assumptions aboutrevenue streams that justify a particular pur-chase price, and in the various roles that thelocal state may play in bounding or manag-ing uncertainty within the transaction.

Third, an emphasis on time and uncer-tainty requires scrutiny of the risks and con-flicts to which the transaction exposes thelocal state. Even as infrastructure concessioncontracts formally indemnify the public fromresponsibility for faulty demand forecasts,economic downturns and other unforeseenevents that jeopardise the flow of value froman infrastructure asset, asset leases placelocal governments at the centre of a fragilearchitecture of inter-linked financial arrange-ments beset by a variety of risks (O’Neill,2009). The terms of each agreement thusstructure distinct conflicts and bargainingdynamics around uncertainty. These rangefrom the quotidian (the enforcement ofpublic standards regarding upkeep of anasset, or the management of compensationdue to the concessionaire for city-induced

4 Urban Studies



disruptions to revenue) to the complex (insol-vency or bankruptcy, operating default, orcontract renegotiation).

Borrowing from legal anthropology, wefocus on how the transaction entangles thestate and a broad range of investors, credi-tors and counterparties in strategies formanaging an asset’s economic value andgoverning future uncertainties. This makesthe financial contract ‘a compact for a short-term political arrangement, a kind of privateconstitution with a time horizon – somethingperhaps best analysed alongside other short-term private and hierarchical political insti-tutions like indentured servitude’ (Riles,2011: 166). As such, we treat the contract asa starting point from which to analyse howthese asset lease deals and the processes offinancialisation they embody transform thestate.

Chicago: The sell-off city

Several factors position Chicago as a reveal-ing case through which to examine the polit-ical changes produced by asset leases.Chicago’s embrace of privatisation and leas-ing began early in the Richard M. Daleyadministration, when it contracted out basiccity services to cut costs and weaken publicsector unions (Scholl, 1991). By 2004, whenthe Daley administration solicited bids forthe Chicago Skyway, a seven-mile toll road-bridge connecting the city to NorthwestIndiana, Chicago had embraced privatisa-tion as a means to manage city services anddeliver selective benefits to political constitu-encies in areas such as recycling and janitor-ial services at Chicago public schools.1 By2008, the City had completed concessionagreements for the Skyway (2005), the city’sunderground parking garages (2006), andstreet parking meters (2008).2

Under Daley and his successor, MayorRahm Emanuel, the City opened MidwayAirport for privatisation (financing for the

winning bidder failed) and explored leasearrangements for the McCormick Place con-vention centre, the Taste of Chicago festival,and the supply of water from Lake Michigan(Hawthorne, 2009). Beginning in 2011, theEmanuel administration took steps to insti-tutionalise these changes, hiring several keyfinancial advisors and privatisation advo-cates directly into the Mayor’s cabinet, andestablishing the nation’s first local urbaninfrastructure investment bank (City ofChicago, 2012). As such, Chicago now has alonger experience with the privatisation ofinfrastructure assets than any other majorcity in the United States.

The passage of nearly a decade since thesale of the Chicago Skyway, and the subse-quent sale of the underground parking gar-ages and parking meters, provides a uniqueopportunity to examine the local dimensionsof financialisation (Table 1). These dealsrepresent recent trends in infrastructure pri-vatisation (cf. Bel and Foote, 2009; Pageet al., 2008). All involved long-term leases(from 75 to 99 years) to a private concessio-naire, typically a consortium comprised of aglobal investment bank, sovereign wealth orhedge fund, and an operating partner. The2008 parking meters concession, for exam-ple, was awarded to a partnership betweenMorgan Stanley, Germany’s Allianz CapitalPartners, and the Abu Dhabi InvestmentAuthority (Mihalopoulos, 2009). The part-nership, known as Chicago Parking MetersLLC, subcontracted with LAZ Parking forthe management and maintenance of themeters.

