In closing the state’s $5.5 billion revenue shortfall, privatization isn’t the miracle cure conservatives claim it is.
Later this month, Governor Tim Pawlenty is scheduled to present new budget proposals. One proposal which he has hinted at is large asset privatization, which may include the Minneapolis-St.Paul International Airport.
Under a plan proposed by State Senator Geoff Michel and State Representative Laura Brod, the state would lease the airport to private investors, fetching at least $2.5 billion. This money would then be set aside in a 21st Century Economic and Academic Competitiveness Fund, designed to foster education and advance Minnesota’s competitiveness in the global economy.
Given the state’s current and expected budgetary problems, one of the increasingly likely scenarios is that Pawlenty’s budget proposal would instead use the airport earnings to combat the impending deficits.
However, before we focus on how to allocate this $2.5 billion, it is important to examine the valuation method that led to this figure. In other words, before we write off $2.5 billion from our budget deficit, we first need to examine the validity of this number, and then decide whether or not this is even a good deal.
There are a number of factors that make this type of valuation difficult, most notably the lack of an ideal market-based pricing mechanism. With typical goods and services, the market determines prices based on a supply and demand that factor in prices of the same goods and services in different areas. However, in the case of unique assets, comparisons cannot be made- at least not as well- resulting in a skewed supply and demand that may not accurately convey the true, or “fair value” of the asset. In fact, the lack of comparable prices often creates an element of uncertainty that scares off potential buyers, thereby depressing prices.
Nevertheless, Michel and Brod suggest that we compare the MSP international airport to Chicago’s Midway Airport, which was recently privatized for $2.5 billion.
“The MSP airport landed weight is about twice the size of Midway, so easily you could surmise that the negotiated partnership price would increase substantially for the MSP proposal,” says Brod.
However, this method of valuation only works over relatively short time horizons without significant changes in economic conditions. In this case, it fails to acknowledge the recent economic downturn and severe tightening of credit.
Although Chicago Mayor Richard Daley unveiled Midway Airport’s 99-year lease only recently (Sept. 30), the deal was two years in the making, and managed to avoid the worst of the current recession by beginning bid negotiations last February. Even so, the deal gathered only six formal bids.
With capital markets constricted by a lingering credit crunch, and investors wary of any investments not guaranteed by the government, there is legitimate concern that any MSP Airport deal may see low bids. To put this in perspective, on February 13, 2008, the date when Midway Airport’s bidding began, the Dow Jones Industrial Average was at 12,552. As of January 5, 2009, it had fallen to approximately 9000. In short, the active and liquid market that promotes a fair price may no longer exist.
However, Representative Brod says, “According to the financial folks we have spoken to, the capital available for projects like this remains strong and viable.”
This is some truth to this. Amidst a deep recession, many investors will be actively searching for long-term investments currently at fire sale prices. To prevent Minnesota from receiving the short end of the stick on such a large deal, additional methods of asset valuation-income based approaches, cost based approaches, etc.- need to be used before considering this proposal.
A final issue of concern is the time horizon for the airport privatization. For any large asset to receive its fair value, it requires a significant marketing period to attract the most bidders. However, it is currently against federal law for Minnesota to privatize its airport, something which Chicago was able to do only as part of a federal experiment (the Airport Privatization Pilot Program). Any type of large hub airport privatization would require new legislation, reducing the airport’s time to remain on the market. In combination with the time constraint of Minnesota’s budget deadline, this could put further downward pressure on its price, and continue to move it toward its liquidation value instead of its fair value.
As Minnesota searches for new ways to cure its budget deficit, it is important that we continue to use sound judgment prior to jumping aboard any bill that promises fast, easy money. $2.5 billion is by no means assured, and by no means a fair value. We would do well to look at what we might lose before we start seeing our airport as money in the bank.