Public Equity, Private Debt. The Efficient Financing of Roads. (Complete paper)

7/27/2019 Public Equity, Private Debt. The Efficient Financing of Roads. (Complete paper)

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'&di Schroders

PUBLIC EQUITY, PRIVATE DEBT

THE EFFICIENT FINANCING OF ROADS

PRESENTATION TO

AUSTRALIAN AUTOMOBILE ASSOCIATION

LAND TRANSPORT INFRASTRUCTURE SYMPOSIUMCANBERR A,22 MARCH 1994


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1.

ABSTRACT

The risks facing lenders and investors in the toll road industry are quite unlike therisks facing lenders and investors in other industries. The involvement ofgovernment in roads - even privately owned roads - is much greater than in otherutilities. The most efficient form of private sector involvement in roads is differentfrom that in other utilities.

The spectrum of possible private sector involvement in roads may be considered inthree zones: public ownership with public debt finance, public ownership withprivate debt finance, and private ownership with private debt finance. Publicownership with private debt finance achieves private sector efficiencies with thelowest long term cost of finance and without problems of monopolisation.

The conventional view is that private tolling concessions will run their term andthat the roads will revert to govemment. This view is comrnercially naive. Havingestablished a private taxing monopoly, govemment cannot gain access to the taxflow without either waiting for the concession to expire or negotiating (without thepossibility of tender) with the incumbent monopolist. Incumbents use suchrenegotiations to progressively extend tolling concessions creating permanentprivate monopolies.

One such untendered renegotiation has already occurred in Australia.

At present Loan Council rules discourage the cornbination of public ownership andprivate debt, thereby forcing State governments to establish private tollingmonopolies. If Loan Council rules are not changed, it may be possible to workaround them by using motoring clubs as private sector owners of convenience.

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1.

INTRODUCTION

It is an undeniable fact of life that the process of government is oftenconducted through buzzwords and catchy slogans. In the mid-1940s we weretold that government had to capture the "high ground

of economic activity" inorder to create a socialist utopia. Forty years later we were told that this wasall a terrible mistake and that all government activities had to be sold in orderto secure "private sector efficiencies".

For those of us who have no particular financial interest in the outcome ofthese affairs, the challenge is to steer between these exffeme views anddiligently seek the policy which will best deliver services to the public at leastcost to them and to the taxpayer. This involves not just promoting privatesector efficiencies, but capturing those efficiencies for the benefit of the public.

Nowhere is this challenge gleator than in the provision of road infrasffucture.

PECULIARITIES OF ROADS

4. Roads are extraordinary candidates for privatisation. Consider the following:

any particular toll road is almost always competing with free roads.This is particularly so in the urban road network. Yet consider howAmotts would behave if it were govemment policy to have a freebiscuit maker. Consider how BHP would behave if it were governmentpolicy to have

afree

steel or oilproducer;

whether roads are public or private, the government still has detailedinvolvement in their planning, including control over the timing of theirconsffuction, the route which they must take, and the standard to whichthey are built;

once the road is built there is little a private owner can do to increase itstraffic. Traffic volumes depend largely on development of access roadsand altemative free roads;

motorists drive their own cars, so (unlike, say, private railways) there islittle a private owner can do to improve the quality of service on boardthe vehicle;

if tolls are charged, they are usually set in advance with an indexationformula so there is little scope for improving ailocative efficiency bychanging prices to match demand. (Indeed, any toll road which isoperating at less than capacity is a living example of allocativeinefficiency. The scarce resources which were sunk into building it arenot being used to full benefit); and

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in developed counffies, roads are never funded privately withoutgovernment subsidy -: grants, subordinated "loans", tolling monopolieson existing roads, traffrc underwriting agreements, or gmnts of publicland.

SPECTRUM OF PRIVATE SECTOR INVOLVEMENT

5. What then does the private sector have to offer in the area of road provision?To answer this we consider the spectrum of private sector involvement. This isshown below, roughly in order of increasing risk transfer to the private sector.Three zones are shown. The first involves only project delivery, the secondproject delivery and financing, and the third private ownership.

Cost-plus construction contract Irast private sectorrisk and profit

Fixed-price consffuction contract

Fixed-price, lump sum construction contract

Build, frnance, ffansfer

Build, finance, and transfer to independent

agency S.evenue bonds)

BUILD, TRANSFER, OPERATE

Build, own, operate (transfer) Most private sectorrisk and profit

Under the traditional cost-plus contract, the contractor works at unit rates.Provided that such a contract is well project managed, it may be quite costeffective. However, there is clearly no incentive on the contractor to innovateand reduce costs. If the contract is not well managed, costs can blow out.

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The fixed price contract gives the conffactor that incentive. If he can bring theproject in below his tendered price, he profits. While attractive in theory, lumpsum conffacts run into practical difficulties with "variations". If unforeseencircumstances arise, the additional costs must be met on a cost-plus basis.Especially on large projects for government clients, there may be a temptationto profit from variations. The responsibility for variations may be in doubt, andthe conffactor may prefer to delay or to litigate, knowing that the governmenthas a deep pocket and would prefer to see the facility completed rather thanface an embarrassing delay. It is sometimes said in the consffuction indusEythat "you make your money on the variations".

The fixed-price lump sum contract removes some of the incentive to haggleover variations, and provides the contractor with an additional incentive tobring the work in ahead of schedule. Because it is the contractor rather than thegovernment who bears the cost of capitalised interest during delay there is anincentive to complete on time or earlier.

The fixed price lump sum contract can be elaborated to strengthen the incentiveand reward for early completion. In build-finance-transfer contracts aconsortium may be established to build and finance the facility and then totransfer it for a lump sum after, say, a year of successful operation. Theconsortium may receive the income of the facility in the period before it istransferred. Schroders used a variation of the build-finance-ffansfer contractfor the Manchester Light Rapid Transit. The project developer was required tobuild the facility and to hold it for a minimum of three years before it could betransferred back to the public sector.

The build-finance-ffansfer contract also captures the privatesector's flexibilityin project delivery. There is a story (possibly apocryphal) of the private road

developer who discovered that an additional few metres of corridor wasrequired at one spot. Rather than going through the delay of public sector landvaluation and resumption procedures, the matter was resolved within days witha generous payment to the landowner. The developer was able to weigh up therelative benefits of saving money on land resumption and saving time oncompletion.

None of the contract forms mentioned so far requires ongoing private financingor ownership. They are project delivery options, and it is in project deliverythat almost all of the private sector efficiencies are obtained.

There may still be a risk, even with build-finance-transfer, that govemment willsuccumb to delaying tactics by the developrnent consortiurn seeking torenegotiate the lurnp sum transfer price. Alternatively, government may simplynot wish to undertake the borrowing needed to pay for the facility. It may beconcerned about its credit rating. It rnay wish to ensure that toll income isdedicated to repaying road construction loans.

In any of these cases it may be very effective to arrange for the developer toenter into a lump sum conffact or a build-firnance-transfer contract with an

independent non-guaranteed agency. This is the essence of the "revenue bond"widely used in the United States. The agency can only pay out what it canborrow, and it can only draw down loans when the facility is up and working.

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An added feature of this approach is that govemment can present thetransaction as a "private" undertaking (even though it remains the beneficialowner of the facility). Any delays can be atributed to the private developers.

Revenue bonds are also used on a massive scale on the French toll road system.Individual toll roads are owned by soci6t6s d'economie mixte ("SEMs") whoseshareholders are central, regional and local government together with chambersof commerce or chambers of agriculture. The SEMs borrow from a centralborrowing agency - the Caisse Nationale des Autoroutes ("CNA"). CNA inturn issues non-guaranteed bonds to institutional investors. Because of thebroad spread of traffic risk, CNA has achieved an AAA credit rating despite theabsence of a government guarantee.

Throughout the world, revenue bonds, or a variation thereon, are the mostcommon form of road finance. They may be pure revenue bonds in the UnitedStates, the French public-private system, or the Autostrade in Italy. Thecoffrmon feature is private debt, but beneficial ownership retained in the publicsector.

The revenue bond approach may also incorporate an operating andmaintenance contract with a private firm. This has sometimes been describedas the "build-transfer-operate" approach. It transfers to the private sector allthe risks which the private sector can manage without transferringunmanageable risks and without creating unregulated private monopolies.

In our view, build-transfer-operate represents the optirnurn level of risk transfer

tothe private

sector.The private sector provides design, construction, project

management, operation and debt finance. A description of the build-transfer-operate model applied to the San Joaquin toll road is set out at Attachment I.

It is possible to go further and to transfer equity ownership and control to theprivate sector. This is the essence of the build-own-operate-transfer ("BOOT")and build-own-operate models which have been ernbraced by Australiangovernments. lraving aside for the moment the issue of Loan Council (whichis discussed below), it is our view that these models do not give taxpayers ormotorists the same value for money as the build-transfer-operate model.

DISADVANTAGES OF THE BOOT MODEL

lnappropriate risk transfer

20. As noted earlier, one of the peculiarities of roads is that the rnain post-construction risk - traffic risk - is one which a private sector owner ispowerless to manage. Typically, government is in a much better position tomanage traffic risk through its road planning and traffic management functions.


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2r. This is the very reason why successful toll road programs around the world relyon private debt financing rather than on private equity and ownership. Withprivate debt financing the rate of return to investors is fixed. Government maysubsidise the project, or give it more traffic than it needs for the constructionbeing undertaken, in the knowledge that all excess income will be recaptured.

If there is private equity in the road, government may get away with a lowerinitial subsidy. But it (or the motorists) will pay in the long run as the privateequity investors demand a high rate of return for taking unmanageable risks.

In some cases it appea-rs that private investors contribute very little equity.Attachment II seeks to estimate the value of risk capital in the M4 project inSydney. The accounts suggest only $460,000 of ordinary equity in the $180million project. Even ascribing a value to the preference capital (determinedfrom recent share transfers) puts the total equity at only $11 million, or 6Vo ofthe project cost. The contribution of an additional 6Vo pivate equity, whichwill demand a high rate of return, does not seem to justify the difficultiesassociated with private ownership.

