At the end of May investors in the Macquarie International Infrastructure Fund (MIIF) got a nasty shock when they were informed that revenues from a Chinese toll road in the fund’s portfolio were likely to fall by as much as 25%.
That wasn’t down to a fall in traffic or operational glitches. Instead it was due to a notification from the Guangdong Transport Bureau that toll rates in the province would be ‘standardised’ at Rmb0.60 per kilometre of road. Previously MIIF’s Hua Nan Expressway had been charging Rmb0.75/km. (Another notification hit revenues again by changing the methodology by which slip road length is calculated.)
Singapore-listed MIIF noted in a press release that its toll road “has been operating strictly in accordance with its legally binding contract with the Guangdong provincial government and charging approved toll rates in accordance with applicable laws”. Accordingly it “reserved its rights in relation to the changes and will pursue all available options to seek a favourable resolution on this matter”. Hong Kong-listed NWS Holdings (part of the New World conglomerate) and Hopewell Highway Infrastructure have also notified investors of similar changes in toll road rates. According to an HSBC report the revisions could see their revenues decline 16.7%.
All the firms were told the new tolls will apply from June 1.
Guangdong has long been known as one of China’s most business-friendly provinces, so what is going on?
Naturally, the measure will prove popular with motorists. But the probe into toll rates dates back to last year when inflation was the main policy concern. The price of basic foodstuffs was the worry, with one area for focus the cost of transporting eggs, pork and vegetables from farm to the supermarket shelf.
The likely culprits? The price of fuel, as well as inefficient logistics (far more costly in China than in the US, see WiC 108). And as part of this discussion tolls inevitably came into focus too. Critics said they were too high but toll operators at Hua Nan Expressway point out that rates have been steady since 1999. When measured against inflation, they’ve fallen 16%.
In any case, if the tolls were to be changed, a formal consultation and review process was supposed to have been launched with the firms involved. Designed to last a year, it would look at construction costs, inflation, levels of investment and rates of return. At the end of this dialogue, a new application process would determine a series of updated toll charges.
But to the surprise of the three overseas-listed toll operators, the review process failed to take place. In fact, the slashing of rates looks to have been carried out in an arbitrary fashion with little explanation of why a toll of Rmb0.60/km was chosen rather than one at Rmb0.55/km or Rmb0.65/km. Given most of the province’s toll roads are state-owned, such details may not have been felt necessary. But privately-owned businesses will be a lot less familiar with such cavalier treatment.
As a lesson for investors in how administrative diktat can trump contracts, Guangdong’s toll road debacle offer a cautionary tale. China is still a country where rule of law remains subordinate to the Party and its policy objectives.
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