Friday, 5 August 2011

What happens when toll roads go bankrupt? They stay open

Reason Foundation's Robert Poole writes that privately owned toll roads can be a good way of transferring risk of failure, due to over-optimistic forecasts, to private investors.

According to Sign On San Diego he wrote:

He cites the $2 billion Clem Jones Tunnel project in Brisbane, Australia and the South Bay Expressway in San Diego County.  In both cases the heavy-duty bank investors get priority over all other claimants -- but even they get the short end of their original investment. Some get nothing for their troubles.  In both cases, the highway projects kept running through bankruptcy and reorganization.

I've written about both roads before (Clem 7 here and South Bay Expressway here), and indeed it shows that PPP concessions can be arranged to avoid government bearing the capital risks of such projects.  Of course, it works because some prove lucrative, such as Melbourne Citylink.

The full essay he wrote appear to no longer be available on the website quoted, but what I do have on the South Bay Expressway is what he was quoted in Sign On San Diego:

"Under the terms of the settlement, owner Macquarie lost all its $150 million equity investment. A group of 10 banks that held $363 million in debt settled for $210 million in new loans (58 percent of the previous amount) and a 68 percent ownership stake. The federal TIFIA (Transportation Infrastructure Finance and Innovation Act) program, suffering its first-ever default, wrote down its $172 million loan to $93 million, while gaining the remaining 32 percent ownership stake."  

and so

The best way to deal with that riskiness," he writes, "is to shift it from general taxpayers to sophisticated investors who are prepared to balance the occasional loss in exchange for solid long-term returns in other cases."

It's a lesson naysayers ignore when they look at the profits that toll roads can generate, presuming this is always the case.  Yet new routes carry substantial risks, risks that the demand elasticity of users is not that sensitive to time savings, but very sensitive to tolls, risks of economic fluctuations or indeed natural disaster, or dependencies on other projects (the Clem 7 problem).

However, what it requires is good contract preparation and negotiation.  Because this IS about ensuring risk transfer is maintained, because concessionaires will, inherently, want to shift risk onto the public sector for as much as possible.

No comments:

Post a Comment

Post a Comment