Permanent unregulated private monopolies

24. In theory, the BOOT model gives the private owner a "temporary" concessionto collect tolls from a particular stretch of road. Indeed, it is AAA policy thatroads should become toll-free when the tolling concessions expire. In practice,the temporary concession may turn into a perrnanent unregulated privatemonopoly. The reason for this can be seen in Figure 1.

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Figure I

Figure 1 shows the gross and net borrowing capacity of a public toll roadfinanced

withrevenue

bonds over a 20 year concession expressed as apercentage of the original construction cost. (A full list of assumptions is setout at Attachment IV.)

ffi eross OeOtffi oigino toon

Gros s borrowing copocilyond originol debt

TC\jVtOI:OOCV(lICf'-C{

Yeors

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rsryz.oqJ

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H rmu.En

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EI

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In the pre-opening phase the gross borrowing capacity is equal to theconsffuction cost. The net borrowing capacity is zero.

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Before opening, lenders are relying on uncertain traffic forecasts. Shortly afteropening, lenders can ascertain the actual traffic flows. In the analysisunderlying Figure 1, it is assumed that the required loan life cover ratio fallsfrom 2.0 times to 1.4 times and concession life cover falls from 2.5 times to1.75 times as the risk of traffic flow falls away. Assuming that the projectedtraffic flows are achieved, the gross borrowing capacity of the roadtses byabout 1007o. Thereafter, gross borrowing capacity slowly falls.

However, the original loan is also being repaid so the net borrowing capacityrises sharply. Figure 2 shows the net capital raising capacity of the road.


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Figure 2

N Netrrewdebt

Net borrowing copocity

-c{v(o-c{v(5CO--a'l

Yeors

E \W"o(JE'a

E Bff/OoENd

oU(utrL ffi/"qfrErl

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E Ary/o

29. This additional capital raising capacity is a valuable asset. ff the road ispublicly owned, the government may raise further debt finance to build morefacilities without drawing on government guarantees or subsidies.


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However, if the facility is privately owned under a Boor arrangement, then itis clear what is going to happen. Sometime in the first five or sii years ofoperation the owner, who may have conffibuted negligible original equity andwho can now borrow against the established traffic flows,

will approach-government and offer to build some "free" road in return for an eitension ofthe concession or a renegotiation of the maximum toii. Of course the extraroad is not free at all. It is paid for by motorists in the form of a longer toliingperiod, higher tolls, some more government subsidy taken from the ioadsbudget, or all three.

Moreover, such an extension conffact is not subject to tendering either in theconstruction or in the financing. Government is placed in the invidious positionof either dealing with the incumbent monopolist or waiting 15 years forlheconcession to expire before it can gain access to the cash flow.

The incumbent monopolist may have another advantage. The originat financingwill usually have been based on the existing road configuration. If the newwork is an extension of the original, and increases traffic flows above theoriginal projections, this flows as a superprofit to the incumbent. Theincumbent may agree to contribute part of this superprofit towards the newroad (keeping the other part) provided that the extension conffact is not putout to tender. (Sometimes there may be a notional superprofit cap. However,as shown below, this is generally ineffective.)

The progressive extension of toll road concessions is not necessarily a bad

thing.The French

tolled motorway system was developed by progressivelyextending the concessions of the SEMs and borrowing against their establishedtraffic flows to finance new works. However, uniike privately owned tollroads, the SEMs are not seeking to profit from their monopoly position. Theirrole is to develop the road system, and they let out construction to tender so asto maintain competition and to capture the benefits of private sector efficiency.

Nor are private monopolies necessarily a bad thing. Private natural monopoliesoccur in the gas, water and electricity distribution industries. But, wherecompetitive tendering is not practicable, they are invariably subject to someform of independent profit regulation.

The most worrying aspect of the BOOT model is that it rnay be creatingpermanent, unregulated, private monopolies. This is likely to increase ratherthan decrease the costs faced by motorists over time.

Appendix III sets out press coverage of the M5 extension contract which wasawarded without tender.

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Superprofit recovery

It is often claimed that BOOT contracts contain superprofit "sharing" clauses.traving aside the question of why superprofits should be shared at all, it isunlikely that such limits on superprofis will work.

Superprofit caps and sharing arrangements require the owner to achieve acumulative rate of return before they are activated. Moreover, they are usuallysubordinate to the repayment of debt. Just as the owner can renegotiate thelength of the concession period long before it terminates, so the owner is likelyto renegotiate the superprofit cap away long before it becomes effective.

It should also be remembered that the most effective form of superprofit cap isthe fixed rate loan. Superprofit caps only become an issue because the BOOTapproach uses private equity and ownership.

lncome tax

40. Federal income tax is payable on the profits earned by investors in BOOTarrangements. This further increases the cost of the equity component of thefinancing.

LOAN COUNCIL AND TOLL ROADS

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4r. Given the disadvantages of the BOOT approach, one might well ask whyAustralian governments don't use revenue bonds and build-transfer-operateschemes. The reason is Loan Council, which forces the States intounnecessarily expensive transactions with the private sector in order to bypassthe Global Borrowing Limits. flVhy a State which is not constrained by GlobalBorrowing Limits would enter into a BOOT contract is a complete mystery.)

Under the "old" Loan Council rules, borrowings were included in GlobalBorrowing Limits if they were undertaken by entities which were "owned orcontrolled" by a State or Territory. It made no difference that the borrowingswere not guaranteed by the State. On the other hand, borrowings by otherentities fell outside the Global Limits, regardless of whether the project wassubsidised or otherwise assisted by the State.

The definition of "conffol" was a not fixed. For the Sydney Harbour Tunnelproject it was decided that the entity was not controlled by the State, eventhough its income was guaranteed by the State. However, this view was thensuddenly reversed and it was decided that any further "private" toll roads couldnot rely on income streams guaranteed by the State.

In 1993, in an attempt to bring some order to the apparently arbitrary

application of Loan Council rules, a new set of guidelines was released. Thesewere based on the concept of actual and contingent liabilities incurred by theStates. Specifically, paragraph 39 of the new guidelines states:

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Any attempt to draw a public/private boundary line based on the underlyingeconomic anangements would simply take us back to the original problem of tryingto allocate risk between the public and private sectors. The best approach is to adopta boundary line that is readily identified and admit that it is an arbitrary linedetermined only by considerations of simplicity.

The boundary proposed is to only apply the risk weightings to any public sectorinfrastructure prqect with private sector involvement which operate for 10 years orlonger (including options for renewal) and which involve the provision of servicesdirect to a public sector entity or the underwriting tly the public sector (that is,the generation ofany financial exposure by the public sector, whether actual orcontingent) of services provided directly to consumer:s.

one might reasonably have interpreted this to mean that a build-transfer-operate project with revenue bond finance, providing services directly tomotorists, would not have its borrowings included in the Global BorrowingLimits.

Unfortunately, this is not so. Our discussions with State Treasury officials inDecember 1993, revealed a hitherto undisclosed aspect of the new guidelines:that they operate in conjunction with the old guidelines. In other words, theold rules concerning "control" still apply and presumably are as arbitrary asever.

AN ALTERNATIVE TO BOOT TOLL ROADS

unhappy with private toll road monopolies, we have sought to devise a betteralternative.

If Loan Council will not permit build-transfer-operate projects; if LoanCouncil insists that there be a profit maximising private owner of the toll roadmonopolies, then let that owner be an organisation which will reinvest theprofits for the benefit of motorists.

In France this role is filled by the sEMs with their chamber of commercesharehoiders. In Australia, we are fortunate in having organisations such asAAA, and its motoring club members, who can fill this role. Moreover, suchorganisations have a long history of running successful commercial businesses.Most have a commercially run insurance business.

There are a number of ways in which motoring club participation could beimplemented. One such structure is illustrated below:

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lrnders' Representative

Trusteerustee

I

Tnst

Ownerof

C-onces s ion

Road Concession C-onces s ion

Agreernent

Govemrnent

51. In this model, the concession is owned by a profirseeking trust whose trusteesare the State motoring club and a representative of the lenders to the project.Important features include the following:

the ffust would be required under its deed, under its concessionagreement, and under its borrowing covenants, to put out tocompetitive tender all aspects of design, consffuction and operation;

the motoring club trustees would seek competitive financing; and

(in order to avoid the creation ofan unaccountable and cash richagency) it would be a requirement of the trust deed that surplus incomebe reinvested in roadworks, or placed on deposit until suitable worksare approved by government. It is proposed that the trust should be afinancing and administrative agency with minimal staff and with allsignificant functions conffacted-out to the private sector.

52. A further feafure of note is that such a trust is likely to be tax exempt.


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Attachment I

B UILD-TRANS FER-O PERATE

TI{E SAN JOAQUIN TOLL ROAD


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1. This attachrnent describes tlie San Joaquin toll road in Califonria which is beingdeveloped on a build-transfer-operate basis.

Interesting features include the following:

the facility is publicly owned initially by San Joaquin HillsTransporlation Corridor Agency ("TCA") cornprising Orange Countyand 10 southern Californian cities, and later by California Departrnentof Transportation;

total constnrction cost before capitalised interest is about $914 rniliion;

financing inclucles:

- $1079 rnillion BBB rated revenue bonds,- $91 rnilliorr urrrated subordinated zero coLrpon bonds;- $111 rnillion State and Federal grants;

since the facility is pLrblicly owned, under United States law the bondsa-re tax-free. The tax-exernpt yield of 1.597o per annLtm is equivalent toabout Il.4Vo per Annunr to tlxpaying irrvestors;

TCA will insure the "rarnp-Lrp" risk by guaranreeing rhe first two yearsof debt service after cornpletion;

consnuction is on a fixecl price, fixed tirne basis with incentives andpenalties:

- liqLridated darnages of $192,2-50 per day are payable for up ro4-55 days. The contractors' total potenrial liability for allpenalties is $107 rnillion; and

- there is a bonus equal to7}Vo of net toll reverrues collected forevery day the road is pLlt in service ahead of scliedule; and

toll systern supply is on a turrrkey basis which gLlaranrees99To accuracyin toll collection. Toll collectictn is conn-acrecl out for five years withextension Lrp to 2-5 years iit TCA's option.

