Hunton & Williams partners G. Roth Kehoe II and David R. Yates have spent so much time in Connecticut recently that they joke about being entitled to vote there.
The lawyers, who have spent about 18 months putting together a public-private concessions deal that will involve investment of about $178 million, may one day be able to enjoy the fruits of their labors in the form of a full tank of gas, a meatball marinara sandwich from SUBWAY or a cup of coffee and a chocolate glazed from Dunkin' Donuts when driving Connecticut's highways.
That's because the deal gives Hunton's client, Project Service LLC, the right to redevelop, operate and maintain 23 highway service areas across the state for a 35-year term in exchange for bankrolling all improvements and renovations. The transaction includes a revenue-sharing agreement with the state, and what Kehoe describes as other “minimum payments” from Project Service to the state throughout the life of the agreement.
Project Service is a joint venture comprised of private equity firm The Carlyle Group; Doctor's Associates Inc., the parent company of SUBWAY Restaurants; and SubCon Inc., the development company for SUBWAY in Connecticut and New York, which serves as franchisee for some 400 SUBWAY locations.
Kehoe said the state, which was represented by Connecticut law firm Halloran & Sage, issued requests for proposals for the project in July 2008. His client was chosen as the preferred bidder, and began negotiations with the state this spring. The parties struck a deal in mid-November.
Previously, Kehoe said, the state ran the service areas itself via contracts with ExxonMobil and McDonald's but wanted to upgrade its facilities, which were built in the 1940s and 1950s, and increase food and fuel offerings. The service areas that come under the agreement are spread along Interstate 95, which is the Connecticut Turnpike; I-395 and State Route 15, also known as the Wilbur Cross and Merritt Parkways.
“The state was very excited and creative in deciding that it wanted a single contractor to deliver the entire package,” Kehoe said, adding that while other states have entered similar public-private concessions agreements—including Florida and Massachusetts—Connecticut's is unique because of the large-scale redevelopment handled by a single provider.
Kehoe said the economy, which has taken a toll on many states' coffers as tax revenues have fallen, is influencing states to consider public-private partnerships instead of the bond deals they might otherwise do. “I think there are a lot of states that are giving careful thought to monetizing assets in ways that would ultimately improve service for their users,” he said.
For example, the Georgia Department of Transportation is slated to hold a forum today to give members of the transportation industry a comprehensive overview of the state's new Public Private Partnership program, known as P3, which is likely to focus on road construction and toll projects.
While Georgia has a statute governing public-private partnerships, Kehoe and Yates said Connecticut does not. “That actually makes things a little more challenging,” Kehoe said. “The [public-private partnership] statutes can be somewhat limiting, but they also give you a clear avenue in terms of how things should come together.”
In the absence of such a statute, he said, lawyers have to create their own structure for the deal, looking at procurement laws and hypothesizing about how various parts of the transaction should work under different scenarios.
Public-private partnership projects can be politically charged. Connecticut State Sen. Andrew McDonald has called for a financial analysis of the Project Service contract. A lease deal involving the Pennsylvania Turnpike that was supported by Gov. Ed Rendell died when the Legislature, which opposed the plan, failed to act on an outstanding bid.
But Yates said that as more public-private partnerships like this happen and succeed, “It's just going to become more and more comfortable … and there won't be as much resistance from a political standpoint.”
Also, he pointed out, there's a lot of benefit to be gleaned from public-private partnerships. For example, Connecticut's governor, M. Jodi Rell, has estimated that the benefit her state will gain over the life of the Project Service contract will be nearly $500 million.