11 March 2014
Major Road Projects Conference
A financiers perspective of toll road analysis
A financier’s perspective of toll road analysis 2
Consulting firm specialising in the financial analysis of infrastructure projects
Involved in virtually all Australian PPP bids
Through our London office we have significant exposure to North American
and European infrastructure transactions.
A financier’s perspective of toll road analysis 3
Have a sullied reputation – why?
As an asset they are an essential piece of regional and national infrastructure
so where is the industry going wrong?
Overview of todays presentation
Toll road credit 101
A financier’s perspective of toll road analysis 4
As an Australian Project Finance banker I spent three years losing toll road bids
and looking at winning assumptions
Cross City Tunnel – losing bid
Cross City Tunnel – syndicated participant on winning bid
Lane Cove Tunnel – losing bid
Lane cove Tunnel - syndicated participant on winning bid
Western Sydney Orbital (M7) – losing bid
A financier’s perspective of toll road analysis 5
There is an art to optimising a bid but fundamentally, for capital intensive projects
like toll roads, the situation is best described as a “cost-of-capital” shootout. “The
consortia with the lowest acceptable returns at the end of the day will have the best
chance, all other things being equal…”
Financially the best outcome for government is from the party who is able to
‘contribute’ to government funds the most on a comparable risk basis to other bids.
The bid that can free up enough surplus cash and achieve the lowest acceptable
For a toll road the drivers of this are:
Cost to build and operate
A financier’s perspective of toll road analysis 6
From an engineering and operational perspective toll roads are fairly boring!
Tunnels and bridges make it more interesting of course…
But patronage risk is dynamite!
It is historically significantly over-estimated
‘Ramp-up’ takes longer to achieve (and that is to a lower steady state)
Alternate routes are not as unattractive as planned
Irrational negative public perception does not align with modelling
Until recently the uptake and effectiveness of e-tags was a major sticking point
A financier’s perspective of toll road analysis 7
Design and technology risk
How does a banker look at a toll-road?
A financier’s perspective of toll road analysis 8
Construction broken down into:
Civil works (bridges etc.)
Lighting, safety and monitoring systems
Takes longer to build
Costs more to build
Built to spec
Ability for staged opening
Experience of parties
Cost of materials and labour
Scheduling and logistics (earth moving etc.)
Toll road credit 101 – Construction
A financier’s perspective of toll road analysis 9
Toll road users are below planned
Ramp-up takes longer than expected
Mix of commercial (heavy) versus passenger (light) traffic
(higher costs/different peaks)
• Time value of money, daily and annual profile…
• Signalling, on/off ramp gradients, lane changing…
Network modelling algorithms
Interface with existing infrastructure
Performance of alternate route choices improve
Alternate travel options become available
Toll road credit 101- Patronage
A financier’s perspective of toll road analysis 10
Doesn’t satisfy planned volume
Costs more to operate and maintain
Tolls are not collected accurately
Doesn’t integrate with existing infrastructure properly
Can’t satisfy a staged opening
Experience of Construction and Operating parties
Lanes, location, length and gradient of ramps
Monitoring system not proven in given
Ability to recognise local plates
Interfacing with electronic tolling systems
Processing system volume, speed, interface with traffic databases
Toll road credit 101 - Design and technology
A financier’s perspective of toll road analysis 11
Right to access the land and operate a toll road
Control over the circumstances when Government can step in versus
Ability to pursue users for unpaid tolls
Interface risk of Major Contracts
Toll road credit 101 – Legal
A financier’s perspective of toll road analysis 12
Storm water drainage
Impact on surrounding wildlife as a result of:
Displacement of people
Impact on local quality of living
Toll road credit 101 - Environmental
A financier’s perspective of toll road analysis 13
Patronage modelling can only interface with the financial model at a simplistic
level – especially when flexibility is needed.
