Citi consortium lands Pennsylvania Turnpike lease for $12.8bn

A Goldman Sachs-led consortium lost out to Citi Infrastructure Investors and Spanish infrastructure operator Abertis Infraestructuras in what is potentially the largest toll road privatisation in US history.

Pennsylvania drivers will soon rely on private equity to maintain a major toll road.

Citi Infrastructure Investors and Spanish toll operator Abertis Infraestructuras have placed a winning $12.8 billion (€8.2 billion) bid to lease the Pennsylvania Turnpike that, if approved by legislators, will constitute the largest highway privatiziation in US history.

“We think an investment like this is a good long term investment,” said Michael Froman, head of Citi’s infrastructure and sustainable development investments. “This represents an increase and an affirmation of our commitment to Pennsylvania”, he said, referencing Citi’s retail banking operations. 

Citi will contribute 41 percent of the all-cash transaction that grants Abertis the right to operate and maintain the 531-mile series of roadways for the next 75 years. Abertis will pay 50 percent, and leading Abertis shareholder Criteria Caixa will pay 9 percent.
The investors “have to make this the best road at a fair price if they want to attract volume, and volume will determine how much money they make”, Pennsylvania Governor Ed Rendell said at a morning press conference.  “They can’t make money if this isn’t a great road.”

Stretching from New Jersey to Ohio, the Pennsylvania Turnpike collected roughly $545 million in revenues from 188 million vehicles last year.

The bid represents the highest-profile investment Citi’s one-year old infrastructure platform has made to date. The Citi consortium beat out competing bids from infrastructure giants Goldman Sachs and Macquarie Infrastructure Group (MGPA).

The Goldman Sachs and Transurban Group bid fell short at $12.1 billion, while the Macquarie-led bid did not advance to the final selection round because it was not within 10 percent of the highest initial bid.

Citi’s past notable infrastructure investments have included a 50 percent partnership with the Vancouver Airport Authority, a deal agreed last month, and the November 2007 acquisition of Kelda, a UK water company.

Both of those investments were made from Citi’s debut $3 billion infrastructure fund, whose target has been raised to $5 billion, a source familiar with the firm told PERE. 

Although vigorously supported by Rendell, the deal faces an uphill battle in the Pennsylvania state legislature, where the Democratic majority has voiced its preference for toll hikes and public investment instead of privatization.

Rendell argued that the lease agreement contains numerous safeguards that may assuage the concerns that privatization of turnpike operations may not be in the public interest.

Those safeguards include a provision that caps future toll increases at either 2.5 percent or the rate of inflation, whichever is greater. Those limits would follow a 25 percent increase in toll rates in 2009, a measure the state transportation authority is already moving to adopt.

The lease also requires that Abertis maintain the turnpike workers’ union’s current collective bargaining agreement.

Rendell, who has formed a public-private infrastructure advocacy coalition with New York Mayor Michael Bloomberg and California Governor Arnold Schwarzenegger, said that revenue from the lease agreement would be reinvested by the Pennsylvania State Employee Retirement System and eventually dedicated to in-state road and bridge repair.