PRIVATIZATION:407 Sold for $2.1 billion - Province Doubles its $s
By Peter Samuel
The new owner of 407-ETR is a group led by the Spanish construction company Grupo Ferrovial and its toll subsidiary Concesiones de INfraestructures de TRAnsporte (henceforth CINTRA) 61% of equity, the Montreal-based engineering firm SNC-Lavalin (SNCL) 23% equity, and a bank Caisse de Depot et Placement du Quebec (CDPQ) 16% equity. The Bank of Montreal was the principal organizer of the groups borrowings, supported by Citigroup. CINTRA operates about 12 toll roads internationally.
The province-owned Ontario Transp Capital Corp which until recently owned the highway has been transformed into 407 ETR Concession Company and title to this company will be transferred to new owners at the scheduled financial closing May 5.
Robert Racine with SNCL said the buying group is delighted to have won the project. He said the investors have to put up about $600m in addition to the $2.1b to finance extra works and capitalize the enterprise so their total commitment is about $2.7b.
The extra construction includes:
(1) West Extension - 24km of 6-lane (expandable to 8-lanes) from the present western end of 407-Central at H403 in Oakville to the QEW in Burlington at H403, with 5 ICs, work beginning shortly for road opening 7/31/01
(2) East Partial Extension - 15km of 4-lane (expandable to 10-lanes) from H48 to H7 east of Brock Rd Pickering with 4 ICs, work beginning soon for completion by end-01
(3) Additional interchanges and some improvements (possibly including widening the western 4-lane section H403 to H401) of 407-Central for completion by end-2001
By early 2002 the 407-ETR should be a 108km toll road (66mi). On the drawing board is a further extension, Eastern Completion, which would bring the road to 174km (106mi) but the financial case for the last leg is weak at present, and there is strong environmental opposition to it.
The sale agreement limits toll rate increases to inflation plus 2% each year for the first 15 years and to inflation after that. In addition, if certain specified traffic levels on 407-ETR are not met the province gets a penalty claw back or proportion of toll revenues. This seems to be an effort to discourage the concessionaire from pursuing a high toll rate/low traffic strategy, which would put more vehicles on competing free roads. The vehicle classification structure, which has single unit trucks tolled twice the car rate, and tractor-trailers three times, must be maintained.
The selection of the Ferrovial/SNCL group came in a second round of bidding with a group that involved the Thomson media companies, roadbuilder Kiewit (the principal in 91X in CA), with lending being organized by Toronto Dominion Bank. It was top bidder first up with C$2.75b to C$2.7b for Ferrovial. Bidding C$2.5b was a group led by another large Spanish based roadbuilder and toll operator Dragados, with Canadian Miller Paving and finance being arranged by Australias Macquarie Bank. Biggest surprise was the inability of early favorite Canadian Highways International Corp (CHIC) to put together a bid for the purchase.
CHIC did the design-build of the original 407-Central under contract to the provinces OTCC, and it has been operating the road under another contract since the road opened. CHIC seems to be handicapped by lack of support from some of its owners. There were also reports that its finance partners GE Capital and CIBC were half-hearted about the project. CHIC is a consortium of four Canadian construction companies, and its big remaining piece of work is the Cross-Israel Highway, supposed to close shortly after long delays.
The bidding process for 407-ETR provided that the if the top two companies first bids were within 5% of each other, a second round of bidding between them would decide the result. Reportedly the CEO of Ferrovial, when told of the second round of bidding, said simply: I want this road. Give them what it takes.
Ferrovial raised its offer C$400m. By contrast the Thompson/Kiewit group only raised its final bid by half that amount to C$2.95b, and was beaten by C$150m.
The sale is the largest highway privatization by far in North American history, and is only surpassed by toll road privatizations in Italy (Autostrade) and Portugal (Brise). 407-ETR is the worlds most advanced toll road. Arguably 91X in Orange Co CA is the first automated toll road, opening in Dec 95, since it has no on-site toll collection, but it only admits patrons equipped with an electronic toll transponder and it is a simple in one end, out the other, facility of 17km (10mi) length.
407-ETR is the first fully automated-toll road with multiple interchanges and which caters to occasional users not equipped with transponders. They are billed after their license plates are photographed by automatic equipment at entries and exits. 210k tolls per day are being collected on the 407-ETR and all the bidding groups said they judged it to be a well-designed toll road with robust technology and a profitable future. One of the losers told us: Ferrovial paid full price, and going out that far they take a few risks, but the price is not unreasonable. They could get a big return down the track. It is a very solid investment. We were sorry not to get it.
The land was bought by and remains the property of the provincial government, but all improvements become the property of the Ferrovial/SNCL group for the 99-year term of the concession.
The Ontario govt spent about $250m cash on ICs and other works for the road before deciding that toll revenue bonds were the only way to get it built in less than 20 years. Through OTCC it borrowed just under $1b, making its total outlay $1.2b. It is therefore able to retire its debt and pocket $900m for the taxpayers of the province to give them taxcuts or extra services. Very handy with elections approaching!
The financial and political bonanza seems likely to help the present conservative government, though an earlier centrist government started the road. Despite Ontario having no history of toll roads in the automobile era, drivers have flocked to the 407, delighted by the opportunity to make rapid comfortable trips avoiding the procession of traffic signals on surface arterials. The road is for some an alternative to congestion on the parallel 14-lane H401 8km (5mi) to the south.
The success of the 407 sale could make governments elsewhere look at whether they have similar valuable highway assets that could be put into business ownership and operation, and the proceeds used more productively for taxpayers.
Triumph for province
Ontarios privatization minister Rob Sampson was triumphant about the price obtained, there having been fears at one point that the government might not get bids high enough to recoup its investment. Only sour note was sounded by the Canadian motorists organization CAA and opposition politicians who criticized the 99-term of the concession, and tolls for our children and grandchildren.
However a shorter term would have depressed the price and it is unclear why tolling should not be permanent, since it provides a dedicated revenue stream and a valuable traffic management tool. Without tolls, taxes would have to be higher to pay for the road.
Sampson says he thinks other governments may be encouraged to follow the example of 407. The US has a bunch of toll agencies that would attract billions each based on their valuable assets and proven patronage, but the Detroit-Windsor Tunnel is the only example of privatization so far.
BACKGROUND: 407 is the worlds first multi-interchange automated tollway. It tolls at highway speed by using shortrange radio communications with transponders issued to account-holders for fixing to their windshields, and by imaging license plates of non-account customers and billing them monthly by mail. Trip lengths are computed by identifying each vehicle at entry and exit ramps of which there are 126 at 28 interchanges. The toll technology designed by the then Hughes (now Raytheon HTMS) of Fullerton CA and Bell Canada is solid and efficient by all accounts. It uses a pair of IBMs most powerful mainframe computers and a major fiber-optic communications network and cost about $50m.
The toll rates vary:
(1) peak periods weekdays 5:30-9:30am and 4:00-7:00pm 10c/km (thats Canadian cents, about US7c)
(2) daytime off-peak weekdays 9:30am-4:00pm 7:00pm-11pm and weekends & holidays 5:30am:11pm 7c/km (US5c)
(3) nighttimes 11:00pm to 5:30am 4c/km (US3c)
Those are for light vehicles under 5t. Single unit heavy vehicles pay twice namely 20c, 14c and 8c/km. Tractor trailers pay three times the light vehicle toll, namely 30c, 21c and 12c.
407-ETR opened: June 7, 1997
Tolling began: Oct 14, 1997
Traffic: 210,000 veh/weekday recently
(Contacts: Robert Racine Ferrovial/SNCL 514 393 1000x2015)