The failure of BrisConnections, which put itself into voluntary administration today, will probably confirm, if it needed confirmation, the end of a particular model of infrastructure funding that was pioneered by Macquarie Group in the 1990s for the far-more-successful CityLink project in Melbourne.
In fact it has been obvious for some time that the user-pays toll road model pioneered with CityLink had been so abused and misapplied, in the pre-crisis infatuation with toll road projects, that it had been discredited by the failure of a succession of those projects.
The problem, however, isn’t necessarily with the model but with its application to projects like BrisConnections’ Airport Link toll road, or RiverCity Motorway’s Clem7 tunnel project, also in Brisbane, or the Lane Cove and Cross City tunnels in Sydney.
Transurban’s Scott Charlton made the point in a KGB Interview earlier this month that his group liked the network approach, with very long roads, lots of optionality and lots of connections. BrisConnections and RiverCity, he said, were expensive tunnels with little opportunity for expansion.
‘’They’re small connections even though they’re big, capital-intensive projects so they’re expensive to operate,’’ he said.
What he didn’t say, but could have, was that building short roads – Airport Link is 6.7 km long and contains 5.7 km of tunnels – as privately-financed toll roads requires heroic assumptions about the amount of traffic they will carry to justify the amounts of capital required. As with all the failed toll road projects, the assumptions for the BrisConnections project were extremely optimistic but proved completely unrealistic.
The very structure of the tender processes for awarding toll road concessions, of course, encouraged overly-hopeful traffic forecasts by developers and promoters who would then on-sell much of the traffic risk to investors, including retail investors, on terms that effectively embedded that optimism within the capital structures.
Airport Link opened last July but its traffic volumes in recent months have been less than a third of those forecast in its business plan. Given that it cost $4.2 billion just to construct Airport Link that kind of shortfall was always going to spell disaster for those who had effectively capitalised those expectations into the funding for the project.
There is nothing wrong with Airport Link as an important piece of public infrastructure that is the centrepiece of Brisbane’s road transport network, other than the way it was funded.
That insight, which must have dawned on them quite early in the piece, has come too late for the group of banks that financed the project and that appointed voluntary administrators from McGrathNichol today.
BrisConnections was one of the early casualties of the financial crisis, which caught its three-tranche-instalment midstream and ultimately forced its underwriters, Macquarie and Deutsche, to let the instalment holders of the hook by standing in their shoes and providing the funding they had committed to. In Macquarie’s case it was effectively getting something of notional value in exchange for a bridging loan it had extended to BrisConnections.
Macquarie’s still there, with about 46 per cent of the probably valueless equity but also a big slice of the $3 billion or so of bank debt which it acquired at a discount from some of the original lenders, presumably in an effort to organise some kind of debt-for-equity restructuring of BrisConnections’ balance sheet. It may still be able to use its interests as leverage in any reconstruction of BrisConnections.
The BrisConnections board, which has been trying to put its own survival plan together since last November, had tried to convince the lenders to keep the group afloat by foregoing some of the interest on their loans (presumably in the hope that traffic would pick up over time) but self-evidently wasn’t convincing enough. With a need to sign off on the group’s half-yearly accounts looming, the directors had no sensible option but to call in the administrators.
CityLink and some of the Sydney toll roads now owned by Transurban would suggest that the model can be a viable one if applied to the appropriate projects and based on reasonably realistic traffic assumptions. It is improbable, however, that anyone is going to provide the equity or debt for another toll road where the private sector investors are exposed to the entirety of the traffic risk.
BrisConnections runs out of road
Privately-financed toll roads require heroic assumptions about the amount of traffic they will carry. The BrisConnections miscalculation looks set to end the buiness model for now.
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