Abertis sees credit rating drop due to Spanish toll road demand

Spanish toll road investor Abertis and its French subsidiary SANEF have both had their credit ratings cut to BBB by Standard & Poors according to Reuters.

Abertis has a network of 1500km of toll motorways in Spain via 8 subsidiaries (59% of toll roads in Spain by length), and a minority stake in another 200km of toll roads in Spain. It also has a nearly 15% share of Portuguese toll road operator Brisa, and 25% ownership of RMG (company holding non-tolled concessions on two UK roads). It also owns or partly owns companies responsible for around 700km of Chilean toll roads, has a part share in concessions over 89km of roads in Puerto Rico and has a controlling stake in the concession of one road in Argentina.

SANEF has a network of 17570km of almost entirely toll motorways in France, in the north and east.

The reason given for the downgrade is “of volatility in traffic volumes experienced by its Spanish toll road network operators”

Interesting statistics from the press release:

- Average daily traffic declined by 24% between 2007 and 2011 on Abertis's Spanish toll roads;
- In 2012, S&P forecasts a further contraction by 9% on Spanish toll roads;

- This is driven by very high unemployment, weak economy;

- Abertis's Spanish toll roads have greater exposure to competition from untolled roads than similar roads in France or Italy.

- 80% of dividends in past three years originated from Spanish toll roads, with concessionaire Acesa (541km of road) contributing 70% of that. This decline will be partly offset by good performance on toll roads elsewhere, and expected tariff increases and cost savings.

However, S&P sees risks in the proposed acquisition of the Brazilian and Chilean toll road operators of Obrascon Huarte Lain (OHL) which includes over 3100km of roads in Brazil and around 340km of roads in Chile because it Brazil is:

-- An emerging economy, with a soft currency that could suffer  depreciation vis-a-vis the euro. 
-- A relatively dynamic regulatory environment in Brazil, where the bulk of the operations to be integrated are located. Unilateral changes to concessions are allowed in Brazil, although appropriate remuneration must be provided to the toll road operator to restore the concession's economic
balance.
-- A greater proportion of heavy vehicle traffic, which we view as more volatile than light vehicle traffic. Heavy vehicle traffic volumes account for more than 30% of total traffic volumes on the roads to be integrated, compared with 15% on average on Abertis' network.

On SANEF, S&P says:

Sanef operates the third-largest interconnected toll road network in France. Although the company is exposed to variations in traffic volumes, it benefits from a strong competitive position; favorable concession agreements, including yearly inflation-linked tariff increases; high profitability, and positive free cash flows. We consider the risk of acquisitions and diversification to be low. These strengths are partly offset by Sanef's high indebtedness, and its relatively rigid dividend policy.

Conclusion

Even a casual observer of Spain's economy can see the crash of property and construction dramatically affecting overall demand, and it appears far too many concessions were predicated on forecasts of demand that now look unattainable in the medium term.  Abertis may be big enough to hold onto most of what it has, but it is likely this sector will remain tough for some time, and there is pressure to have consolidation and refinancing so that such roads can be on a sustainable footing.  There is rumour that the Spanish government is considering how to address these problems, and it may even think about having some form of charges on existing roads.

Puerto Rico success in converting to electronic free flow tolling

I've written before about the privatisation of Puerto Rico's toll roads with Goldman Sachs and Abertis, and the plans to transform the territory's toll roads through improved maintenance and service standards.  The two roads involved are Highways 5 and 22. 

Businesswire writes about the success so far in introducing electronic free flow technology to two publicly owned highways.  PR-52 and PR-53.  The Puerto Rico Highway and Transportation Authority contracted Transcore as system supplier.

The PR-52 north to south arterial highway linking San Juan with Ponce, which includes five toll plazas, and PR-53 linking the south and east coasts of the island, with three toll plazas, were part of phase I of the project and were the first to transition. Previously rush hour wait times at high traffic toll plazas ranged from 15 to 20 minutes or more. Now motorists can pass through those same toll plazas at highway speeds, reducing some commute times by up to 45 minutes.

An obvious benefit of removing manual tolls.  Although the report indicated not only that cash lanes were converted to electronic free flow but new lanes were added for free flow - which honestly seems a little odd - true electronic free flow at highway speeds need no more lanes than the road has itself.

The project for conversion cost US$26 million and is branded AutoEspreso, starting with ETC lanes in 2004, and is expected to be completed by mid 2012.  Current ETC market share is 70% across all toll roads.

A key issue, much neglected, is how to deal with the "unbanked" population - people without bank accounts.  45% of the population of Puerto Rico is without a bank account, so 55% of motorists top up their toll accounts with cash over the counter.   Not the traditional direct debit/credit card model elsewhere, demonstrating the need for cash payment to be addressed.   Another innovation is ILR (In Lane Replenishment) allowing motorists to set up accounts on the spot with cash or credit/debit cards, or to top up their accounts (this might explain the "extra lanes" which are not exactly free flow, but provide essentially a retail outlet at the gantry).

