In the largest toll road lease deal to date, Pennsylvania Gov. Edward Rendell will need to gain legislative approval for the $12.8 billion, 75-year concession before the state can collect Citi and Abertis Infraestructuras' up-front payment.
The governor yesterday announced that the consortium beat out two other bidders for the management rights on the state's 530-mile roadway. Along with the $12.8 billion offer from Citi and Abertis, the Turnpike brought in a $12.1 billion joint offer from Goldman, Sachs & Co. and Transurban Group and an $8.1 billion joint bid from Macquarie Infrastructure Group of Australia and Cintra Concesiones de Infraestructuras de Transporte SA of Spain.
Those bids are lower than the estimated $12 billion to $18 billion range that Morgan Stanley in May 2007 projected the Turnpike would garner. Yet the top $18 billion figure was based on annual toll increases of 5.5%. Under the proposed contract with Citi/Abertis, Turnpike tolls would increase in 2009 by 25% and roughly 3% per year thereafter.
"When Morgan Stanley was making the estimate, the high end of the estimate, the $18 billion, presumed a toll schedule that was used in Indiana where the tolls tracked GDP and could rise at an average of 5.5% a year," Rendell said. "Because our tolls will rise on an average of no more than 3% a year, that's why we came in at the low-end of the spectrum at $12.8 billion."
The Indiana Tollroad brought in $3.8 billion from its 75-year lease agreement following a 99-year agreement on the Chicago Skyway that generated $1.8 billion. In both deals, Macquarie and Cintra joined together on the transactions.
In addition to Pennsylvania's lower toll increases, the PTC's agreement with Citi/Abertis differs from the Indiana and Chicago Skyway transactions in that Citi/Abertis will finance the Turnpike's $5.5 billion, 10-year capital program.
"The lease requires that the concessionaire upgrade the Turnpike according to the 10-year capital plan published by the [PTC] and to meet strict numerical standards for bridge and road quality thereafter," Rendall said.
The potential concession agreement proceeds would first pay down the system's outstanding debt of roughly $2.8 billion, with officials then placing the remaining $10 billion into the Pennsylvania State Employees' Retirement System, called SERS. Rendell, a Democrat, said that investment could generate for the state about $1.1 billion annually for transportation infrastructure for the first 10 years of the long-term lease, based on an average return of 12%. Over the past 20 years, SERS has generated an average investment return of 12% and last year, the system showed a 17% gain on investments.
The governor's strategy requires those funds to only be used for transportation projects and Rendell said the proposed concession agreement with Citi and Abertis would bring in more money for the state than Pennsylvania's current transportation funding plan called Act 44. With Act 44, the Pennsylvania Turnpike Commission, which oversees the roadway, has the capacity to issue up to $5 billion of special revenue bonds. Under Act 44, the PTC - in a public-public partnership - would lease I-80 from the Pennsylvania Department of Transportation, starting with a $750 million payment this fiscal year, and begin tolling the road, if approved by the federal government.
"This bid will allow us to increase spending on roads, bridges, and transit above what is in the current plan enacted in Act 44 that includes plans to toll I-80. If the legislature would allow us to accept this bid, these funds will be guaranteed cash in hand, not dependant on the risk of having the I-80 tolling turned down by the federal government," Rendell said at a press conference announcing the winning Turnpike bid. "Even if the I-80 tolls are approved, this lease plan will provide more funding than Act 44, about 13% more if invested at the historic rate of return in the state employee's retirement system and it will cost Pennsylvania drivers 30% less because I-80 tolls will not be needed."
The Turnpike runs east-west along the southern region of the state from New Jersey to Ohio while I-80 runs parallel to the Turnpike through the state's central region.
Yet no matter how Rendell's administration would like to use the potential $12.8 billion of concession proceeds, the long-term lease agreement must gain legislative approval before officials can accept the hefty payment. So far, lawmakers in both chambers have been skeptical of privatizing the Turnpike. Bill Patton, spokesman for House Speaker Dennis O'Brien, R-Philadelphia County, said the speaker has yet to fully back the agreement.
"He's not going to prevent the offer from being considered and looked at, but he's been very up front in the past that he doesn't think that it's a good idea," Patton said.
Standard & Poor's and Fitch Ratings rate the PTC's senior revenue bonds A-plus. Moody's Investors Service rates the senior revenue bonds Aa3.