A pressured seller

When Prime Minister Gordon Brown announced in October his intention to sell a number of state assets over the next two years, reactions were mixed. The sceptical view was that the stated aim of easing the UK’s budgetary woes was a questionable one, given that total proceeds from the sell-off are expected to be around £16 billion (€17.4 billion; €26.1 billion). Set against Treasury deficits expected to reach £170 billion a year in both 2009/10 and 2010/11 and government debt of more than £1 trillion next year, it’s a relatively humble sum.

The other main criticism of the plan was that it signalled desperation to sell off crown jewels at a time of depressed valuations. For infrastructure investors, however, this may represent an interesting opportunity. Among the eclectic bunch of assets up for sale – which include the Student Loan Company and Tote, a bookmaker – are two core infrastructure assets, the Dartford Crossing and the Channel Tunnel rail link.

“These are very attractive assets, especially the Channel Tunnel rail link, and I see no intrinsic reason why the sales should not take place if structured correctly by the government,” according to Richard Threlfall, a partner in KPMG’s transport advisory team.

However, the sales could prove to be a political hot potato. Some opposition members of parliament have dubbed the proposals the biggest sell-off since the controversial 1980s privatisations when British Telecom and several utilities were put on the sale block by Margaret Thatcher’s Conservative government.

When potential buyers receive their sales memoranda, what can potential buyers expect to read about? Here’s our own brief summary:

Dartford Crossing

The Dartford Crossing comprises two toll tunnels and a toll bridge over the Thames linking Dartford to Thurrock in Essex in South East England. It currently handles around 150,000 vehicles daily.

While being a core transport infrastructure asset, the sale of the crossing could be hampered by political issues. The biggest issue is that toll-setting in the past has been made on political rather than economic grounds, meaning that tolls on the crossing are extremely cheap compared to other similar crossings in the UK. For example, the toll for a car to traverse the Dartford Crossing is £1.50. Compare this to the £5.40 cost of taking a car across the Severn River Crossing in South West England and it becomes clear how low the Dartford Crossing’s fees are, and how much the crossing is being under-exploited as an economic asset.

The government would first have to take steps to commercialise the asset for it to become a feasible proposition to investors.

Channel Tunnel rail link

The Channel Tunnel rail link is the high speed rail line on the UK side of the Channel Tunnel, along which Eurostar services operate.  The link, also known as High Speed 1, was completed in 2003 at a cost of over £5 billion. It is around 108 kilometres in length. Moves were made, albeit unsuccessfully, to sell the link last year.

The rail link in particular has infrastructure investors salivating.

French and German rail operators SNCF and Deutsche Bahn have both publicly expressed an interest in the asset, which comprises the track between London and the middle of the tunnel. Eurotunnel, the operator of the train services that use the tunnel, is also keen.

Infrastructure funds and pension funds too are likely to be monitoring the link, whose tracks offer a long-term availability payment regime that closely matches their long-term, stable cash flow objectives.

The only issue holding back this sale could be timing, as the government looks to get the best price possible in difficult conditions. Current value estimates indicate a range between £2 billion to £3 billion, although the price received will ultimately be dependent on economic regulatory authority the Office of Rail Regulation, which governs the level of access charges that can be set.

Infrastructure Investor understands a formal process for the sale of the Channel Tunnel rail link is likely to start before the end of the year.