A road without bumps

At midnight on February 15 2010, with little coverage in the industry or media, a landmark infrastructure transaction that had been a model for many future similar deals and the harbinger of a new asset class reached completion.

On that day, a 20-year concession on the M4 Western Motorway, a major highway in the State of New South Wales (NSW) in Australia reached close and tolling ceased. Infrastructure investors may find the lack of interest disappointing but understandable. It’s the nature of infrastructure – essential assets that are mostly taken for granted in peoples’ day-to-day lives.

The M4 concession agreement proved to be a good deal for the government, investors and users alike. While not all the financial returns to investors are publicly available, the underlying consistency of demand and cash flow, plus the relative ease with which the concession changed hands on a number of occasions, attests to the underlying investment appeal of these types of assets. Ultimately, it became the template for transport infrastructure projects in the state.

It also continues to provide a number of interesting insights for infrastructure investors such as:

• the role concessions can play in supporting government budget needs;
• the efficiencies offered by these structures for investors and users;
• the marketability of the private concession companies over the course of the contract’s life and the ability of these assets to meet a range of investors’ risk appetites.

History and scope of the project

The M4 Western Motorway is a 26-mile road running east to west on the outskirts of Sydney. The NSW State government began its construction in the late 1960s. But by 1985, lacking the ability to fund the project any further, the government halted construction in its final stages. For the next four years, the project was a dormant political embarrassment.

In December 1989 the government agreed to a “Build-Own-Operate-Transfer” (BOOT) financing structure with a Macquarie Bank-backed private consortium to complete the project. The agreement involved upgrades to existing sections of the motorway, construction of a new 6.2-mile section and concessions for two proposed service centres with fuel, food and convenience outlets.

In return for funding construction, the private consortium, State Wide Roads, was given permission to toll a separate 7.8-mile section of the motorway where traffic volumes were high and strong demand would support a short toll period with low tolls. The toll road provided an alternative to the heavily congested Parramatta Road and eliminated 60 sets of traffic signals.

Tolling on the M4 Motorway commenced in 1992 with the initial toll set at A$1.50 for cars and A$4.00 for trucks. Average daily traffic volume was 50,000. At the end of the concession the toll had risen to A$2.75 for cars and A$6.60 for trucks. Average daily traffic volume had risen to 112,000.

The M4 also had an element of political controversy.  In 1997 local residents flexed their political muscle, resulting in the government introducing a “cashback scheme” or subsidy for some local residents using the toll road.

Critical to investors, the terms of the concession allowed State Wide Roads to adjust the tolls in line with movements in the Consumer Price Index (CPI), providing an essential inflation protection to the long-term revenue stream.

Ownership history

As an investment asset, the M4 Motorway went through three distinct phases over the concession period: development and growth, mature growth and maturity. The risks and operating characteristics of these three stages are summarised in figure 3. Through these three phases, the ownership also changed three times from its original owner to its sale to MIG, the short-lived public listing of the asset, and, finally, its takeover by Transurban. 

Each of the various owners of the concession took on a different level of risk and achieved overall returns that were in line with that risk profile.

Development and growth

Over the construction and ramp-up period, the original investors in State Wide Roads took a larger risk and a commensurately larger return. The returns to these investors have not been declared.  Development of the motorway continued in subsequent years. Between 1996 and 1998 the road was expanded from four to six lanes and the roadway upgraded. In 1997 electronic tolling devices were introduced that would not be fully adopted until 2003.

Mature growth

By December 2000, the growth opportunities for the road had been largely realised. At that time, Macquarie Infrastructure Group (MIG) announced that it would acquire a 50.6 percent controlling interest in State Wide Roads. MIG, a publicly listed company, released data at the time of the purchase illustrating its expectations from the M4 of a pre-tax internal rate of return of 16 percent and an annual cash return in the first five years of 12 percent per annum from the M4.

The M4 was a strategic acquisition for MIG, which held a portfolio of toll road interests of various maturities across Australia, the UK and Germany.  MIG was clear in its statement at the time of purchase that it saw the M4 as a mature and stabilising asset in its broader portfolio.