Highly leveraged to begin with, theChicago deals became more so through avariety of complex financial engineeringstrategies used to structure future cash flows(Ashton et al., 2012). Foreign investmentbanks provided much of this debt financing.For the Skyway, Banco Santander CentralHispano, S.A. (Spain), Calyon Corporate &Investment Bank (France), BBVA (Spain)

Ashton et al. 5



and DEPFA Bank PLC (Ireland) under-wrote the $1.8 billion concession purchasedby the Cintra-Macquarie consortium(FHWA, 2013). The involvement of bondinsurers, ratings agencies, and creditenhancement and derivatives issuers helps tocirculate value and allocate risks througheven more diffuse channels. While theseinvestment partners have different time hori-zons and penchants for risk, the threeChicago deals under discussion were led byinvestment banks (Morgan Stanley,Macquarie) whose infrastructure funds hadsimilar risk-return profiles (Lawrence andStapledon, 2008).

However, a focus on the formal elementsof capital structure or the spatial reach oflenders and investors misses the institutionalreorganisation essential to the creation offinancial assets for global investors. In addi-tion to the necessary scrutiny of the financialinstruments and business strategies conces-sionaires develop to generate value frominfrastructure assets, our transactionalapproach requires two additional analyticalfoci. First, the transactions must be treatedas ‘governance-in-motion’ – not as one-timetransfers of public assets to private control,but as the complex process of constructingthe powers and capacities necessary to pro-duce value from urban infrastructure. Someof this reorganisation, such as the develop-ment of a durable network of law firms,financial analysts and advisors capable ofassembling deals – as well as the designationof executive powers for some public agencies– was critical to transforming public assetsinto financial commodities. Rather thantreat the contracts as bilateral transactionsbetween two fixed entities, then, we viewthese large infrastructure deals as changingthe very nature of the entities doing thebargaining.

Second, following Riles’ (2011) character-isation of financial contracts as entanglingtheir parties, a transactional approachT

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6 Urban Studies



requires the assessment of relationshipsbetween the City and investment bank con-sortia as they unfold over time. Even thoughthe transactions on which we focus arerecent, events subsequent to each deal high-light new roles and exposures producedwithin each transaction. These include newCity responsibilities for producing revenuestreams for investors through nonfinancialmeans, as well as legal, financial and admin-istrative exposures that unexpectedlyemerged from privatised infrastructure.Even as the privatisation agreements enactformal measures to protect the City fromthe claims of investors, creditors and coun-terparties, they inject multiple uncertaintiesinto basic service delivery and planning forlocal growth and management.

We ground this approach in an analysisof each transaction, focusing on the infra-structure lease agreements, enabling ordi-nances and ancillary documents, as well asfinancial prospectuses for concessionaires,coverage in the trade press, and third partyanalyses. We combine those findings with aselect number of targeted interviews thatprovide new empirical material on hereto-fore under-analysed dimensions offinancialisation.4

Governance in motion: Producingasset leases

Arguments that asset sales disembed infra-structure from cities focus on the asset leaseand the subsequent circulation of its value inglobal financial circuits (Torrance, 2008).Before value can be circulated, however, itneeds to be produced. Our analysis of thethree Chicago deals highlights this processof production – not from the point of viewof the arcane financial instruments involved,but also from a more foundational assess-ment of the critical inputs necessary for eachtransaction, and the interlocking network ofpublic and private actors charged with deal

execution. In this sense, finance unfolds inthe very localised and humanly scaled set-tings of Chicago’s particular institutions andprofessional networks.

These efforts shape the process of privati-sation from the beginning. As dependentlegal entities in the US federal system (Frug,1999), municipalities must build the legalpowers necessary to create enforceable andalienable property rights in local infrastruc-ture assets (see O’Neill, 2013). For instance,the City of Chicago and the Chicago ParkDistrict had to pass ordinances consolidat-ing ownership of the downtown under-ground parking system to facilitate itstransfer to Morgan Stanley (City ofChicago, 2006). To create the legal authorityto open up the Skyway to private control,the Chicago branch of global law firmMayer Brown lobbied both the IllinoisGeneral Assembly and federal highwayauthorities to amend legislation and alterregulatory standards (Interview with LeaseAttorney 2008). As the Skyway concessiondeal would make the publicly owned tollroad taxable for private concessionaires, theCity also successfully lobbied the State ofIllinois for property tax exemptions thatcould be transferred to the concessionaire(City of Chicago, 2004: 41; Shields, 2006).

