The Kennett Government might have done a good job getting $30 billion for Victoria’s energy assets in the second half of the 1990s, but it was absolutely cleaned up by Macquarie Bank in negotiations over the giant City Link tollroad project owned by Transurban.

City Link was a $1.2 billion construction job that is now collecting $350 million a year in toll revenue from Melbourne motorists – almost more than all of Sydney’s tollroads combined – with a contract that lasts until 2034.

Transurban shares were floated at the equivalent of $1 a share in a grubby 1996 deal where a number of Macquarie Bank and UBS executives scooped up very large allocations.

It has distributed more than $2 a share back to shareholders over the past decade and when the stock peaked above $8.50 last June, foundation investors were enjoying a total shareholder return of more than 1000%. Thank you, Jeff!

However, Transurban also pioneered the practice of borrowing to pay distributions. Debt soared to more than $4 billion after a series of US acquisitions, plus the purchase of Sydney Roads and Hills Motorway. Transurban shares slumped 35% over the past year on concerns about debt, so new CEO Chris Lynch has today bitten the bullet.

In this dramatic market update, the former BHP-Billiton finance director unveiled a $659 million placement, $100 million share purchase plan and announced that future dividends will broadly match operating cash flow.

Whilst the 29c distribution for the current June half has been confirmed, bringing the total 2007-08 payout to 57c or $627 million, guidance for next year has been slashed to 22c or just $247 million.

The stock is still suspended so we’re yet to see what the market thinks about a $750 million capital raising and $380 million cut in distributions.

The likes of Transurban and Asciano have long needed to clarify whether they are income plays or growth stocks, but this Transurban move will put significant pressure on companies that continue to pay distributions out of debt.

Look no further than Babcock & Brown Infrastructure which has today confirmed a 7.5c distribution will be paid on September 15, lifting the annual payout to 15c.

BBI today recovered 5c to 92c – still an unsustainable 16.3% dividend yield — but with almost $10 billion of debt and a market capitalisation that fell below $2 billion last week, you have to ask how the independent directors of BBI justify distributing $356 million this financial year.

Incidentally, BBI has today appointed former Queensland Treasurer David Hamill as acting independent chairman, replacing Babcock CEO Phil Green.

Babcock & Brown owns 8.24% of BBI and will appreciate getting a cheque for $9.1 million on September 15, while Green himself owns 17.78 million BBI units and will receive $1.33 million.

In these troubled times it is all about who has got the debt and where the cash flows. Maybe it is time the Babcock empire followed Transurban’s lead and offered investors internal management and cash-flow supported distributions?