The use of revenue boncls provides the State with access to off-bucigetcapitalwithout establishing a privately owned and conrrolled tolling rronopoly.Private sector efficierrcies in construction arrd operation are realisecl throLrghco ntrac tillg-oLtt.

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Ni' . i' 1!,1:jVolume 61

flrc interrratiunal brisinc-s guidcto pu biic-privatc partrlcrshipsarrrl in novativc fln:lnce

, / 1. :!-':.:r.;-i;::.:: .' '-,!1 ' '' i a:-.'

EWCFruffi'1'he successlul fundrng and order loploceed rviLh consiruction

olrhe

g1 .i billion San Joaquin Hills tollroai in Orange CounL-r', Ca)i1., earl-viiris rronllr represents a major ad-l,ance in the de velopmenl ol p1i-\':te11' financed infrastrucLurepr^..cls irr tirp U.S .

-'r--iier five years ol strenuous and:osil)' ellorls by public and privateinleresls in soutl-rern California, ancar-record tax-exempl bond issuefor r. startrrlr toll roaci sold oub in trvohc,urs

on NIarch 3. As thedus1"

sett led, a cheer rvent up on the trad-

SAN JOAQUIN TOLL ROAD FUNDINGBUILDS A STRONG BASE FOR NEW,

URBAN INFRASTRUCTURE IN THE [J.S.By )Yilliant G. Reinltardt

ing floor at Firsr Boston Corp., thelead underw,rirer, which

had beenmarketing the gl.i7-billion insenior anci junior Iien debt lormonths.

A geographically diverse gr-oup ofabout 25 sophisricaled institutionalinvestors bought lhe revenue bonds,despite lasl-minute questions raisedby Standard f: Poor's aboul thehearlg reliance on senior debt andcoverage ol construction risk. Theissue rvas ciouded lurlhel by uncer-

taint-v over Lhe ia-r implications olafederal letler ol credit obrained bv

tl-ie project sponsors Lo cover.ome of

the trafTic risk ciuring the ramp-uppe:iod.Based on the need lor t]'ie rcad, the

se- iir debt u'as gi,,'en a BBB invesl-me-rr"- glade ralingon Feb. 26 by Fitch]nvestors Sen'icc Inc., rvhich provcdlo be enough to unlock the Ccor on atax-exentpL markeL star-v-ed ior rated,high-yield securities.

The issuer, San Joaqutn HillsTr-ansportation Corridor -\gency(TCA), a Soint aclion agenc\. ol Or-

ange Countl'and 10 southern Caii-lornia cit ies. ;.supd e notic" ro pro-

t\\


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IN TTIS ISSUESpecial Report

San Joaquin Hills Toll Road

I $i.4-billion San Joaquinfunding builds a strong base lorother urban infrastruclure

deals

Franklin Fuud was abig believer

Banks or bonds? It came dorvnto who believed the trafllcstudies

Toll roads will become lhenation's new high-servicehighways

San Joaquin team is rich inlalent

10 Aggressive environmenlalstrategy, strong friends madeSan Joaquin go

l3 Preventing endangered speciestrain wrecks is expensive

14 Aggressive compliance s'orks(when you're rich)

l5 Project highlightsl6 BechLel and Kiewil team up for

private infrastructure

18 A modest proposai forleveraging federal dollars

The New ParadigmWhy private infrastrucfu reis real and how to sell iL togovernment

24 Public-Private Serr.rcesDirectory

Public Works Financing is published monthiyfor $327 a year (government), $42? a year{private secLor) and $447 a year (ouiside NorthAmerica) by RCC's Public Works Financing,154 Harrison Ave., Westfield, NJ 0?00'2433.Second class postage pending at Westfield, NJ.

Postmaster: Send address changes toPWF, 15{ Hurlson Ave', Westfield, NJ07090-24 33.

ceed to Kiewil Pacific and GraniteConstruclion on March 11. Barringany unforeseen problems with envi-ronmental litigation or construction,the high-speed, heavily automatedroad will be the firsl new highwaybuili in Orange County in decadesand the first major toll road ever

attempted in California.The 15-mile corridor is the f-rrst

leg of a 67-mile system of new higli-service roads conceived almost 20years ago and financially supportedby private landowners and OrangeCounty govern-ments ever since.The state govern-ment has agreedto contribube$110.7 million in

demonstrationgr:anbs for the SanJoaquin segment.Andthe CalilorniaDept. ofTranspor-talion will main-tain the completedroad.

But the SanJoaquin Hills rev-enue bonds aresecured primarilyby future toll rev-enues based ontraffic projectionsfrom Wilbur

"Since the early 7980s,I'ue seen an aLDfuI lot ofaision by the publicIeadership working withthe priuate deuelopersout there to bring abouta neu.) system oftransportati.onimprouernerlts."

-ThomasBradshaw,

Managing Directorand head ofFirst Boston'stransportation group

rhan in many developing countries.TCA and its aggressive environmen--xJ compliance team have found array through the project-permitiinggzuntlet in congested, smog-ridden.politically fickle-and verl'rrealthy-southern Caiifornia.

THE HISTORYOrange County's population hasiripled during the past 40 years andrncreased by 60Vo since 1970. Yelonly four miles of new highway har-e'oeen buill in the region during the

past 20 years.The San JoaquinHilis transporta-tion corridor rvasadded lo OrangeCounty's master

plan in 1976 af-ter transporta-tion, land-useand environmen-tal sludies indi-cafed a pressingneed for a newfreeway.

There was nomoney for a free-wdy, hon'ever.Starting in 19E4,

Orange Countyvoters turneddown two at-tempts before fi-

Smith Associates CWSA), New Ha-ven, Conn.

The sale ofthe bonds proves thatconstruction and traffrc risks can beshared in new ways between thepublic and private sectors-and inways that satisfy credit-rating agen-cies and investors.

It proves that there is a marketfor well-structured revenue-bondfinancings ofcostly, startup toll roadprojects in urban areas, especiallylhose thal relieve existing conges-tion.

And it proves that there is a suc-cessful financing path for a projecbhotly pursued by environmentalislsand their lawyers in a state wheresome consider the polilical risk of

project development to be greater

nally agreeing to increase the localsales tax to pay for transportationimprovements in 1990. It didn't lookIike Sacramento orWashington rvasgoing to donate funds to one of cheweallhiesl counties in the counEryeither.

Instead, the local governmentsand Orange County's private devel-opers agreed to try to buiid a majornew transportation system usingonly developmenl-impacb fees, pri-vate lanci proffers and in-kind ser-vices as local equity.

The plan was to pay 48.5Vo of thecost of construcLion from impact leesand borrow lhe rest based on futuretoli revenues. The real estate side ofthat equation feli through a fervyears

ago whennew residenLial de-

PWT it nncing / It{arch 199 3


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\ elopme rt slowed to a Lrickle inOrange County.

Impact fees as high as $2,823 pernew residential unit have been coi-Iected since 1986, however. Thosefees are TCA's only source of fundsand have allowed it to raise the $84million spent gebting lhe SanJoaquin Hills projecL to the pointrvhere it could be pul belore inves-lors.

"Since the early 1980s, I've seenan awful lot of vision by the publicIeadership working with the privaledevelopers oul there to bring abouta new sysLem of transportation im-provements," says ThomasBradshaw, Managing Direclor andhead ol First Boston's transporta-

bion group.

UnitedffiA Partnership ofBechtel and Kiewit

flringing together the best in development, engineering andconstruction, the United lnfrastructure Company plans. financesbuilds and operates transportation and environmenta I facilitiesin partnership with public agencies.

For more information please call:Ul5) 768-1994 or (402) 271-2960

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PWTinnncinglltf:rch 1993 3


20/51

"This project wouidn't have got-ten off the ground without Lhe pri-vate secLor's money and Lhe solidsupport from The Irvine Companyon the legislative front in Sacra-mento and Washington," he says.'1lhe private sector was a major fac-Lor in this project's success."

THE PROJECTThe San Joaquin Hills toll road willbe the first modern toll road in Cali-fornia and the first ofthree toll roadstotaiing 67 miles planned byTCA inOrange County. It is scheduled loopen afler four years of constructionin March 1997 between Interstate405, near John Wayne Airport, andI-5 to the south, near San JuanCapistrano.

Sludies by WSA's Senior VicePresident Edward Regan predict anaverage of 71,800 vehicles per daywill use the heavily automated roadin 1997, at an opening-day passen-ger-car to11 of $2 ai the main barrier.(That's the equivalent of 13.8 centsper mile in 1997 or 11.3 cents today,assuming a 4Vo inflaLion rate, mak-ing it the second most expensive tollroad in ihe U.S. afler the OrlandoEast-West Bxpressway in Florida).Most of the earlytraffrc will be week-day commuLers. WSA predicts thatonly 25Vo will be through trips; therest wiil be local traffrc.

The capacity of the completed six-lane limited-access highway wili be5,600 vehicles per hour in each di-rection. WSA estimates 5,000 rphwill use the road duringpeak travelperiods during the first year.

WSA's data indicate thatonly

71.9Vo of the projected north-southtraffic in the region will use lhe new,premium-service route in 1997. Timesavings, assuming the competingroutes are operating at optimum,are eslimated at 10-15 minutes for atypical 10-mile lrip.

The road is designed to relievethe exlreme congestion on theregion's freeways and secondaryroads. In 1991, the average lrafficwas 242,000 vehicles per day on theseclions of i-5 that will be alfected

by the tollroad. Norih-bound travelon I-5 peaksal about 6a.m. anddoesn't dropback intofree-flow con-ditions until72 hourslater.

The tollroad also willconnectIrvine's largecentrai busi-ness disLricL to wealthy residenlialareas in the parts of Orange Countyfarthesl from Los Angeles. Develop-menl and job growth have nearlystopped in the service area. Highland values, greaL personal weallhand a large economic base still un-derpin the traffic projections, how-ever.

'"They did it right. Theydisclo sed euerything andIeft it up to the buyers todecide whether they weread,equately comp ens at edfor tahing the risks."