Members of a Chicago-centred networkhelped to produce the transactions on boththe ‘sell’ and ‘buy’ sides. Chicago law firmsclarified and allocated responsibilities andrewards through contractual language; bondinsurers assumed project risk; investmentanalysts assessed the deals for investors andthe City; and bond underwriters issuedstructured debt instruments. Local firmsWilliam Blair and Associates and ScottBalice Strategies, LLC played multiple rolesin the three Chicago deals. As lead financialadvisor on the parking meter concession,William Blair identified prospective bidders,structured the financial aspects of the con-cession, led the negotiation of the

Ashton et al. 7



agreement, conducted due diligence on bid-ders, and managed the competitive biddingprocess. As it worked in this capacity for theCity, William Blair simultaneously workedon other deals with the eventual winningbidder for the lease, Morgan Stanley. Inother words the firm advised the City tryingto get the highest price for its asset while atthe same time working with potential bid-ders to maximise the concessions extractedfrom the public sector (albeit on otherdeals). Prospective conflicts of interest aside,these actors not only assisted the City in dis-posing of its assets but also helped to forma-lise an organised market for the leases onthose assets.

Combined, this network of actors formeda thick structure of organised fiscal andpolitical capacity, one strong enough towithstand both changes in Chicago’s admin-istration and the frequent restructuring ofcapital. For both the parking garages andparking meters, the firms discussed aboverepositioned themselves at different points inthe network; depending on the deal, individ-ual law firms, brokers and assemblers offinancing moved back and forth from leadto subsidiary debt positions, from positionsof deal-brokering to advising, and from pub-lic to private and back again. For example,the Managing Deputy Comptroller for theCity of Chicago responsible for overseeingthe Skyway, parking meters, and Midwaydeals subsequently left the City to work firstfor a subsidiary of FBR Capital Marketsfocused on public–private partnerships, andlater Gonzalez Saggio & Harlan, the lawfirm that wrote the ordinance authorisingthe City to enter into the parking metersagreement. In 2011, then Mayor-elect RahmEmanuel hired executives from two of thefirms active in the Skyway and Midwaydeals (municipal finance consultants ScottBalice Strategies LLC and law firm Baker &MacKenzie) as his Chief Financial Officerand Budget Director (Dumke, 2012). The

multiple roles played by actors in this localnetwork made them durable and availablefor subsequent transactions.

As this network built the market forassets, the City of Chicago enacted multiplechanges to create the kinds of deal-makingapparatuses necessary to carry out infrastruc-ture transactions. Two types of institutionalchanges stand out. First, we observe a pre-mium placed on speed, consistent withJessop’s (2008) argument that globalisationelevates institutions and individuals that canact quickly to negotiate with private agentswhile simultaneously eliminating proceduralbarriers to swift action. Chicago’s asset trans-fers were finalised through accelerated citycouncil votes, informal negotiations betweenpublic representatives and financiers, andcontractual negotiations submitted for publicreview only after the general terms had beenagreed upon (Office of the Inspector General,2010). Changes in administration elevatedstrong executives – in particular, the Mayor’sOffice, the Comptroller, and the Office ofManagement and Budget – and normalisedexpert discourses and easily replicable formsof ‘fast policy’, at the expense of legislative,judicial and other administrative powers (cf.Peck and Theodore, 2010).

Second, the transactions reworked institu-tional structures and capacities once centralto direct public ownership and governance.For example, the Chicago Park District his-torically operated the downtown parkinggarages, whose capacity, pricing and mainte-nance was integrated with the City’s multiplepublic facilities investments and tourist desti-nations along the downtown lakefront. The99 year lease for the garages stripped thePark District of enforcement powers, reser-ving them for the City as a corporate entity(City of Chicago, 2006). The City ordinanceauthorising the parking meters deal similarlyamended the Municipal Code to subordinatethe Commissioner of Transportation tothe Department of Revenue, which gains

8 Urban Studies



authority to ‘operate off-street parking facil-ities owned by the city, and to collect all feesand charges for the use of such facilities inregards to the installation, management, andcollection of revenue from parking meters inthe city’ (City of Chicago, 2008b: 5). Thatordinance also exempted the Department ofRevenue and its agents (which now includethe Morgan Stanley-led consortium) fromoversight by other City agencies in regardsto permitting, approvals, signage and otherrules (City of Chicago, 2008b: 7–9). Thedeals also promoted executive powers whenpost-agreement oversight and monitoringwas required. All of the leases we reviewedassigned these powers to the Comptrollerand the Departments of Finance andRevenue, rather than agencies that histori-cally oversaw the operation of the transpor-tation system.

