Monopoly-like essential services with defensive, inflation-linked revenues streams are the archetypal infrastructure investments – even if there are obviously many different types of infrastructure now compared to the early days of the asset class.
In that sense, transport assets – like toll roads – with regulated or contracted revenue streams remain a bedrock of many investors’ infrastructure portfolios.
An independent review of tolling in Sydney, Australia, published this week, has demonstrated that unforeseen risks lurk in these types of assets, too.
As we have covered at length before, private toll road concessions in Sydney and Melbourne are almost entirely (with only a few exceptions) controlled by ASX-listed Transurban and associated consortia of institutional investors.
The WestConnex concession auctions, in Sydney, highlighted a potential problem – that Transurban’s incumbency position means it has access to information that other potential bidders do not, making it extremely difficult to outbid them when concessions hit the market.
Transurban and its partners have disputed this characterisation, it should be noted, but Australian state governments and the Australian Competition and Consumer Commission have begun to take notice.
The New South Wales Labor government that was elected in 2023 included in its policy platform a promise to instigate an independent review of tolling in Sydney, which is what was published this week. In the meantime, the Australian Competition and Consumer Commission blocked Transurban from bidding for the EastLink concession in Melbourne earlier this year over competition concerns, allowing the Future Fund to get a foothold in the Australian toll road sector for the first time.
The review backs tolls and the ability of concessionaires to recoup costs incurred via them, but it also found that “competition for concessions has not clearly been based on the level of tolls that bidders proposed to set”. Rather, it said, tolls have been set in advance by governments, with bids then framed on that basis.
If that premise is accepted, then it’s a fair criticism. After all, the promise of privatisation is that it should allow the competition of the free market to create efficiencies.
The report also called for greater transparency in the setting of tolls. It argued that projected rates of return for concessionaires were boosted by the risks they were perceived to have taken on, partly relating to negative traffic forecasts that “may not be realised”. With none of the financial modelling behind these agreements public, we cannot know how accurate that is – which some would argue is a problem in itself.
The end result: a recommendation for NSW to introduce networking tolling, whereby road users pay a charge to enter the toll network (which will vary depending on which part of the network a user travels on) coupled with a distance-based toll that declines as distance increases.
The report includes a response from NSW Toll Road Partners, a group representing toll road concessionaires, that raises doubts about network tolling, which would require redrawing the current contracts they all hold with the state government – and would inevitably involve some tolls decreasing (while others increase). This might create winners and losers different to the status quo.
Following that, the nub of the matter: the report recommends “a sound legislative framework… to operate as a backstop should negotiations [with concessionaires] be delayed”, which is an effective call for the government to legislate changes to already-signed contracts if the need arises.
This is really the nuclear option – and may raise concerns for all investors in public-facing infrastructure that might one day see questions over cost pass-through and social licence to operate leading to political pressure to reduce their agreed-upon returns.
The whole affair should serve as a warning that regulatory and political risk can emerge when you don’t expect it. Also, while monopoly like characteristics are an obvious attraction to the asset class, there are dangers in growing too big and too dominant in any one sector.