Connecticut will round out the year with a new public-private partnership for highway service plazas. In December, a consortium will take over operations of 23 service plazas and sink in millions of dollars to upgrade the facilities.
The state expects to get at least $250 million of revenue sharing during the life of the 35-year concession. The consortium plans to invest $178 million upgrading the facilities in the first five years and $52 million to maintain them.
“P3s for rest stops — this is the first time we’ve heard of this,” said Moody’s Investors Service analyst Chee Mee Hu. “They’re just asking the private sector to come in and set up these rest stops and operations, put in some capital, and then manage it for a defined period of time, so it’s relatively low key, relatively low risk.”
Project Service LLC, a joint venture formed by the private-equity firm the Carlyle Group, Doctor’s Associates Inc., and Subcon Inc., will be the prime contractor responsible for design, development, maintenance, and operations of the plazas.
Doctor’s Associates is the parent company of the Subway restaurant chain and Subcon is a developer of Subway franchises in the New York and Connecticut area.
Project Service responded to a request for proposals issued by the Connecticut Department of Transportation last year. The 1940s- and 1950s-era service areas on Interstates 95 and 395 and Route 15 will get their first significant capital improvements in 25 years.
“The transaction is a pretty unique transaction from an infrastructure standpoint,” said Roth Kehoe, who worked on the transaction for Project Service as an attorney at Hunton & Williams LLP. “Historically, the state had put out for concession the food service separate from the fuel service and was looking for an approach that consolidated all of the service providing into one single provider.”
Under the old arrangement, the DOT maintained the facilities and had a contract with McDonald’s as the food provider and ExxonMobil as the fuel provider. In the new arrangement, McDonald’s will still be around but Project Service is the primary contractor and will add Subway and Dunkin Donuts franchises, as well as other restaurants and stores. Alliance Energy LLC will provide fuel and run the convenience stores.
The concession requires Project Service to pay the DOT a percentage of gross receipts and a portion of gas receipts, subject to minimum monthly and annual payment amounts.
The payment amounts calculated on gross receipts and gas sales, as well as the minimum payments, will rise during the life of the contract. Gross receipt payments begin at 1.25% and increase over the years to 5.5% in 2040. Added to that is a fuel charge of one cent per gallon that rises to 2.25 cents per gallon by 2035. Minimum monthly payments begin at $83,333 and steadily rise to a top rate of $375,000 in 2040.
The state hasn’t offered any incentives and is not involved in any financing.
“Project Service LLC is responsible for the cost of all improvements, and has the capital to do so,” DOT spokesman Judd Everhart said in an e-mail. “If it determines it is more beneficial to finance any of its investment with a financial instrument other than cash, they have some latitude to do so [but] the state is not issuing any bonds for these capital improvements.”
The P3 plaza idea could spread.
Carlyle Group spokesman Chris Ullman said his firm expects to do more highway plaza P3s like the one in Connecticut in other states but has no projects to announce at this time.
Kehoe said: “A lot of states are seeing these as opportunities to generate revenue. Georgia has publicly indicated that they’ve got some interest in figuring out if they can provide private services at their service plazas as well.”
Georgia’s Department of Transportation plans to hold a P3 workshop on Thursday.
“You can apply this partnership methodology to virtually any kind of asset that generates revenues,” Hu said. “In many ways it’s wide open in terms of state and local governments to think about how they can deploy the P3 model to generating services and revenues and assets as a way to diversify the options they currently have. This was a good example. Nobody’s done this before that I can think of.”