As a result of these changes, the state thatplanned infrastructure leases differ signifi-cantly from the state that supports andmaintains them. Tasking the agenciesresponsible for city finances with managingprivatisation signifies a shift in both themeaning and the practice of infrastructuremanagement, from something operated forits use value to a commodity valued for itsability to be circulated and exchanged(O’Neill, 2009).

The public protection of assetvalues

While a full evaluation of the costs and ben-efits of Chicago’s asset sales lies beyond thescope of this paper, such an evaluationwould likely identify several immediate ben-efits to the City. The three deals generatedover $3.5 billion in direct payments (Table 1),allowing Chicago to pay down more than$925 million in outstanding debt (Saffold,2010). Even before the high-value parkingmeters deal, Moody’s had cited fallingindebtedness in upgrading Chicago’s general

obligation bond rating from A1 to Aa3(Shingore, 2009).5

In the short term, the deals advanced mul-tiple longstanding public policy goals.Chicago’s asset lease agreements each con-tain dozens of provisions requiring concessio-naires to maintain and improve the quality ofthe infrastructure itself. The parking metersconcession devotes three pages alone to speci-fying new metering technologies, for exam-ple, pay stations (City of Chicago, 2008a:48–51), and all three deals detail extensivecapital improvement standards to maintainthe quality of infrastructure as a public good(City of Chicago, 2008a). The parking metersand underground garages transactions bothenact hiring quotas for minorities (as muchas 40% of all employees) and dictate adher-ence to the city’s women- and minority-owned contracting laws (City of Chicago,2006, 2008a). As such, these deals use newfinancial arrangements to solve certainintractable political problems, in the processenhancing the City’s manoeuvring room inits management of short-term budgetaryissues, its longer-term profile with creditors,and its capacity to deliver selective benefits topolitical constituencies.

Criticisms of infrastructure privatisationcounter by pointing to contractual provi-sions that generate high value for concessio-naires and their investors and creditors(Baxandall, 2007). These include lengthylease terms, accelerated toll or rate increases,non-compete clauses that produce monopolypower for the concessionaire by limiting thedevelopment of competing assets, andrequirements that the public sector compen-sate the lessor for actions and events thatreduce an asset’s cash flow. However, to theextent that these value-enhancing provisionsare directly related to the large size of thewinning bids, a focus on the up-front config-uration of value produces zero-sum assess-ments of deal outcomes: either the City winsa hefty pay-out by out-negotiating the

Ashton et al. 9



banks, or it gives away the store by handingmonopoly power to these profit-orientedactors. This binary opposition between mar-ket and state power obscures the local eco-nomic and political changes promoted byfinancialisation (Jessop, 2008).

The value of an infrastructure concessioncan more productively be understood asenmeshed in a long-term financial partnershipbetween Chicago and the investment consor-tia. The economic value of a concessionagreement is not settled at the moment thecontract is signed and does not circulate in astraightforward manner. In the case of trans-portation assets, value extraction depends onthe collective behaviour of commuters andspillover effects from a wide range of publicand private investments. As Riles (2011) sug-gests, the contractual provisions in infrastruc-ture agreements are placeholders – temporarysettlements of contentious issues related tothe value of a concession to investors andcreditors that stretch out over the lifecycle ofthe asset. It is therefore critical to assess howthe benefits to both the concessionaire andthe City simultaneously produce new publicliabilities, duties, and exposures within thetransaction.

Two particular dimensions of the entan-glement between public and private emergefrom our analysis of the leases and subse-quent changes in Chicago policies and prac-tices: The deployment of supplementaryregulatory powers to ensure returns onassets, and the liabilities and exposures thatfall on the local state.

