Toll Road Disruption

Toll roads are a core infrastructure investment class, in our view, but new transport and tolling technologies could disrupt the traditional business model. Morgan Stanley’s research team estimate that shared autonomous vehicles could widen toll road valuation ranges by as much as 15%.    

Toll roads often act as the arteries into and between cities, supporting employment hubs, trade flows, and real property values.

A good toll road is a long-life asset with a low cost of capital (stable traffic patterns and fixed prices support high financial leverage). Through appropriate maintenance, a concrete road can last 40 years. Therefore policy-makers globally view toll roads as an attractive option for transport infrastructure and development.

Relative to other asset classes, mature toll road cashflows are relatively stable and predictable (<5% cashflow variability year-on-year), so toll roads can generally sustain high levels of investment-grade debt, and toll road equity investment is typically seen as defensive.

Capital is flowing into mobility innovation, with the rising use of technologies such as app-enabled ride-sharing, autonomous vehicles, optical recognition, more efficient batteries, and drones. This disruption presents both opportunities and challenges to traditional toll roads.

Toll roads are typically classed as intra-urban, where the road links a city and its surrounding suburbs, or inter-urban, where the road links different cities. Disruption impacts will be different for intra-urban roads (which tend to cater more to commuting) vs. inter-urban roads (which tend to carry more freight and leisure traffic) and for cars vs. trucks. 

• There continue to be economic drivers, such as population growth and increased merchandise trade demands, which could lead to increased freight travel and freight capacity utilisation.
• Vehicle identification tolling technologies, such as optical license plate recognition and vehicle GPS data, could improve safety (e.g incident response) and reduce infrastructure requirements.
• There are potential positives in the impact of shared autonomous vehicles on a generic toll road. Travel demand could grow an extra 1% per year over 40 years, as cost per kilometre falls and unserved passengers gain access, and roads might fit an extra 10% of vehicles on a semi-autonomous basis.

• Commuter travel has higher risk of disruption, owing to lower capacity utilisation (~1.5 passengers per car) and the potential for unpredictable behavioural change.
• There are potential challenges with the rise of shared autonomous vehicles, as there could be less traffic and less predictable traffic. For example, an increase in passengers per car to ~2.5x would reduce toll road revenue by 40%.
• Modal substitutes, such as drone delivery and drone taxi may reduce trips, especially intra-urban short distance travel.
• Travel substitutes, such as telepresence, could also reduce trips (especially business travel) while more advanced 3D printing technology may reduce heavy vehicle traffic depending on the relative density of raw materials to finished goods.

The McKinsey Global Institute estimates there will be US$18 trillion in total road infrastructure investment to 2035 and Morgan Stanley believes that an even higher proportion of roads will be tolled in future. We believe this will be driven by a virtuous circle of low operating risk and low cost of capital, which helps policy-makers manage finite budgets.

In general, Morgan Stanley sees high, and perhaps underappreciated, disruption risk for toll road business models on a 20-year view, due to the inevitable collision of technological advancements and behavioural changes. However, this provides new opportunities for investors, operators and policy-makers, and will require increased focus on risk allocation and strategic options.

For more on the challenges and opportunities of toll road disruption, speak to your Morgan Stanley financial adviser or representative. Plus, more ideas from Morgan Stanley’s thought leaders.