PUBLIC ISSUE: Australian mutual fund boosts pikes

In North America investors holding equity positions in toll facilities have tended to adopt one of two corporate forms: the limited liability partnership (91-Express, Dulles Greenway, CA-125) or private company (Detroit-Windsor Tunnel, Ambassador Bridge, Adams Avenue, Camino-Columbia and several private ventures in the south).

In Australia they’ve been marketing common stock and mutual fund units for new pikes. The $1b Melbourne City Link project (inner city tunnel and elevated motorway) raised over $300m in Transurban City Link common stock which is traded on Australian stock exchanges. Another Australian innovation is heavy involvement by a mutual fund (or unit trust) called Infrastrastructure Trust of Australia (ITA) sponsored and managed by the Macquarie Bank of Sydney, which has put together the funding on the last 3 private tollroad projects in Australia to fly. ITA has taken a majority equity position (75%) in Airport Motorway the company with the concession to build the Eastern Distributor toll project, a $600m tunnel and depressed motorway from the airport to the central business district in Sydney, that is currently under construction and due for completion in time for the 2000 Olympics. ITA also has 50% of the equity of Interlink, the owner/operator of an existing toll road the M5, southwest of Sydney. This motorway has been operating for 5 years but is getting improvements and extensions.

ITA has investments (8% of the equity) in Hills Motorway Group, owner/operator of the M2, which opened late summer, in the northwest suburbs of Sydney (TRnl#13 Mar 97 p9, TRnl#17 Jul 97 p12), and nearly 10% of the equity of Transurban City Link in Melbourne (TRnl#2 Apr 96 p1, TRnl#14 Apr 97 p7).

The IGA was launched with a public offering of 300m units at c65c (A$1) each in July 1996, and though it has a charter (and name) to invest broadly in infrastructure including power, water, ports, it has put most of its money so far into the 4 toll projects in Australia’s two largest cities.

Infrastructure bonds, regardless of who issued them, were made tax exempt in Australia some years ago, encouraging a scale of private sector involvement in toll projects way ahead of anything that has occurred in the US. Indeed there was no need down under for contrived “public private partnerships” or “not-for-profit” corporations as favored by the US tax code, because simple for-profit toll businesses could borrow under the same tax rules. As a result tolling is almost entirely the province of business (with the exception of the old Sydney Harbor bridge, owned and tolled by the state of NSW). And in Australia it would be unthinkable to propose state infrastructure banks because in the 1980s two out of the six state governments were almost bankrupted, some leading businessmen went to jail, and governments were thrown out by electors, after the collapse of major state banks and the revelation of a massive ‘rort’ (Australian for rip-off, looting and general licentiousness.) Any politician suggesting a new state bank would be a made an instant laughing stock by political cartoonists.

With a number of major projects launched and the Australian federal government criticized for losing revenues it backtracked in 1996 and revoked the general tax exemption for new infrastructure bonds but a system of tax rebates gives investors some continued advantage — though in Australia there is no tax-exempt state or municipal sector as in the US.

ITA has already had its ups and downs. It started off up, the initial offering at A$1/unit being the subject of heavy demand, causing it to open trading in Dec 96 at A$1.40. In the northern spring it topped at A$1.55. 30 to 40c was lost early in the n. summer when newspapers hyped reports that the M2 Hills mwy was below projections. The pike started with a bit over 40k vehs/day which the media compared with a forecast 72k vehs/day, but that forecast was for the end of the first full year of operation, and it now doing over 50k and continuing to grow steadily, so it is not clear the project is doing too badly. But the M2 news was a reminder to the predominantly small investors in ITA that forecasts are forecasts. For a short time during the late Oct mini-crash of stockmarkets in Asia ITA traded below its issue price of A$1.00 but it has been in the range A$1.05 to A$1.20 as we went to press.

One benefit of public stock issues and mutual fund investments is a plethora of detailed public information about the projects in glossy stylish reports and prospectuses. (Contact Nicholas James, ITA 61 2 9237 4734 njames@macquarie.com.au)