Bloomberg had an article this morning highlighting a pretty neat infrastructure investment: parking meters. According to reporter Darrell Preston:
“Morgan Stanley, Abu Dhabi Investment Authority and Allianz Capital Partners may earn a profit of $9.58 billion before interest, taxes and depreciation…Chicago gave up billions of dollars in revenue when it announced in 2008 that it leased Morgan Stanley its 36,000 parking meters, the third- largest U.S. system, for $1.15 billion to balance its budget.”
Now, the reporter is being overly dramatic here — for example, the story is titled “Morgan Stanley’s $11 Billion Makes Chicago Taxpayers Cry” — but he does have a point: parking meters appear to offer investors healthy cash flows over the long-term. Who knew? (Actually, the real money is in the parking tickets…but’s that’s another post altogether.)
Now, the $9.58 billion “profit” cited by Mr. Preston (which is before interest, taxes and depreciation) on $1.15 billion invested doesn’t look quite as outlandish when spread over 75 years. Depending on your assumptions for how the profits accrue to the investors, a back of the envelope calculation (using my trusty rule of 72) suggests this is only around 3-4% (compounded) annual return.
In other words, it’s not at all the jaw dropping largesse that Mr. Preston is insinuating. So, while the article says this deal was “…despicable the way it went down…”, I’d say this looks like a pretty fair shake (especially given the circumstances) for the city’s taxpayers. Just try to think of this as a long, long, long bond with some parking meters as collateral. There’s no need to cry about this one.
Ashby,
The parking meter revenue is subject to capacity utilization (and apparently the buyer is raising capacity, so there is more than one source of variation) and parking rates can be adjusted for inflation. So it is a bit more like the stripped coupons of an inflation-adjusted bond. That means that the 75-year nominal revenue stream is subject to a few assumptions. Great investment for a pension fund, unless you do not trust the future of the automobile, air travel and the ability of governments to bend the rules. Not easy to value though.
That’s a good point, Rien. There’s no telling what we’ll be doing 75 years from now. Well, you and I evidently won’t be doing much, but the good citizens of Chicago may have evolved into a post automotive society. Given some of these risks, I’m actually surprised the MS consortium didn’t get a slightly better return. And yes, for a pension fund with liabilities to match 50-60 years out, this is a perfect play.