Monday, January 05, 2009

"The brutal reality is that most private sector toll operators are a shambles."

Infrastructure rethink needed as PPPs burn participants


Adele Ferguson
The Australian
Copyright 2008

TRANSURBAN is less than 10 days away from stitching up a deal to buy a stake in Sydney's Westlink M7 toll road.

This is after Macquarie Infrastructure Group (MIG) lined up Queensland super fund QIC to buy 25 per cent of the business at more than $400 million in early December.

The agreed price set by MIG for its 50 per cent stake is $805 million, a slight discount to its June 30 book value.

Transurban has until January 15 to decide whether it will exercise its pre-emptive right over Westlink -- an exercise that would be cashflow-dilutive and therefore detrimental to its share price -- or let its rights lapse.

It is unlikely to let the rights lapse completely, as speculation mounts that it will take between 10 per cent and 25 per cent, rather than 50 per cent, to bring its entire holding to between 60 per cent and 75 per cent, with the rest owned by QIC and a few other key investors such as Capital Partners.

Meanwhile, things are understood to be hotting up behind the scenes at BrisConnections as the second of a three-part instalment looms in April.

The first $1 instalment is currently trading at 0.001c a share, which has caused massive headaches for everyone. The second instalment is causing even bigger headaches as the underwriters, Deutsche Bank and Macquarie, try to find a solution to the mess -- or take a big hit.

It is hard to imagine the retail investors, which now dominate the share register, will be willing or able to stump up the next installment even with threats of legal action. This leaves some form of a government bailout, or a buyout by institutional investors, a more likely option.

BrisConnections is the latest in a number of private sector-funded tolls that have flopped. Lane Cove Tunnel, Sydney's Cross City Tunnel, RiverCity and ConnectEast have all failed to meet expectations, leaving their stakeholders in the red. The brutal reality is that most private sector toll operators are a shambles.

Most have overinflated their traffic forecasts, financed them with a slice of equity from the public markets, then geared up, and paid investors back their own capital in distributions (which enticed them into the float in the first place).

As the debt markets worsen and most listed infrastructure funds have fallen apart, a new model is needed to help finance the estimated $800 billion the country needs to spend on infrastructure in the next decade.

Super funds are expected to be enlisted to co-invest, but this might not be as easy as it sounds.

For one, funds have mandates laying out where they can put their money, and secondly investments in unlisted assets such as infrastructure are about to come under the blowtorch.

The upshot is the Government is going to have to meet the private sector halfway if it is to fund the growing list of infrastructure projects.

To this end a debate is brewing behind the scenes between the private sector and the state and federal governments over the way public-private partnerships (PPPs) are structured.

The private sector is calling on governments to take more of the risk to entice the badly burned investors back into the fray.

The proposals -- which vary from granting tax concessions at early stages of a development, to shadow tolls, availability payments, and underwriting financing -- are being taken seriously because Australia needs to spend more than $800 billion on infrastructure in the next decade, and at least $25 billion on roads.

The Infrastructure Partnerships Australia peak body is working on a major submission to the federal and state governments on the issue.

IPA chairman Mark Birrell said the uncertainties in global debt and equity markets demanded that the infrastructure partnerships models evolved, ensuring sustainable and stable investment in much-needed new projects and services.

"Otherwise we could find that projects simply won't attract a suitable level of interest in the much-changed global economy," he said. Birrell says a review is needed of risk allocation, with governments giving active consideration to fostering projects that involve a shadow toll or use an availability payment model.

Under this framework, government pays a certain fee to the private consortium each year if it meets pre-determined service outcomes.

The private sector continues to shoulder construction and other project risks.

Availability payment models have been used with great success to deliver hospitals, schools and justice facilities. Given the seismic change in global economic circumstances, pressure is on government to give consideration to this model for economic infrastructure too. With highway projects, for instance, it would mean consideration of the shadow tolling option as well as direct tolling.

Leighton Holdings chief executive Wal King knows all too well the risks taken by the private sector, after being forced to write off the group's investment in Lane Cove, along with some writedowns of its RiverCity and ConnectEast holdings. More writedowns are expected when it releases its interim results in February.

Leighton also has a $200 million investment in BrisConnections, which it will undoubtedly have to review given the shenanigans the project has attracted.

From where he is sitting, King says the problem with toll roads is that it is difficult to predict traffic levels, particularly in the first few years of operation, making it increasingly hard to turn a long-term asset into an economic proposition that can be privately funded.

King's solution is for government to guarantee to cover any shortfall in the numbers. For instance, if a toll road forecasts 50,000 cars a day, and it starts out with 30,000 cars a day, the government should pick up the shortfall for a certain number of years to ensure that a certain rate of return is guaranteed to equity and debt investors in the early days.

If patronage goes above the forecast, the private sector would get a share of the upside. Sydney's Cross City Tunnel, which opened in 2005, lapsed into receivership a year later, after failing to reach its traffic forecasts. The target had been 90,000 cars a day when the reality at start-up did not even make 40,000.

The Lane Cove tunnel has also been plagued by problems including missing traffic forecasts and causing owner Connector to nearly treble its net loss in 2007.

There is no doubt the current state of play with toll roads is unworkable, but as ABN Amro structured finance head John Martin argues, a kneejerk reaction could be to the detriment of the country.

Martin contends that if the pendulum swings from the private sector taking all the risk to governments taking all the risk, there will come a day when governments decide to do it all themselves. As in most things, the middle ground is best, and in the current climate short-term bridging arrangements similar to what the government did with the banks, would help projects get started.

For instance, in NSW, it could get the $7 billion-plus M4 East extension -- the missing piece of Sydney's orbital road network -- going. In Victoria, it could get Rod Eddington's proposed infrastructure project up and running and in Brisbane the much-needed $2.6 billion Northern Link. Until a proper funding model can be sorted out that is palatable to governments and the private sector, projects such as these will be remain pipe dreams.

© 2009 The Australian:

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