French road concessions: users versus shareholders

The regulator, in its contract signed with the road concessionaires, allows them to change the toll fares so as to maintain the net asset value and the agreed “fair” return to their initial levels. Higher inflation has mixed effects for this sector: though toll road companies can index their fares to general rising prices, they have in fact limited variable costs and relatively low level of operating leverage; moreover, through higher interest rates and increases in the discount rates used to compute the net value of the concessions, higher inflation impacts asset values. In other words, based on their calculations, the researchers highlight that the market value of French roads concessions should decrease by about 7% in the no toll indexation scenario.

In February 2023, the road concessionaires have implemented an average increase of 4.75% to the toll fares, with some reductions offered to the regular users (more than 10 trips a month on the same road). Based on their previous research noted in the press and used by the Senate in its n°709 report, the EDHECinfra researchers* have calculated assuming a low price elasticity of demand for these road networks, the increase in tolls should increase revenues by at least 4.25%. Since operating leverage for French roads was around 2 at the end of 2021 - each additional euro of revenue creates 2 additional euros of profit – this will lead to an increase in profits of approximately 8.5%.

Because higher profits are associated with lower dividend risk (and lower discount risk), this will lead to an equivalent increase in dividends and a higher valuation of the concession contracts. Altogether, for the 10 concessions analysed, which weigh EUR 275 billion in terms of market value equity, this difference between the -7% and the +8.5% will create an additional value of approximately EUR 4 billion for the investors.

The researchers consider that the motorway concession contracts are poorly designed, leading year after year to a financial disequilibrium unfavourable to users. In 2020, EDHECinfra noted that it could be possible to lower motorway tolls by 15% without threatening the financial equilibrium of the concessions.

Références

• Amenc, N. & Blanc-Brude, F. (2020). "The cost of capital of motorway concessions in France – A modern approach to toll regulation", EDHECinfra Publication.
• Whittaker, T. et Tan, R. (2020) "Anatomy of a Cash Cow", EDHECinfra Publication.
• Blanc-Brude, F. (2018) "Unlisted Infrastructure Asset Pricing Methodology – A modern approach to measuring fair value in illiquid assets", EDHECinfra Publication.
• Lac, M. et Ferreira, L. (2002). "Modelling tolls: values of time and elasticities of demand: a summary of evidence". Physical Infrastructure Centre Research Report 02-01, School of Civil Engineering, Queensland University of Technology, Brisbane.

Read also the September 2020 EDHECinfra press release « Archaïsme et injustice de la gestion des péages autoroutiers en France » and the article published in October 2020 in The Conversation / EDHEC Vox « L’injustifiable rentabilité des concessions autoroutières ».

* Noël Amenc, Associate Professor of Finance, EDHEC Business School, Director, Scientific Infra - Frédéric Blanc-Brude, Director, EDHECinfra - Tim Whittaker, Research Director, EDHECinfra