The M6 toll road was supposed to be a very British romance. A marriage of public infrastructure and private investment, it was consummated by 2.5m Mills & Boon novels that were pulped and then blended into its tarmac.
But that is the closest this project has come to a happy ending. The owner of the flagship toll road – the Australian Macquarie group – has slashed the value of its investment in a move that does not bode well for David Cameron's ambitions for a private sector-backed infrastructure spree.
For all the hope invested in it, the toll is a relatively modest stretch of the UK's 2,211-mile motorway network: a 27-mile route that runs from the National Exhibition Centre in the south-east of Birmingham to Cannock in Staffordshire.
But Macquarie, a seasoned player in this market, has written £150m off the value of its subsidiary, Midland Expressway, which operates the road.
In a Companies House filing, Macquarie Motorways Group (MMG) blamed the recession and higher interest rates as the number of motorists willing to pay £5.50 for a 20-minute trip – lorries, vans and coaches must pay £11 – dwindles. It has written 20% off the value of its M6 toll road investment.
In the year to December 2011, MMG racked up losses of £224m, more than double those recorded in the previous 18 months, and it owes more than £1bn to its banks – debt that was piled into the company six years ago, in part to provide a near £400m payout to Macquarie.
"Given the continuing uncertainty in the UK economic outlook, MMG has decided to reduce the carrying value of its investment in MEL [Midland Expressway] based on its revised return expectations over the remaining 42 years of the concession," an MMG spokesman said.
The financial problems at the M6 toll road will unnerve private sector investors who are now being courted by the prime minister and the chancellor, George Osborne, to pay for an upgrade of Britain's road network. In March, Cameron said: "We need to look urgently at the options for getting large-scale private investment into the national roads network – from sovereign wealth funds, pension funds, and other investors."
He also bemoaned the fact that the public sector is inevitably called upon to finance the road system. "Why is it that other infrastructure – for example water – is funded by private-sector capital through privately owned, independently regulated utilities, but roads in Britain call on the public finances for funding?" he asked.
Infrastructure experts say the M6 case will not help. Stephen Glaister, director of the RAC Foundation, says it is easier to get the private sector involved in a piece of infrastructure that has already been built. For instance, a concession to run the government-underwritten High Speed One rail line has just been sold to a consortium of Canadian investors for £2.1bn. If you are starting from scratch, however, private investors' appetite weakens.
"A lot of infrastructure people are saying that it is much easier to get private sector involvement in an existing facility rather than a greenfield project. They are not happy about taking the hit on a greenfield programme," says Glaister.
The RAC Foundation has looked at the business case for building a new A14 road from the Midlands to Felixstowe – a key freight artery for UK trade – and believes that toll charges alone will not cover the project. Public money will still be needed.
Furthermore, the difficulties with the M6 toll road suggest that road projects carry a higher-risk profile than utilities.
One of the main problems facing the toll road is declining traffic volumes. The road has not registered a quarterly rise in average daily road traffic since the autumn of 2010 when the daily average was 44,089 vehicles. In the first three months of this year it had fallen to a daily average of 30,418 vehicles.
That represents a near-13% decline on the first quarter of last year. In its calculation to assess the extent of the writedown on the toll road MMG assumed that traffic would grow at 2.24% during the lifetime of the concession. Revenues in the year to December 2011 from the toll road fell by 7%.
MMG is pinning its hopes for a recovery on forthcoming roadworks on the M6 between junctions five and eight, which they believe will push drivers towards their disruption-free lanes. MMG's problem is that any traffic increase could be shortlived: the M6 project involves using the hard shoulder during busy times and should mean that the non-tolled M6 will become less traffic-clogged once the work is finished.
Macquarie Atlas Roads (MQA), which owns MMG's parent company in Bermuda, blames the performance of the M6 toll road for its own deficiency of capital and reserves. However, it pointed out in its 2011 annual report it has no responsibility to provide further funds to bail out the asset if its financial difficulties get worse.
It said: "These project-related liabilities are non-recourse beyond the M6 Toll assets and ... MQA has no commitments to provide further debt or equity funding to the M6 Toll in order to meet these liabilities."
Macquarie Atlas Roadsdenied that it might be preparing to walk away from the project. A spokesman said: "The M6 Toll is an important infrastructure project and MQA intends to maintain its investment over the long term. Despite the current economic downturn, the M6 toll is a long-term business with 42 years remaining in its concession life and it is expected to be successful over its project life."
But in its annual report for the year to December 2011 MQA pointed to considerable uncertainties. The report said: "Operating cash flows of the M6 Toll are expected to be sufficient to service the ongoing interest charges on the non-recourse loans for at least the next 12 months from the date of this report. However, the outlook for future economic conditions in the UK remains uncertain and, as a consequence, the future traffic, revenue performance and ongoing compliance with debt covenants of the M6 Toll will be subject to economic factors outside its control."
In recent presentations to analysts and shareholders MQA has said: "UK traffic conditions are expected to remain weak." It has also warned that there will be no repeat of the £392m dividend which Macquarie paid itself as part of the refinancing in 2006 which put £1bn of debt on the MMG balance sheet.
"Given traffic performance no further distributions are expected from the M6 toll over the medium term," it said.
The clock is ticking. The £1bn of debt has to be repaid in full in three years, which will require a refinancing. The prospectus for that will not be a page-turner.
The preparation for the refinancing comes as traffic volumes are falling and interest rates are rising. Under a complex hedging arrangement at the time of the 2006 refinancing Macquarie entered into a series of stepped interest rate swaps. Under the terms of these swaps the company was charged an interest rate of just 1% (excluding a 0.37% swap margin) between 2006 and 2010. From 2011 that rate is increased by 0.25 percentage points every six months until it peaks at 8.5% in 2025.