Disconnection in Queensland

July 4, 2008

Michael West, The Sydney Morning Herald

Once the biggest company in the world, General Motors is now valued by the share market at $US5.6 billion. Mattel, which makes Matchbox cars, has a market capitalisation of $US6.2 billion.

Things are changing. Not the structure of the latest toll-road float though. In spite of a rampant oil price, the recent business-model-backflip from Transurban, atrocious market conditions and, more specifically, the punishment meted out to externally-managed infrastructure vehicles, the float of BrisConnections is away with aplomb.

Snapped up by institutions, its retail component fully underwritten - $1.2 billion in equity has been put to bed.

You've got to hand it to Macquarie. MIG, MAP and MCG are dancing on their lows, RiverCity Motorway  the other Brisbane toll road - is wallowing at one-third of its issue price and the macramé magicians bob along and blithely rip out $110 million in fees upfront six years before there is sufficient toll revenue to fund a distribution for investors from cash flow. Le plus ca change.

Mind you, the touted 14% yield in year one is an eye-catcher - albeit as manufactured a yield as ever.

The Government for its part is thrilled to the back teeth. "We get $5 billion worth of infrastructure for $1.5 billion,'' exclaimed one ministerial apparatchik before dodging all meaningful questions for two days.

So far, this is all good. Investors accept the risk for a lush return, at least in terms of yield. The Queensland Government gets its urgently-needed Airport Link roads built quickly and defrays the costs to future generations. Motorists are relieved of congestion. That's good.

So what's the catch ... over the next 45 years of the lease? The catch, as usual, is disclosure.

Queensland is catching up to NSW and Victoria on transparency  lack of transparency that is. Flogging monopoly concessions, taxpayer assets, on terms undisclosed for large fees to bankers and consultants.

What are the oil price assumptions? No answer. Why are they being kept secret? No answer. Was there a comparative evaluation of state and other financing options before the tender? No answer. How much have consortium members made in political donations over the past two years? No answer.

Anna Bligh's Government has done a bit better than NSW, where contracts for the M2, M5, M4 (formerly MacBank and now Transurban) are still a secret. Like Victoria's Connect East project whose Mitchum to Frankston tollroad opened last weekend, the concession deeds are to be made public on financial close.

For BrisConnections, that is the end of this month when the company floats. These deeds don't reveal everything though.

While the same financial structure, the Macquarie Model, has been used for all the projects, the oil price has risen from $US20 when the M2 was constructed to $US140.

All the operators, however, sing from the same songsheet when it comes to the oil price. Yes, it was a factor in our modelling. No, it was not material. No, we are not going to reveal it. In any case, motorists save more on petrol by using our road so higher oil means higher toll income.

Apparently, all the operators and their government clients reckon the oil price won't be a problem for toll-road revenues over the coming decades. Why are they all so reluctant to stump up their numbers for public purview then?

The oil price assumptions are made in the traffic forecasters' report.

In the case of BrisConnections, the traffic expert is a mob called Arup. No one from Arup was available for comment over the past three days. The fellow who was apparently, solely, responsible was on holiday, according to the PR stonewaller.

He will be having a swell holiday with his $4.69 million fee. That's not bad for an opinion. Thank you, Mr and Mrs Taxpayer. We still won't tell you about our oil price forecasts.

The sensitivity with the traffic forecasters is quite an issue. Sydney's Cross City Tunnel went belly up and, more recently, the Lane Cove Tunnel project conceded it was running at a loss. The consortium took writedowns.

In both cases, the traffic forecasters were too optimistic. The critics say the forecasts are constructed around the financial model and the return required to get investors on board and take fees not the other way around.

From a trading point of view, investors have clearly found the 14% yield on BrisConnections irresistible. It is quite a feat from Macquarie and its float managers CSFB and JPMorgan to get this thing away without even having to resort to ABN Amro Morgan's 60-office retail distribution.

For the struggling Rivercity Motorway, the construction of the Airport link should deliver complementary traffic. In view of the mea culpa by Transurban though which capitulated to rising debt pressures last month and cut its distribution in a degearing initiative  it is surprising how well the BrisConnections float went off.

In his deleveraging and restructuring, Transurban's new chief Chris Lynch effectively repudiated the Macquarie Model.

Meanwhile, Macquarie simply pitches a higher yield, gets the $1.2 billion equity in the door, not to mention its fees. Breathtaking stuff.