In 1995 an Infrastructure Sector Index was created on the ASX and within a brief time, infrastructure achieved recognition as a distinct asset class. By 2001, market capitalisation of the sector reached $18,557 million and within 12 months, this had increased to $25,632 million (Regan 2004). The early practice of forming diversified multi-sector portfolio funds (Infrastructure Trust of Australia 1996; Australian Infrastructure Fund 1997) evolved to a sector-specific focus within a few years with the listing of Macquarie Airports Group and the creation of Macquarie Infrastructure Group. The Transurban and Hills Motorway initial public offerings (IPOs) were the first single asset property vehicles. The market experienced considerable "churn" in the period 1995-2003 with few of the original companies in the sector surviving in the same form 8 years later.
Australian superannuation fund managers became the largest investor group in this asset class. The long-term investment horizon and low demand elasticity offer a good match for the fund manager's liabilities and yield requirements. In 2001, institutional investors accounted from 75.8% of listed infrastructure vehicles, a greater level than for other sectors of the ASX at that time (Regan 2004). Studies conducted in recent years suggest that listed economic infrastructure entities exhibit distinct asset class characteristics. In the relatively benign market conditions of the 1990s, these investments offered effective counter-cyclical properties avoiding the return volatility of other leading sectors such as manufacturing, transport, telecommunications and indirect property. Additionally, infrastructure offers different reactions to movement in leading economic indicators such as United States and domestic GDP, short and medium-term interest rates, inflation and stock price movements (AMP Capital 2006, Regan 2004). Recent events in capital markets may have removed some of the insularity to market volatility previously believed to be a characteristic of this asset group and infrastructure has revealed a vulnerability to delivery risk, high leverage and patronage risk in conditions of uncertainty.
The three recent Queensland PPP projects were large by Australian standards and commenced with the Southbank Institute (2004) to be followed by the North-South By-Pass Tunnel (2006) and the Airport Link project (2008). PPP projects are capitalised with high levels of debt which is well suited to long-term capital-intensive projects. Infrastructure is a specialised asset class possessing investment characteristics not commonly found in other asset classes. These characteristics include:
1. Stable, indexed revenue streams
2. Low variable cost structures
3. High earnings before interest tax and depreciation (EBITDA) margins
4. Low demand price elasticity (Regan 2004).
Infrastructure also features low demand price elasticity although recent evidence from toll roads suggests that this asset group may be the exception. These assets are well suited to high levels of debt which has the effect of lowering the sponsor's weighted cost of capital and improves return on equity. Several early PPP toll road IPOs employed stapled security structures and high leverage compared with other capital intensive asset classes such as the resources sector, direct and indirect property. The market appeal of these assets was their robust and indexed revenue stream, strong debt service coverage and the long-term investment horizon which matched the long-dated liabilities of pension and fund managers.
The important role that capital markets play in the capitalisation of these assets is demonstrated by the early toll road PPPs.5 Australia's first toll road was the Sydney Harbour Tunnel commissioned in 1988 and this was followed by Hills Motorway in 1999 and the Transurban City Link project in Melbourne which was commissioned in 2001. Transurban listed in the ASX in 2001 and undertook a program of expansion in recent years which included the acquisition of Hills Motorway in Sydney, an interest in other Australian toll roads and new projects in the North America. The Eastlink project was listed as ConnectEast Group in November 2004 prior to construction commencing in early 2005 and included completion risk in the parcel of risks transferred to buyers of its securities.
The Eastlink project in Melbourne was listed on the ASX by Macquarie Bank in 2004, ABN Amro followed with the North-South By-Pass Tunnel in Brisbane in 2007 and Macquarie Bank with the Airport Link project in Brisbane in 2008. The collapse in equity prices for both these projects in 2007-08 was partly a result of the sharp fall in stock prices and highly-leveraged infrastructure stocks in particular. Falling stock prices is also attributed to concern about traffic forecasts and high energy prices which adversely affect the patronage and financial economics of these assets. The veracity of traffic forecasts has been a problem for transport projects for many years and attracted wide publicity with the troubled Sydney Airport Rail Project, Brisbane's Skytrain, and the Cross-City Tunnel in Sydney.
In 2008, the recently opened Land Cove Tunnel and Eastlink projects also failed to achieve forecast revenue within the early ramp-up period. Recent research by Bond University suggests that 65% of security price contraction in 2008 for listed infrastructure motorway stocks is due to systematic or market risk factors common to the sector. The balance of the loss of value mainly reflects unsystematic or project-specific risk concerns (Regan 2008). Research by Standard and Poor's using 282 international transport projects identified systemic overestimation of patronage with land transportation projects (Standard and Poor's 2002, 2004). The average error rate was 30% (projects on average achieved 70% of forecast revenue in the fist 3 years of operation). Research in 2006 using a sample of 210 projects found that:
1. 25% of projects had an average forecasting error +/-40%
2. 50% of projects had an average forecasting error +/-10%
3. If the error is evident in year 1, it will continue during the revenue "ramping up" period (Flyvbjerg, Skamris Holm and Buhl 2006; Standard and Poor's 2004).
It is disconcerting that optimism bias has been a problem with transport forecasting for over 25 years despite significant changes in measurement methods and the benefit of precedent. The study suggests that forecasters are not learning from experience.
An alternative view is that PPPs are long-term investments and early stage patronage error does not necessarily mean projects are not viable in the medium to long term. The recent purchase of Sydney's Cross City Tunnel by Leighton Contractors, financed by ABN Amro, indicates that even at patronage levels around 60% of those originally forecast, the investment is viable to the new owners.
Few other PPPs are listed on the ASX as single asset investments although most are dependant on off-market bond issues and debt syndication for the limited recourse finance that they require.
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5 The Hills Motorway, Transurban and Sydney Harbour Tunnel projects were BOOT transactions and not implemented under State Government PPP policies. However, for these purposes, the wider definition of PPP is used and this includes outsourcing as well as the build own operate (BOT) and BOO procurement methods (Regan 2008).