M6 toll road up for sale: a good long term prospect?

According to the FT, the consortium of 27 banks and lenders which own the M6 Toll Road (including Crédit Agricole, Commerzbank and Banco Esparto Santo) have decided to sell the road to attempt to recover the £1.9 billion (US$2.76 billion) debt tied to the road.  The road is still managed by Macquarie Atlas Roads which holds 100% of the equity in it, although the beneficial interest is zero due to the underlying debt (which was subject to restructuring at the end of 2013). 

M6 toll road bypasses the M6 through Birmingham

The concession ends in 2054, so any investors will be looking at the long term.  They have to, since the road has yet to turn a profit, as the road average 48,000 vehicles per day, well below forecasts of 72,000 when the concession was let.  Yet growth has been significant as of late, with a 12.6% increase in traffic for 2015 over 2014.  This suggests it is not far from returning to its previous record demand of 55,000 per day in 2006 (although that still is insufficient to break even).  It cost £900 million (US$1.3 billion) to build in 2002 values and prices (around £1.3 billion (US$1.88 billion) in todays prices).

The road lost £28.6 million in 2014 (debts have simply been increased to absorb the losses on top of the capital cost for the construction).

As I wrote before, the project has been good for the taxpayer, as it is completely unsubsidised, debt is not backed by the Crown and Treasury still gets revenue from fuel tax paid through burning petrol and diesel on the road, without paying a penny for maintenance.  However, it is also likely that the 1p nominal drop in fuel duty since 2010, and the significant drop of wholesale fuel prices will contribute to some increase of demand and willingness to pay the toll increasing.

There is a modest campaign calling on government to nationalise the road and remove tolls to reduce congestion on the bypassed segment, but I doubt if the current Conservative government would be keen on bailing out private investors for a project for which there may be a buyer (given it is generally positive about tolls on roads that have a viable alternative route).

From an equity perspective, it would be justifiable for there to be some state contribution towards maintenance costs based on that revenue (and indeed revenue from vehicle excise duty and the HGV levy), but that would mean challenging Treasury's position that fuel tax is "just another tax on energy" rather than a tax that is generated primarily from using roads (unlike VAT).  There is little chance of any movement on that in the foreseeable future.

As an investment, it is definitely one for those willing to tolerate years of losses before seeing any success.  Tolls as they stand are around about at the yield maximising level.  Although it does not have electronic free flow tolls (but has a non-interoperate barrier based DSRC electronic toll system), there will be little appetite to address this while it continues to lose money.

Any investor will be hoping that economic growth generates more demand so that eventually the road can reach break even (given the "hope for a government bailout" option is almost certainly not going to happen under this government and the next general election is 2020).  Given the greatest increases in traffic in the UK in recent years have come from light commercial vehicles (PDF) (partly because of the increase in deliveries due to online retail), it is unclear whether M6 Toll is able to take advantage of that traffic.   Nevertheless, as overall traffic demand in the UK is now at pre-recession levels, and oil prices look like staying relatively low for some time, the prospects may look brighter than they have been for ten years.

Still, after 13 years of losses, it would take a courageous and bullish investor to think that paying £1.9 billion for the road is worth it.

Macquarie Atlas Roads revenue up in June 2012 quarter

The Herald Sun of Melbourne reports that toll road concessionaire Macquarie Atlas Roads has stated that toll revenue across its investments increased 1% in the latest quarter, despite a weighted average toll volume reduction by 1.7%.  The headline results are reported by MAR as follows:

• In 6 months to 30 June 2012, weighted average toll revenue is up 0.9% compared to the same period the previous year.
• Autoroutes Paris-Rhin-Rhone (France) has seen a 0.5% reduction in revenue in the past 6 months compared to the previous, reflecting a 5.2% reduction in heavy vehicle traffic and 2% reduction in light traffic.  This was put down to the weak economy, reduction in workdays (negative for trucks, but the positive effect on cars was offset by poor weather) and high fuel prices.
• Dulles Greenway (DC) has seen a 8.3% increase in revenue in the past 6 months compared to the previous, with a 0.3% increase in total trips.  Revenue increased due to an average 8% increase in pricing on 1 January 2012 approved by the Virginia State Corporation Commission, indicating very low demand elasticity relative to pricing.
• M6 Toll (UK) has seen a 3.1% increase in revenue in the past 6 months compared to the previous, with a 0.6% increase in trips (although this involves a 1.8% increase in workday trips, but 3% reduction on weekends and public holidays).  The proportion of cash transactions (indicating more occasional users) increased by 1.7% of all transactions.  Revenue increased due to changes in pricing on 1 March 2012 and increased demand.
• Chicago Skyway (IL) has seen a 4.9% increase in revenue in the past 6 months compared to the previous, with a 1.1% increase in trips (comprising a 2.6% increase on workdays but a 1.6% decrease on weekends/public holidays).   Revenue and trip increases were driven by a 18.9% increase in heavy vehicle volumes, offsetting the 0.9% decrease in light traffic.
• Indiana Toll Road has seen a 7.7% increase in revenue in the past 6 months compared to the previous.  Traffic was up 2.6%.  Most notable is an 18.7% increase in heavy vehicle traffic paying using manual collection rather than account based transactions, this compares with only a 2.2% increase in traffic for all light vehicles, and heavy vehicles with accounts.  Toll rates were revised in 1 July 2011 which also contributed to higher revenues.
• Warnow Tunnel (Germany) saw a 7.1% decrease in revenue in the past 6 months compared to the previous.  This followed a 12.2% decrease in total trips.  The primary reason is that roadworks on the “competing” untolled route ceased in October 2011, resulting in a diversion back to the no longer disrupted untolled option.  Toll rate increases on 1 November 2011 and 1 May 2012 partly offset this reduction in demand, although it would not be surprising if the November 2011 increase induced a greater shift in demand as the tolled route was seen as even less competitive on price and travel time.

