WestConnex to be sold in stages

15 November 2016 - 12:00 am UTC

The New South Wales government is mulling plans to sell the WestConnex motorway several years ahead of schedule. 

NSW Treasury on Monday (14/11) appointed Goldman Sachs as financial adviser and Ashurst as legal adviser for a scoping study to be delivered early next year. It will examine several options including placing each of the motorway’s stages on the market sequentially.
The motorway is costing AUD 16.8bn (USD 12.7bn) to build but could sell for considerably more than that, depending on how it is packaged. 
Study options may lead to a series of partial sales, with the proceeds factored into the 2017-18 state budget, but the actual auctions could play out over many years. 

Toll road developer Transurban is considered the natural buyer for the motorway network, given it holds a concession for the M5 which is being expanded under WestConnex. 

Chief executive Scott Charlton has previously said the company would look at WestConnex if the government chooses to sell it, and that there would be synergies with other Transurban-invested roads including the Eastern Distributor and the Cross City Tunnel. 

Infrastructure fund managers, pension funds, and potentially international players – including Spain’s Abertis and Ferrovial subsidiary Cintra – would also be drawn to the sale. 

Investors that co-own the M5 alongside Transurban have also reported their interest – they include AMP Capital, Hastings Funds Management and IFM Investors – but are unlikely to bid as a unit, two sources claimed. 

WestConnex’s owner is the state-backed Sydney Motorways Corporation (SMC) which has the concession with Roads and Maritime Services giving it the right to toll motorists and raise limited recourse debt. 

Construction on part of the first stage of Westconnex – a widening of the M4 – is underway and expected to be finished in 2017, with work on the adjacent M4 East tunnel between Homebush and Haberfield due to conclude in 2019. 

Macquarie Capital has been hired to place limited recourse debt for the Stage 1 tunnel, and is speaking to several local and international banks but has not yet closed a deal, as reported. 

Stage 2 – a duplication of the M5 – gained planning and environmental consents in July this year and work began later that month. SMC is borrowing AUD 1.5bn from a club of banks in a deal inked last November. There is also state-backed debt in the form of a subordinated loan from the federal government in the capital structure. 

The study positions the sale to be fast-tracked by at least two years, according to the latest business case from November 2015. It said SMC would sell Stage 1 in 2019, after construction on the M4 East tunnel finishes. 

If Treasury puts part of the road on the blocks after the scoping study completes next year, construction on the first two stages will still be in progress. This could make it more difficult for potential buyers to know how much traffic will be on the road when it is built. Traffic flows on the existing M4 and M5 motorways will be known, but buyers will not know how many more cars will use the roads when they are extended. 

The investment has been described as “khaki” in that it has elements of greenfield and brownfield risk, because a buyer would take on more risk while the traffic is ramping up. 

“SMC has borrowed money and has to repay it – it is taking the risk that toll revenue will be sufficient to repay the debt,” a source who has previously advised on WestConnex told InfraAsia. 

A buyer will have no room to move on the toll, which has been set in stone by the government but ratchets up with CPI. Official forecasts show that 163,800 vehicles will use the widened M4 per day and 132,400 will use the M4 East by 2031. Tolling is distance-based and capped at AUD 4.21 for the widened M4 and AUD 3.65 for the M4 East. 

Another potential risk for the buyer of the first stage is that they will not know how many cars will use the third stage – a road linking the M4 and M5 between St Peters and Haberfield. Early stage planning is underway but construction won’t have begun by the middle of next year when Stage 1 is being sold.  

The source said the third stage was a vital “missing link” and would have a huge impact on the performance of the first and second stages. 

PwC has also been appointed in an accounting and tax advisory role.