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.

News briefs - Indonesia, North Carolina, Washington DC

Indonesia - Jakarta to get six new urban toll roads

Jakarta has serious congestion, which is estimated to cost RP46 trillion (US$4.7 billion) a year in delays, wasted fuel and vehicle wear and tear, with fuel being the biggest cost (no doubt because the value of time in the city is relatively low on a per person basis).  The city is developing bus rapid transit, has plans for a metro and is widening existing corridors, but its most ambitious plan is to build six new urban toll roads.  The intention is for them to be tolled, not just to pay for the high capital costs, but to manage demand, so that the inexorable demand for road space is tempered by having to pay for it.

However, it is controversial as the Jakarta Transportation Council, an advisory body, says it will have "no positive effect" on traffic, according to the Jakarta Post.   The projects will cost RP42 trillion (US$4.1 billion).  Objectors say it will encourage sprawl and pollution, harming the environment and public health, although it is entirely plausible that the roads could be priced and managed to minimise this.  Some argue that as the new roads are being built above existing railways or roads, that the railways should be expanded instead.   The project was advanced by the previous Governor, with one argument made that the city has a small proportion of land dedicated to roads at 6.2%, when the target is 12%.

I'm hardly in a position to judge on this, particularly as it is easy for middle income people in wealthy countries to pontificate about what is good for developing countries, and also because I am technologically neutral.  Roads are simply transport corridors, and as long as they are priced correctly, and the corridor managed well, there is no reason for them not to be positive for public transport, and to allow road space on the routes bypassed to be given over to pedestrians, cyclists, carts, and to properly regulate parking.

The six roads are shown on this Jakarta Post map:

The first phase of construction will include the 17.8-kilometer route from Semanan, West Jakarta, to Sunter, North Jakarta, and the 11-kilometer route from Sunter to Bekasi.

The second phase includes roads from Duri Pulo, Central Jakarta, to Kampung Melayu, East Jakarta, and from Kampung Melayu to Kemayoran, East Jakarta.

The third construction phase will link Ulujami, South Jakarta, to Tanah Abang, Central Jakarta and the fourth will connect Pasar Minggu, South Jakarta, to the Casablanca area in South Jakarta.

The state company PT Jakarta Tollroad Development is owned by multiple local companies, "city-owned enterprises collectively hold the majority of shares in JTD, namely, PT Jaya Real Property (22,5 percent), PT Pembangunan Jaya Ancol (20 percent), PT Jaya Konstruksi (16 percent), PT Pembangunan Jaya (9 percent), PT Jakarta Propertindo (7 percent) and PT Jaya Land (3.5 percent)."

Jakarta is also planning an electronic road pricing system to manage congestion, with legal approval for introduction reached in October 2012.   I will write more on that later.  However, I would hope that before that happens, that all toll roads in the city get converted to electronic free flow systems, which will be necessary for any form of congestion pricing in any case.

In any case, the Jakarta Post reports that it is now up to current Governor, Joko “Jokowi” Widodo, to decide on starting any of the new toll road projects.   

North Carolina toll road faces double billing controversy

According to the Charlotte Observer:

At least 800 drivers on the Triangle Expressway have been double-billed this month, paying electronic tolls twice for every trip, the N.C. Turnpike Authority says.

The problem is fairly obvious, motorists travelling with two tags both of which are getting recognised and generating a bill.  The NCTA has its own "Quickpass" as its product, but some motorists also have the EZ Pass tag, used across 14 states.

You see the Expressway is fully electronic free flow, but as of the start of 2013, it has been interoperable with EZ Pass, so there are customers with both units, and so are being billed twice.

The NCTA blames motorists for this, because the terms and conditions for its contract with customers using Quickpass is for only one tag/sticker to be in a vehicle at any one time.   However, as true as this may be, the system should have avoided this problem in its architecture.

For the system architecture should not allow two chargeable events to be attributed to the same number plate.  This isn't hard to manage, as the system ought to reconcile these sorts of events (and indeed this will become more common over time), so that while motorists should only use one device at a time, the system should not charge an identifed vehicle more than once in a specific interval.

