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Road privatisation should benefit the UK

A well-planned and targeted road privatisation programme in the UK is set to benefit road-users, the taxpayer and investors, according to Niall Millspictured), head of infrastructure asset management Europe at First State Investments. He says that the key is to strike the right balance between risk, reward and investors’ appetite for such assets…

We are still awaiting the details of government proposals but clearly a great deal of effort will be spent in balancing the needs of the public, sponsors, contractors, operators, as well as the financial community, who would be encouraged to provide debt and invest equity. In one model, taxpayers may have an opportunity to participate, on favourable terms, through a public subscription. Alternatively, infrastructure funds or consortia may invest directly, ensuring that adequate assurances or suitable legal protections are provided by the authorities as was the case when the energy and utility sectors were privatised. The key in either scenario, or indeed in any other structure, will be to have aligned interests and an appropriate allocation of risk amongst participating parties.

The proposed investment model is expected to be based on a regulated asset return (RAB) for existing roads. A similar model, which has worked well for utilities, has been copied in other countries over the years.

It has been typified by the UK water industry, now with over GBP100bn of new investment delivered since its privatisation in 1989. We have seen huge improvements to environmental standards, most notably river quality.

Not only has the government not needed to find GBP100bn of capital to support the water industry in the last 20 years, but even more importantly, consumers’ bills have benefited from a tough regulatory regime demanding ever greater efficiency from the water companies. According to the Water Services Regulation Authority (OFWAT), the privatised water utilities companies of England and Wales have delivered better cost savings to the consumer than their publically run peers in Scotland.

One of the key reasons for this has been relatively high capital maintenance costs in Scotland. Privatised water utilities in the UK also charge consumers less than the publically-owned counterparts in Continental Europe, according to Canadian government figures. Similar success stories can be seen in the electricity & gas sector, where privately owned but firmly regulated models have worked very well over more than twenty years.

While regulated return parameters for privatised UK road networks are still to be decided, we would expect that in the majority of cases traffic volume risk will be retained by the government as part of ‘availability tariff’ commission agreements with operators. In returns, operators will be expected to adhere to specified operating standards, levels of investments and, quite likely, major capital investment programmes over long periods of time.

By delivering the investment programmes and meeting the specified operating performance metrics, owners and operators will earn a regulatory return on their asset base. Beating the targets over a sustained period of time will enhance these returns and may, in due course, allow even greater risk/return characteristics than has been the case for utilities.

Using very broad initial assumptions, the equity pool of the prospective private toll road market in the UK can be valued at about GBP15bn, and on a notional 65% debt/equity ratio this would equate to the total asset value of over GBP40billion.

‘Infrastructure is critical to an efficient economy and with the UK facing the need to reduce its national debt and future liabilities, we expect that the government will continue to demonstrate an appetite for successfully divesting valuable operational infrastructure assets. Clearly the right model and a carefully planned strategy are essential – memories of where this has failed will linger in the corridors of Whitehall. However, on the whole, private ownership and operation of many large infrastructure industries are seen as success stories. Given the right model, major road privatisation can provide the next opportunity for the Government to tap into. Not only should it help the UK Treasury and, by extension, the taxpayer, but the improvements in efficiency and customer experience seen in other industries will benefit all road users.

Subject to successful execution of policy, the Treasury should see a significant inflow into the Exchequer, while debt subscribers and equity investors would have a new attractive investment pool. We await the next stages in the development of this interesting policy and not without some considerable optimism.

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