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Tolling Points

Fitch: Toll Roads Are Resilient Assets

Cherian George

While infrastructure as a collective is no doubt aging throughout the developed world, toll roads remain lucrative assets because they bring in substantial revenue. As discussed in Fitch’s special report “Toll Roads – 10 Years in Infrastructure”, which provides a first-of-a-kind, global overview of toll roads operational and financial performance including the worst financial crisis since the Great Depression, they successfully bring in revenue because of their resiliency.

Toll roads = resilient assets

The report illustrates the performance of toll roads in the US, Latin America, Europe and Asia, and the correlation with GDP among other economic indicators.  The Global Financial Crisis, which was centered in the US, highlighted the exposure to the economy but also the recovery potential of toll-road assets.  Europe faced a double-dip recession, yet most toll roads recovered.  Meanwhile, the high growth rates in Asia and Latin America only slowed during that period.

Dependence on commuter traffic largely provided that stability even through these crises of the last decade that crippled the broader economy. Not only did toll roads survive a seismic stress test, but they also demonstrated the ability to recover using available pricing flexibility. Not all toll roads survived, unscathed, however, as smaller networks, standalone assets and roads that saw more freight and leisure traffic proved more vulnerable to economic cycles. Interestingly, price elasticity was lower than expected in these instances as well.

Urbanization = greater car ownership

Urban population growth has outstripped that of the global population as a whole with middle-income households alone growing 12% between 2006 and 2016. Urban populations expanded by almost 25% (over 750 million people) during the same time period. These trends are not likely to let up, either, because 80% of the world’s population is in non-OECD (largely emerging and less-developed) countries, which have high population growth rates.

What the explosive growth in urban population has done is lead to increased mobility, particularly personal transportation. Global car ownership rose over 40% between 2005 and 2015. In the more mature US, revenue from large toll roads grew in double-digits. Traffic growth is also worth note in other parts of the world. European toll roads withstood the sovereign crisis of 2011-2013 and have seen traffic volumes recover to levels approaching those seen back in 2007. Elsewhere, emerging-market toll roads have seen traffic growth across the board following the global financial crisis.

Lessons Learned

The past 10 years have reinforced what many in the market have already known about toll roads – that forecasting traffic volumes remains a challenge. Individual asset performance can and often varies significantly while exposure to competition always remains a material risk. That said, pricing flexibility, even for weaker assets, has been greater than expected where legal rate-making authority existed. High leverage, aggressive debt structures and political risk are significant risks to investors.

What’s Next?

Modern infrastructure is more critical than ever to incentivize changes in travel behavior that are needed to maximize the social and economic benefits of technological advances. Planning for the long haul and engendering political-will, though likely to be elusive, are also important to garnering those benefits.

What do US toll road operators need to do to stay relevant as we progress through the 21st century?

They will have to invest in the overall condition of the road and highway network and new technology to allow for driverless cars and connected vehicles to operate efficiently. The underlying infrastructure needs to achieve higher standards for smooth operation. The problem here is that many non-tolled roads throughout the country are poor in quality. This may slow the adoption of driverless cars because drivers may still be needed for these sub-standard roads, while others do not have the necessary in-built infrastructure in place to permit high volumes of driverless cars. Upgrading and maintaining road infrastructure will not be cheap, either; an enormous challenge for a nation already dealing with a multi-trillion-dollar infrastructure deficit.

About the writer, Cherian George is the Managing Director, Americas, with Fitch Ratings in New York.


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