Washington DC sceptical about congestion pricing but it's hardly surprising

There have been various reports of what is essentially a public opinion survey about transport policy, that came to the conclusion that people in Washington DC are most accepting of tolled lanes, and least accepting of distance based road pricing.  Really? It took money to figure that out?  The Brookings Institute research is interesting in as far as it shows considerable support (60%) for toll lanes - but beyond that it isn't anything that any expert in this area could not have expected.

There have been surveys about road pricing for many years in many countries, and the conclusion is pretty much always the same. The majority oppose paying more to use existing roads, and the more complicated the proposal they more resistant they are.   They like it better if more money (whose?) is spent on more public transport and other alternative modes.  

The acceptance of toll lanes is obvious, as they are optional.  The lesser support for some sort of cordon based pricing is because it would not be, and distance based pricing is always clumsily sold as some sort of tracking system, and there are no explanations made of how much people pay now with fuel taxes.

The errors in this work look like (from the reports) to be:

1.     It provided details with little rationale as to what the merits of them are;

2.     It gave people little confidence in what any of the options would deliver (why would anyone support paying more without understanding or believing that conditions could improve);

3.     It provided options without reference to replacing the gas tax;

4.     Those undertaking the survey appeared to be unable to answer core criticisms of the public, such as thinking that a cordon creates congestion just outside it.

It was undertaken using public forums.  Maybe the 20th century would like to get it survey technique back.  The busiest people or those with the least flexibility are unable to participate in such a manner.

Now I am pleased these issues are being discussed in the United States, it has taken long enough, as only eight years nobody talked about pricing existing roads.  However, it would be good for the debate for surveys like this to not occur.  

Are surveys undertaken about taxation policy, health policy, how to manage the electricity or telecommunications networks?  No.  Why would anyone presume that the general public - who can attend such meetings - are sufficiently well informed to react intelligently to what is presented to them?  More importantly, why aren't the lessons learnt from those who have tried to do this actually being applied in describing options and managing such processes?

Washington Examiner damns plan to "nationalise" Dulles Greenway

In a local editorial, the Washington Examiner describes plans to socialise/nationalise the Dulles Greenway as one that will "saddle Virginia taxpayers with this white elephant".  The plan comes from Virginia House Transportation Committee Chairman Joe May, (R-Leesburg).  So yes it is a Republican wanting the government to take over a private business, ostensibly to subsidise the users of that business. The report states the road loses US$25 million a year, which would effectively be transferred to taxpayers.  

The private owner, Macquarie Atlas Roads, would of course seek to maximise the price that it would extract from a willing buyer, and the continuing unprofitable nature of the road would be hidden in the state's public debt and general taxation.

It all seems absurd.  The whole point of private road concessions is to transfer risk, which is what has been done in this case.  The road has been built, the tolls are relatively high, but increases are capped by the concession, and the continued losses are born by the investors.   Far better for the motorists on the road to be effectively subsidised by the private owners (which is a transfer into the state from foreign investors) than from taxpayers.

ead more here: http://www.charlotteobserver.com/2013/01/31/3823197/nc-turnpike-authority-double-bills.html#storylink=cpy

News briefs - Australia, China, Indonesia, Macquarie Atlas Roads, Texas, UK

Australia - New South Wales government denies interest in congestion pricing

AAP reports that NSW Roads Minister Duncan Gay has said that the State Government has ruled out a congestion tax, but is considering implementing distance-based tolling.   Certainly it is clear that NSW is considering reforming toll roads around Sydney so that pricing is more closely related to a proxy for distance, but it is less clear as to whether the state is interested in a wider roll out of distance based charging to replace ownership taxes.

China - Standard & Poors affirms BB- rating and negative outlook for toll road investor Road King

Reuters reports that property and toll road investment company Road King maintains its rating with with S&P.  Property is the dominant factor for the relatively low rating and negative outlook.  On toll roads it reports a more optimistic side to the firm:

Road King's stable operating performance and the sizable cash flows from its toll road business support the rating. The company currently derives more than 80% of its toll revenue from its expressway projects, including the Longcheng Expressway it acquired early in 2011 and which commenced operation in July 2012. We expect Road King's toll road business to continue to provide stable cash flows in the next one to two years, underpinned by its stable profit sharing ratios. 

Indonesia - Longer toll road concessions to be allowed

Tempo Interactive reports that the Indonesian Government is to change the law to extend the maximum toll road management permits for private companies from 40 to 50 years.

