New from Down Under: American Toll Roads

A crumbling US infrastructure hurts many companies. Could the best answer come all the way from Australia?



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The Indiana Toll Road is a 157-mile stretch of asphalt crossing the not-particularly-pretty terrain of northern Indiana. The only real landmarks the road passes are giant steel mills—some still operating, some shut down—and no one would ever call a steel mill beautiful.

But the toll road in some ways is a model of efficiency. It lets drivers traverse the Hoosier state, in barely two hours if traffic is good, much more quickly than other roadways. It’s a key artery to move goods from the West Coast to big markets on the East Coast. And with an $11 toll to run the road’s length in a car—and as much as $93 for a big truck—it raises considerable funds to help pay for road repairs and other maintenance. The only wrinkle: Some of those funds are also used to help people 10,000 miles east of Indiana—Australian retirees.

Even in a world where anyone can own anything anywhere, it’s still a little jarring that a stretch of highway through northern Indiana is owned, in part, by Australian pension plans. But this road, which has been Aussie-owned since 2015, is considered a prize among the many toll roads owned around the world, in part, by Australians. Private ownership of roads in the United States has a checkered history at best, but it may become one of the ways the country—along with many other nations worldwide—builds and replaces its infrastructure. Indeed, much of President Trump’s initial plan for revitalizing US roads involves private-public partnerships similar to the Indiana Toll Road. How well private Australian investors run a toll road in Indiana may forecast how transportation networks will be run in the US and beyond.

No matter who owns the roads, there’s broad consensus that the United States needs to spend more on them. Congestion cost US drivers alone nearly $300 billion in 2016, according to INRIX, a Seattle-based technology company that compiles traffic data. Bad roads not only increase commuting times, but also play a role in decisions about where to build an office or manufacturing facility. No leader wants to place a factory along a road whose poor condition creates shipping delays. “The real justification for improving transportation infrastructure is to make our economy more productive,” says Robert Poole, director of transportation policy at the Reason Foundation, a Los Angeles-based think tank. “It’s the means to the end of faster and more reliable goods movement, better matching of employer needs and employee skills, and shorter and less stressful commutes.”


The problem, of course, is how to fund those costs. While engineers and federal officials differ in their estimates of what it will cost to refurbish American roads, the tab for rebuilding promises to be steep. In its new “Report Card” on the condition of US infrastructure, the American Society of Civil Engineers (ASCE) said a total investment of $4.59 trillion would be needed to restore US infrastructure to an adequate grade by 2025. Roads and transit systems account for the lion’s share of the funding gap. In 2016, the ASCE says, the country faced a $1.1 trillion backlog of maintenance work needed on surface transportation assets by 2025, and only 46 percent of that was funded. The US isn’t alone; the world needs to spend $34 trillion from now to 2040 to build and maintain healthy road networks, according to the Global Infrastructure Hub, an Australia-based nonprofit.

Toll roads might be an answer—but the concept isn’t welcomed in the US. Ironically, they were actually among the best way to travel by vehicle until the 1950s—when the US Interstate System was built, providing a national highway network without user fees. Americans have been unwilling to confront the true cost of road infrastructure for decades, says Tanya Langman, director at Fitch Ratings, a firm that reviews debt deals that finance infrastructure. That’s created “unrealistic expectations about the real cost and the obligation of the public to pay for it,” she adds, leaving the US facing “an infrastructure investment cliff.”

All of which opens up the road for Australia—whose pension funds are happy to help. “In Australia, infrastructure is front-page news all the time, a lot of funds are investing in it, and people are talking about it,” says Julio Garcia, head of infrastructure for North America at IFM Investors. Australian interest in urban toll roads stems from having a small population, about 23 million, concentrated in a few state capital cities, rather than more evenly dispersed across a land mass about the size of the lower 48 US states, Garcia says. In contrast to the heavy use of the US Interstate network, Australians fly between dense urban areas, resulting in relatively infrequent travel on long-distance highways. Toll roads have evolved to serve the major metro regions around Sydney, Melbourne and Brisbane, where the need for financing meant many main arteries were built as toll highways from the start. “People could see a new benefit in terms of a road they didn’t have before, but it did come with a user fee,” Garcia says.

