Netflow Group grows ahead of Westconnex sale launch

10 November 2017 - 12:00 am UTC

Bid groups for the AUD 16.8bn (USD 12.9bn) WestConnex project are firming ahead of the Monday sign-up deadline, but many have serious misgivings about the risks of the project.

It is understood at least three main groups will lodge expressions of interest on Monday (13 November) for the 51% stake in project owner, Sydney Motorway Corporation, including Transurban with its partner AustralianSuper, the Netflow consortium of Plenary and Cintra with several offshore equity partners, and IFM Investors.

Inframation understands from several sources that Netflow is to include several Canadian funds, including CDPQ, Borealis Infrastructure, PSP Investments and Alberta Investment Management Corporation, as well as Partners Group.

A spokesperson for Netflow declined to comment.

Numerous other parties will likely lodge an EOI, but are as yet unaligned and questions remain over their ability to raise the equity. Industry sources have named Globalvia, CIMIC, CP2, Abertis, QIC and Shandong High Speed Rail as interested players.

But it may still end up a two-horse race between the Transurban and Netflow groups. Some suggest there remains a risk Transurban will be the only bidder, quashing the governments hopes of “leveling the playing field” with other contenders.

Several alternative bidders argue the structure of this pair’s consortia and market dominance gives them the ability to out bid all other rivals, even if the government offers concessions to reduce the risk of the yet to be built M4-M5 link and associated interchange infrastructure and provides more guarantees on expected traffic flows.

The government has provided some deal sweeteners so far to maintain competition. That includes confirming the concession will extend out to 2060, adding greater traffic flows with the inclusion of the western section of the M5 to Sydney Motorway Corporation in 2026 and selling the Roads and Maritime Service e-toll system as well.

In a note to investors in early October, former Citi analyst, Anthony Moulder, estimated WestConnex traffic forecasts were about 10% too high.

He said with the promises made so far by the government, even for the frontrunner, Transurban, there was still AUD 600m of “support” needed or investment into WestConnex would be “value destructive” for Transurban shareholders.

Construction risk is a major factor on the M4-M5 link, as well as the highly complex Rozelle Interchange and Iron Cove Link that would connect the new M4-M5 tunnel to the extended M4 and other planned motorways. The connecting roads are not part of Westconnex but it has been suggested the government and contractors could share some of the risks of cost blowouts.

Suggestions to reduce risk by bidders include giving them preferred bidder status on roads planned to link up with WestConnex – including the Western Harbour Tunnel, Sydney Gateway – a tolled road and rail duplication to the airport and Port Botany – and the F6 to the south – and even roads not connected to WestConnex.

Another is maintaining the present “cashback” scheme on the M5 for the length of the concession to 2060, ensuring the present traffic on the M5 is at least maintained.

One major infrastructure investor still considering a bid already envisages complications with the M4-M5 link that could bring big cost hikes and said a delay finishing Rozelle Interchange would affect traffic numbers and add to costs on the M4-M5 link.

They suggest it will be very difficult to pass construction cost rises onto contractors given the negotiating power they have with the present level of demand in the market for their services.

Two investors said competing with the bid groups of Netflow and Transurban will also be tough because the operators are not competing to own the asset for the long term, like infrastructure funds would be.

“It is one of the least attractive opportunities at the moment,” one said. “The misalignment of operators and passive equity [you’re competing with], and the quite significant construction risk and traffic risk on Stage 3 – if you did win it, you’d be nervous.”

“Conditional bids” or indicative bids are understood to be due in late February, with short listing soon after and binding bids due by mid-2018.

On Friday (10 November), the NSW government confirmed the state Treasury’s WestConnex transaction director, Leilani Frew, will be succeeded by Alexander Wendler after Frew left to take up a role with the federal government.