A bank’s perspective is often hard to understand from a developer or patronage
Patronage modelling is:
Non-transparent – unfamiliar software
Complex algorithms/neural network – don’t marry well with low cost debt
Dependent on computationally intensive convergence
Tough to calibrate accurately
Dependent on rational behaviour and an individual to value utility / time.
Characterised by a wide range of assumptions
Educated unbiased independent peer review is underused
Not well documented/widely understood differences between approaches
Localised – Melbourne has a different model to Sydney…
Patronage modelling – banks perspective
A financier’s perspective of toll road analysis 14
Bain (2009) showed the mean ratio of actual to modelled demand is 77%. This
means that on average a given toll road attracts 23% less traffic than planned.
The same study showed a staggering 96% mean ratio for un-tolled roads.
A quarter of a sample of 183 tolled roads had errors ± 40%.
These errors are not “symmetrically distributed” – there is a strong tendency for
planned demand to be higher rather than lower than actual. A strong optimism
bias can be rationally hypothesised, why might this happen?
Short term financial reward
Patronage modelling - the facts
A financier’s perspective of toll road analysis 15
Bain R, Error and optimism bias in toll road traffic forecasts.
Figure 1, 2005 Full data-set forecast performance distribution
Under estimatedOver estimated
A financier’s perspective of toll road analysis 16
A failure for equity investors and lenders no longer willing to invest in this asset
class without substantial changes in risk allocation
Cross City Tunnel A$300 million loss
Lane Cove Tunnel A$1 billion loss
East Link A$770 million loss
Clem7 A$1 billion loss
Airport Link A$800 million loss
A success for taxpayers
Delivered on time or ahead of schedule
At tolls cheaper than what would otherwise be expected given realised traffic
volumes and full cost of the asset
A financier’s perspective of toll road analysis 17
So what analysis to banks like to perform?
Run extensive, seemingly simplistic scenarios - patronage consultants
generally don’t like this.
Breakeven x% reduction
To maintain a flat DSCR of 1.00x
Minimum LLCR of 1.00x
Patronage stress on the ramp-up profile
Seemingly over-conservative cases such as six months no revenue part way
through the project and complete re-finance failure
A financier’s perspective of toll road analysis 18
Patronage scenarios from network modelling overlaid with fairly simplistic
time based linear adjustments to Bank Base Case and Bank Downside Case
Less people use it
Take longer to ramp-up to the steady growth state
Time over run (revenue delayed)
Cost over run
Increased operating and maintenance costs
Performance of revenue (cash) realisation (monitoring to collection)
Critical analysis - Scenarios
A financier’s perspective of toll road analysis 19
From the outset have a financial model constructed to a standard that is in line
with the rest of the project submissions and documentation. The project needs
this to be able to make better decisions with confidence.
This is not the time for ‘my first model’ or for somebody to be learning on
Choose a methodology such as SMARTTM that favours:
Work with a model auditor who can add value throughout the process to keep
the final model audit costs to a sensible minimum.
How can you have great analysis?
A financier’s perspective of toll road analysis 20
Work with a financial modelling partner
Design your financial model before you start building it
Layout model clearly
Separate inputs, calculations and outputs
Focus the detail and flexibility around the key drivers
• Seasonality, daily profiles, peak / off-peak / shoulders
Toll rate and escalation
Build in integrity checks and commercial signals
How can you have great analysis?
A financier’s perspective of toll road analysis 21
Tony Abbott has declared that he wants to be “the infrastructure prime minister”.
Major projects like Badgerys Creek and high speed rail, will require extensive
road and rail infrastructure for passengers, freight and heavy commercial traffic –
over the time it takes to progress these projects credit markets cycle.
I believe we should expect to see more patronage risk style projects needed to
be financed and for the market to move slowly away from pure availability based
regimes to more innovative mechanisms such as staggered phases with different
levels of government guarantee.
Furthermore, I think international banks and credit agencies are likely to lead the
way on this.
Toll road’s – the outlook
A financier’s perspective of toll road analysis 22
Nick Crawley, Principal
02 9229 7401
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