The Chicago Transit Board today approved an agreement to engage financial advisors to pursue innovative, alternative financing options to invest in transit projects in the coming years.
With more than $5 billion in capital needs envisioned for the Red Line, CTA is taking steps to explore a range of opportunities for revenue, investment and financing, including public-private partnerships that would reduce reliance on traditional funding sources, officials said.
“Traditional federal, state and local funding sources are uncertain, and may be insufficient to meet our needs within the next several years,” said CTA President Forrest Claypool. “This agreement will allow the CTA to pursue innovative ideas and possible new funding sources to complete some of the important projects we have planned.”
Among those projects are the modernization of the Red and Purple Lines north of Belmont (known as Red-Purple Modernization, or RPM) and an extension of the Red Line from 95th Street terminal south to 130th Street.
Public-private partnerships, or P3, could entail transit-oriented development, new non-farebox revenue sources and other ways to capture real-estate value created by the Red Line.
In the first year of the four-year agreement, the financial advisors will not be paid, as they complete an intensive due diligence process to assess how P3 approaches could add value and/or reduce costs for Red Line projects.
The lead financial advisor would be Goldman Sachs, supported by two co-financial advisors—Chicago-based Loop Capital Markets LLC and Estrada Hinojosa & Company.
They will be paid a monthly fee in the remaining years, as well as small percentage of any successful transactions. The advisors were chosen through a professional services agreement, and their selection was based on their industry expertise and strong experience with P3s, transit finance and municipal financing.
Public-private partnerships have helped improve transit and transportation systems across the country and throughout the world. Notable examples of P3s for transit include the Canada Line in Vancouver and the Docklands Light Railway in London.
In the United States, a key precedent for such deals is the Denver RTD Eagle P3, a $2 billion new commuter rail project currently under construction. The project represents the first transit public-private partnership in the country in which a private consortium will design, build, finance, operate and maintain a new transit line in return for payments from the public agency based upon performance. The Eagle P3 project is being recognized nationally as a model for efficient transit project delivery, cost control and risk transfer.
Financial Advisor Fees
The first year of these agreements is free. CTA can terminate the agreements before starting to incur fees if we don’t think there are viable P3 opportunities to pursue further. Only if CTA decides to proceed past the first year of work will retainer fees be paid.
Year 1: $0
Year 2: $50,000/month for lead advisor; $4,000/month each for 2 co-advisors
Year 3: $37,500/month for lead advisor; $4,000/month each for 2 co-advisors
Year 4: $25,000/month for lead advisor; $4,000/month each for 2 co-advisors
Success Fees—to be paid only if a successful P3 transaction is completed
Lead advisor: 0.375% on first $2B; 0.25% over $2B
Co-advisors: 0.0625% on first $2B; 0.05% over $2B
These investments are comparatively very small compared to the billions of dollars in much-needed funding CTA would secure to complete these important projects.