Extra-contractual safeguards

The reorganisation of City powers duringthe production of each deal extended beyondthe execution of the agreement, yielding bothanticipated and unanticipated new roles andpowers the City exercised to maximise reve-nue streams for investors after the agree-ment’s consummation. The illustrative case

of the 2008 parking meters concession identi-fies ways in which the City of Chicago com-mitted and repurposed its administrativepowers in support of the concession through-out the life of the transaction. In manyinstances, this involved safeguarding non-financial determinants of value, such asrestricting the availability of legal recoursefor ticketed drivers or the severity of trans-portation regulations beyond those strictlyinvolving parking.

The repurposing of state administrativepowers to support the parking meters conces-sion was first evident in a minor scandalinvolving rush-hour traffic management. In2010, the Department of Transportation liftedrush-hour parking bans on 225 city blocks inand near the Loop, allowing an extra fourhours of meter-eligible parking on busy citystreets and arterials. This action expanded therevenue capacity of meters by 25% for certainhigh-value areas. Although the cited ratio-nale – safety for pedestrians and cyclists – wasbroad, analysts noted that the waiver onlygoverned blocks covered by Morgan Stanley’sconcession (Wisniewski, 2010).

A closer read of the contract and its gov-ernance aftermath reveals additional uses ofCity authority to ensure the value of theconcession. A prime example is the issuanceof parking tickets. The parking meters con-cession committed Chicago to expandedenforcement of parking violations as ameans to incentivise payment of parking fees(City of Chicago, 2008a). In the immediateaftermath of the meters sale, parking ticketissuance by the City’s traffic enforcementdivision rose; leaked emails from theChicago Department of Revenue in 2010subsequently revealed aggressive ticketingquotas (Main and Spielman, 2010). Whereasthe agreement granted the Morgan Stanley-led consortium authority to issue parkingtickets alongside the City, all parking ticketfines ultimately reverted to the City alone,suggesting that the transaction may have

10 Urban Studies



simultaneously incentivised the City to actas a co-rent seeker and to take advantage ofthe new (and more accurate) metering tech-nology to increase its own revenue streams.The impact on the aggregate public welfareis ambiguous and, perhaps, positive. But thechange in public policy, buried deep in thecontract, is significant.

The repurposing of state authority wasalso evident in the use of several minor, pro-cedural powers to routinize and speed the col-lection of parking revenue. In 2010, the Citybegan attaching the ‘Denver boot’ to largernumbers of cars with outstanding parkingviolations. Booting results in both a moreexpensive penalty for drivers and a greaterlikelihood of payment (Spielman, 2010), fac-tors consistent with the Agreement’s mandateof a City ‘vehicle immobilisation program’ asa ‘method of deterrence’ (City of Chicago,2008b: 61). A series of related measures – allmandated by the concession agreement itself– included the City’s agreement to notify theIllinois Secretary of State to pursue licencesuspensions for drivers with delinquent park-ing tickets and to expedite the prosecution oftraffic tickets in court (City of Chicago,2008a: 40, 64). Rather explicitly, the agree-ment required the City to restrict ‘parking byExempt Persons’, also known as the disabled,against whom the City is now obligated toimplement ‘significant fines and other appro-priate measures . to ensure the levels ofcounterfeit parking permits are minimized’(City of Chicago, 2008: 61). Cumulatively,these observed changes both confirm andextend Dannin’s (2009: 4) observation thatmany common measures in privatisationagreements ‘make government the insurer ofthe private contractor’s financial success’ forthe duration of the contract.

Post-contractual exposures

Common criticisms of privatisation focuson the diminished public capacity for

transportation planning that comes withlong-term infrastructure leases (cf. Dutziket al., 2012; Farmer, 2013; Siemiatycki andFarooqi, 2012). In addition to the con-straints placed on potential future action, amore specific set of uncertainties are createdwithin the transaction itself. These exposuresrange from the strategic issues for the Cityposed by the risky financing mechanismsused to generate value for investors, to a setof legal liabilities, financial costs, and insti-tutional compromises that accompany eachtransaction’s more specific parameters.

