Lessons from Lane Cove

Why financing structures rather than toll roads are the enemy of sensible infrastructure investing.

Back in August 2008, the Lane Cove Tunnel toll road in Sydney was producing repercussions as far away as Texas. With toll road projects in the Lone Star state under consideration at the time, Texas Monthly magazine took one look at the rapidly unravelling Australian project and declared that if Texan officials had heard of Lane Cove “they might not be so eager to raid the teacher and state employee retirement funds to build toll roads”. Declaring such toll roads “irresponsible and immoral”, the magazine described Lane Cove as a “bottomless pit for its financial backers”.

The “bottomless pit” description was an apt one. Having paid A$1.6 billion (€1.1 billion; $1.4 billion) to become owner and operator of Lane Cove in March 2007, the Connector Motorways consortium watched in horror as traffic volumes plummeted way below the projections in their business plan, delivering weaker-than-expected revenues as a consequence. In late 2008, Fitch and Moody’s handed negative ratings to Connector Motorways’ financing arm. Last month, Lane Cove was put into the hands of the receiver after its backers failed to meet interest payments on A$1.16 billion of outstanding debt.

In the latest twist to the tale, however, InfrastructureInvestor reported earlier this week that toll road operator Transurban had placed an expression of interest in buying Lane Cove. Transurban chief executive Chris Lynch said during a results presentation that Lane Cove was “a well constructed asset; it just had an unrealistic expectation inherent in the original business case”. The Australian newspaper reported that analysts had placed a price tag of “up to A$600 million” on the asset – A$1 billion down on the price paid three years ago.

There has been much talk lately of how infrastructure investors have had their fingers burnt by certain assets which may have appeared to fit within acceptable risk parameters only to be exposed by the economic downturn as too prone to market volatility. Pundits have speculated that investors will not fall into the same trap again. The likes of toll roads will quite simply be off the agenda for many investors in future, so the theory goes.

The renewed interest in Lane Cove, though, suggests reality may not be quite that simple. Infrastructure investing isn’t just about owning assets – it’s about taking ownership of assets at the right price and with the right structure. Sophisticated investors, rather than easily-frightened ones, may see no reason why such a marriage cannot be achieved with toll roads. Even those with such a bad history as Lane Cove.