When roads take a toll

In the early 2000s, before the cheap debt bubble came along, invitations to invest in toll roads were viewed as being only for the brave. No one had to slap “caveat emptor” on any invitation to participate in a toll road project for that to be implicitly understood.

These were benign economic times, however, when – as long as you structured such deals sensibly – it was possible for toll roads to deliver steady revenues and decent returns. Slowly but surely, they were able to shed their somewhat exotic image and return to the mainstream. Toll roads and ‘core’ infrastructure investing were no longer seen as mutually exclusive.

And then came the capital markets’ razzle-dazzle years in the mid-2000s, when the positives of toll road investing were talked up and the negatives – construction risk, unpredictable traffic volumes etc – were talked down. It was an era when getting the deal done was the priority – and if this meant leveraging projects up to the hilt, then so be it. Cheap debt was the facilitator.

The initial outcome was inappropriate financial structures in-the-making. Following the plague that was visited upon the world’s financial markets in the wake of Lehman Brothers’ collapse, the subsequent outcome was all-too predictable. With their exposure to market risk, and weighed down by excessive debt, toll road projects fast unravelled.

In the InfrastructureInvestor Annual Review of 2009, which accompanies this issue, an article by Michael Dinham, head of infrastructure finance Europe at ING Commercial Banking, points out that toll roads have typically under-performed other forms of infrastructure investment by a wide margin. He thinks write-offs may be limited, but that equity performance has been “dire”. Nor is the end of investors’ pain likely to be imminent. In Dinham’s view there is more suffering to come as a result of inappropriate financing techniques and ongoing currency risks.

A classic example of a toll road gone wrong comes from Australia, where the Lane Cove Tunnel toll road in Sydney recently landed in the hands of the receivers after its financial backers failed to meet interest payments on A$1.16 billion (€762 million; $1.04 billion) of outstanding debt.

Having paid A$1.6 billion to become owner and operator of Lane Cove in March 2007, the Connector Motorways consortium – comprising Australian developer Leighton Holdings, real estate group Mirvac and Hong Kong entrepreneur Li Ka-Shing – 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. And then came the final descent into receivership.      

This sorry tale is all the confirmation many investors will need to conclude that toll roads are a bad
bet that should be given a wide berth from now on. Once bitten, twice shy, as the saying goes.     

Never say never

In the latest twist to the tale, however, InfrastructureInvestor.com recently reported that Australian 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.

The renewed interest in Lane Cove suggests that there may be some misconceptions surrounding the viability or otherwise of toll road investing. Infrastructure investing generally isn’t just about owning assets – it’s about taking ownership of assets at the right price and with the right structure. Sophisticated investors may look at today’s more sensible financing environment and see no reason why such a marriage cannot be achieved with toll roads. In spite of what other investors may see as the overwhelming evidence to the contrary.