The nation's oldest turnpike is now the center of attention in one of the newest developments in international private equity investments in specialty real estate. The Commonwealth of Pennsylvania has selected a consortium of some of the world's top investment and infrastructure companies as the highest bidder to lease and manage the Pennsylvania Turnpike for the next 75 years. The bid to privatize the toll road totals $12.8 billion.
The consortium is led by Spain-based abertis, one of the largest toll road operators in the world; Citi Infrastructure Investors, a division of Citi, a leading global financial services company; and Criteria CaixaCorp, an investment holding company controlled by Spanish savings bank La Caixa. The deal marks abertis' entry in the U.S. toll road market.
But like anyone who has driven the turnpike and is familiar with its potholes, heavy commercial traffic and persistent lane closures, the winning bidders may also find the road to final award of a contract will be no easy pass.
The 359-mile Pennsylvania Turnpike system services one of the most highly developed regions of the U.S., linking the major urban areas of Philadelphia, Scranton, Harrisburg and Pittsburgh and links up with toll roads to Boston, New York and Chicago. Drivers and passengers in the average 35,000 vehicles per day that stop at its 57 tollbooths and 20 service plazas generate annual revenues of more than $600 million.
If award of the contract were eventually approved, it would be one of the largest public private partnership initiatives ever undertaken in the U.S.
The U.S. represents a strategic market for abertis and its partners where abertis is already present via its airport business that manages the Orlando-Sanford airport and the Atlanta international terminal, one of the busiest in the world.
It also affords the consortium a position from which to embark on additional growth opportunities and boosts its scope for expanding into other sectors in the U.S., the largest market in the world.
"We urgently need new funding for road and bridge repair, and a turnpike lease will help us meet that need," said Pennsylvania Gov. Edward G. Rendell in announcing the award. "Under the terms and conditions we set, the turnpike will be upgraded and tolls will be no higher than the Turnpike Commission will charge. Where Pennsylvanians will see a major difference is on our other roads. Road repair all over the state will accelerate and we will be able to cancel the plan to impose tolls on Interstate 80."
"The $12.8 billion lease payment would be dedicated to road and bridge repair and support 73 public transit agencies across the state," Rendell said. "By investing the money for the long term, the lease plan would generate annual payouts for transportation over the 75-year life of the lease. These payments would average 13% higher than the maximum available under the I-80 tolling plan, assuming investment returns equal to the average earnings of the Pennsylvania State Employee Retirement System over the past 20 years."
As part of its plan, the consortium would implement a capital investment plan of $5.5 billion to improve the toll road.
Final acceptance of the winning bid will require enactment of legislation by the Pennsylvania General Assembly and will require modification of Act 44 -- the most recent legislative action on transportation funding in July 2007.
Act 44 directs the Pennsylvania Turnpike Commission to apply to the U.S. Department of Transportation for permission to impose tolls on Interstate 80. If approval is granted, the Turnpike Commission would make annual payments to PennDOT averaging $944 million per year for the first 10 years, and larger amounts thereafter.
However, federal legislation has been introduced that would prohibit imposing tolls on I-80. If permission to toll I-80 were not granted, payments to PennDOT would fall to $450 million per year with no escalation.
That was the impetus behind Rendell's decision to privatize the turnpike and ensure a steady more predictable stream of income.
However, there are major obstacles facing abertis and Citi. The Pennsylvania Turnpike Commission opposes Gov. Rendell's plan to privatize the road. For starters, privatization could eliminate many of the more 2,200 employees of the commission, including the 1,765 workers employed under a collective bargaining agreement.
"The Pennsylvania Motor Truck Association (PMTA) is concerned with the current state of Pennsylvania's aging infrastructure, but the governor's solution to effectively sell our Turnpike for 75 years does not meet the needs of the transportation community at large," said Jim Runk, president of PMTA. "We Pennsylvanians are anxious to repair our transportation infrastructure, but with the federal government planning to evaluate it on a national level in 2009, we should be leery of speeding forward with a plan that does not take federal solutions into account. If we bypass a thoughtful and transparent debate on how to best manage these necessary improvements, we risk punting the ramifications of a near-sighted solution to our children. We urge legislators to consider whether this proposed solution will truly improve travel for Pennsylvania motorists along our main artery."