-Laurie Mahon,Senior Vice President ofKidder Peabody Inc.

Construcbion involves ?8 bridgesand 10 interchanges over 19.4 milesof road improvements. Of that, 14.5miles is new construclion,4.2 milesis widening work on Interstale 5,and 0.7 miles is improvements toState RouLe ?3, which connecLs thetoll road to I-405, Lhe San DiegoFreeway.

Three lanes will be built in eachdirection with room left in lhe BB-ftmedian for two reversible high-oc-cupancy-vehicle (HO\D lanes. Thenorlh-bound traffic on Lhe toll road

is expected to reach capacity duringpeak travei periods in 2001.

Based on those projections, TCAis seeking federal and stale fundsnow to start construcbion of the re-versible HOV lanes as soon as pos-sible. In addition to increasing theservice delivered by the normal traf-fic lanes, the tolled HOV systemwould shorten the ramp-up periodto full traffic and revenue potential.Toll revenue in 2010 from the HOVlanes alone are estimated by WSAat $25 million a year.

The desiga is about 35Vo com-plete. A11 but aboub SVo of Lhe right-of-way is in TCA's hands and theremaining 19 parcels are commer-cial property subject to 90-day takesby the joint powers agency.

The totai project cost is $1.4 bil-iion. About $830 million of that isneeded to complete the right-of-way,desigrr and conslruction. Includingthe $84 million already spent byTCA, direct project costs will totalabout $914 million.

TURNKEY TOLLCOLLECTION

Toll colleclion and revenue man-agemenb will be handied under a$ 12.9-miliion turnkey contraclawarded on Mar. 5 Lo Lockheed In-formalion Management ServicesCo., Teaneck, N.J.

In addition to financing the in-stallation and slartup ofils toll sys-

tem, the defense contractor hasagreed to provide a lO}Vo perfor-

P'WFinanc inglMarch 1993


21/51

mance bond, a $10-million fidelitybond or similar instrument as a per-lormance guarantee, and a subordi-nated $9-million Iine of credit toTCA in case the road doesn't gener-ate enough net cash flow duringramp-up to pay debt service andadministrative costs. The contractalso includes a guaranLee of 99Voaccuracy backed by Lockheed'spledge to reimburse TCA for anydifference between lrafTic counls andrevenues collected.

An initi al 5-year operating agree-ment may be exlended four times at

TCA's option. TCA eslimates thevalue of fhe contract over the full 25-year term will be $600 million to$800 million depending on the vol-ume of traffic. Those figures arebased on Lockheed's monthly man-agement fee which includes a fixed,minimum fee and a per-transactionfee for Lraffic volumes beyond anannual base. The variable fee muslbe less than lhe annual fixed fee.Increases in the fixed fee are cappedaL 6Vo a year for the firsl five years.

A closed system comprising amainline barrier and 14 ramp Loil

plazas will be used. Collection willbe handled manually, by coin ma-chines and using automatic vehicleidenbilicalion (AVI) systems.Lockheed IMS willprovide systemsintegralion and operations manage-menl. Ils subcontractor, AT&T MSComm unications System s,Bridgewater, N.J., will supply thesmarl card transponders, commu-nicalions infrasLructure and cus-tomer services for toll colleclions.

l,ockheed has agreed to share asmall percentage of its incremenlalgross income wilh TCA for its help

Sct forth bciow is 8 sunmary of thc estimatcd sourccs and uses of funds in conncction with thc financiagfor thc finql d6ig1 aad construction of thc Toll Road. For a more completc dcscription of such es 'mrtedsourcs of funding and cstimated costs of fiaal desig:r and constmction, sec 'THE TOLL ROAD-tostComponcnts and Sourccs sf punding" hcrcin.

Sorrctr Urcr

Scoior Lica Bonda Sl,0'18,629,421Junior Lico Bonds 90,947,437Advancc Fundcd Dcvdopmcat

Impct Fcca(l)Fcdcrs.l and Starc Fundiag(2) . ...Intcrcst Earning{3)

Total Sourcrs

Dcsig1/Build Contract Costs(4) . .Agcncy Costs(5)Projecd Contingcncy

31,00O,0O0 Loan Repaymsot(O .110,738,850 Senior Lien Capit"lized106,353,055 Intercst(f

SI,4l7 ,66g,j y Scnior Lien Dcbt Scrvicc Reservc

Junior Lien Debt Servicc RescrvcFund .

Financing Costs(8)Original Issue Dircount .. . . ... . .

Total Uscs

s 702,922,250127,606,123100,000,000

18,340,627

289,50!.,725

75,000,000

10,000,00024,125,11370,169,E56

(1)

(2)

(3)

(4)

(t(o

(7)

sr,417,668,7 54

Rcpresantr ccrtain advancc finded dcvelopment impact fees. Sec "DEVELOPMENT IMPACT FEEPRO GRAM-Mission Vi cjo Compaay A grecmcnt " h crcin.Rcprcscnts ${Q rnillisrg allocet d to thc Toll Road by the California Transportation Com-rrission tbroug!thc Statc Transportatis,n Improvemcnt Progrem and $70.? million allocated to the Toll Road undcr theStatc and Local Transportation Partncrship Progra-. Sec "THE TOLL ROAD--4ost Componcnts andSourccs of Funding-Sourccs of Funding" hcrein.Assumcs an intcrcst ratc of 4.OVo on moneys ia thc Consfruction Fund, 6.0Vo on moneys in the RescrvcFu]lds, and 4.9Vo on rnoDcys in thc Capitalizcd Intercst Arcouat.Rcdccts amounts payablc to thc Contrsctor undcr tbe Dcsign/Build Contract rcduccd by priccadjustments for rcschedulcd work and smounts previously paid to the Contractor as well as the dcferralof a portion of thc coatract Paymsnts. Sec "THE TOLL ROA-D-The Dcsigrr,rBuiJd Contract."Includcs right-of-way costs, construction cnginccring and design managcment, toll collection facilitiesand administrativc costs-Indudes r?symsnt of loaru to the Orange County Traruportation Authorify and Morgan Guara.nryTrust Company of Ncw York.Rcpreseots intcrcst on thc Senior Lisn Bonds tfuough March 1999, which date is approximately twoyears bcyond the schedu-led compietion date of the Toll Road.

(8) Includcs undcrxritrng costs, lcgal, firranciai and consulting fees, pnnting costs.and other misccllaneouscrPcftst.

PVFinortcing / March 1993


22/51

in markeling Lockheed's smart cardtransponders for use in parking lots,buses, and other transportation ser-vices in the region.

THE FINANCINGIn working with the credil-raLingagencies last fall, TCA had askedStandard & Poor's for a private opin-ion on a transacLion Lhat soughl tobalance TCA's needs with S&P'sconcerns abouL the balance beLrveenbhe senior and junior Iien bonds.Once Firch issued its investment,-grade BBB rating last month, S&Pmoved quickly to market, accordingbo Walier D. Kreutzen, TCA's Ex-ecutive Vice President for Financeand Administration.

TCA rvould have preferred to gel

a rating from all three agencies. ButKreuLzen and his advisors figuredthat all the Lax Lalk in Washingtonwould creaLe a lerrific opporbunityin the tax-exempt markets for anykind of rated bonds with above-av-erage yields. They were right. 'lVehiL a great market," says Kreutzen."I'd rather be lucky than good anyday."

Various lranches of senior andjunior lien bonds were issued onMarch 3. Accordingto KreuLzen, the$1.08 billion in senior lien bondswere oversubscribed by at Ieasl twoand as much as five times theamounls oflered, depending on lhetypes of bonds and terms. The highdemand aliowed TCA to reprice atthe final hour and drop the interestrates by anlnvhere from 2.5 Lo 7.5

basis poinls, he says.A little over $91 million in

unrated, junior lien zero-couponbonds were also sold. There wasslrong interesl in bolh the seniorand junior Iien debt, says Brad-shar.v.Investor interesl in lhe current-in-terest senior debt was so great, hesays, that TCA was abie to reducelhe amounl ol junior lien ciebt byabout $10 million, which loweredlhe overall cosl of capiLal.

As the markets shifted in thefinal week, First Boston shonenedlhe maturities of the junior bondsand lengthened the malurities onthe current-interesl senior ciebt. Italso sought Lo avoid some of thetrad in g voI af i I ity for TCA's delerred-interesl capital appreciaLion bondsby adding more currenl-interesl

PWFinancing / March 1993


23/51

PWTinancinglMarch 1993

:,::.:i':ti-:4


24/51

TCA's overali cost of-capital_qn San U SlFl-rj!:=+lypr4ieclfinanc-Joa-quin Hiils was ?.59%,-l,a-r.ex- i@skJhatempt. Assuming Congress giv,es c6ffie-s rn undql t%,is-lonsideredJo

says Matron, wilh all lhe risks dis-closed and discussed. "They did itright," she says. 'They disclosedevery4hing and left il up to Lhe buY-ers to decide wheLher they were ad-equalely compensaled for taking therisks."

AlLhough il's still noL clear ri'herethe yield has to be lor lhe nextprojects, "San Joaquin shows rhereis a markel for private loll-roadfinancings, and we're very encour-aged by that," says Mahon.

COST OF CAPITAL

President. Clinton a 367o tax bracketand a 107o surcharge for the verywealLhy, the laxable equivalentworks out to a 1,l.4Vo on lhe currenl-interest se"ioi6o"as, which makeup the bulk of the securities issued.

"I think we paid a penalLy forbeing the first, for being big, for Lhefact lhat we didn't have ail Lhreeraling agencies rate us, for being asbartup toll road in California andfor polential litigalion," saysKreutzen.

Though expensive by some stan-dards-TCA's rated, senior bondssold at about 100 basis-poi+ts-over

be a great success. 'No one everenvisioned that we'd be able to dothis at these attractive inLeresLrates" on purely speculalive bonds,says Bradshaw.

TCA earlier had proposed to is-sue variable-rate bonds secured bya bank letter of credit whose termexlended through consfruction andLhree years past sLarLup. The esti-mated cost of capital in that planwas 7.SVo, but subjected TCA andthe banks to refinancing risk.