A unique organization, IFM is owned by 28 Australian pension funds that formed a consortium more than 20 years ago to invest in infrastructure. Today, IFM manages about $58 billion on behalf of pension savers, with about $25 billion invested in 29 infrastructure assets across the world. While it’s based in Australia, IFM today also invests on behalf of North American and European pension plans, and counts more than 75 US pension funds among its 175 institutional investors.

All told, the Australian retirement system, called superannuation, now has more than $2 trillion in capital. Created in 1983 as the solution to national union negotiations, the system requires employers to contribute 9.5 percent of salary to a retirement account for workers over age 18 earning more than $450 per month. Contributions are directed to “super funds,” large pools of capital managed by professional investment teams. Because many workers won’t retire for decades and won’t need to tap their accounts, those investment teams are able to invest in illiquid assets with very long-term income streams. Toll roads fit the bill, and the ITR fits especially well. “We try to find assets that are critical to the economies and communities that they operate in,” Garcia says.


The Indiana Toll Road is one of IFM’s prize assets—which is something of a turnaround for the venture, given that a prior consortium that was hit by the financial crisis filed for bankruptcy court protection. Under IFM, the road has benefited from heavy traffic by import-laden trucks from West Coast ports. “Anything going either to the Midwest or to East Coast cities, in all likelihood, is going to go out in a truck over the ITR,” says Garcia.

In general, the concept of privatizing the Indiana Toll Road’s operation has proved to be a boon to Indiana’s aging roads. While the road opened as a free highway in 1956 (it’s technically a stretch of Interstate 90) the $3.8 billion initial lease payment the state got for selling operating rights in 2006 funded a statewide transportation investment program, including deferred maintenance on the toll road. It also helped seed “Major Moves,” a $2.8 billion ongoing highway construction program that has paid for hundreds of road and bridge projects in Indiana that had previously lacked funding.

The deal has enabled Indiana to convert the long-term economic potential of a strategically located road—which had been losing money under government operation—to ready cash for immediate upgrades to roads. But it’s not just Indiana that has tapped the potential of privately operated toll roads. Motor along the two major interstate arteries that feed into Washington D.C. from Virginia and you’ll find adjacent tolled express lanes operated by yet another Australian firm, Melbourne-based Transurban. The firm, which runs a fund for Australian higher education and research professionals, says it specializes in building and operating “smarter motorways” that use emerging digital technologies to smooth out the bumps in daily commuting.

Toll revenue there is already up, but the firm says its unique traffic management system is only going to boost the number of cars passing through. The company is piloting autonomous and connected driving technologies to control vehicle position, speed and lane changes in heavy traffic, as well as technology that digitally connects cars to sensors embedded along the motorway.

The goal is to form rush-hour drivers into “platoons,” computer-guided groups moving in sync like the Tour de France peloton, with vehicles just close enough together to allow maximum speed for prevailing conditions. High-speed platoons can increase the capacity of a roadway by as much as 25 percent without compromising safety, the company says. In a novel take on board engagement, company directors are literally going the extra mile to support Transurban’s tech initiatives—several have served as passengers for connected-driving tests conducted on the express lanes around Washington.

Ultimately, experts say, the future of the toll roads will likely come from more public acceptance and more public funding. “It would be great if the Trump administration could offer some sort of incentives like the capital recycling we’ve done [in Australia] or through additional loans,” says Scott Charlton, CEO of Transurban. The Australian federal government grants a 15 percent subsidy to states that privatize infrastructure and reinvest the capital raised from private investors into additional infrastructure. Will the US take that route? “Tolling isn’t the right answer for every road,” says IFM’s Garcia. “But I think it’s a sensible direction for the country.”

(click the image to enlarge)


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