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Building Bridges

Almost to the day back in 1989 as citizens began dismantling the Berlin Wall, America has voted in a new President that is vowing to build walls, not just with Mexico but trade barriers everywhere.

But it is construction of a different kind that perhaps should be drawing as much attention.

President-elect Trump sort of has a plan to spend large amounts of money on improving America’s infrastructure. Like all things associated with Mr Trump, the details are lacking, but the message is not and it will help the US economic growth rate.

Former RBA Governor Glenn Stevens was a vocal critic of the lack of global fiscal support to the heavy monetary policy easing (Quantitative Easing) that has had limited effect on lifting economic growth on its own.

Former US Treasury Secretary Larry Summers (a Democrat supporter) co-wrote earlier this year about the effects of secular stagnation – low interest rates, below target inflation and sluggish output growth. The findings concluded, inter alia, that sufficiently large fiscal interventions can eliminate a secular stagnation.

Mr Summers spoke to a recent Citi conference in Sydney and noted that infrastructure spending in the US was at its lowest point as a percentage of GDP since 1947. He advocated the country should spend up to US$2.5 trillion on infrastructure over the next decade to fix many of its run down assets such as JFK International Airport.

That’s a big pot of money and considerably more than the five-year $750 billion program Hillary Clinton was proposing in her Democratic policies. Mr Trump decided that he would ‘double’ what Hillary was going to spend but failed to elucidate precisely what that meant.

One case example of where large infrastructure spending is working is right here in Australia.

New South Wales Treasurer Gladys Berejiklian proudly trots out the achievements of her government with regard to its substantive infrastructure program.

Over the next four years, the NSW Government will spend approximately $73 billion on a variety of infrastructure projects across roads, rail, water, electricity, hospitals and even some social housing. Much of the program is either underway or in some cases already complete.

A significant amount of the full program is focused on road infrastructure including the $20 billion Sydney Metro, the $16.8 billion WestConnex and the $3 billion NorthConnex tunnel.

While the WestConnex project will initially be a government-only project, it will eventually sell down its equity to reinvest in the later stages of the massive Sydney-wide project.

Transurban

It is at this point that companies like Transurban (TCL) will likely become involved and given its track record in constructing and operating projects of this scale, is a strong contender to add this to its portfolio.

More immediately, TCL is already heavily involved in the NorthConnex project which is a twin 9km tunnel in northern Sydney that has often been referred to as ‘the missing link’ between the M1 Pacific Motorway and the Hills M2 motorway – also a TCL toll road

NorthConnex is part of the more than $30 billion of road projects underway across NSW.

TCL’s total project pipeline currently amounts to $11 billion of which its share is approximately $8 billion.

TCL’s big advantage is that it operates a network of roads across Sydney, Melbourne and Brisbane. It also has some toll roads in Virginia, USA.

With a team of 30 traffic analysts that is larger than any organisation in the country, including the government, TCL monitors and maps the critical road networks of Australia’s main cities so that it can plan and manage the ever increasing volume of traffic.

Contrary to what many people think, TCL does not have any pricing power regarding its tolls which are regulated under the various concession agreements. Approximately 60% of the portfolio has inflation adjustments built into the toll structure.

TCL is thinking heavily about the future with work being done on the inevitable rise of autonomous vehicles. The cost of road deaths in Australia is calculated at around $27 billion each year so the benefits of new road technology are important to the community in more ways than simple transportation. The company has an autonomous vehicle test underway in Virginia, in conjunction with Virginia Tech.

Autonomous vehicles could theoretically double the current road capacity of around 2,000 vehicles per lane per hour. There are congestion reduction benefits as well.

Of course, TCL does all this using shareholder funds and a large amount of debt (just over A$12 billion) that is mostly project-specific. It hedges all its foreign exchange risk and its interest rate risk.

The company’s cash flow policy is to pay 90-110% of it back to shareholders. It does not hoard the cash, preferring to go back to shareholders when opportunities for new investment arise.

The NSW Government has a process to handle so-called unsolicited proposals. TCL sees this as a handy tool to work closely with the government on possible future projects such as a Northern Beaches motorway, a second harbour road crossing and of course, the crucial road requirements surrounding the Western Sydney Airport that must be built.

Much of this discussion has focused on the Sydney network but Melbourne and Brisbane each have substantial future opportunities too.

The Transurban share price has been sold down following the US election on fears of rising interest rates affecting the value of its debt. While there is some validity to this argument, it presents investors with a chance to buy this long term infrastructure stock that has many positive attributes.

Let’s hope President-elect Trump really does understand the benefit of building lots of excellent infrastructure. NSW and TCL do.

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