Market conditions helped to lowerfhe interest rate. The real key,Bradshaw says, is that the institu-tional investors who iooked at theproject all know the transportationindusbry well. Then in meetings,

conferencecalis

and helicoptertours of the region during thepast year, he says, 'We got lherncomfortable that the projecl doeswork, thal there is a strong ul-derlying need for the road."

On that score, 'Ed Regan lofWSAI did a tremendous job forthe TCA on this project," saysBradshaw. "Heknew all lhe num-bers and was abie to explain whathe was doing and answer al] the

questions posed by lhe analysts."After lhat, he says, il was a

matter of convincing them thatthere was enough money to coverunanlicipated delays from envj-ronmental suits or constructionproblems.

RAMP.UP RISK

Investors derived greal comfortfrom the fact thal Caltrans willtake ownership of the road atcompletion, assume ail tort liabil-iLy, use its best efforts to main-tain a S-mile noncompetitionzone on eibher side of the tollroad and pay all costs for itsmaintenance and repair for theLerm of Lhe bonds.

Analysls for the funds weresbill concerned about the ramp-up risk, however. To assure themthaL there will be enough Lollrevenue bo support the debt ser-vice duling the traffic ramP-up

l

Jx11

!i|c

1i

i

PWTinancingl March 1993


25/51

Deriod, TCA agreed to fund six yearsof capitalized inLerest and io pay lhefirsl lrvo 1,'e:irs of debl service aflercornpleLion lrom thal fund Sen iorand subordinate debt-service re-serves extend the rantp-up risk cov,erage for anolher lB n-ionrhs, saysKreulzen.

Finall-v, 'I'CA in lgg2 u as able tosecure a projecl-specific lederal lineol crediL ol up t.o 924 million a yearfor fir'e years afler the capitalizedinleresl is exhausled.'fhe agencywas not abie to get a ruline from iLsbond counsel that the implied fed-eral guarantee rvouldn't affecl thelederal tax-exemption on iis bonds,hoq,ever. So it has asked rhe iRS lora private ruling lhat its bonds rvillnot be considered federal I,r' guaran-teed il TCA taps

the federal creditfacilit-r'.

Il the IRS turns it do.,i'n some-time next monih, Kreutzen says,TCA will consider new lederal legrs-lation ro specifically address tl'reimplied guarant,ee question

The Inlermodal Surlace Trans-portation Elficrency Act ol 1991 al-Lorvs staies to commit lederal lundsor credit Lo public or prlvaie loilprojecls lhrough state revolvinglunds. That approach mav run upagainsl similar interesl exclusionquesLions at IRS, says IGeutzen, sosomeone is going to I'iave lo seekclarilying legrslalion from Congress.

Thai ellort may soon be under,rvay by a new group, the Inflrastruc-ture Aiiiance, which hopes to getlederal loan guaranLees for sLarluptollprojecls ir-rserted inlo the Clintonst.imulus package.

'The new CIin ton Adm i n isrr:rlior-rhas focused on private infrastruc-Lure developmenl," says Kreutzen,"so I think that kind of legrslalion,,'"'ill be possible 'liier-e are a loL oloLher startup toll roads anci otherki nds ol in lrastrucLr: re proJect.s lhat*'on't nrove unless rhey deal w.ilhihis, either Lhr-ough a change in theLax larvs or a clar-ificalion lrorrr lheIRS that supports" lederal creditbeing available for Lax-eren'rplproject financir-rgs.

CONSTRUCTION RtSKJoinL venLure parLners Kiewit Pa-cific Co. and Granite ConstructionCo hold a g786 7-rnil)ion designbuild contracl in which lhey shareresponsibilities on a 70-30 basis.Their joinL venlure, Calilornia Cor-ridor Conslruclors, has subcon-

tr-acLed ri'iLh Parsons DeLeuiv Ir-rc ,a subsidiary ol'lhe Parsons Corp ,and Greiner Engineering Inc. lo com-plele the desigl. 'I'he turnkey con-tract was reduced to 9702.9 nrillion,main ly by reschedu ling work, deler-ring progress payrnents and throughvalue engineering.

:::s


26/51

Ailhough the San Joaquin bondswe.. ,tot insured or issued behind aIeLter of credit, Kreutzen saYs themarkefs viewed TCA's design-buildcontract with two of the largest, bestmanaged highway contractors in lheU.S. as a form of credit enhance-menl. The deep-pocket contractorsassumed some of the risks typicallytaken by owners in a conventional,uniL-price contracf.

'lile're changing lhe way busi-ness has been done," Kreutzen says.'This is thewayof the future. You'vegot to have a fixed-lerm and fixed-price contracl with strong guaran-tees lo finance large projects."

The contract, written by Los An-geles altorney Nancy Smith ofNossaman, Guthner, Knox & Elliott,gives the constructors 7}Vo of Lhenel loll revenues collecLedevery dayany segment of the road is put inservice ahead of the 1,460-daycompletion schedule. It penalizesthem with liquidaLed damages of$195,250 per day for up to 455 dayspasf the startup deadline in March1997. Including stipulated damages,lhe joint venture's total potentialliability is $107.2 million.

Richard Geary, President ofKiewitPacific, made a powerful casefor the contractors' ability to assessthe conslruclion risks in meelingswith the credit agencies. Most ofKiewif's sfock is held by its senioremployees, and they were the oneswho decided to sign the TCA con-tract. Kiewit Pacific's parent,Omaha-based Kiewit Construction

Group, had gro'ss revenues in calen-dar 1991 of $1.4 billion and stock-holders' equity of $552 million. Inaddrtion, Graniie grossed $564 mil-lion in 1991 and holds $155 millionin equity.

Finally, Kiewit-Granile agreed lodeler $3 7.8 million in payments unlillhe compleLed road was generaLingnet revenue, after debt service. 'Thalmeant a lol to investors," saysBradshaw. "Kiewit and Granite be-Iieved so slrongly in their capabilityLo deiiver, that theywould put someof their profit in a subordinate posi-tion."

On a pass-through basis, the de-sign-build conlractors have acquireda $200-million builder's risk policylrom Allianz Insurance Co. to coverdebL-service def-rciencies due to latecompletion because of earthquakes,mudslides or obher natural calami-ties. The road is being built to 1.5iimes the current Caltrans seismicstandards even though most of it islounded on bedrock and is not in ahigh-seismic zone.

STRONG START

By all accounts, the San Joaquinsuccess bodes well for the half dozenolher toll projects moving towardfinancing now.

TCA plans to be back into themarkels this summer to fund a seg-menf of its Foobhill projecl. By de-sign, it was carefui to keep its debt-service coverage ratios on the SanJoaquin securities within a range

that would nol restrict thal elforl orthe financing of any other slarlupLo11 projects.

'IVe were very sensiLive lhaf ifwe set coverage levels too high, thatnobody else could ever clear lhehurdle, including us on the Foothili/Easlern project," says Kreutzen.

"The crediL rating agencies col-lectively worked very hard ,,vith usto iook at lots of options," he says.'We finally chose the Fitch capitalstructure because it worked best forTCA when you included ali Lhethings we had to look at."

The seniorbonds were issued witha coverage 011.3 on net loll revenuesonly. Including the subordinaleddebl, Lhe focal coverage for ail bonds

al the time of issuance is 1.15.Kreutzen says the post-redemptioncoverage ri'illbe 1.35 for all debt andabout 1.5 lor Lhe senior debt alone.

Projected gross toll revenues forthe first fuli year of operation in1998 are $? 1.? million. The nel afterIVa LolI evasion, toll colleclion andrevenue managemenl cosls plusadministrative expenses is $59.3million.

David Sellzer, Senior Vice Presi-dent of Lehman Brolhers, says, 'Thewind and ride were clearly in TCA'sfavor. Bur I don'L see iL being a one-shoL deal riding on favorable mar-ket conditions." IJnanticipaled en-vironmental litigalion or construc-lion problems could still sour themarkeL. But right now, he says, thesuccess of the San Joaquin financ-ing "is a slrong posilive." I

JOBS TRUMP ENVIRONMENTAL ACEIN SAN JOAQUIN ROAD'S END GAME

When InLerior Secretary Bruce B ab-bilt announced on March 25 thatthe California gnatcatcher would belisled as threatened rather lhanendangered, il was a greab victory

for theforces of reason-and flex-

ibility-in the national environmen-tai debate.

Meanwhile, at ground zero, LheTransporLation Corridor Agencies(TCA) had already fixed its gnat-calcher problem, arranged financ-ing and slarled conslruclion on ils

$1.4-billionSan Joaquin Hills toll

road. In addition, TCA's environ-mental compliance slralegist had

already mel with Babbitt so hewouldn'L gel caught offguard by thefoll road agency's aggressive-andexpensive-drive Lo the bond mar-kels.

Both moves are typical of TCA's"no-holds-barred" approach toproject development, namely:

.: :' .

'o PWFinancinglMarch 1993


27/51

E#, Schroders

Attachment II

ESTTN{ATION OF RISK CAPITAL IN PRTVATE TOLL ROADS

THE M4 PROJECT


28/51

td,Schroders

2.

The arnount of equity corrtribLrted by the owner of BOOT toll roads is oftenvery srnall. Tliis attachlnent sets olltexnacts frorn the latest annual return ofStatewide Roads Lirnited ("SWR"), owner of the M4 concession, together withpress coverage of the sale to AIDC of l}Vo of the ordinary sltares in SWR, andseeks to estirnate the proporrion of true equity in a private toll road.

