RBC sees lessons in Sydney's M4 toll road concession

Matthew McPhee of RBC Global Asset Management argues in a study of the Australian toll road investment that it was a 'win-win-win' for its users, investors and the government.

Sydney's M4 toll road concession offers a glimpse into how investors and governments can create “win-win-win” infrastructure deals, according to an independent review by Canada's RBC Global Asset Management.

“It highlights what an efficient structure private vehicles can be in terms of managing change,” said RBC's Matthew McPhee, who authored a case study about the toll road.

The case study walks readers through the complete life cycle of a private toll road concession: from December 1989, then the New South Wales government agreed to a build-own-operate-transfer deal with a Macquarie-led group of investors, to midnight on 15 February 2010, when their 20-year concession on the road expired.

“It has been a win-win-win for users, for investors, and for the government,” McPhee said.

McPhee points out that motorists who used the road got to bypass 60 traffic lights in exchange for a toll, initially set at A$1.50 in 1992. And investors consistently assessed the 26-mile road near Sydney as a valuable asset able to meet their risk-return criteria.

For example, the M4 was owned by the Macquarie-led group of investors, State Wide Roads group, through the initial construction and ramp-up in growth on the toll road. In 2000, one the growth opportunities had been realised, Sydney-listed toll road fund Macquarie Infrastruture Group bought the M4. And in 2006, once traffic on the M4 reached a mature, steady-state, toll road Transurban bought it out.  

Macquarie Infrastructure Group recorded a 30 percent internal rate of return on its investment and Transurban found it attractive enough that it bid a 17 percent premium on M4 in 2006.

“Across the spectrum of risk and return, you see the investment being positive for a number of different investors,” McPhee said.

The M4 was so successful it became a landmark deal for New South Wales government's other deals, such as the M2, M5 and M7 toll roads.

“There's a bunch of other infrastructure projects where the state saw the success they had [with the M4] and thought, 'this is an example to be emulated elsewhere,” McPhee said.

McPhee's case study is published in its entirety in the October issue of Infrastructure Investor. To read it, click here.