October 18, 2004

Efficiency gains  

Last week mayor Daley announced that the City of Chicago is going to privatize the Chicago Skyway by leasing it to Cintra-Macquarie Consortium for the next 99 years. The company will get all the tolls on the highway, but it takes on responsibility for maintenance and operations; the city will get $1.82 billion up front.

I tend to be against taking a public good out of the hands of a government that 1) has an incentive to work for the public good and 2) already has the necessary expertise in place. But in this case, the sheer size of the payout blows me away. No I don't have a degree in finance, but $1.82B seems like an absolutely astonishing sum for a highway with a $40m revenue stream, especially given the limitations on toll increases. If the traffic stays constant and we assume a 10% rate of inflation and a much smaller 2% discount rate (wildly optimistic parameters for the new concessionaire) the value of this investment over the next 99 years is less than half what they paid for it. And while the traffic will probably increase some, it can't increase all that much without massively expensive changes to the relevant infrastructure.

In addition to the huge price tag, Cintra-Macquarie has to shoulder the risk that the Skyway might lsoe value over the next hundred years, whether because of economic or population decline in Chicago, a change in technology, or even significant upgrades to transportation alternatives (the much maligned Borman expressway, or perhaps a high speed rail link). I don't see what it is they're getting that's worth $1.82B. Congrats to Daley, I guess, for finding such a generous buyer!


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