First State bullish on UK roads privatisation

Head of infrastructure asset management for Europe Niall Mils (pictured) expects a £40bn roads sell-off using an investment model based on the utility industry's regulated asset return model. Mills expects the government to retain volume traffic risk ‘in the majority of cases’.

Niall Mills, First State Investments’ head of infrastructure asset management for Europe, is optimistic on prime-minister David Cameron’s recently announced plans to open the UK roads sector to private investment, particularly if it ends up following the regulated asset return model used in the utility sector.

“While regulated return parameters for privatised UK road networks are still to be decided, we would expect that in the majority of cases traffic volume risk will be retained by the government as part of ‘availability tariff’ commission agreements with operators. In return, operators will be expected to adhere to specified operating standards, levels of investments and, quite likely, major capital programmes over long periods of time,” Mills said in a statement.

Mills points to the successful use of regulated returns in the utility sector as a potential model for a future roads sell-off: “It has been typified by the UK water industry, now with over £100 billion of new investment delivered since its privatisation in 1989.” That’s £100 billion of capital “the government has not needed to find […] to support the water industry in the last 20 years,” he stresses.

If executed rightly, a potential privatisation of UK roads could create a sizeable market: “Using very broad initial assumptions, the equity pool of the prospective private toll road market in the UK can be valued at about £15 billion, and on a notional 65 percent debt/equity ratio this would equate to the total asset value of over £40 billion,” Mills estimates.

Earlier this year, David Cameron signalled that his government was getting ready to open up the UK roads network to private investment. In a speech to the Institution of Civil Engineers, the UK prime-minister said:

“The problem’s clear: we don’t have enough capacity in places of key demand. But how do we do more, when, frankly, there isn’t enough money? Road tolling is one option, but we are only considering this for new, not existing, capacity.”

“But we now need to be more ambitious,” Cameron continued. “Why is it that other infrastructure – for example water – is funded by private sector capital through privately owned, independently regulated, utilities but roads in Britain call on the public finances for funding?” 

“We need to look urgently at the options for getting large-scale private investment into the national roads network – from sovereign wealth funds, pension funds, and other investors. That's why I have asked the Department for Transport and the Treasury to carry out a feasibility study of new ownership and financing models for the national roads system and to report progress to me in the autumn,” Cameron concluded.