At a broad level, concession contractsincrease the exposure of the City’s financialcapacity to the risks inherent in global capi-tal markets, even as they appear to indemnifythe public from obligations to bondholdersand investors. The contracts do not set limitson overall leverage or indebtedness, nor dothey address the manipulation of projectcash flows through advanced financial engi-neering techniques such as interest rate swaps(see Allen and Pryke, 2013; Ashton et al.,2012).6 For example, the Macquarie-led part-nership refinanced the Skyway’s debt in2006, using interest rate swaps and sweeps tofrontload equity distributions to investorswhile deferring principal payment on debtfar into the future (see also Bel and Foote,2009). These equity distributions depend onoptimistic assumptions about revenueincreases, and on accounting manipulationsthat increase the book value of the asset. Asone analyst noted, the strategy of investorslike Macquarie amounts to a ‘triple-loadedbetting system’ (Zhang, 2008: 61) rife withrisks that make the deals vulnerable to eco-nomic shocks or failed assumptions.Moreover, these bets are highly leveraged,implicating a wide range of creditors (banksand bondholders) and counterparties (swapsellers and bond insurers) in the vulnerabilityof concession deals.

Because no catastrophic event has cometo pass in Chicago, analysis of the strategic

Ashton et al. 11



issues the City would face in response to anoperator default necessarily remains specula-tive.7 While each agreement contains stan-dard contractual language supposedlylimiting public-sector exposure to distress,the omissions to these contracts – their intrin-sic inability to account for future economicshocks, fluctuations in the operating firm’sviability, or faulty demand forecasts – poten-tially create new and uncharted exposures.The experience of privatising states in SouthAmerica indicates that distress creates strate-gic moments in a transaction where conces-sionaires can press further risk-shifting fromthe private to the public sector (Guasch etal., 2008). Were a default to occur, the Citywould be forced to confront creditors, inves-tors and counterparties involved in thesedeals and determine whether and how tomodify their claims, wipe them out by termi-nating the agreement, or make them wholeby absorbing the distressed asset onto theCity’s books.

In contrast to these hypothetical scenar-ios, the three deals in our analysis all pro-duce a more direct set of exposures, some ofwhich have already been made manifest.Even as the lengthy contracts seem to assurethat public interests will be protectedthroughout the length of the concession –often through details as small as the spacingof parking meters, the time within which les-sors must fill pot holes, and capital improve-ment schedules for parking garages (Dannin,2009) – the contractual provisions markclear paths and conflict points along whichthe relationship between cities and conces-sionaires will be contested.

Of primary concern are the many con-tractual measures requiring the City to com-pensate investors for adverse actions (i.e.‘compensation events’) that lower an asset’scash flow and thus its exchange value. In2011 and 2012, Chicago Parking MetersLLC billed Chicago more than $50 millionfor routine street closings resulting from

street festivals, construction, and the use ofmetered parking spaces by cars with disabil-ity placards (Dardick and Harris, 2012). Thepotential costs stray into everyday planningactivities such as zoning and permitting, asevidenced by another prospective cost, a$200 million lawsuit from Chicago LoopParking8 claiming that the City’s approvalof a competing private parking garage vio-lated the terms of the lease (Mihalopoulosand Fusco, 2012).

Political fallout from the parking meterslease and these fees led new Mayor RahmEmanuel to renegotiate the parking meterslease in 2013. The renegotiation yieldedsome politically desirable concessions,including free parking on Sundays outsideof the central business district. To obtainthese changes, Chicago allowed rate hikeson downtown meters, added one hour dailyto metered parking on other days, andagreed to a $54.9 million settlement withChicago Parking Meters, LLC, over the con-cessionaire’s revenue losses form disabilityplacards. More favourably for the City, therevision changed the calculation of revenuecompensation events in the City’s favour,with the mayor opining that the reducedpay-outs (Chicago owed Morgan Stanley$49 million in compensation for the priortwo years) would translate into $1 billion insavings over the life of the deal (City ofChicago, 2013).

