Monday, May 21, 2018

Brian Gaynor: Finding money to get Auckland on the rails


Auckland’s transport system, particularly the proposed light rail project, will generate considerable debate over the next few years.

The objective of this column is to assess the potential financing of the light rail plan rather than assessing the merits of the development. Will it be funded by rates increases?

What role will the New Zealand Superannuation Fund play? What contribution will central government make?

One way to look at Auckland’s proposal is to compare it with Montreal’s light rail project, which began construction last month.

A comparison with Montreal is appropriate because the Canadian project is mainly financed and owned by CDPQ Infra, a potential NZ Super Fund partner in the Auckland project.

The first point to note about Greater Auckland is that it has a much smaller population than Greater Montreal — 1.66 million to Montreal’s 4.1 million.

The other big difference is that Auckland is more spread out, with a population density of 343 people per square kilometre while Montreal has 965 per square kilometre.

Aucklanders are more reliant on roads, with 905 vehicles for every 1000 inhabitants aged 15-plus, while Montreal inhabitants have a vehicle density of only 440 per thousand inhabitants and rely more heavily on public transport.

Montreal had 430 million public transport passenger trips in 2017, while Auckland had only 91 million (rail, 20m; bus, 65m; and ferry, 6m). An estimated 22 per cent of Montrealers travel to work by public transport while the Auckland figure is well under 10 per cent.

The Montreal light rail project — officially called Reseau Express Metropolitain (REM) — is a rapid transport system linking Greater Montreal with the downtown through several suburbs.

The REM will also establish a rail connection between the downtown and Montreal-Pierre Elliott Trudeau International Airport.

Trudeau International Airport, which had 18.2 million passengers in 2017, is reliant on cars and buses at present. Auckland International Airport, which had 20.0 million passengers in the March 2018 year, will also be connected to the downtown through Auckland’s proposed light rail project.

The REM, which is estimated to cost C$6.3 billion ($7.2b), is a 67km light rail system with 26 stations. It will be independent of — but connected to — the existing Montreal Metro, the city’s 69.2km underground rapid transport system. The REM trains are expected to be fully automated and driverless.

According to Canadian media reports, this would make it the world’s third longest automated transportation system, after the Vancouver SkyTrain (79.5km) and the Dubai Metro (74.6km).

Singapore’s Mass Rapid Transit system (82 km) is often considered to be the world’s longest automated system but it is not fully automated.

The REM’s main funders and shareholders are:
  • CDPQ Infra, 51 per cent
  • Government of Quebec, 22 per cent
  • Government of Canada, 22 per cent
  • Hydro-Quebec, 5 per cent.
All the funding is in the form of equity because of simplicity, increased flexibility during the construction phase and reduced interest rate risks.

In addition, the city of Montreal has pledged C$100m although specific details on this are not available.

CDPQ Infra has a priority return threshold of 8 per cent on its REM equity investment.
The priority return threshold is a return rate that must be achieve by CDPQ Infra before the three minority shareholders receive any return. The priority return is not the same as CDPQ’s anticipated rate of return, which is between 8 per cent and 9 per cent.

Until CDPQ Infra’s 8 per cent priority return is met, all of REM’s dividends will be paid to the majority shareholder. Once the threshold is met, an estimated 72 per cent of the dividend will be paid to the three minority shareholders until they achieve their minimum target return rate of 3.7 per cent.

The minority shareholders’ targeted return of 3.7 per cent is equivalent to the average borrowing costs of the Quebec Government. Once minority shareholders have reached the targeted rate of return, dividends will be paid in accordance to ownership: 51 per cent to CDPQ Infra with the remaining 49 per cent to the three minority shareholders.

An information note released by CDPQ Infra stated: “The REM project is the first public transit project where the government will recoup its capital investment and its average borrowing cost”.

CDPQ Infra is the infrastructure investment arm of Caisse de depot et placement du Quebec. The Montreal based asset manager has C$298b under management, mainly pension and insurance funds, for 40 public organisations.

Caisse delivered an annual return of 10.2 per cent in the five years ended December 2017. This compares with the NZ Superannuation Fund’s long-term return of 10.3 per cent per annum.

The REM model is unusual, because the assets are owned by CDPQ Infra and the other shareholders, while under the public private partnership (PPP) model, the assets remain government or regional authority owned.

The financial return to CDPQ Infra and the other shareholders will depend on the patronage, the number of passengers that REM attracts.

A February 2017 report estimated that REM would capture 84 per cent of passengers who travel to Trudeau International Airport by bus, it would attract 17 per cent of passengers who take a taxi and 13 per cent of passengers who park their car and fly.

The report estimated that REM would capture 18 per cent of the total passenger and airport staff travelling to Trudeau International Airport by bus, taxi and car.

If REM captures more passengers than expected, then the project will be a financial success. If it captures less than expected, shareholders will bear the cost.

Auckland Transport (AT) believes that light rail is a viable proposition for the region because the trains are faster than buses, use less road space and have more doors to keep stop times below 30 seconds.

The two major light rail proposals are from the city to Auckland Airport and the northwestern corridor, from the city to Westgate. Auckland Mayor Phil Goff is in a hurry to get the project off the ground but the AT website has several reports, going back to 2015, that don’t have much precise detail.

Auckland’s light rail project jumped back into the headlines on May 9 when Finance Minister Grant Robertson and Transport Minister Phil Twyford announced that “a modern, rapid transit light rail network to transform Auckland is a step closer with Cabinet agreeing to launch a procurement process”.

Twyford was quoted as saying, “the Government is committed to progressing light rail to transform Auckland. It will be a magnet for private investment in urban renewal. Last month, the Government received an unsolicited proposal from the New Zealand Superannuation Fund, which proposed they would form an international consortium to design, build and operate Auckland’s light rail network”.

Twyford concluded: “the Government will not be commenting further on the proposal other than to say we welcome the strong interest in light rail and acknowledge than any investors will require a reasonable commercial return”.

The response to NZ Super’s proposal has been largely negative, but Montreal’s REM project gives us some sight into its proposal because CDPQ Infra, the majority owner and operator of REM, is the Super Fund’s proposed partner.

The REM’s majority shareholder has an anticipated rate of return of 8.0 to 9.0 per cent.
This anticipated rate of return is comparable to greenfield-type investments with a similar risk-return profile, including construction risk. Shareholders assume the passenger usage risk and the project is funded by debt.

Light rail and other infrastructure projects will attract more funding from long-term superannuation funds.

Isn’t it more appropriate that the NZ Superannuation Fund is given the opportunity to fund New Zealand infrastructure projects, instead of funding infrastructure developments in other countries?

Brian Gaynor is an investment analyst and the Executive Director of Milford Asset Management. This article originally appeared in the NZ Herald.

2 comments:

Unknown said...
Reply To This Comment

THis is to thank Brian for his succint contribution setting out how the Montreal version of this plan is to be financed and the figures on usage it is based upon and the heartening 20m vs 18m passenger movements at the two airports quite detached from the base city populations involved. Fancy that, the NZ Super fund investing in NZ! Dick L

Warren Sanderson said...
Reply To This Comment

No great wonder we have outrageous vehicle congestion in Auckland. As Brian Gaynor points out we 905 vehicles per 1000 inhabitants aged 15+ whilst Montreal has only 440 per 1000 ie nearly one car per person in Auckland which gives us a massive/expensive car storage problem whether being driven or parked. All because the last Government would only spend money on roads and refused for ideological reasons to invest
in public transport!

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