The Jakarta Post reports that a 73km toll road is to be built in North Bali from Kuta to Seririt at a price of US$872 million.  The project is intended to open up a wide area for tourism and development, and is linked to plans for a new airport at the north of the island.

Macquarie Atlas Roads posts half year loss and further asset devaluations

Business Spectator reports that Macquarie Atlas Roads has posted a loss of A$75.2 million (US$77.7 million) in the six month to June 30 2012.  This is an improvement on the A$106.4 million (US$110 million) loss for the same period last year.

The A$33.4 million fall in the value of investments comprised a loss of A$26 million on the Autoroutes Paris-Rhine-Rhone (APRR) toll road in France compared to a profit of A$11 million in 2011; a loss of A$7.4 million on the Dulles Greenway toll road in the US compared to a loss of A$10.8 million in 2011; and no loss on the Chicago Skyway toll road in the US compared to a loss of A$17.5 million in 2011.

There was no loss booked for the Chicago Skyway in the first half of 2012 because the carrying value of the road had been reduced to nil.

The Australian reports that the company expects to release a dividend next year.  It also noted:

Macquarie Atlas Roads said the increased losses partly reflected losses on interest rate swaps and higher debt-related amortisation.

Macquarie Atlas Roads said proportionate revenue from its roads rose by 1.4 per cent to $330.8 million in the first half of 2012 despite a 1.9 per cent fall in traffic volumes.

Revenue was boosted by toll increases.

"Macquarie Atlas Roads' portfolio of toll roads has continued to generate positive revenue and EBITDA growth during the period despite difficult economic conditions in Europe and the US," chief executive Peter Trent said.

Texas - new toll road to have highest speed limit in US

The Texas Weekly reports that Texas State Highway 130  (which will be a toll road) will have a speed limit of 85mph (about 137km/h), which will be the fastest in the USA.  Some advocates of private toll roads have promoted the idea that roads could be built to enable relatively safe driving at faster speeds, and motorists could be charged the price to allow it.  In Texas, it looks like it will happening, albeit with an increment of only 5mph.

Meanwhile, the Statesmen argues that the new speed limit is partly about enhancing the viability of the toll road, which includes lowering the speed limit on the existing highway from 65mph to 55mph, even though it will be safer (because the new road will be between the north and southbound lanes of the existing lanes).   Is it a conspiracy to make the new lanes more likely to be financially positive or just coincidence?

UK - Dartford Crossing manual tolling to be gone by 2014

The Brentwood Weekly News reports that the UK Government has announced that it is spending £25 million (US$40 million) to undertake a range of improvements to the tolled Dartford Crossing routes, including removal of manual toll booths as part of a programme to make the highway a fully electronic free flow tollway.  The route is notorious for being a bottleneck in both directions, in part due to the queues at toll booths.  The UK Highways Agency is hoping to have removed the manual toll booths by October 2014.

News briefs: Australia, Florida, Mexico, UK, Virginia

Australian Federal Opposition suggests more tolls

Australia's Federal Shadow Treasurer (Opposition Finance spokesman) Joe Hockey (LIberal Party) has suggested to the Western Australian State Government that it should consider tolling, pointing out how successful it has been in New South Wales.  According to the Australian Broadcasting Corporation he said:

"From a federal government perspective there is limited money available for infrastructure"

implying that states that adopt tolling are more likely to be considered sympathetically for future funds compared to those that do not, presumably because tolling states have shown greater willingness to get motorists to pay directly for their infrastructure.

Both major parties in Western Australia continue to oppose tolls, but how long they can do so is questionable.  There are no toll roads in Western Australia, but there is a growing number of major highways around Sydney, Melbourne and Brisbane with tolls.  Given much of Australia's highway infrastructure is partially funded from the Federal Goverment paid for by fuel taxes, the inevitable question will be whether states which don't seek to recover whatever they can from tolls should be entitled to the same share of revenue from that tax.

Brisbane's new toll road impresses - but it's free for now

Finally, Brisbane's long awaited AirportLink toll road is opened and media reports indicate that motorists are impressed with the time savings it offers.  That bodes well, the more that try it out for free, the more who will think it is worth paying for, so the owners are hoping.  I profiled the road before, noting that the first month it will be completely toll free, and the subsequent two months it will also be free but users will need to have signed up for an account.  After that, tolls will increase sharply in 6 monthly intervals.   Time will tell if this strategy works.  I suspect it will at first, but such rapid inflation in pricing will put people off too soon, and it may be wiser to wait for a year before making such significant price hikes.   Curiously one report states people queued for "hours" to be the first on the new road.  Does the prospect of a new toll road generate that much excitement and patience elsewhere?