In March 2006, after a review of its portfolio, MIG announced plans to divest three of its more mature assets including the M4. For the combined portfolio of roads, of which the M4 was the oldest, MIG would record a 30 percent IRR and 5x multiple in realised value and dividends capital invested. To divest these roads, MIG created Sydney Roads Group (SRG). MIG shareholders received an in specie distribution of SRG stock that listed in July 2006.

SRG’s life as a stand-alone company was short-lived. In December 2006, Transurban Group made a takeover offer for SRG, valuing the equity of the company at a 17 percent premium to SRG's listing price. For Transurban, the M4 would become part of a larger portfolio. Its acquisition made sense in terms of the synergies that were available with neighbouring assets and also because of an element of free optionality in terms of what the government may have decided at the end of the concession.

At each stage, the M4 was assessed as a valuable asset and was able to meet the evaluation criteria of experienced investors with different risk criteria.

End of the concession

As the concession came to the end of its road, the government had several options:
• negotiate an extension of the existing concession;
• seek proposals for a new concession;
• continue tolling under state management;
• end the concession and the toll.

The government’s decision to end the concession and the toll was not surprising. Public opinion polls at the time showed 71 percent support for the move and it was one year out from an election. However, there was some disagreement from the media, economists and business community, which noted that the removal of the toll also removed an opportunity for traffic congestion management in Sydney.  Data on the impact of the removal of the toll on traffic volumes has yet to emerge but initial estimates suggested a traffic increase of about 27 percent, or 6.5 minutes extra on the prior 26-minute morning commute.


The role concessions can play in supporting government budget needs

The establishment of the concession provided obvious benefits to the government, both at its inception and throughout the next 20 years. Prior to the agreement, the project had been stalled. Signing the agreement reinvigorated a much needed public asset. The initial cost of the final section of the road and the upgrade amounted to A$246 million (US$220 million) in 1992. 

Throughout the life of the project, the motorway remained a public asset. The contract for the concession placed detailed service requirements on the operator such as management of litter, breakdowns, toll collection centre service levels and the overall quality of the road surface.  As such, the public recognised that this was not a privatisation of public assets.

 The efficiencies offered by these structures for investors and users

The M4 met all the key characteristics of core infrastructure: an essential asset with high barriers to entry, able to generate stable, predictable cash flows over a long operating life, and inflation-linked revenue with low demand elasticity. Figure 2 illustrates the consistency of the Motorway’s demand and revenue profile.  The steeper revenue line is explained by the linking of the tolls to CPI adjustments. Despite the increase in tolls, traffic volume growth remained consistent with only a small anomaly attached to the Sydney 2000 Olympic Games. Public data on the EBITDA margin (average 78 percent) also illustrates the strong cash flow generation of the asset, underpinning the yield and valuation.  

While the toll road was not without its political controversy, the overall user experience was positive. The concession was able to be structured to meet the government’s goal for a relatively short 20-year life, and was able to demonstrate to the public a clear justification for the toll in terms of a significant reduction in travel time and consistency in road quality.

The marketability of assets over the course of the contract life and the ability of these assets to meet a range of investors risk appetites

The changes in ownership interests over the concession life of the M4 illustrate the ability of assets such as this to provide attractive investment returns to a range of investors with different risk appetites. From the growth to maturity phases, each of the various investors matched different levels of risk and achieved overall returns in line with those expectations.

Ultimately, the M4 became a landmark deal for NSW.  While small by itself, it became the template for a number of new user-pay transport infrastructure projects in the state such as the M2, M5, M7, the Cross City Tunnel, the Lane Cove Tunnel, the Sydney Harbour Tunnel and the Eastern Distributor.

Infrastructure is a new asset class that has accelerated its development over the past decade. As such, many of the existing projects and concessions are still relatively new. The completion of the M4 concession serves as a useful model for understanding the full life-cycle of PPP infrastructure projects.

Matthew McPhee is a managing director and founding member of the Infrastructure Investment Group at RBC Global Asset Management, the Canada-based global investment manager