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Troll Roads

The effects of inflation are now really being felt in the community, I don’t mean inflation as some statistical calculation of the rate of price change for a basket of goods, I mean inflation as a feeling – ‘sh!t everything is expensive and I don’t see any relief in sight’. In financial markets we’re concerned with measures and statistics, in politics though, it’s the feeling of the public that really drives action.  Inflation (traditional measure) has fallen, but the issue for the public is that the absolute level of prices now are high, and inflation (absent real wage growth) slowing to 2-3% doesn’t change the status quo.

We’re now in the picking villains phase, supermarkets, electricity retailers….toll roads.  It’s not that any single one of these is the cause, and certainly not the location of the solution, but we (as a society, echoed and broadcast through the media) are picking out the singular villains. 

NSW Premier Chris Minns announced that the NSW Government was looking at toll road cost relief following the release of the Independent Toll Review, Interim Report.  Sydney Toll Roads are estimated to cost users $195 billion (nominal) over the next 36 years (Westconnex accounts for 52%).  Sydney has the highest concentration of toll roads and tolls are adjusted with inflation (e.g. the higher of 4% or CPI) – so the last two years have seen noticeable increases. Keeping in mind that the economic incidence of tolls is not uniform across the population, ultimately users are questioning the economic utility of the road system and the Premier is reading the political tea leaves. 

Transurban is the dominant player and holds most of the privately allocated concessions in Sydney – they either own the concession outright, or they hold majority ownership (Westconnex and Eastern Distributor).  NorthWestern Roads Group (QIC) owns NorthConnex and Westlink M7.  The concessions are not uniform, and they shouldn’t be thought of as regulated utilities.

Putting to one side the question of whether there should be change, and rather assuming it is decided there will be change, what choices does the Government have?  The high-level simple options are detailed below:

  1. Reacquire some or all of the toll road concessions

  2. Change the rules to limit the cost of tolls

  3. Subsidise the tolls

  4. Negotiate to alter the concession to limit the cost impact today.

Option 1 would seem extreme.  I haven’t tried to calculate the value of each individual toll concession, but to give some perspective of cost, a rough approach would be to look at the Transurban market cap.  Note Transurban has other toll roads in Queensland and Victoria, the United States and Canada – 9 of their 21 Toll Roads are in NSW.  Transurban’s market cap is approximately $41bn and has an enterprise value of $71bn (debt plus equity).

Option 2 seems like a legal nightmare and risks concerns around ‘sovereign risk’.  Toll concessions are set on a firm contractual basis and are the basis for the original investment.  Thus, there would likely be a strong basis for legal claim for compensation if there was an unilateral change in tolling arrangements Of all options, this one would seem to have the lowest expediency.

Option 3 has already been implemented with the NSW Government introducing in December 2023 a $60 toll cap as part of a cost of living relief strategy.  Subsidising tolls either via some form of subsidy (perhaps with means testing) would avoid any major legal dispute with private concession holders, and most likely result in a windfall gain for Toll Operators through higher (subsidised) patronage. For users and taxpayers, subsidies don’t result in any economic efficiency, simply a redistribution of cost from users to taxpayers.

Option 4. This would be an arrangement where Toll Operators might give up something today (eg lower tolls) to receive something in the future.   An example of this would be an extension of concession/s by a further 10 years.  This option aligns with the objectives of the parties – politicians have a relatively short-term imperative (4 year election cycles) relative to Toll Operator investors which operate on a much longer time horizon and can simply value any negotiated outcome such as a concession extension.  An example would be extending concessions by say a further 10 years, in exchange for a freeze in tolls for 5 years.  In this example, politically it would be seen to be doing something now, but from an investor standpoint any concession extension is likely to materially lift the NPV of each concession.  Whilst potentially politically expedient and definitely beneficial to the concession owners (as they wouldn’t agree if it wasn’t) , this option does nothing to improve the economic utility of toll roads.  

A variant of Option 4 would be, for the few roads with single direction tolls, to alter the tolls such that they are bi-directional.   Single direction tolls are simply a function of history, and date back to a time before electronic tolling where tolls were collected in cash – this necessitated a wide expansion of road (eg 8-10 lanes).  Back then, it was more cost effective to only charge the toll in one direction and save the cost of constructing a second toll plaza.  While this approach was cheaper, it does lead to an economically inefficient allocation of congestion, with single direct roads having substantially more traffic (and congestion) in the untolled direction.  However, now with electronic tolling, this should be relatively straightforward to implement bi-directional tolling.  Simplistically the original toll (in one direction) could be slightly more than halved and chargedin both directions.  This would collect the same revenue, but for existing toll users, lead to a small saving (at the cost to the welfare of those who only ever used the road in the free direction).    This change would improve the economic utility of those specific toll roads – but probably wouldn’t be a big political winner as the savings involved are reasonably small.  

Of all options, Option 3 and 4 are most likely, with Option 3 being the most expedient. More broadly, our view is that whichever option the NSW government chooses, toll road concession owners will be the net winner.  The market appears to have the same view, whilst in the days after the announcement there was a small fall in the Transurban share price, it doesn’t appear that the market thinks that Transurban will be a big loser from this review.

Source: Refinitiv Eikon


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