Abertis/Citi selected in $12.8 billion bid for Pennsylvania Turnpike lease

May 19, 2008
By Peter Samuel

With a bid of $12.8 billion an Abertis/Citi team has been selected as the concessionaire in a 75 year lease of the Pennsylvania Turnpike. The bids were received in a second round of best-&-final offer bids last Friday (May 16). #2 bidder was Transurban/Goldman Sachs at $12.1b.

Discussing the result at a news conference Governor Ed Rendell was enthusiastic, saying he'll strongly urge the legislature to pass the required legislation because it's a "slam dunk".

"This is a very good deal for Pennsylvania taxpayers," Rendell declared.

State officials were far less embulient before the Friday bids, thinking that they were going to get under $12b. $12b was a major line to break since they'd said last year they expected to be able to get between $12b and $18b.

Invested with the state pension fund SERS the upfront concession fee of $12.8b will yield $1.1b/year indefinitely to the state for its transportation needs, 13% more than the average $965m/yr promised by the Turnpike Commission under the Act 44 concession with the state. These estimates of the value of the bid are after allowing for defeasing Turnpike Commission debt, Roy Kienitz of the Governor's office said.

A lease not a sale

Gov Rendell stressed that the deal is for a lease, not a sale. The lease contract allows the state to cap toll increase to inflation, set standards for maintenance and operations, detail the capital program, and see that the new operators abide by the labor agreements with the unionized workforce of the Turnpike Commission. But the Governor said the profit motive is good, and is the major guarantor that the Turnpike will be run well because the concessionaires can't make money unless they provide good service and attract users.

In addition Rendell said that with the Turnpike concessioned:

- no tolls will be needed on I-80

- the toll increases on the Turnpike are contractually capped whereas the Turnpike Commission has the power to make unlimited toll increases

- the return to the state is more assured because the fee is paid upfront ("money in hand") whereas Turnpike Commission money is paid annually

Big increase in the second round

The second round of bidding saw a major 21% increase in the Abertis/Citi bid.

In the first round of bids on May 8 top bidder was Transurban/Goldman Sachs at $11.26b with Abertis/Citi second at $10.6b.

Cintra/Macquarie bid $8.14b and under the rules, being more than 10% below the highest bidder, were excluded from further bidding.

Details

Abertis as the international toll operator is clearly the lead in the joint venture. Abertis by itself has 50% and Criteria Caica Corp a major shareholder in Abertis another 9% for a 59% Abertis family share, and Citi 41%.

According to Roy Kientiz the Governor's lead staffer on the Turnpike concession of the $12.8b due to be received on signing of a toll concession about $2.3b would be spent on defeasing Turnpike Commission debt and paying for transactions costs leaving about $10.5b to be invested.

The investment would be managed by the state pension fund investors SERS and based on their historical rate of return would yield 12%.

I-80 tolling uncertainty

Gov Rendell said that if the US Government doesn't allow tolling on I-80 then the Abertis-led concession bid is even better for the state. In that case the state is only set to receive $450m/year from the Turnpike Commission.

Rendell confirmed that the Turnpike Commission missed his deadline of last Friday for completing answers to questions posed by the USDOT on their application to toll I-80. The Commission has had since mid-December to compose their answers. Rendell said he now hoped they would have the answers done by the end of this week. The Governor's office is calling this a re-application.

The Governor said he'd asked US sec transportation Mary Peters to expedite a decision, without himself expressing any opinion either way on the validity of tolling under US law.

Given that the Turnpike Commission has had five months now to respond to USDOT questions it appears they are deliberately stalling, preferring uncertainty to the expected 'No' from the Feds.

June 20 deadline flexible

Officially the Abertis-Citi offer is only valid until June 20. However Gov Rendell and an Abertis official agreed that they could stretch the period for a few weeks so long as the offer is being seriously considered. However the Abertis offer would not be around "in five years."

Abertis statement

A statement posted to the Abertis website quotes senior officials in the somewhat stilted language of a translator:

Chairman of Abertis, Isidre Fainé: "Our bid represents the interests of the State of Pennsylvania, contributing our excellent track record in managing toll roads worldwide. We combine this management excellence with the society and citizen service component implied by infrastructure management. We are known for delivering on our long-term commitments. Civil engineering works such as the Pennsylvania Turnpike are infrastructure assets that serve the communities and territories they transect. They are inextricably entwined in these communities and play a key role in their development."

