Behind the scenes as Midway privatization deal falls apart
BY FRAN SPIELMAN City Hall Reporter September 7, 2013 9:46AM
FILE - In this Feb. 1, 2011 file photo, a traveler walks down to security lines at Midway International Airport in Chicago. Mayor Rahm Emanuel has decided not to move forward with plans to lease Midway International Airport, ending a bid to make it the first major U.S. hub to be brought under the management of private investors, his spokeswoman said Friday, Sept. 6, 2013. Midway would have been the first large U.S. airport to go private under a pilot program overseen by the Federal Aviation Administration. (AP Photo/M. Spencer Green) ORG XMIT: CER202
Updated: October 9, 2013 7:48PM
It was down-to-the wire time — again — for the mega-deal that didn’t fly the first time around.
Aug. 29 — yet another in a series of meetings with the two bidding teams still standing on the runway in the high-stakes sweepstakes to lease and operate Midway Airport.
Then, a phone call came in that threw City Hall for a loop.
The team that included Industry Funds Management of Australia and Manchester Airports Group was dropping out just as both teams were trying to line up financing.
They had crunched the numbers against Mayor Rahm Emanuel’s demand for a 39-year deal with price controls and a sliding scale of city profit-sharing and determined they could not make it work.
“To say people on our side were angry and startled is an understatement,” said a source close to the sensitive negotiations.
“Usually, if someone is gonna withdraw, you pick up signs. They stop coming to meetings. Lawyers stop paying attention to documents. In IFM’s case, they were very engaged until the end. Then, quite suddenly, we had a process with only one bidder.”
IFM’s New York-based representative Anthony Edwards could not be reached for comment about the decision to withdraw, a few weeks before final bids were due. The source close to the negotiations was surprised by the timing, but not by the decision.
“Midway is a wonderful airport, but it’s also a limited airport with limited growth. It won’t expand physically. It’s totally dependent on Southwest Airlines. Those factors caused people to be skeptical,” the source said.
“Internally, they had their own consultant reports on what you were likely to see in future revenues and came to the conclusion the numbers didn’t get them to the kind of offer that they knew the city was looking for” after paying off $1.4 billion in Midway debt.
The stunning news was communicated to Credit Suisse, the city’s financial adviser, then relayed to Chief Financial Officer Lois Scott, Emanuel’s politically wounded pilot for the Midway deal.
The only bidding team left standing — a partnership between Spain’s Ferrovial and Macquarie Group that leased the Chicago Skyway for 99 years — reiterated its intention to forge ahead with a bid “at a level somewhere above $2 billion in present value and $4 billion over 39 years,” sources said.
Scott said she thought it would be difficult to move forward, then went mountain hiking while negotiations continued with the Ferrovial-Macquarie team. As late as 2 p.m. Thursday, the lone bidder and its attorneys were on the phone with city advisers and the Federal Aviation Administration in Washington discussing federal regulations.
A few minutes later, Scott called attorney David Narefsky, who was representing the city in the negotiations, with news that Emanuel had pulled the plug. He was not comfortable moving forward with one bidder. Not when he had promised competition to get the best possible deal for taxpayers who got the short end of the stick on the parking meter deal.
To skeptics, it looked like an all-too-convenient excuse for a mayor whose point-person in selling the Midway deal to an increasingly wary City Council — Lois Scott — had been damaged by the fact that she recommended and had business dealings with indicted former City Comptroller Amer Ahmad.
But Ald. Pat O’Connor (40th), the mayor’s City Council floor leader, insisted that the Midway deal would have passed and that Scott’s political troubles had nothing to do with Emanuel’s decision.
Nor did Ferrovial-Macquarie’s decision to hire lobbyist William Filan, who works together on some projects with former Ald. Mark Fary (12th), husband of Aviation Commissioner Rosemarie Andolino. While the lobbying relationship might have created an appearance of a conflict, Andolino’s job — one of the lone holdovers from the Daley administration — is considered safe.
Instead, O’Connor argued that Emanuel set a high bar for a deal he knew would be controversial and that one of the bidding teams simply couldn’t meet it. This time, there was no political back-story. The collapse really was what it seemed.
“This deal had to be wonderful in light of the previous privatization efforts, but it was never good enough to take the chance of the fallout from leasing a major asset,” O’Connor said.
“If you had one group willing to pay $2 billion, your negotiating power is gone. It wasn’t going to produce the results the mayor was looking for. They’ve been working on this, pretty much since he came in. To pull back from the deal has to be disappointing. But not withstanding the fact that we need revenue and this extends the huge problems we have, it wasn’t gonna be a fire sale.”
Four years ago, former Mayor Richard M. Daley’s 99-year, $2.5 billion deal to privatize Midway collapsed for lack of financing, leaving Chicago taxpayers with a $126 million down payment but no apparent way to shore up underfunded city pensions.
This time, the city has nothing to show for a process that cost hundreds of thousands of dollars with two teams of consultants — one working for the city, the other for a Midway Advisory panel that included Aviation Committee Chairman Mike Zalewski (23rd), whose ward includes Midway.
In mid-July, Moody’s Investors ordered an unprecedented triple-drop in the city’s bond rating, citing Chicago’s “very large and growing” pension liabilities, “significant” debt service payments, “unrelenting public safety demands” and historic reluctance to raise local taxes that has continued under Emanuel.
The Midway bonanza would have left Chicago with roughly $500 million to shore up city pensions and build infrastructure projects Chicago cannot afford to build on its own.
Now, it’s back to Square One eyeing the jackpot of revenues from a yet-to-be-approved Chicago casino that Emanuel had hoped to use to build and renovate Chicago Public Schools.
“I don’t know if he’d be willing to consider some of that casino money to go toward pensions, but clearly we have to go to an alternate plan and find some revenue,” O’Connor said.
“In the short term, the focus will shift to Springfield to see what they do to ameliorate the pension problem. Then, the spotlight will come back to us to see how we pick up the remainder. We’ve got bonding agencies out there saying we’ve got to start hitting taxpayers . . . . There’ s a lot of pressure on us to work toward solving these financial problems.”
After repeatedly persuading the FAA to extend the deadline for privatizing Midway — and hold open the only slot earmarked for a big-city airport to be privatized — it’s unlikely the mega-deal will be revived any time soon. At least not until after the 2015 mayoral election.
“This has happened twice now. How are they gonna get investors to go through this process again? These guys are never gonna come back. It’s over. And what kind of message do you think this sends to investors for other privatization efforts about doing business with the city?” said another source close to the negotiations.
O’Connor scoffed at suggestions that Emanuel’s decision to pull the plug on the Midway deal could impact the city’s ability to privatize assets and attract interest in the $1.7 billion Infrastructure Trust that has been slow to get off the ground.
“All it’s gonna do is tell private investors we’re getting smarter as a negotiating adversary. They’re not gonna be able to come in and make a ton of money off us at our sufferance,” he said.
“The only message it sends is, if you want to do these deals, bring your `A’ game because we’ve got an ‘A’ game going.”