Robert E. Latham, executive vice president of Associated Pennsylvania Constructors and spokesman for the Transportation Construction Industries coalition, said: "Replacing one inadequate funding source with another inadequate funding source does not constitute a vision for Pennsylvania's future mobility. Neither the I-80 tolling plan nor the Turnpike lease plan will provide all the revenue necessary to repair the existing highway system or provide for the expansion required for economic growth."
When Gov. Rendell outlined his privatization plan in April, Turnpike CEO Joe Brimmeier said, "We are obviously disappointed that the Rendell administration has taken this step. We remain committed to implementing Act 44 - which was signed into law just nine months ago by Gov. Ed Rendell. We've made tremendous progress."
At that time Brimmeier outlined a long list of concerns about the plan - none of which he backed off of this week, when the consortium submitted its bid.
- What will the impact be on the Commonwealth's 73 mass transit agencies, which have already started to see the benefits of Act 44? (Act 44 provides mass transit with $37 billion in the next 50 years.)
- What is the Commonwealth's plan for the inevitable reconstruction of I-80 (the need for which will now be accelerated due to the diverted traffic from the mainline of the Turnpike)?
- Will the winning bidder be held responsible for any capital improvements for projects required after the first 10 years of the lease?
- How will the administration ensure that any lump-sum payment for the lease agreement will be properly invested and safeguarded against re-direction for non-transportation purposes?
- What will happen in the event of a default by the concessionaire? Will its creditors have the ability to step in?
Salvador Alemany, CEO of abertis, says his firm is equipped to handle the controversy.
"Gov. Rendell's decision presents our group with a new challenge, similar to the one we faced when we integrated Aurea and Acesa Infraestructuras back in 2003, or when we acquired TBI's airport business in 2005, thereby gaining a foothold in the U.S., and when we participated in the privatization of sanef in 2006, a process which set a precedent for the tender awarded today by the state of Pennsylvania. We will rise to the challenge and the trust placed in our consortium," Alemany said this week.
Global interest in infrastructure investments is increasing, according to Deloitte, a global professional services and accounting firm.
And it's not just in toll roads. Bridges, ports, schools, public housing, prisons and defense facilities and water treatment plants around the world are in urgent need of repair and upgrade. This infrastructure deficit, as it's called, is expected to grow a lot worse without concerted remedial action, Deloitte reported this spring in a report entitled: Closing the Infrastructure Gap: The Role of Public-Private Partnerships
In the U.S. alone, the potential infrastructure market may amount to $3 trillion, Deloitte estimated.
Infrastructure assets offer stable long-term returns with running yields and have high barriers to entry. Also, as budgetary pressures worldwide provide greater incentives for governments to explore alternatives to financing public services as Pennsylvania is doing, there is a steady flow of new opportunities coming to market either through public/private partnerships, or direct private investment.
Fourteen investment groups initially looked at the opportunity of taking over the Pennsylvania Turnpike and eventually three serious bidders stepped forward.
A consortium made up of Spain-based Cintra and Australia's Macquarie Infrastructure Group decided against increasing their bid and New York's Goldman Sachs, which partnered with Transurban and the Ontario Teachers' Pension Plan, came in below abertis and Citi.
Citi Infrastructure Investors was formed in May of last year to capitalize on the growing trend to manage equity investments in infrastructure assets and to oversee a management company focused on the operation of these investments. The Pennsylvania Turnpike bid was its second major win this past week. It also entered into a partnership with the Vancouver Airport Authority to pursue the sourcing, funding and maximization of potential airport opportunities.
Babcock & Brown, an international investment and specialized fund and asset management group, is working with Citi. Earlier this year, Babcock & Brown raised $450 million of committed capital for infrastructure investment opportunities in the North American markets. This increased its capital raised for investment in North American infrastructure projects to approximately $1.85 billion. Babcock & Brown holds investments in the Natural Gas Pipeline Company of America and the ICS port.