Meanwhile the HeraldSun reports that Brisconnections is trying to avoid the mistakes made around the nearby Clem7 toll tunnel, by being friendlier towards customers with better signage and clarity around speed limits (there was a higher than average level of speed fines on Clem7, with some violators claiming they didn't know the speed limit).

Florida to study shifting toll tariffs towards congestion based pricing

TV station WFTV9 reports that in Florida "Taxpayers are funding a study that could help set even higher toll prices during peak hours on the Florida Turnpike, State Road 528 and State Road 417". ..

The Turnpike Authority received a $400,000 grant from the federal government to study the concept in Florida's three metropolitan areas including, Orlando, South Florida and Tampa. 

The reason for the study is to manage demand on sections that are too expensive to widen, but there is local concern about traffic diversion.  Presumably the study should also consider lowering tolls at off peak times to counteract peak tolls, that is assuming toll revenue is adequate to cover infrastructure costs.  No information about the proposed study is on the Florida Turnpike Authority website.

Mexico - Libramiento de Matehuala highway has steady growth in demand

Standard and Poors affirms the BBB debt rating on the Libramiento de Matehuala toll road in Mexico according to Reuters.  The road is a 14.2 km long toll highway between Mexico City and Monterrey which bypasses Matehuala, on the San Luis Potosi-Saltillo highway.

The report continues:

For the 12 months ended June 30, 2012, traffic increased 4.1% due to the stable economic conditions in the country. Also, revenues grew 9.6% because of higher traffic and tariffs in line with inflation, and a favorable traffic mix, with trucks making up almost 60% of the vehicles on the road. We expect traffic to grow at an average rate of 3% throughout the term of the debt, which reflects the road's vital trade link between Mexico and the U.S. as part of the NAFTA corridor.

The report claims it requires minimal maintenance given its construction is in hydraulic concrete.  Demand is highly dependent on commercial activity and it faces toll-free alternatives.  It has been open since 2004 and carries around 8,579 vehicles per day (low for a toll road).  Tariffs are listed here (in Spanish) ranging from US$1.45 for a car to US$7.24 for the largest trucks.  The concession allows tariffs to be increased in line with inflation.

UK - Lukewarm reception for A14 toll idea

I wrote before about the UK Government's plans to help fund one of its largest highway projects with help from tolling.  It would be fair to say that enthusiasm for tolling is weak at best.  Local newspaper Peterborough Today reports that local businesses are concerned about tolling increasing their costs or that motorists will avoid the tolled route increasing traffic on local roads.   The local Chamber of Commerce head says it might be a "necessary evil".  Clearly there is a lot of work to do to convince people that accelerating a long delayed road project is better than not doing anything at all, but more importantly that the tolling plan envisaged wont make traffic worse.  The key will be to demonstrate that people can either choose to drive the existing route (in one form or another) untolled or have an improved route that is tolled.   Meanwhile, anti-road lobbyists the "Campaign for Better Transport" and "Sustrans" are opposed, because they don't believe in major highway improvements at all - suggesting rail freight improvements would be preferable and that building a toll road will induce additional demand.  It would seem that using pricing to manage demand is considered unacceptable if it means new capacity is funded by it.

Virginia - Dulles Greenway credit rating maintained

Owner of the Dulles Greenway, Toll Road Investors Partnership II, has had its credit rating of BBB- confirmed by Fitch according to Reuters.  TRIP II is 50% owned by Macquarie Atlas Roads.


Key points reported about the toll road (which is just over 20km long from the end of the Dulles Toll Road to the Leesburg Bypass in Virginia):
- From 2013 through to 2020 tolls can escalate annually at the highest of (i) CPI + 1% (ii) Real GDP, or (iii) 2.8% per annum;
- Year on year traffic increased 1.8% by May 2012, but tolls had increased by 6.7% in January 2012 resulting in a 10% increase in revenue year on year;
- This is only starting to offset a year on year decline in traffic since 2005, due to a combination of the economic situation and improvements to parallel routes.

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.