Abertis' Chief Executive Officer, Salvador Alemany: "We have worked very hard on this bid with our partners Citi Infrastructures and with the support of Criteria CaixaCorp., whose presence underscores renewed commitment to growth at abertis and demonstrates, yet again, that our shareholder structure is one of our greatest strengths. Governor 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 US, and when we participated in the privatisation 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."

In a statement to investors Abertis says that this toll concession of 801km (498 miles) would increase the length of tollroads it operates directly to over 4,100km (2,548 miles). 63% of this would be outside Spain. In addition Abertis participates in management of another 5600km (3480 miles) of tollroad via investments in pikes in Italy, Portugal, UK, Colombia, Argentina and Chile. The only US toll facility of Abertis at present is the Teodoro Moscoso Toll Bridge near San Juan Airport in Puerto Rico.

They describe average daily traffic on the Turnpike as 35k vehicles/day on the mainline, a point traffic average per km - a measure commonly used in Europe but unknown in the US. The Pennylvania Turnpike's East-West Mainlne's 35k veh/day European style compares with SANEF the Abertis owned French tollroad 24k and on the Spanish owned TRs of Abertis of 27.6k.

The common US measure of "traffic" is the number of toll transactions. For the Turnpike overall that's about 509k/day and above 400k for the East-West Mainline.

"The practical end of the Turnpike Commission... except for the Mon Fayette Expressway"

For some the high point of the Governor's press conference was when he observed drily: "This could mean the practical end of the Turnpike Commission."

Although he went on to observe the Commission might still be in charge of the partially built Mon Fayette Expressway project.

Under the terms of the proposed concession Abertis would take on the Turnpike's obligations with the unionized workforce of the Turnpike Commission with about four years left in their labor contract.

Turnpike Commission's bland comment

Turnpike Commission CEO Joe Brimmeier has told staff in apocalyptic tones of a life and death struggle. He has said they are fighting for their survival and that if they don't all fight side by side against the Governor's plan all three thousand of them will be out of work and destitute.

However in a statement issued today he is quoted blandly as saying:

"Ever since Governor Rendell first told me about privatization in December 2006, we understood that he would eventually unveil bids to lease the Turnpike."

"The matter is now in the hands of the State House and Senate Transportation Committees, who must analyze the concession agreement that's been submitted for their consideration. We have full confidence that committee leaders and members will weigh transportation-funding options based on what works best for all citizens of the Commonwealth."

"If asked, we will take part in the discussion that will no doubt arise from the bid now before lawmakers."

"In the meantime, Act 44 has already begun to address our transportation-funding crisis. In just the past nine months, the Turnpike provided PennDOT with $750 million in new revenue for road, bridge and mass-transit projects under Act 44. That money -- generated entirely by tolls and bonding on the existing Turnpike -- is being put to work across Pennsylvania today."

"With Act 44, the Turnpike will supply PennDOT almost $84 billion over 50 years without raising taxes or out-sourcing a critical asset. That's why we remain committed to implementing Act 44 and seeing it through to completion."

Citi fighting both sides of a Chinese Wall

One amusing aspect of the contest is that Citi has had separate groups on each side of this civil war. A Citi public finance group was heavily involved in financial modeling on behalf of the Turnpike Commission, doing most of the projections for Act 44 at no fee. They did that work hoping to be favored with future paying work at the Commission.

At the same time a different Citi group, Citi Infrastructures, was teaming up with Abertis. An official there said there was a "Chinese Wall" between the two Citi groups. (He hadn't heard of Manhattan Mongols successfully storming the Great Wall.)

 

See the official announcement from the Governor's office

http://www.tollroadsnews.com/sites/default/files/RendellPR080519.doc

See the concession & lease document of 686 pages and other news here

http://www.dot.state.pa.us/internet/paturnpikelease.nsf/PATurnpikelease?

ADDITIONS POSSIBLE

TOLLROADSnews 2008-05-19 12:50, 14:30, 16:00


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