Features of interest in the M4 project include the following:

the ordinary share capital of SWR is $460,252;

in addition, the cornpany has on issue one class "A" cutnulativeredeemable preference share entitling the owner (the CornmonwealthBank) to 12.5Vo of any retained profit. (A class "B" curnulativepreference share was issued during the 1992193 year entitling the ownerto l2.5Vo of the profit of SWR Properties Pty Ltcl);

as at 30 June 1992, shortly after the opening of the M4 toll road, thecornpany had total assets of $176 rnillion arrd bomowings of $179rnillion (rnostly secured loans frorn the Corntnonwealth Bank);

in tlre 1992193 year the cornpany recorded earnings before interest andtax of $ 13 rnillion, representing a retllrn on total assets of 1 .4Vo.However, dLre to interest expense on its loatrs, it recorded a net loss,

dr,rrirrg the 1992193 year, AIDC Lirrrited pr-rrchased l)Vo of the ordinarysha.res frorn an existing shareholder. The purchase price has not beendisclosed, but uncon{irmed reports in the Australian Financial Reviewsuggest that it was $7.7 Inillion. This would value tlie ordinary sharesat $77 rnillion;

assuming that the $7.7 rnillion is conect, this woLrld value theComrnonwealth Barrk's par-ticipating preference shale at $ l l million asfollows:

Cornrnonwealtlt BartkAIDC (ljVo of rernaincie r)Other (907o of rerttairtder)

Entitlementto Profit Vo

12.508.15

18.15

-T00o-o

CurrentValuation$ million

1 1.007.70

69.30

--88T0-

As the Cornrnonwealth Bank wasthe project's failure, its preference

risk capitel in the pro.iect:

lender to theshare rnight

project, and at risk forbe regarded as the true


29/51

,[d, Schroders1

' the total original equity at risk in the project rnay therefore be estirnateclat$11.46 rnillion, being the Corrrnonwealth Bank's $11 rnillion and theother sharelrolc'lers'$460,000. This is only 6.5vo of trre cosr of thefacility.


30/51

lalSr; i'*!c 4 c:30 kldr C:4:949I1 r:.: :UC:5:J 5:3

Sha res

lot6tc I ats co{ie .rerber i ssuedAuiii; 1!r^. I

0?D 1e25C

17 List of 14crbers (sharehoIoers)

rnf$cr's f ui i hlnre end eddrcss

AIDC L]I'{ITEO, \/l zl uAol?tur .errr6F

201 KENI STREET SYOHEY NSt] ZCTJO

15 I ssrred si.nres enC upt ion_a

cIo3s codc description, fult titl. cf shaie

AC/-iP A CTASS REDEEt,lAgtE PREFERENCE6CF.P E CLASS RF)EEfiiSLF PREFEREiiCEn)h

vr\vt(^rt. oni\cr

rrorni na I va I uePl qllda c $

1 .001 .00

1 .00

nofiinet veluc1

I

l0L)u

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nr:,tpr of shaces ev_erer p:-,entittd to pef sharc

Are sheres ts mccsecfuLLy paid? ben. oiirrer

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SYUI1EY NSH 20UU

CC{.II{CNIIEALT[i BAHK OT AUSTRAL IiUADTIU OI AÊ

SY0NEY Nstr 2000

lilrQql rl i LlflrliU

SgUTI{ TO!]EP TI]! IilTERCi.I,lIIGE67 ALBERI ST (;I{ATS.JOoD NSII 2067

5.1u4

DAIGRAI{)O PTY. LTD-11TII fLOC]R ALTGH HC.USE.i BLI6H sT sY['HEY tiS,t 2000

na\/lA! oTy I lurrcn

i 1TH FL BLIGH Hr)rJ:-E{ oLlun }r 51UNct NJH zLru!

JZ)IJ

DEVG'i! PIY.LI;,IIIED11TH FL TL]GH IIi{JSF/ hr i^rr -Yx oLruil er trurct nrx ?300

CRAIiDA,qI CO PIY. L IHI TEO

r r I tt r LKiK trL iqh ljLc tijt4 BLlcti sT silii;Y t{5H 2000

11iLL8i. PIY,LTO.1O UILOHA NVE

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r-Pale laI of 5

t_tIATEHIDE R'J.405 LIHITEO A,C.H. OO] 5rJ 57]


31/51

L3!'E l7 -'ige 14 of 3C rxld:

tr

ffi STATEWIDE ROADS tlililTED AND CO${TROLLED Et.lTlTiES

ffi

ffi&T

ffi

ffi *uunnu"

H! oo.r.",ing protiV(toss) beroreincom lax

},NVTII T4AU L\JUD I\UL,L'Uft I bFOR THE YEriR ENDED 30 JUNE, 1g3

Consolidatod Cirief Entity1993 1992 1ss3 1gS2

.!s {i

ffi ,n"o*u kx attributabls toEr operating protrv(toss)

ffiEfi operating proflV(lcss) aftor. inccme taxffiSl Retaineti profiv(eccumulated iosses) at the

, beginning of the yearffi R"i.in*O profitV(accumulalcd losses)sl ai rho end of Ute year

IYIJ I E

3 3.1,903,361 5,595,493 20,537,036 16,33i ,e6B_=====?_=

43 (4,618,918) {8,2i5,069) (190,301) 3,408,877

22

12 (4,61e.918) {8,215,069) (190,301) 3,408,ri77

(1 1 ,671 ,442) (3,456,373) 3,416,641 7,761

{15,2s0,360) (11,671,442) 3,22e,34C 3.416,e41

ffi =====-======== ==;sE======= ===========Tne accornpanying nctes form pert of these financiel slaiementsffi

H

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ffi

ffi

ffi

ffi

ffi

tHBccdirfird


32/51

a39?a ..r:Jc 15 cf 3C L',-lCr 0!.:5t,lgll ),r:r::C3 Sl:5?3ffir+:n

STATESJIDE ROAOS LIMIT*D AF.{ D ECIT{TROLLED EF.JTITIES

ffi

ffi

ffi

n4t^ltAF

nraFFeAU'ALI+t\Ltr, }Nl:E I 5A.S AT 30 JUN[:, 1Sg3

^^^^^ll)^t^)Ur to(JilqdtUU1Sg3 1932

c69Of..roTE

6 5,865,738 7.8E5,9757 647,310 325,5SI 6,555I 5,526,960 5,8S2,269

12,04s,663 14,093,833

Chief Entiryi 99-1+

i s92

.geURREl^lT ASSETS

ffi

* Cashff ReceivabtesS lnventory

Otherg

$ ror,rl cuRRENT A.ssETS

7,85)6,42-2

154,334,878

15,842,875

154,918,774

3,5'13,633ahl D1 at 4 r.(J I I

4 EO4 ano4,JU.J,Qd.O

e o ( o o?4Q.Lt Q.a t a-

l?o


33/51

Fd{i.i

19 of 30 D*Ic: CC15t491l |.a11 .aC3 5,a3 5'li

:

ST.IITEW!DE ROADS LIF-rilTED AttD

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CONTT-IO LLED E T.ITETI ES

NQTES TO AND FOF?I#1I.{G PART C]F Ti{E FiNAi{CiALSTATEE{Ei.JI'SFOE THE YEAFI E'..iDED 30 JUriE 1993

*NOTE 2 - OPERATIf.IG PneFrT / (LCSS)H&ITne operating prcfit / (ir:ss} 5n1or" income tax

has been arriveci at atier:Etir'itHqE

trEH Charging as e.Ypenses:e

Depreciaiicn - piant & equipment

ffi lnrerest e;(pense- crher per.scnS/ffi corpcralllrns

r\aaanlir-+^lvvt rovIvdtEu ^L:^r_.{ t{ II l'J,)

e

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rf


34/51

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.1,{ a-^, '^t6

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rl'h6 /

w

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#:4-!iNOTES 15 - PROVISIONSli f ;mninrr,ra nniiilomonlc

;fr Provisiori for aiiiiicnai rcad

asI'ett:: I

ffi Noi.i -ciJ RRcNT LlABlLtn L,sH

Ei NOTE 16 - CRE0|TORS A,ND BORRO\ritNcSHr{a

Cornmonwealth Bank of AusiraliaFa - SeCUred lcerlsFq6:[

.n^t'I JJJ

6a

q EEA acfl


35/51

at:2t1

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H

ffiNI

SE

ffi

STATtrV{IDE FiGADS IIMITED A.FiD CSITTfiOtLED EF{TITIES

NOTE TO AND FART,'!IFiG PART OF T?iE FINANCIA.L STATERIENTSFOR TI.IE YEAR ENDSD 30 JUi,IE 1983

^^^^^l:/^r- ^lvvl iouil(JdtsLl1 993 1 9S2

sc


36/51

Qr*stions foryesterdaylsmen on $2hnSydney proj ectLIKE bees around the honey-pot, a who's who of business isswarming over $2 billionworth of projects in thenorth-west of Sydney.

They include maoy meobest krown for roles in the1980s - Nick Greiner, formerNSW premier; Frank Conroy,former managing director ofWestpac; Gerry-,van derMerwe, former depufy manag-ing director of Citibaok; IanStanwell, former managingdirector ol the AMP Society;Barry Glover, former manag-ing director of Hooker Corpo-ration; and Peter Dransfield,former director of housiag ofthe NSW Housing Depart-ment.

The projects are the $500million private M2 toliwayand the $1.5 billion millionRouse Hill residential devel-opment in the centre of Syd-ney's nortl-west sector.

The potential returns inthese projects in which theIJSW Government has amajor role are difficuit togauge, particularly as the M2is shrouded in confidentialityagreements.

Mr Bob Morris, theregional director of the NSWRoads and Traffic Authoritywhich has just called forexpressions of .interest in theM2, did Dot want to discussthe tollway, due to open in1997. Nor did Mr van derMerwe, Mr Frank Coruoy, orNSW Minister for Transport,Mr Baird.

The winning tenderer willfinance, build and operate t}te2lkm tollway from NorthRyde to west Baulkham Hillson land leased from theGovernment for an agreedperiod.

The Government has said

Friday, October tS, 1993 FINANCIAL REVIEW

8y VAIIRE UWS0ll

repeatedly that the M2 isneeded to serve up to 250,000people to be housed i-o the ,growiag Rouse Hill area. Yetthere are strong indicationsnow tlat the NSW Depart. iment of Housing is sloning Iphnned expansion ia Rouse iHilr- i

Suge l, a l,200ha area, forlwhich infrastrucfiire wiil be;completed next yeai, will pro-ivide 15 years worth of landisupply for only 80,000 people. i

Mr Peter Olive, divisional.manager in charge of Rouse.Hill at the Department ofiPlenning, said there were noiplans to progress to stage 2 for r15 years. Therefore, the Gov-lernment must now be looking;at other ways to supply alcaptive market for tle M2 ,operator.

