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As they struggle to close ballooning budget deficits amid the worst financial crisis since the Great Depression, many U.S. state and local governments will be tempted to follow the example of Chicago.

The third-largest U.S. city has raised billions of dollars in recent years turning public assets over to private businesses that then run them as for-profit enterprises.

The early success of those transactions, as well a much-longer track record overseas, has stoked an interest in these “public-private partnerships” — or P3s for short.

So, too, has the growth of funds focused on P3 investing. In recent years, they’ve raised money from pension funds and other big investors faster than assets have hit the market, creating a demand for deals that has only gained strength as Wall Street melted down and triggered a flight to safety.

“These things give investors steady earnings over a long period of time,” said James McKinney, head of debt capital markets at William Blair & Co, a lead adviser to Chicago when the city leased 36,000 parking meters to a private consortium.

But critics warn the push to lease toll roads, airports, parking meters and other public assets to corporate concessionaires is not the painless panacea backers claim.

They say the deals, especially when asset values are depressed across the board, are myopic moves that elevate private profit over public good, entail long-term costs and risks, and could trigger a financial crisis of their own.

“The devil is in the details — as future generations to come will learn,” said Pat Andrews, editor of Alltolled fast cash.com, a Web site dedicated to preventing more highway privatizations in the state of Indiana, another pioneer of such transactions.

“That’s the most irritating thing about this — the sheer shortsightedness of it. It’s money now and who the hell cares about three generations from now. And that’s not right.”

But backers say a reluctance to tax, coupled with chronic underinvestment in public services for decades, has left many city and state financial managers little choice.

“There needs to be an introduction of private sector capital to help deal with the legacy of underinvestment and, frankly, undercharging for infrastructure that has gone on in this country for a very long time,” said Tom Osborne, head of Americas Infrastructure/Privatization at UBS.

But McKinney at William Blair & Co admits the current downturn is focusing policy-makers’ minds.

“There are a lot of municipalities that are suddenly open to discussions on the topic, that’s for sure,” McKinney said.

EYE-POPPING MULTIPLES

In the deal William Blair brokered last year, a Morgan Stanley infrastructure investment fund paid Chicago nearly $1.2 billion up front to operate the parking meters for 75 years — or more than 60 times the system’s annual operating profit of about $19 million. 

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