A traffic signal

Happold Consulting

25/07/2012 Written by: Philip Bates No comments

Infrastructure has become increasingly popular with private sector investors in recent years, with highways leading the way in transport. Highways usually represent less of a monopoly and are more open to market competition than some of the utility infrastructure assets, such as power and water.

While some countries, especially in the developed world, have been looking to availability based payments for highways, the majority of deals still use toll based funding. As with most highway projects, market share and growth are critical considerations.

Traffic growth in the UK and USA

Population and wealth are not the only key drivers for traffic growth; indeed we are starting to see evidence that increasing wealth may no longer translate into growing demand for highways in developed economies.

In the UK, between 1949 and 1999 vehicle miles travelled (VMT) increased 10 times, while GDP increased 3.5 times. However, between 1999 and 2009, VMT only increased by 8% while GDP increased by 30%.

A similar pattern can be seen in the USA; between 2005 and 2011, population and GDP both grew by 5%, but VMT declined by 1%. It would be easy to blame the recession on the disconnection between economy and traffic but it seems to have started prior to this. The bottom line seems to be that there comes a point where you simply cannot consume more travel, irrespective of income.

Developing economies: The rise of the middle class

We need to examine what it is about the growth in wealth that triggers large scale highway use and subsequent network development. The UN publication 'Drivers of changing production and consumption patterns' states: 'Consumption of some goods – e.g. consumer durables, like automobiles, can increase very rapidly once middle class incomes pass a certain threshold. Car ownership plotted against per capita income shows a non-linear relationship. Ownership rates are usually minimal in the lowest income countries, but increase rapidly as per capita incomes rise above a threshold (around $10,000 per capita at purchasing power parity exchange rates).'

If we look at car ownership (cars per 1,000 people) against GDP per head, we can see that there is a dramatic acceleration of car ownership between $5,000 and $10,000 GDP, with the $10,000 to $15,000 band being the second strongest growth group. In many ways, this profile mirrors the Kuztnets Curve; a hypothesis that states as a country develops, there is a cycle of economic inequality driven by market forces, which at first increases and then decreases after a certain average income is attained.

The demographic factor

The structure of a population also has an impact on traffic growth. If we look at the UK, we see that car trips per person vary by age:

•Age 21-29 = 550 car trips a year

•Age 40-49 = 790 car trips a year

•Age 60-69 = 660 car trips a year

It appears that car travel increases until we reach around 45, then declines. As most developing economies have a young age structure, it appears inevitable that future demand for highways is going to grow dramatically. Household size can also have an impact – one house with two people generates fewer trips than two houses each with one person, and it appears household size declines as wealth grows.

Traffic growth and infrastructure provision

There is a point at which increasing wealth triggers a massive growth in the demand for infrastructure, including highways. Given this, and based on a review of where countries are in the infrastructure cycle, it appears you can subdivide developing economies into three broad groups based on GDP (Purchasing Power Parity) per head:

•$3,000-$8,999

•$9,000-$11,999

•$12,000-$14,999

Of course when considering these three bands it must be acknowledged that there will be outliers and exceptions, and that very large countries need to be considered at a regional, rather than national, level.

Band 1: $3,000-$8,999

This band is in the process of developing their basic infrastructure. Toll roads are only just starting to be considered as investments as car ownership is low and paying a toll is a luxury for many. Countries in this group include much of the Caribbean, Colombia, Tunisia and Algeria. India also fits this group but due to its size it should be looked at regionally rather than nationally, as many parts of India are actually in Band 2.

Band 2: $9,000-$11,999

This group appears to represent the toll road tipping point for many countries, and theoretically offers significant opportunities, as early legacy infrastructure requires significant upgrading and expansion in response to the dramatic surge in traffic. In addition to this, the rapid growth and ability to pay means new schemes become increasingly self-financing. Examples of such countries include Peru, Costa Rica, the 'Balkans' and the wealthier 'Stans' of Central Asia.

Band 3: $12,000-$14,999

This final group is often starting to suffer from the downsides of success, with demand outpacing new capacity. The absolute number of infrastructure opportunities might start to decline, but their scale can often increase significantly, as the most intractable problems are left until last to solve. Examples for this band are Turkey, Chile and Malaysia.

Exponential growth

The recent economic and financial turmoil in the developed world has coincided with the emergence of a block of developing economies that have reached a stage in their social and economic development where the combination of income growth and age structure means the demand for infrastructure will grow exponentially. Experience would suggest transport, and in particular toll roads, will be in the vanguard of this. While the countries included in this are generally defined by a GDP per head of around $10,000 it seems likely this can be further sub-divided into three sub groups: $3,000 to $8,999, $9,000 to $11,999, and $12,000 to $14,999.

For those searching out growth, the answer seems clear – just ask the $10,000 question...