Regardless of how the renegotiationtransforms these problems, the City’s expo-sure to such compensation events representsa problem distinct from, and more enduringthan, allegations of bad deal-making and alack of foresight. These costs cannot be man-aged by the contract for the simple reasonthat they result from the uncertainties andpositionalities created within the transactionitself. Under earlier modes of service deliverythe City never had to systematically calculatethe aggregate costs of street repairs, disabledparking concessions and other parking

12 Urban Studies



disruptions to parking meter revenue – itwas only within the transaction that thosewere rendered calculable and monetised forthe first time. Now, accommodating its rela-tionship with investors requires Chicago todevelop new analytical capacities to attachdirect costs to capital improvements, andnew powers to coordinate agency activitiesrelative to its concession agreements. Forinstance, in 2012 the City pushed for theState of Illinois to approve a bill restrictinghandicap parking licence plates and pla-cards, which had allowed individuals exemp-tion from parking fees (Garcia, 2012). Thisneed to manage exposure to compensationevents has enhanced the power of theDepartments of Finance and Revenue, achange likely to complicate the City’s pursuitof comprehensive environmental and eco-nomic development goals through planningtools such as Bus Rapid Transit or dedicatedbike lanes (see Siemiatycki and Farooqi,2012).

Conclusion

Previous accounts of privatisation tend totreat the contracts leasing public assets asthe beginning and end of the story.Privatisation advocates, for example, viewthe concession agreements as making futurerelationships between public and privatemore evident and therefore manageable. Alawyer himself, former Mayor Richard MDaley frequently invoked the length ofChicago’s asset-lease agreements to arguethat the City would be protected from allnegative contingencies and that the risksinvolved in asset ownership could beassigned to non-local actors.

Treating these transactions as instances offinancialisation, however, requires a broaderanalysis of state power and network relation-ships. Our assessment of Chicago’s infra-structure concession deals approaches thisanalysis in three ways.

First, we scrutinise the production ofinfrastructure ‘commodities’ that then circu-late, disembedded, in global financial cir-cuits. At the local scale, though,financialisation entails not just the disem-bedding of urban assets but also a complexprocess of governing urban problemsthrough finance. The City played a key rolein producing a financial market for urbaninfrastructure assets, mobilising an extensivenetwork of actors and generating powersnecessary to transform infrastructure intovalue for investors and creditors. Asset salesprovided Chicago with essential manoeuvr-ability during deep fiscal crises.

Second, many of the state powers mobi-lised within these infrastructure transactionshave been directed towards co-managing theextraction of profits. Because the asset’svalue relies on revenue streams prone to dis-ruptions ranging from general economictrends to the availability of competing trans-portation alternatives, infrastructure securi-ties require substantial post-sale statemanagement. The high pay-outs Chicagoearned from the Morgan Stanley andMacquarie-led consortia depended on theCity’s commitment to secure these revenuestreams both through contractual provisionsto allow substantial rate increases andrestrain competition, and (in the case of theparking meters deal) to enforce a wider setof traffic regulations and practices to incen-tivise parking payment. This required shift-ing management for traditional servicefunctions to the City’s executive as well asreorienting other functions towards newstandards of short-term revenue growth.

Third, the commodification of urbaninfrastructure commits the City to continu-ally revisiting and re-negotiating a set ofongoing exposures produced within eachtransaction. For instance, monetising signifi-cant portions of the City’s transportationsystem has exposed conflicts with key urbanmanagement functions – ranging from street

Ashton et al. 13



closings to zoning approvals – that did notexist under earlier modes of service delivery.This required new forms of public sectorexpertise oriented to handling the lawsuits,compensation claims and related chargesagainst the City, further enhancing the roleof the City’s finance department in coordi-nating urban management.

Furthermore, even though it focuses onthree transactions undertaken in a fairlyshort time frame, our analysis suggests thatfinancialisation at the urban scale can beusefully approached as a recursive policyproject – wherein each round of transactionscreates powers, orientations, and constraintsthat pattern a tendency towards more finan-cialisation. Recent developments in Chicagosuggest two trends shaping this recursivity.