UK's M6 toll is a public policy success that should be repeated

In the dying years of the previous Conservative government, the Major government advanced the biggest private toll road project in modern history for the UK. It opened in 2003 (6 weeks ahead of schedule) and is the M6 toll. It is an eastern bypass of the busiest part of the M6 motorway that runs through the city of Birmingham, and was designed to relieve congestion by providing a fast route between the north and south. Its official website is here with all of the details of how it handles customers and the toll rates. 

Midland Motorways Ltd is the company that owns it and has the right to charge any toll it wishes on the 27 mile road. It had a 53 year concession to do so which started in 1998 when construction finally began. It is wholly owned by Macquarie Infrastructure Group. Tolling is manual, with a non-standard DSRC tag system which automatically opens the barriers (and offers a modest discount to users).

M6 toll in relation to other untolled motorways around Birmingham

The road cost £900 million to build, all private money. However, opposition to the road has come from two diverse sources. Motorists who want to use it for free, and environmentalists who perversely think a new road, not used much, is somehow worse than one heavily used.

Some anti-toll advocates claim the road has been a failure, because it is carrying far less traffic today than was anticipated. The Sunday Mercury claims that traffic level are now just 34,900 a day, compared to a peak of 54,700 in 2006. Forecasts had been for 74,000.  The same paper quotes the usage of the parallel untolled M6 at 200,000 vehicles a day, indicating the M6 toll has taken a healthy 15% off of the existing route.

The standard price for a car is £5.30 during weekdays, £4.80 during weekends and £3.80 overnight. Trucks pay up to a multiple of twice that, indicating that is the business being sought. Anti-toll advocates claim it would be better for the government to buy out the road from the owner (who has shown no interest in selling) and make the road toll free. Of course, the British government with public debt approaching 90%, is hardly in a position to buy a toll road and make it revenue free. Similarly, Macquarie appears in no hurry to bail out of an investment that has many years left to run, even if it is generating poor returns for now.   It blames the economic climate for poor demand and Midland Motorway Chief Executive Tom Fanning notes:

"It remains a matter of choice for the driver but over 40,000 drivers benefit from the ease and reliability of the M6 Toll every week day. If the M6 Toll did not exist, road users would instead be adding to the existing congestion on the M6".

Quite.

For the taxpayer, it is a thoroughly good deal. The state owned untolled M6 has less congestion because of those motorists willing to pay to use the toll road. The M6 tollway exists, as an option for motorists, and those who choose to use it have an option they didn’t have before. Nobody loses, and those seeking a free ride might ask why taxpayers should buy them a free road.

More peculiarly, the Friends of the Earth objected to the road because of its underuse, claiming building it was a waste, that the owners will seek to encourage development near the motorway to generate traffic and the money spent on it should have gone on better public transport. Given the money came from private investors, Friends of the Earth appeared unable to distinguish money that isn’t their own and taxpayer money.

The M6 toll is a success. New road capacity built without taxpayers’ money, financed privately, now funded by users. It will always be there, and if it is no longer financially viable, then the owners will have taken a risk that resulted in new infrastructure built, and whoever takes it over will face seeking to maximize revenue – which is a factor of getting the price right to attract the greatest number of users paying the highest yield. Finally, there are no pot holes or congestion on this private toll road, perhaps it is a lesson about the advantages of letting the private sector develop roads.

The lesson of this road is that the UK could do more.  Additional capacity at the Dartford Crossing, a new A14 bypass and dare I say, new tunnelled bypasses in London, all might be viable as tolled private roads if the political climate was to remove regulatory barriers to letting investors develop such routes.  However, in all cases such roads would be more attractive if people did not have to slow down or stop to pay for them.   Congestion in the UK indicates the public demand for road space is high, and tolling will be one way to moderate that demand on any new capacity built to ensure it is sustainable.