Carlyle: Connecticut deal paves new path for PPPs

Barry Gold, co-head of the private equity firm’s $1.15bn infrastructure fund, says the 35-year concession to upgrade and maintain the state’s highway service stops is a PPP ‘put together in a more thoughtful way’ than the Chicago Skyway.

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.

“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.”

This is a very different deal than either the Chicago Skyway or the Indiana Toll Road

Joseph Marie

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 or 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 for was 129 pages long and Alligator Alley also featured a lengthy agreement with detailed standards for everything from highway lighting to pothole mitigation.

This was a partnership that was put together in a more thoughtful way

Barry Gold

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.

Connecticut's service stops: 23 are about to get an upgrade from Project Service,
the Carlyle-backed investor group Connecticut chose for the job.
Source: Connecticut Department of Transportation.

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.

Barry Gold

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.

Connecticut isn't the first US state to include a revenue-sharing provision in a PPP. The Texas Department of Transportation is getting a share of the revenues in a number of its PPPs, such as the development of segments 5 and 6 of State Highway 130, the North Tarrant Express project, and Interstate Highway 635 Managed Lanes development, also known as the “New LBJ” project.

Much needed upgrade

In Connecticut, the revenue-sharing provisions have been warmly received by some local politicians. Democratic  State Senator Bob Duff, vice chair of the state General Assembly’s Transportation Committee, said he liked the idea of the state receiving a revenue stream in exchange for letting the Carlyle consortium operate and maintain the highway service stops. “I think it’s a smart idea to spin it off to the private sector as long as we get something tangible in return,” he said. 

I think it's a smart idea to spin it off to the private sector as long as we get something tangible in return

Sen. Bob Duff

Duff said he will reserve judgment on whether the PPP is a good outcome for Connecticut until he learns more about it. That is because the Department of Transportation did not involve the state’s legislature in the execution of the deal, he said.  For Carlyle and its partners, this lowered the deal’s execution risk, because legislative approval has in the past scuttled some PPPs, most notably last year’s attempted lease of the Pennsylvania Turnpike.

Duff added, though, that Connecticut’s service stops were in much need of an upgrade. Located primarily along the state’s I-95 highway – which he called one of the most congested and dangerous traffic corridors in the country – the service areas are heavily trafficked and utilised.

Gold said the highway's heavy traffic gives the service centers a captive market which will result in a certain level of “penetration”, or share of the highway's users, who rely on them for their food, fuel and vehicle service needs while traveling. As such, the deal fits into his team's definition of infrastructure.

“Infrastructure is really about public benefit, essential service assets,” he said. The highway rest stops are ancillary to a core infrastructure asset and, as such, “it's a situation where these really are providing an essential service for the public.”

Carlyle's infrastructure fund, Carlyle Infrastructure Partners, closed in 2007 on $1.15 billion. It targets assets with stable and predictable cash flows underpinned by regulated revenues, long-term revenue agreements, and/or natural monopoly positions, according to the Carlyle website.

The Connecticut PPP deal was the “first one involving significant infrastructure” in the state, according to Commissioner Marie. It was also the the first PPP for Carlyle's infrastructure team, which has previously made two other non-PPP investments.

Gold believes the deal will set an example for future PPPs in the US. “This lays down a path . . . for more insightful politicians and those involved in the public sector agencies to see a less controversial way to get private capital into public-benefit, essential-service infrastructure,” he said.