Wednesday, October 19, 2005

"Toll road debts are skidding out of control."

Analyst says toll roads heading for trouble

Wednesday, 19 October , 2005

Reporter: Stephen Long
Australian Broadcasting Corporation
Copyright 2005

TONY EASTLEY: It wasn't so long ago that toll roads were seen as a sure way to make money but now questions are being asked about whether even some of Australia's busiest toll roads will make enough in the long run to pay their debts.

One expert says the traffic targets set by the companies are far too ambitious, and he wonders how they'll turn a profit.

Finance Correspondent Stephen Long reports.

STEPHEN LONG: There's a lot of millionaires at Macquarie Bank thanks to roll roads and until recently, tollway companies have been darlings of the stock market.

But now there are claims that toll road debts are skidding out of control.

JOHN GOLDBERG: I don't think it's sustainable in the long-term at all.

STEPHEN LONG: That's Dr John Goldberg of Sydney University. He's analysed the accounts of the M2 motorway in Sydney's north-west, and Citylink in Melbourne - both now owned by Transurban.

He says the way they value future cash flows is optimistic and implausible, and as to the long-run estimates of vehicle use, well, they're one big traffic jam.

JOHN GOLDBERG: You're talking about traffic which corresponds to gridlock, particularly in the peak two hour period in the mornings.

STEPHEN LONG: So basically to make the kind of revenues in the future that the toll road companies are predicting, they would have levels of traffic that would just be choking, amounting to gridlock?

JOHN GOLDBERG: Exactly. Exactly.

STEPHEN LONG: Dr Goldberg claims there are similar problems with Macquarie toll roads.

JOHN GOLDBERG: If you take Connect East, it's structured the same way. The Eastern Distributor in Sydney is structured the same way.

STEPHEN LONG: Toll roads cost a lot to build and generally don't make a profit for many years. So to make their stock attractive to investors, toll road companies borrow against future earnings, and pay that yet to be earned money out to shareholders in dividends today, often refinancing and upping the debt again and again.

Of course those debts eventually have to be repaid. So to keep investors fed with dividends, toll road companies have to buy new assets and start the process all over again. It's a model widely accepted by the financial markets but that doesn't convince or surprise the critics.

JOHN GOLDBERG: You know, you've got the analysts, stockbrokers and nobody wants to know.

STEPHEN LONG: In fact, some investors are raising concerns.

Goldman Sachs JBWere recently rated Transurban a long-term "sell" because it's so heavily geared, that nearly half of its future payments to shareholders will come from debt.

But few seem to buy the claims that Transurban's toll roads won't make enough to pay their debts or Dr Goldberg's claim that the projects are only viable because of tax breaks.

A spokesman for Transurban said Dr Goldberg was a lone voice and his analysis was full of fundamental mistakes. He pointed out that the company's debt has a robust "A-minus" credit rating.

TONY EASTLEY: Stephen Long reporting.

Australian Broadcasting Corporation: