Investing in Privatized Municipal Infrastructure: Accounting for the Legal Risks

Fortune Magazine recently declared privatized municipal infrastructure “one of the hottest asset classes in the U.S.” [1] Banks and private-equity firms alike are lining up to bid on toll roads, parking garages, and for the first time ever a major U.S. airport. The city of Chicago has plans to privatize Midway Airport, which could go for as much as $3 billion. [2]

Chicago is not new to the privatization game. In fact, the city’s lucrative skyway deal became a model for raising government capital to fund highway construction and pay down debt. In 2004 the city received almost $2 billion in exchange for a 99 year toll road lease. [3] Neighboring Indiana recently announced plans to lease a toll road for 75 years to a Spanish-Australian consortium in exchange for $3.85 billion. [4] It plans to use the money to fund over 130 local road projects. [5] Investors like such long-term infrastructure investments because of the relatively steady cash flow and the depreciation benefits. It is estimated that in total, the skyway lease will allow investors to recover anywhere from $300 to $400 million in depreciation benefits alone. [6]

Almost all privatization plans face political hurdles and municipal infrastructure investors are inevitably forced to take on some political risk. A recession, a war, or even an election may jeopardize the viability of an investment. However, such risks are usually publicized before bidding ever takes place and investors can adjust their expectations accordingly. Bidders simply demand higher returns from such investments than from traditional private property investments to account for the added risk. Investors often fail, however, to account for the legal risks associated with privatization. The risk of litigation relating to the ownership or operation of municipal infrastructure does not end when the bidding begins.

Recent cases in the U.S. and abroad demonstrate that investors must take the potentially high cost of litigation into account when investing in privatized government property. Sydney Airport in Australia was privatized in 2001 and has since been profitable for the investment group involved. [7] It was dealt a blow, however, when it recently lost a case over anticompetitive practices concerning its landing fee structure. [8] One of the biggest airport revenue streams is landing fees paid by the airlines. The ability to set these fees is part of the reason airports are such attractive investments. Airlines have argued, however, that privatization can “exacerbate an airport’s natural monopoly” if landing fees are not checked. [9] One of these airlines took Sydney Airport to court over the issue and won, recovering damages along with more negotiating power in the future. [10] Although the airport remains profitable, the investment has yielded less revenue than the bidders anticipated. Other privatized airports, including those in Greece, Italy, and New Zealand have recently been subjects of similar anti-competitive allegations. [11]

The risk of costly litigation is not confined to more active investments like airports, nor is it limited to actions of the investors. In 1999, Chicago faced an anti-trust suit concerning its skyway toll operation before the privatization. [12] The plaintiff argued that the skyway is the only high-speed limited access connection between Indiana and Chicago, and that Chicago’s toll operation is in violation of the Sherman Act. [13] The Court held for Chicago, concluding that:

Aside from the Skyway, there are substitute routes between Chicago and Indiana. Judicial notice is taken of the location map attached to plaintiffs' responsive pleadings as exhibit A. That map shows that there are other primary competing routes connecting the Indiana Toll Road and the Dan Ryan Expressway located in the Skyway's service area, including Interstate 80/94, consisting of the Borman, Kingery and Bishop Ford Expressways. [14]

Although the Court ruled for the toll operation, it relied solely on the factual circumstances surrounding the case. The Court’s reasoning is certainly no comfort to potential toll road investors, since a suit involving a different toll road in a different area with a different court room may yield a completely different outcome. The number of substitute roads in an area is usually not within the control of the investment group and the nature of transportation infrastructure leaves it prone to allegations of natural monopolization. Interested investors should consider the impact that an anti-trust violation such as this would have on the investment and adjust accordingly. Even a victory for the operation may result in costly legal fees that diminish returns.


1. Paul Fruchbom, Investors Circle Midway Airport, FORTUNE MAG., Feb. 12, 2007, available at
2. Id.
3. Marc Chase & Keith Benman, Skyway Deal Appears Lucrative for Private Investors, Chicago,
4. Patrick Guinane, Lease Bid is $3.85 Billion,
5. Id.
6. Chase & Benman, supra note 3.
7. Supra note 1
8. Id.
9. Id.
10. Id.
11. Id.
12. See Endsley v. City of Chicago, 1999 WL 417918 (N. D. Ill. 1999).
13. Id. at 5; Sherman Act, 15 U.S.C.A. §2 (2004).
14. Supra note 12 at 6