BrisConnections , the owner and operator of the 6.7km Airportlink M7 toll road, has gone into voluntary administration after its senior management failed to receive support from its lenders over its restructuring proposals. We believe this latest development in BrisConnections once again highlights the significant demand risks facing toll roads under a Public Private Partnership (PPP) model. Looking ahead, we believe that private investors could be wary towards taking on new PPP toll road projects as we expect Australia's medium-term economic prospects to remain poor. Such a scenario could propel the public sector to introduce alternative PPP models to help reduces the project risks to investors.
BrisConnections was seeking to reduce the interest on its loans - the concessionaire had about AUD3bn worth of debts when it was placed in voluntary administration - but its lenders, a syndicate of around 10 banks, did not accept this proposal. The AUD4.8bn Airportlink M7 toll road is the first expressway linking Brisbane ' s northern suburbs with Brisbane ' s Central Business District and Brisbane Airport, and BrisConnections held the concession to operate the for 45 years (2008-2053).
|Far Below Expectations|
|Airportlink M7 Toll Road Traffic Projections, vehicles per day|
We believe this latest development on BrisConnections once again highlight the significant demand risks facing toll roads under a PPP model. Despite a high level of sophistication in Australia's PPP market, traffic volumes have proven to be difficult to forecast for PPP road projects that rely exclusively on the willingness of commuters to pay. This is evident by the number of PPP toll roads failures in Australia - namely the Lane Cove and Cross City tunnels in Sydney, as well as the Clem7 tunnel in Brisbane (see our online service, February 28 2011, 'Clem7 Collapse Raises Brisbane PPP Sets Alarm Bells Ringing' and January 20 2010, Lane Cove Tunnel Owner Goes Into Receivership'). These toll roads had failed to stay afloat because of over-bullish traffic volume projections which did not take into account for potential downturns in Australia's economic cycle.
Similarly , BrisConnections had fallen prey to overly optimistic traffic volume projections. The concessionaire had been in negotiations with its lenders and key stakeholders over these restructuring proposals since November 2012, just five months after the AirportlinkM7 toll road opened. This is because traffic volumes on the AUD4.8bn AirportlinkM7 toll road were far below projections. The concessionaire had forecasted traffic volumes for the toll road to reach 135,000 vehicles per day in its first month of operations, but after seven months, the toll road averaged less than 50,000 vehicles a day.
Looking ahead, we believe that private investors could be wary towards taking on new PPP toll road projects as we expect Australia's medium-term economic prospects to remain poor. We expect the start of a major deleveraging cycle to undermine consumption in Australia over the coming years as a property market crash and a slowdown in the demand for Australian commodities could dampen the demand for passenger and commercial vehicles within the country ( see our online service, February 8 2013, '10 Year Forecasts - Q2 2013', Australia);. This could in turn dampen traffic volumes in Australia over the medium-term.
|Limited Upside To Traffic Volumes|
|Australia - Vehicle Sales (LHS); GDP Forecasts (RHS)|
Such a scenario could propel the public sector to introduce alternative PPP models that reduces the project risks to investors. This has started to take place in New Zealand. The New Zealand government is planning to launch the Transmission Gully highway project under a new PPP model, where the concessionaire of the project would not derive revenues from tolls, but from payments made by the New Zealand government (see our online service, November 27 2012, ' Politics A Risk To Rewards In First PPP Expressway ' ). This mechanism provides a fixed return to private investors by passing on the demand risks to the public sector. Other options include: a variable mechanism that guarantee the concessionaire a fixed return if traffic volumes fall below a certain level; or a pure Build-Operate-Transfer model, where the government secures financing for the project and the private developers builds and operates the project.