The report indicates operational cost savings of US$2-US$3 million p.a. (presumably by eliminating manual toll collection) and reduced "leakage" (people getting free passage by toll booth collectors and thieving from toll takings) of US$10-US$20 million p.a..  I'm astonished that rather simple steps to address this are not being taken already.

Good on Puerto Rico for moving ahead on free flow technologies, especially at congested sites.  The scope for more such conversions is considerable, but the great lessons learned about Puerto Rico are around understanding the local market.  However, it's important to bear in mind the report was largely based on a press release from TransCore, it will be interesting to see any reports based on experiences of the public in Puerto Rico and perceptions of how they see service standards.

Puerto Rico toll road privatisation goes to Abertis and Goldman Sachs

I wrote in December last year, that Puerto Rico was seeking to privatize two toll roads in order to reduce the territory’s public debts and to finance the upgrade of the roads themselves

Now, Cygnus reports that a US$1.436 billion deal has been signed between the Puerto Rico government and an consortium called Autopistas Metropolitanas de Puerto Rico, LLC- which consists of well known Spanish toll operator Abertis (45%) and Goldman Sachs (55%). Second bid was submitted by a group composed of another Spanish toll operator, OHL Concesiones and Morgan Stanley.

According to Landline Mag, the deal for Puerto Rico’s toll roads ranks fourth in size in North America behind the $3.85 billion Indiana Toll Road lease in 2006; the $2.2 billion 407 Express Toll Route lease in Toronto in 1999; and the $1.85 billion paid for the Chicago Skyway in Illinois in 2005. Each of the top three toll projects involved a partnership between Cintra of Spain and Macquarie of Australia.

Full details about the PPP development and selection process are on the Puerto Rico PPP Authority website.

Highways 5 and 22 will be leased to the company which will finance, repair and operate the highways for a 40 year concession period.

The report says that the Puerto-Rico Public Private Partnership Authority gets an upfront payment of US$1.08 billion, and will invest US$56 million in what are described as “accelerated safety improvements” in the first three years to lift standards on the road.

The report also says the concession: “requires the selected consortium to conduct significant investments in the rehabilitation of said toll road. In addition, it must meet rigorous quality and service standards that will bring about recurring investment and will elevate these toll roads to world-class level with respect to paving, signage, lighting, vehicle flow, safety, and service and toll areas, among others. The winning consortium must also meet operation requirements resulting in safer and more durable roads.”

Improvements are expected to be fast as "During the first year of the contract, lighting, signage, off-ramps, toll plazas and landscaping are all set to improve, and over the next two years, paving projects, rehabilitation of elevated ramps and bridges and a system of alerts for drivers are expected to be put in place.Currently, just 50 percent of the lighting along the highway is functioning" according to David Alvarez, executive director of the Public Private Partnership Authority.

Caribbean Business reports other obligations on the new leaseholders include:

-  Building a bus/toll lane along PR-22 for bus rapid transit, to operate as a dynamically priced lane to maintain a high standard of service.  Revenue from this is split with the government;

-   Paying US$450,000 a year for Police patrols of the roads, and an additional amount of US$450,000 every seven years;

-    Tough service standards such as "potholes need to be repaired within 24 hours on a temporary basis and permanently fixed within two months, while spills need to be responded to within 15 minutes and dead animals removed within eight hours. The standards also call for zero graffiti, with responses required within eight hours."

Caribbean Business notes the revenue of the roads is around US$90-US$95 million p.a. indicating that the consortium will recover its investment less than halfway through the term of the concession.  Toll rates are frozen until 2014 and then increased capped to US inflation + 1.5% (which is apparently the average of Puerto Rico inflation over that of the mainland USA). 

All in all, quite a deal.  No doubt a win win for both sides.  The winning consortium expects it can make a healthy profit on the deal, all the while the roads will be upgraded and maintained, whilst the government gets some relief from debt.  Perhaps others have some lessons to learn from Puerto Rico?

Puerto Rico seeking to privatise toll roads

Bloomberg reports that the US territory of Puerto Rico has shortlisted four bidders for the privatisation of two toll roads on the island.

All four consortia are led by either Spanish or Brazilian road/infrastructure investors:

- Spain’s Abertis Infraestructuras SA and Goldman Sachs’s Infrastructure Partners II unit; 

- Brazil’s Cia. de Concessoes Rodoviarias; 

- Spain’s Itinere Infraestructuras SA and Citigroup Inc.’s Infrastructure Investors unit; and 

- Spain’s Obrascon Huarte Lain SA and Morgan Stanley Infrastructure Inc.

Puerto Rico's Republican Governor is driven by a US$3.3 billion budget deficit that it is seeking to close by retiring debt to reduce net interest payments.   The privatisation will be a concession to own, operate and maintain the roads for 40-50 years.  

The roads to be sold are the Jose de Diego highway (Highway 22) and Highway 5 which generate around US$90 million p.a. in revenue, but the key will be making sure the concessionaire actually manages the roads to a high standard rather than simply regards the tolls as a way to make money.

Once these concessions have been sold, more are to come.  Privately owned roads?  Yes.   They exist all over the world, and finally more and more administrations are coming to appreciate the money that can be made from selling highways, but also the innovation that it can bring.