A toll road in Australia illustrates the stages of an infrastructure project's investment life, according to Matthew McPhee, managing director of RBC Global Asset Management (U.S.) Inc.'s infrastructure investment group.
The M4 Motorway in Sydney is one of the few examples of a fully matured infrastructure project that has reverted to the government entity that brought in private investors 20 years ago.
“It's a relatively unique example within the global marketplace,” Mr. McPhee, co-founder of RBC's infrastructure group, who authored a case study on the toll road, said in an interview.
Infrastructure started in the 1990s as an investment for private investors, with early projects in Australia, the United Kingdom and Canada, he said.
“Because infrastructure deals are long-duration assets and infrastructure investments started in the 1990s, there are not very many examples of full-cycle assets,” Mr. McPhee said.
The M4 Motorway came to the end of its private investment cycle on Feb. 15 when the 20-year private tolling concession came to a close and the New South Wales state government ended the tolls.
“The M4 has some very interesting lessons,” Mr. McPhee said. “Concessions are a win-win-win for government, investors and users.”
That is not to say that all went smoothly on the M4.
In 1997, in response to local residents' input, the government granted a subsidy for some residents using the toll road. What's more, this year when the 20-year concession ended, the government chose not to extend the toll concession contract, entertain bids for a new private concession or continue tolls under state management. It was a year before elections and public opinion polls showed 71% support for ending the toll, the case study noted.
The M4 is a 26-mile road on the outskirts of Sydney. Construction was started by the New South Wales government in the 1960s, but stopped because of lack of funding in 1986, according to the case study.
Four years later, the government entered into what it called a “Build-Own-Operate-Transfer” deal with a private consortium led by Macquarie Bank to finance the project's completion. The consortium agreed to build a new 6.2-mile section and two service centers with gas, food and convenience outlets. In exchange, the consortium was given the right to toll a separate 7.8-mile section of the road in a high-growth area, Mr. McPhee said. The initial cost of the project plus a 1992 upgrade was A$246 million ($220 million), according to the case study.
In 2000, Macquarie Infrastructure Group, the publicly listed infrastructure firm owned by the bank, bought 50.6% in the private consortium. At the time, Macquarie Infrastructure Group owned interests in toll roads under development in Australia, the United Kingdom and Germany. MIG invested in M4 because it was a mature project that would balance out its portfolio and add cash flows, Mr. McPhee explained. Six years later, MIG bundled its interest in the M4 with two other more mature projects and took them public in a vehicle called Sydney Roads Group. MIG shareholders received Sydney Roads Group stock. It was a happy ending for MIG, which recorded a 30% internal rate of return from the sale of the portfolio of three projects.
In December 2006, five months after Sydney Roads Group had gone public, Transurban Group made a takeover offer, valuing the company's equity at a 17% premium to Sydney Roads Group's listing price. Transurban was interested because it operated other toll roads in Australia and saw “operating synergies,” the case study stated. However, since M4 only had four more years left on its concession, most of the synergies would come from the other projects that were bundled with the M4 project, the study noted.
The M4 project was “a classic core infrastructure. It had high barriers to entry, stable and predictable cash flow, and consistent usage and revenue,” Mr. McPhee said. “The final lesson is that ... (infrastructure investments) are not static structures. Every one goes through distinct stages ... at each stage there are different investors with different risk appetites.”