A new path for PPPs?

Why a 35-year concession to upgrade and maintain Connecticut’s highway service stops is a PPP ‘put together in a more thoughtful way’ than the Chicago Skyway according to a Carlyle pro.

Connecticut’s agreement with  The Carlyle Group to upgrade 23 service plazas along the state’s major highways is a new type of public-private partnership that will set the path for a “less controversial way” to get the private sector involved in US infrastructure, according to a senior Carlyle executive involved with the deal.

Barry Gold

“This was a partnership that was put together in a more thoughtful way,” said Barry Gold, managing director and co-head of Carlyle’s infrastructure team. “The state could have just monetised these assets, but the thought here was that that would not allow a collaborative redevelopment partnership between our consortium and the state.” 

In a monetisation, a government typically gives a private contractor the right to collect revenues from a public asset in exchange for an up-front cash payment that represents the discounted net present value of those revenues.

In the US, monetisations have been undertaken successfully in deals such as the Chicago Skyway and the Indiana Toll Road in 2004 and 2006, respectively. More recently, the City of Chicago tried to do a similar deal for its Midway Airport and the State of Florida attempted to monetise a 78-mile long toll road known as Alligator Alley.

Joseph Marie, Connecticut’s Department of Transportation Commissioner, said monetisation didn’t fit with the state’s objectives. “This is a very different deal than either the Chicago Skyway or the Indiana Toll Road deals,” Marie wrote in an email in response to a request for comment, because, “to begin with, the State was not looking to generate a large up-front payment that could be used for ‘other purposes’.” Instead, he said Connecticut was looking to have the private sector fund the service stops’ upgrades and bring innovation and accountability to their ongoing management.

Some have argued that the lengthy agreements for monetisations do in fact provide accountability, in part by codifying service standards that may not have existed prior to the transaction. For example, the Chicago Skyway and the Indiana Toll Road deals each came with new rules and operating standards that the private sector concessionaire had to abide by. Midway Airport’s concession and lease agreement was 129 pages long and Alligator Alley also featured a lengthy agreement with detailed standards for everything from highway lighting to pothole mitigation.

Still, these kinds of deals may not optimally align the interests of all the stakeholders involved and have more potential to result in political, legal and social controversy, Gold said. Carlyle’s infrastructure team has looked at a number of them in the past, including Midway Airport and Alligator Alley, according to public documents, but did not put in final bids on either. They also walked away from the Pennsylvania Turnpike deal early on because, as Carlyle principal John Flaherty said at a conference earlier this year, “we just did not see a political path to victory”. 

Instead, Gold said his firm decided to pursue the Connecticut opportunity in part because it wasn’t a monetisation-type deal. “It’s a very different philosophy here,”  he said. “It’s creating a deal that fits in with the goals and objectives of all the stakeholders, as opposed to saying, ‘you receive a lot of money up-front, but you lose accountability of your asset’,”  Gold said.

Rather than paying up-front for the concession, the Carlyle-backed consortium will instead spend approximately $178 million to upgrade and maintain the service stops over the next 35 years. They will bring in new Subway sandwich outlets and Dunkin’  Donuts pastry shops, furbish the stops with additional fueling stations and convenience stores, and contract with a local chapter of the Service Employees International Union to keep them clean.

The Connecticut Department of Transportation has set standards by which all the construction work, operations and maintenance need to be done. And once the service plazas are upgraded, the department will get a share of their revenues from the consortium according to an agreed-upon formula: 1.25 percent of gross sales in 2010, escalating to 5.5 percent in 2044, and 1 cent per gallon of fuel in 2010, escalating to 2.25 cents by 2044. The state will also receive annual and monthly payments from the consortium of $561,644 and $83,333, respectively, beginning in 2010, escalating to $4,500,000 and $375,000, respectively, by 2044, according to the contract.