Mr Gerry van der Merwe,now managing director olAIDC Ltd, is another playerwith bis eye on the area.AIDC's just released 1993annual report devotes a pageto its purchase this year of 10per cent in Statewide RoadsLtd which is involved in theM2 through an offshoot,Norwest Motorway Co. :

Norwest is preparing a bid ifor the tollway. llr van der IMerwe said hecould not idiscuss the price becausc o[ a :conlidentiality clause in the ;purchase agreement with the :seller of the stake, consulting iengineers and projeA manag- Iers, CMPS and F. :

He would not comment on Isuggestions that this was $7.7million- Mr van der Merwejoincd the board of StatewideRoads last April.

Norwest Motorway is a $2company cstablished last


37/51

ffiwMr COHROY Mr VAH DER MIRWE Mr SIA|{WFI I

mLrntlt \\tlh t\\o dircctor:,'\ll.i'r I t.,r..' .1 ri(, nlJnr(tn),,j.l .' ; I \1.:.,.\rr,j,. R ,.r J.,;rnrj (jr.rlrrrrnc ('.rmpbrll,cir.rrrnrlrr of stetcrvide Riledsr.rrr,;I. Jl i, .,1,. rn.tn.j[,tJ]1.dire.rtrr Lrf tht'nrr jttritr shtrriltrrl.icr irr St.rtc*rLir. (-\.1 1,.\rn!i I: I\\'[-td

Jtlnrng llrcilt JS dis1q1o1_r 1rlN\)r,.\r'st \4rttOrw;r1. thi:nirrnth $dre Chairntan Frank( ()nro\, (ie rr1. \'an dcrlrftr*c. Ian Stnnrr.rll, JolrrrI) rt.r.'rnzrJcir, mdnJtrnidrrrclor of Ilauldcrsronc l{orIpvlrl''eI I:rrginccring, liiJNl.rrtrrr'\ih11.. 51, rnrn.lFrnildirector ol fhie ss Conrracrors

I1-rhc brd rs succcssful, rhcsliarchtrldings in r.\rtrrvt:t u illh,. St.:i. u rJc 4(l f ,,r , crrr.Il.r.rl l, rr'.rn,. I{,,11111.',,,,f .r,r IIlrrr'" l() J)(.r !c11 (..1.11

Mr DRAllSFlttD

.,\ll)(. l0 L)cr !r'11. .r1Ll!n.iir.]it.ntcn{, l0 ltcr .cnt

\ttrtruirJe Ri,.ril. i\.r\1-or ntcti rn I (lSS t() t.ll.a .rri,..lnt.iut ()l !lrr: ( ircintr (i,-rr 1 1 11Ill('irl \ clrirc l(r\\.tiJ\plir.rti:ltlion ()f lnl-r:i\lrur li,rall tr rrrr ti:t. \1J ten.jcr ln l,r:,),l(.'.rrnB un,.ul Ii, ,.. 1. l\,'l.1l r , l .i Irit,r l,il., .toil\\:r) (in Svtlnr\ \ \\e.,tlrrhicir 1ormcr I)rcrrircl (ironcrs:ritl ntu5l bc tturlt .r\ .lprt\ ille l\ O\\'r'rcd !)pCl-.tll!rr) .trr)!)t bt)il( ut:i1l lvlr (irelltci l.i:lyciir jr)ined

thc boarrl ol(. ir'1 I)S and Ir.llrr' lrlJ ,, ntrJ. t i, t r ll

ilcntral. includrng rjci:tijs,rlrl.c kI4. :rrrJng(rr..rrl :.,Itn,tl :l.rt, *i,l..m,,tr: j: :.\\r\(' I)r(rllt\ tlulinll il. ir.,...(Lr:rill .llrl() )

I i)r I'l()l .taL()u1i\ r,l Sl.ttr.

hu&6l

Mr GL0VER

Stage 1

MT GRflHER

No*estB6lness Parl

Prcposed M2 tollwayfrom Paclfic Hwy toOld Wlndsor RdM4 tollway


38/51

wide.Roads show a loss of $8million. However, tle com-pany is clearly sufficientlYattractive long-term for AIDCto pay a substantial amountfor its I 0 per cent share. [f thefigure of $7.7 mil[on is cor.rect, this would value thecompany at $77 million.'-Its1992 return shows t}re com-pany has a paid up.capital ofjust $460,000.

Echoing Mr Greinerlswords, Mr Baird said last'month tle M2 could not befully financed from toll reve-nue or from governmentresourcs but that tle govern-ment would provide somefunding for ttre projecr

Critics are suggesting thegovernrueDt subsidy could beas hig! as 85 per cenl TheRTA's Bob Morris has pub.licly acknowledged it conld be50 per cent A spokesman forMr Baird said yesterday hecould not discuss the level ofsubsidy.

Contributing $80 milliontowards the cost ol the M2 (inreturn for re-zoning of its landby the governmeot) is theRouse Hill InfrastructureConsortium, another groupwith a big interest in privatis-ation of government infra.stnrcture.

The conrcrtium, formed in1988 in partnership with theNSW Government's l:nd andHousing Corporation, includesStockland Coistructors, tleland-holding subsidiary ofStockland Corp which las yearappointed Nick Greiner asdepufy chairman, and NorthSydney Brick and Trle, (knowuas Norbrik, and 25 per ccntowned by IEL) with 363haincorporating the Bella Visaresidential sub-division and theNorwest Business Park.

Norbrik's chairman isBarry Glover and generalmatrager, properfy; Alan Zam-mit, who was a former directorof Australian Housing andLand, the re-named formerHooker land devplopmentdivision.

Other member$ are a com-pany o{ Barrlkharn Hills realestate agent Bruce Lyon, andtwo joint veutuie compbniesof AHL and Fsanda - [aur,iston Developments aad AHLProperty Developments,whose chief executive i5 Brep-dan Crotty, alother .formersenior executive of HookerCo.p.

last year, SBC DominguezBarry woo a beauty parade toorganise $285 miilioa worth offunding by four lanks for tiecoosortium's stage I water,drainage and sewage treatmeoLAld echoing once again thsprivarc tollway story, the WaterBoard said it did not have thefunds to fi-nance the worL

The prime movers behiodthe consortium were the NSWDepartment of Housing andHooker Corporation whichheld about l50ha irr.tle aree,accord;ng to consortium chair-marr, Peter Dransheld. Fromthe end of 1988 until December1990, Mr Dra-nsFreld was direc-!s1 ef fueuqing for the Depart-ment of Housing. He thenrejoined his old company, MrI ^ng Walker's proprty com-pany Walker Corporationwhich has a zub-lease to thehead contraaor for the RouseHill water and sewage works,joint venture John HollandBilfinger and Berger.' Mr Draosfield says he didnot sit on tle tender committeewhich Last year chose Joh-oHolland with whom WalkerCorp was already working.


39/51

,ffi, Schroders

Attachment [II

ROLLING CONCESSIONS

THE M5 EXTENSION CONTRACT


40/51

,&l,Schroders

This anachr.nent set-s oLrt sorre recelrt p|ess describing tlre erterrsion of the M5toli road, both in tirne and in lerrgth.

Features of interest inclLrde the following:

the concessiorr agreernent with the govenrrneltt wAS renegotiated;

the tenn of tlre concession was extended frorn an original 22 yea.rs to 30years;

the maxirnurn toll escalation was reduced frorn 9Vo per annurn to a ratelinked to the consumer price index. (However, given the traffic levelson the existing road, it appeared Lrnlikely that a 9Vo per annurn tollescalation would ltave irtcreased overall revenue for tlie concessionaire);

the concessioniiire agreed to unclertake additiorral works to help drawmore traffic onto the existing toll road;

although the extension works ciicl rrot go to tender, they were notionallycosted at $65 rr.rilliorr:

the govenrrnent assistecl the rrew works by advancing a loan of $50million at conl.nercial rates, bLrt suborciinated to the other debts of theconcessionaire:

the concessionaire agreed to refunci to the governrnelttl}Vo of anysavings which broLrght construction costs below the notional $65rrillion figure;

the concessiorraire entered irrto a new sLlperprofits agreernent underwhich it woLrld reirnburse 957o of profits when, and if, ir achieved anagreed curnulative rate of retLlnt. The new concessiorr agTeer.nentirrdicates that the sLrperp|ofit rate of retultt is lgVo per annLlln after-tax,calcLrlated on the consn-Lrction cost of the origirral toll road plus thenotional $65 rnilliorr cost of the extension. and

the sLrperprofits cap cAnltot cotne into effect urrtil repayrnent of loans.It is conceivable, therefore, thar it rnay be extendecl before thecurrulative rate of retLlnt is achieved.


41/51

dney Morning Herald^rluraday L7 June 1993Page 4

Road link gives clear run to YassBy KARIN BISHOP

Tnnspon Wdttr: Work is erpected to start Dert month ona-o ertrn-doo to tle Iv15 tollway to linkCesula to tle south-western freeway nearPrestons,'provldlng a non-stop run from'Syd:rey'r rcuthern suburbs af most to' Yass.

The Minlster for Transport Mr BaIr4sald yesterday that the llnk wouldprovlde freeway conditions for 230kilometres to the towa of GunnJng.

The project wlll be carrled out by theroad buiJdi-og company, Interlink, whichbullt the eristhg stretch of the M5 fromBcverly }Till3 fe Casula.

Mr Balrd sald the cost of bulldlng the6J kilometre link was esdmated at about565 milllon. Interlink had agreed not tolncrease the exlsting 52 toll on the IV15, atleast until 1996. Instead, lt erpected torecoup the cost of the new link byattracting more traffic onto the M5.

