Study sparks debate over failed Pennsylvania Turnpike lease

Poor communication between the legislative and executive branches and overly optimistic financial assumptions undermined Pennsylvania’s attempt to lease its 537-mile turnpike, according to an independent study of the failed deal.

The non-profit Pew Charitable Trusts’ Center on the States analysed Pennsylvania’s experience to draw lessons for other states considering similar sorts of transactions to help shore up their transportation budgets.

The authors of the report cited poor communication between the state’s legislative and executive branches as the top factor that undermined the deal. The two branches had differing expectations over how to fill the state’s $1.7 billion annual infrastructure funding gap.

The state passed a law in 2007, Act 44, to fund the state’s transportation budget by raising turnpike tolls and tolling an existing freeway, I-80. The measure would raise $116 billion over 50 years and, to many legislators, its passage meant the transportation funding debate was over, the report says.

“Maybe a week later, the governor said, ‘It’s not enough money and the feds might not approve I-80 tolling. I want to pursue a turnpike lease.’ And right off the bat, you’ve got a reversal of the deal that came together on Act 44,” the report cites Craig Shuey, executive director of the Senate Transportation Committee, as saying.

Pennsylvania Turnpike: being revisited

Legislators’ discontent only grew when the winning bid was billions less than what many had expected – a sentiment echoed in the report’s conclusion that the state’s financial assumptions for the deal were overly optimistic.

The state assumed it would earn 12 percent annual interest on the principal, generating more than $1 billion in infrastructure spending a year – a return which was “highly unlikely” and “far outstripped” the returns projected by the state’s financial advisor on the lease, Morgan Stanley, the report says.

A number of legislators believed the bids would be as high as $30 billion, the report says. In the end, a consortium of Citi Infrastructure Investors and Abertis Infraestructuras of Spain made the winning bid of $12.8 billion in return for a 75-year lease of the road.

Speaking to members of the New Mexico Educational Retirement Board in June 2008, Felicity Gates, co-head of Citi Infrastructure Investors, said its bid was at the bottom range of a $12 billion to $18 billion valuation range provided by Morgan Stanley, according to the meeting minutes. The state could have gotten a higher price in different debt markets, Gates said at the meeting.

The Pew report also criticises Pennsylvania for focusing too much on the short-term implications of the upfront payment for the road, rather than its long-term impact on taxpayers and the economies it would impact.

However, the report praised the state for outlining detailed performance standards for the road and for running the bidding process efficiently.

Pew advises other states considering similar deals to pass enabling legislation for public-private partnerships (PPPs) so that ground rules can be set before negotiations begin over a specific proposal. It also advises that proposed deals be based on realistic financial assumptions.

The Pennsylvania governor’s office had a mixed reaction to Pew's report.

“The Pew report does provide some solid advice that other states should use when considering PPPs in the future. However, the report failed to take into consideration the real world realities that were involved in attempting a PPP of that size,” said Barry Ciccocioppo, a spokesperson for the governor.

He cited political make-up of the Pennsylvania Turnpike Commission, the supervisory body for the turnpike, and the state legislature – both of which were biased against the lease – as two such realities.

Speaking at the PPP USA Summit in Washington DC last month, Pennsylvania Governor Ed Rendell placed the political blame for the failure of the transaction on the Pennsylvania Turnpike Commission. The turnpike is a major bastion of civil service jobs in Pennsylvania, Rendell explained, and members of the commission were unwilling to give up the patronage.

In late September 2008, more than four months after winning the bidding, Citi and Abertis let their offer for the turnpike lease lapse since the legislature did not act on their proposal.

The authors of the Pew report were not available for comment at press time.