KVIG Informative

Before a public agency hands a project to a private partner, federal guidance says it should answer one question: would the public get a better deal than if it did the job itself? A 75-year lease in Chicago shows what that question is worth.

FHWA’s Value for Money primer lays out the test. Analysts build what it calls a Public Sector Comparator, an estimate of what the project would cost, adjusted for risk, if the government financed, owned, and ran it. They compare that benchmark to the P3 option, first through an internal estimate called a Shadow Bid and later through actual bids. A P3 shows value for money when it delivers the same outcome at lower total cost.

The benchmark has to be fair to both sides. FHWA calls the correction competitive neutrality. Public agencies typically do not pay certain sales, payroll, or property taxes that a private partner would, and public debt is tax-exempt, so analysts adjust for those differences. Factors that are hard to price are assessed separately. FHWA also notes that P3 procurements carry high transaction costs for agencies and bidders alike, so an agency should be fairly certain before it begins.

A Lease and Its Audit In December 2008, Chicago leased its 36,000-space parking meter system for 75 years to Chicago Parking Meters LLC, a venture led by Morgan Stanley Infrastructure Partners. The company paid the city about $1.16 billion up front and, in exchange, collects the meter revenue through 2083. It is a concession in the sense FHWA uses the term: a long-term lease of a public asset, paid for with a single upfront sum.

Chicago’s Inspector General, David Hoffman, reviewed the deal in a 2009 report. His office concluded that the city had not calculated the system’s value, had not seriously weighed alternatives such as a shorter term or a revenue-sharing provision, and had allowed no meaningful public review. It estimated that the city received at least about $974 million less than the system would have been worth to it over the lease, and put the system’s 75-year value at $2.13 billion or more.

The City’s Side City officials disputed the findings. Paul Volpe, then the mayor’s chief of staff, said the report failed to account for substantial risks tied to collecting revenue in future years. Mayor Richard M. Daley said the proceeds from leasing the city’s parking meters, the Chicago Skyway, and parking garages had saved the city from financial ruin. The city spent roughly $792 million of the meter proceeds within three years on fiscal needs, including balancing budgets, according to city reports. The Inspector General’s report, for its part, described the decision as a hasty response to short-term budget pressure.

Why the Payment Structure Matters The case is a clear illustration of FHWA’s compensation options. Chicago took one large payment and gave up the revenue stream, which meant the private partner took the demand risk and also kept the upside. Central Chicago meter rates rose from $3 to $4.25 an hour after January 2009, with a schedule to $6.25 by 2013, according to the venture’s own bond-sale documents. Those documents projected about $11.6 billion in meter revenue over the lease term, roughly ten times what the city received. KPMG audits show the company earned $160.9 million in income in 2024.

A different structure would have split those outcomes differently. The Inspector General pointed to a shorter term or a revenue-sharing provision as options the city never examined, and both appear among the compensation models FHWA describes. The lease also requires the city to make annual payments to the company, known as true-up payments, which means the city’s own decisions about meters feed back into the company’s revenue.

The lesson is not that partnerships are good or bad. The valuation and the contract terms decide who holds the upside, and the value-for-money test exists to put a price on those terms before anyone signs. For any new deal, the useful questions are whether the test was run, what it assumed about risk, and which payment structure the public chose.