On the one hand, the City’s new powersincrease its capacity to govern urban prob-lems through financial markets. Despite callsfor stringent controls over the terms of pri-vate investment in urban infrastructure, theCity has tested the limits of ‘responsible’ pri-vatisation and found it wanting: a 2012 pro-cess to re-bid Midway Airport failed whenno bidders were willing to pay for a conces-sion lease that was only 40 years long(Holeywell, 2013). Rather, the latest roundsof deal-making explored direct financialpartnerships with investors as means to max-imise the extraction of value from infrastruc-ture. The new Chicago Infrastructure Trust,an initiative housed in a separate non-profitagency (off the City’s balance sheet) yet con-trolled by the mayor, is expressly mandatedto find ways to package and sell revenuestreams from public infrastructure projectsand places the City in a central role coordi-nating repayment to investors (City ofChicago, 2012).

On the other hand, the fiscal and politicalcapacities generated by the deals have pro-ven contingent or even fleeting as broaderproblems, such as rising health care costsand pension obligations, increase demands

on the public fiscal base. Within two yearsof inking the deal, Chicago spent $973 mil-lion of the parking meter proceeds, 94% ofwhich financed routine city operations in thewake of recession-induced revenue short-falls. The rating agency Fitch downgradedthe City’s bond rating in part because it wasrelying on these one-time events to fundongoing operations (Fitch Ratings, 2010).Converting relatively stable income sources(like meter revenue) into a short-term bud-getary fix defers reckoning with structuralbudget problems at the cost of deepeningthem, a process which ultimately will requirea new set of short-term revenue solutionsand experimentations. Like the networks theCity has woven around itself, these expo-sures predispose Chicago towards future pri-vatisations. These transactions deepen thefinancial obligations of the local state andcomplicate the very fiscal management theyaim to solve.

Acknowledgements

The authors would like to acknowledge the capa-ble research assistance provided by AbbyCrisostomo and Zafer Sonmez, as well as BobLake and the Rutgers PhD Colloquium, DavidWilson and the UIUC Urban Prisms seminar,

Peter Wissoker, and two anonymous reviewersfor comments on earlier drafts of this paper.

Funding

This research received no specific grant from anyfunding agency in the public, commercial, or not-for-profit sectors.

Notes

1. The long-term lease of the Skyway, the firstexisting US toll road to be privatised, has ledobservers to characterise Chicago as ‘groundzero’ for infrastructure privatisation(Thornton, 2007). By 2008, there had beendozens of proposals nationwide to lease tollroads, parking meters, parking garages,

14 Urban Studies



airports and other pieces of transportationinfrastructure (Ashton et al., 2012; Mier andSyal, 2010).

2. A proposed lease of Midway InternationalAirport for 99 years and $2.52 billion fellapart in late 2008, when the financial crisisupended the lessor’s debt financing (Sechlerand Merrick, 2009).

3. Earnings multiple is the ratio of bid price torevenues (with data drawn from the mostrecent year prior to privatisation).

4. We interviewed professionals involved in the

three lease deals, including those representingthe public sector and providing the privateconcessionaires with financial and legal anal-yses and advice. We also spoke with advo-cates for and observers of infrastructurepolicy in Chicago, including journalists, for-mer public officials, and research directors ofthink tanks. We identified these subjects bysnowball sampling, identifying a small groupof informants through our own professionalnetworks who were connected to a largergroup of experts.

5. The proceeds of the deals were used primarilyto fill operating budget gaps. In the case ofthe Skyway and garages deals, portions of thefunds were allocated towards a micro-financeinitiative and some neighbourhood invest-ments (City of Chicago, 2004, 2008a; CivicFederation, 2006).

6. The modest contractual measures governinglenders limit creditor participation to ‘institu-tional lenders’ and restrict collateral for dealfinancing to the concessionaire’s capital,rather than the physical asset itself (City ofChicago, 2006).

7. The Skyway consortium, led by Macquarieand Cintra, has experienced severe financialproblems. The Skyway contributed morethan $85 million to the Macquarie’sInfrastructure Fund cumulative losses of$299.1 million in 2010 and 2011 (MacquarieGroup, 2011: 53), leaving the ‘so-calledMacquarie model in tatters’ (Tenorio and

Idzelis, 2009).8. Morgan Stanley’s operator on the concession

for the underground parking garagesdowntown.

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Reconstituting the State: City Powers and Exposures in Chicago's Infrastructure Leases

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