The announcement has concernedeoyiroumentallsts tnd resldentr of theWolll Creek areq who believe the Roadsand TraJTic Authorify (RTA) may nowwent to complete the other "mlssing llnk'th the M5, whlch ls planned to connectBeverly_stlt..to Alerandria, and niblg[passes througb the environmentally ren-sldve Woll.l Creek reserve- r..e WoIU Creel( reserye. ,{.The chalrman of the Friendt of Wotu

However, the director of the RTA'sSydney reglon, Mr Bob Morrls, sald nodeclsiou had been made about the llnkthrough Wolll Creek and that a separateEnvlronmental Impact Statement wasbelng prepared.

The secretary of &e Berley Cbamber ofCommercg Mrs Alison Edts& sald theCasula-Prestons lllk would create worsetrrffic problems around Berley airdBeverly Bllls where the tollway ff;khed.Sbe caled on the Government t6 completethe Wolll Creek llnk as soon rs possible.

'The cbntinuadon of the spme road rvlllhelp people dowu that end a-nd make iteasler for .tra-filc to come from tbe touthwest through to Beverty HIlh But our maluconcerD ls to get the other end completcd soIt docsn't cnd Ia nld-alr," rbe rald.

Mr Balrd sald the construcdon of theCasula-Prestonr llnk ivas erpected to becompleted by Septeinber neit year, andwould create about 200 Jobs in theLlverpool area, whlch has au unemploy-ment level of about 17 per cent^ "Sydneyts south-west reglon lr grow-Ing rapldly and the proposed llnk bnecessary to keep trafllc out of localroads and provlde for planned futnregrowth,t he sald.

He sald the proJect ivould reduce thecongestlog on thc Eume Eighway fromLlverpool to the Crossroadi.Mr Morrlr sald the tlnk war belngbullt ln roponre to pressurc from localcouncils ln the Cempbelltown areq whichhad been pushlng for dlrect access to tbcM5.

,,f,reel


42/51

Sr1 14

\o -6-73

malnfatnrng our exrstingand fixing the rralfic blac[he said

roadsspots,"

dtl

E

Mr Langron questioned thelegality of the deal between theGovernmenr and Interlink, sayingthat ir should

have been op.o tJparliamcnt.irl scn_rtiny."I have never before seen acase u,here S50 million or for thatmatter any amount has been lentto a private company withoutcomperi.tire rcnders beingtcalledand withour rhe miniiter orTreasurer making an announce-ment," he sard " l think it's ascandal the \\,ay it has beenhandled _- rhe y have deliberatelytned to keep rhe detaits secret.i'

Interlink spcnr about $250miliion burJdrng rhe M5 toUway.f rom Brverlr Ftills to Casula,which opened last August. ThecompanY borrowed the moncyfrom tire Commonwcalth Bank.

HOrvcVer, acCording to a su[ve yby Liverpool Council, on averagconly 22,25t) cars and 750 rrucksuse thc tttllu'ay cach day, com-pared w,ith a projcctcd total ol33,000 vr'hicles

Thc N,{ayor oI Liverpool,Alderman fu1ark Latham, said thcannual revenuc would bc Just$ i7 2 milUon, wirich would notservice the S250 million loan.

A spokesman for Interlinkre[used (o comment.

State Eexeds$S{}r:r to frrnjto extexjd V{bBy FTARIN BISHOpTranspon Wrrter

The State Government has lenrS50 mrllion ar low inre rcsr to aprir.'are company to exte nd the M5tollway.

It is understood that the interestrate on the loan is about 7 per centi. year for ll years. The'currenta,verage corporate

loan rate ishetu'een ll and l6 per cenr. The money has been lent to

InterluLk Roads Pr-v Ltd ro build a565 mllllon exrension ro $e M5,from Casula to prestons, ro becompleted by September nexr year.

A spokesman for the Mrnister[or Roads and Transport, MrBaird, said the Government hadto give Interlink the loan ..so thevwould build it". "This is one wayol gerrln. rhe.proJecr up andrunnlng, ne satd.

Earlier this month Mr Bairdannounced Interlink would beginbuilding the M5 exrension by Ju"l1,,and promised that ta*pry.rr.money lvould not be used

"The taxpa;'er will not have topay a cent for this road - rherewill be no toll on the nerv section,'.Mr Baird said nvo weeks ago

A spokesman for Mr gairadefended the [oan. "lt is a goodinvesrmcnr. It means ttrey stiii gcrthe road rvhich is neede d and'10years quicker than would other-wise have bcen possible and rhe nt,',c !.et the rnoney back."

N4r Baird said Interlink hadagrce cl not to rncrcase the $2 roll orrLhc M5 unrii ar leas( March 1996

Horvevcr, rt is understood tlrcnerv agrcemcnt u'ill allo*, Intcr_link ro ntarntain the toll [or l0yeil[s, irrstelrd of 2] r,ears. ils \\,irsoriginali;,planncd

Thc Opposirion transporrspokesman, Mr LanEon, .said r,hc$50 million loan meant othcr urge nrroadrvorks rvould be delayed -

'This is money which l-ras becntakcn lrom motorists and wlrrchshould have been dedic;rtcri r()

Prescons


43/51

Sn t+ /- I - q?t t lJ

Spurned tollway needs another $65ntBy K.ARIN BISHOP

Tnnspon Wricer

The operator ol SydneY's new-est orivate toLlwav will be forcedto btrrow a lurther $65 million inaddition to its $50 million StateGovernment loan in order to keePthe project viable, it was revealedyesterday.

Interlink Roads Pry Ltd admit-ted that tie money was neededbecause of lower than expectedtrafflc volumes on the M5 in theciry's wept-

The chief executive of theRoads and Traffic AuthoritY, MrBernard Fisk, revealed yesterday

that the Government's $50 millionloan to Interlink was to enable it

to refinance a $230 million debton the construction of the M5.

The extra $65 million wasneeded to finance lhe actualconstruction of a 6.5-kilometresection connecting the M5 to theSouthwest freeway at hestons.

Mr Fisk conceded that underthe terms of the $50 million loan,the Government would not receiveany repayments lrom Interlinkuntil after it had repaid the $230million and $65 million loans.

He admitted that the Govern-ment had no alTangement withInterlink requiring it to beginrepayments by any given date.

The Opposition's spokesman

on transport, Mr BrianLangton,

called on the NSW Auditor-

General and the Federal L,oansCouncil to examine the loan."This is a Government guaranteefor a supposedly private enter-prise operation," he said.

Interlink will operate the M5for 30 vears and mav not evenbegin repaying the $-1i0 million,plus 7 per cent per annum interest,until the end of that time.

Mr Fisk defended the 7 per centrate, saying: "Many people getloans at that rate; onJy short-term,high-risk loans have interest ratesbehveen I I and 16 per cent."

Three weeks ago, the Ministerfor Transport, Mr Baird, prom-ised that "the taxpayer would notpay a cent" for the 6.5-kilometreextenslon.

But he did not reveal at the timeeither the Government loan or thelact that the RTA had renegoti-ated its contract with Interlink aspart of the extension agreement.

Mr Rick Turchini, generalmanager and director of Leigh-tons - which jointly owns Inter-link with the CommonwealthBank - said that under theoriginal agreement with the Gov-ernment, it could increase the tollby 9 per cent a year on top ofinflation.

Under the new agreement, thetoll will remain at $2 for cars untilMarch 1996 and thereafter willincrease in line with inflation.

Mr Turchini said that afternearly a year of operation, an

average of just 32,000 cars a daywere using the tollway, comparedwith the anticipated 40,000.

He said Interlink had proposedthe $50 million loan to th'e RTA tocompensate for the lower trafficflow and to build the extension,which he hoped would generatemore traffic.

Truck numbers were down farmore than car traffic, with driversavoiding the $4.50 toll by takingalternative routes along localroads.

Mr Langton said he would askthe Government's PublicAccounts Comminee to look intothe deal as part of its inquiry intothe private financing and man-agement of public infrastructure.


44/51

Jtil,y |, 1993W.@ndl ePftrl FslqRItiA

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jt'JnvsRmmr

\atronal Roaos;.dVO(Or,st9 ASScr:.a::OnA C:r C@ 910 i,r6l3l Ciarerce StreetSyoney NSw 20@

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I

Media Enquiria

Rod Frall{oZ) & S171r1(o?) 7r395g(h)

Tony Hoban(o2) rc 81 75 1r1ro2) 922 45r I (hl

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Questions about M5 link:NRMA

NRMA has expressed concern at the number of uranswered questionssurrourding the Roads and Traffic Authority's funding of the M5missing lirtlc

ITIRMA's Chief Traffic Engineer, Peter Steele said today the la& ofinformation provided to the public about a $50 million loan to the tollwayoperabr, Interlinl, placed the credibility of privately funded roads atrisk.

'NRMA is on record as supporting construction of tlr.is essenrial link andthe principle of private sdor funded toliways if it means gettingessential infrastmcrr.ue builr well ahead of when the Covernment couldalford to build it.

"However, the apparent lack of public or parliamentary scrutinv of thenew agreement stnrck berween the RTA and Inrerlink is cause ior concernfor taxpayers generaliy and motorists in particular.'

Mr Steele said NR.VA had expressed concerns to the previous Road:Minister, Mr Munay, about the lack of public access to agreementsbeween the State Government artd private consortia. NR\'LA President.Don Mackay had suggested the organisation play a consumer watchdogrole in future negotiations, but this had been rejected.

''We believe the public needs to be better informed about these issues andwe have written today bo the Roads Mjnister, Mr Baird, seekingdarification of a number of points about funding of the linl," Mr Steeiesaid.

These points induded:

' the statement by l'{r Baird in Ns June i5 media release that taxpayerswould not pay any additional costs for the link, when it is not dearwhat effect the provision of 950 mjllion from the RTA's budget wilihave on other roadworks and what the reiative cost-benefit of such along term, Iow interest loan is.

. delays in construction of promrsed exit road ran)p> '' ^r.' :rz.jeffect of rrapping motorists on the tollway

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'The original agreement allowedyer.Thjs has now been limitedanother 6 years to enable theconstmction of the new linl


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FSARK COULTAN

On roadswith nodircctionIN FEBRUARY 199 I the Common-wealth Bank's head of structured

financing, Mr John Talbot, wrote anarticle in a

Documents

Public Equity, Private Debt. The Efficient Financing of Roads. (Complete paper)