Standard and Poor’s latest report makes good reading for tolling companies.
Few disruptions appear on the horizon for global toll road operators, with the US poised to become a better bet for major investment, according to ratings agency Standard and Poor’s (S&P’s) Global Ratings’ 2017 report, which rates toll road operators according to their ability to raise capital. The outlook is generally stable for business conditions and credit quality for toll roads worldwide. One positive exception is the US where the overall outlook is ‘positive’ as S&P expects traffic growth to increase slightly faster than baseline US GDP – which the company usually takes as the major variable in traffic growth predictions.
Many economic and industry-specific trends are considered in the 21-page report including economic conditions, demographic trends and geopolitical risks that affect the movement of people and goods. Although directly influenced by such trends, the report said ‘rated toll facility operators have generally performed very well, with continued strong competitive positions and resilience as an asset class’.
It said toll operators are well-positioned to manage risks that might arise to affect credit quality and, this year, predicts stable or improving, but still fragile, national economies will produce traffic growth in many (but not all) regions. It also found that toll road operators are benefitting from electronic tolling which has reduced toll evasion and provided better data on road usage as well as making payments quicker and easier.
However, it sounds a warning that over the next decade technological upheavals will likely challenge toll road operators. Trends such as ride-sharing and the possible growth of autonomous vehicles and other forms of transportation, could radically change traffic dynamics - especially for commuter roads providing free access for high-occupancy vehicles.
Equally, the increased use of GPS could lead motorists onto toll-free roads and the report notes that the growing acceptance of GPS and tracking devices could enable different toll-charging mechanisms. These include distance-based tolls or time-of-day charges which could expand ‘well beyond the boundaries of traditional toll roads’.
An increased reliance on cloud-based support systems may expose users and toll road operators to cybersecurity threats while the increase in fuel-efficient and electric vehicles will reduce government intake of fuel taxes, which, in turn, will force many agencies to adopt other funding mechanisms. But, according to the company, “these technologies will take a long time to become common and will require close coordination between governments and toll road operators. In many cases, they’ll also necessitate fundamental changes in concession agreements that were structured on existing toll charge mechanisms.”
For the US market, the report highlights continued economic expansion, low fuel prices and growth in US vehicle-miles travelled as providing higher traffic volumes for toll road operators.
In addition, president Trump’s focus on infrastructure development with more private sector financial input and responsibility, points to increased opportunities for toll road operators.
Canada
Canada’s outlook is a mixed bag, with lower than expected traffic volumes for some operators but continued growth for the major Toronto-area toll road operator, 407 International. The company is reported to have ‘enjoyed strong traffic growth of 4.5% in the first nine months of 2016’, reflecting the ‘robust economies’ surrounding the road; lower gas prices and an increase in traffic following the opening of an extension in the Greater Toronto region.
According to the report, Canada’s provincial governments are shying away from new volume-based toll-road projects and are expected to continue procuring new road and bridge projects through public-private partnerships (PPPs) in which governments retain market risk. Examples include the Highway 407 extension phase 2 and the $3.5 billion George Massey Tunnel Replacement project in British Columbia.
In Central and South America, Colombia stands out as having good investment opportunities thanks to its ongoing 4G infrastructure upgrading programme. The report says there is potential in Argentina, where the government has stated its aim to “foster investments in transportation infrastructure”. In both Brazil and Mexico, activity in new transportation concessions, or P3s, is expected to be ‘very limited’ with both countries predicted by the report to see only low or marginal traffic growth.
Europe
Within Europe, terrorism and Brexit negotiations for the UK to leave the European Union could affect government investment in infrastructure, as well as the ability of private firms to raise capital. In particular, the report identifies political populism and nationalistic, anti-immigration views or protectionist measures as creating the potential to raise barriers to international trade and disrupt investment. The report goes on to say “this risk would manifest itself through disruption in traffic levels from security threats.”
Also, it said a prolonged period of low inflation might cap toll increases while acknowledging that the private sector appears to have solid concession contracts ‘that firmly set the remuneration mechanisms, despite attempted political interventions’ to roll back agreements.
In France, it said attempts to freeze tariff increases and cap profits of large toll road operators have resulted in compensation payments to the operators. On that basis, it expects significant changes to existing contracts would be difficult due to the compensation mechanisms or financial equilibrium principle within the various contractual structures - attesting to the stability of the European toll-road regulatory framework.
Asia Pacific
The Chinese government’s investment in transportation infrastructure to support economic growth suggests that the toll road industry will maintain good momentum up to 2020. The government plans to spend about US$240 billion to construct 30,000km of highways during this period, extending total mileage to 150,000km by 2020. As a result, S&P predicts “significant capital expenditure in expanding provincial toll road networks, particularly in central and western China.”
Large transactions and merger and acquisition activity are expected to dominate the Australian market, according to the report.
Overall, the Asia-Pacific toll market should remain stable mainly “because many toll road operators in the region are partially or wholly government-owned and our ratings on them benefit from that relationship”. Operators should continue “as relatively resilient and well-positioned to manage risks to credit quality in the medium term.”
