The ideological debate
The transport debate in Sydney seems to be building up on two sides: those who want more public transport, and those who want more roads.
On one side you have those who want funding for public transport prioritised. This includes the Minister for Transport, Gladys Berejiklian, who’s department, Transport for NSW, released a (relatively) pro public transport report: the Transport Master Plan, as well as the Sydney Morning Hearld, which released a (very) pro public transport report: the Independent Public Inquiry into Public Transport and has trashed the idea of the $10bn WestConnex plan as “an awful lot to pay for a bigger traffic jam”.
On the other side you have those who want funding for roads prioritised. This includes Nick Greiner, who’s department, Infrastructure NSW, released a pro roads infrastructure report: First Things First, as well as the Daily Telegraph, which released a (mildly) pro public transport report: The People’s Plan for Sydney (Transport and Driving), then ironically went on to seemingly only focus on the roads aspect of it, dismissing the Transport Master Plan as “vague and cobbled-together”.
The tension between the two sides erupted quietly behind the scenes two months ago when the Director-General of Transport for NSW, Les Wielinga, resigned from the board of Infrastructure NSW due to differing visions that each of the two bodies had towards how transport should be approached in Sydney. The differences of opinion, amongst other things, became so great, that Mr Wielinga no longer felt it appropriate to sit on a board that would sign off on a report that presented recommendations so different to those of his own department’s report.
Interestingly, when asked what the best way to reduce traffic congestion was at the recent Community Cabinet this past August, Roads Minister Duncan Gay said it was to get as many people out of their cars and into public transport. That puts the 2 most important members of the cabinet more or less on the side of public transport, while the biggest supporter of roads, Mr Greiner, sits as the chairman of an independent body that advices cabinet but does not make the final decisions.
Where the risk lies
The poor financial experiences of both the Lane Cove Tunnel and Cross City Tunnel, which saw the private sector take on the risk of unknown levels of traffic, have put a dent in the viability of private public partnerships. Many private infrastructure funds are now hesitant to invest in road projects, given the uncertainty of toll revenues that may come from it. However, it hasn’t all been doom and gloom – both the M7 and M2 have performed well, with the latter being widened to meet higher than expected traffic levels. The difference, I think, was the higher costs of tunnels, making recouping the initial investment more difficult – if you raise the toll then you also reduce traffic, which further reduces your revenues.
The Infrastructure NSW report seeks to lessen the risk to private investors by shifting some of that risk back to the government. Presumably, if traffic forecasts, do not eventuate, then it will be the government that is left to pay the costs of the project, rather than the private investor. This will increase the number of potential investors, but at what cost?
The point of PPP projects is precisely that it shifts the risk away from the government and into private hands. And risk goes in two ways – you might get a dud (like the CCT or LCT), but you might also land what is effectively a license to print money (like the M2 and M7). It’s the basic risk vs return concept that you learn in every introductory business subject in the first year of university. If the government is now suggesting that it will accept the downside risk, while letting the private investors take all the upside risk, then it defeats the purpose of doing a PPP in the first place! You may as well get the government to build it.
In reality, the way to lure more private investors is to find ways of building new roads more cheaply. Tunnels are expensive, building on open land is not. This where the WestConnex plan of digging a slot under Parramatta Road came from – it’s cheaper than building a tunnel, thus making it a more viable project. It can then be tolled and given over almost entirely to private investors, who will then take on the risk of what the actual traffic volumes will be. But if the government takes on the downside risk, then that estimated $2.5bn government contribution could balloon. Suddenly that Second Harbour Crossing won’t seem so expensive after all.
The cost of priorities
Barry O’Farrell’s landslide victory in 2011 was based in large part on a promise to build new infrastructure. His biggest promise was to build the Northwest Rail Link, which is progressing and will be built by the end of the decade. (The Second Harbour Crossing is not quite guaranteed to happen, no matter how many times the government wants to reassure the people of Sydney that it will also complete it.) He also promised to build a new motorway, but declined to specify which one, instead choosing to commission Infrastructure NSW to decide which one. The release of its report this week meant the government will now get started on building the WestConnex. The price tag for these 3 projects is $29bn, or over $6,000 per person in Sydney. Excluding the Second Harbour Crossing, and assuming that three quarters of the WestConnex will be paid for by tolls still leaves the government with a cost of $11.5bn.
This has to be paid for. And it would be difficult to pay for under normal conditions. But this government doesn’t have normal conditions. It is facing a revenue black hole, led by a slow NSW economy and lower than expected GST receipts. This is why the government has been cutting spending so much: $1.7bn cut from education, $3bn cut from health, $2.2bn from capping salary increases to 2.5%, amongst others. It has also put privatisation on the table: the power generators, Port Botany, the desalination plant, everything except the poles and wires might be sold off by the government. Many of these are unpopular, but the government has made the decision that its priorities lie in funding infrastructure investment and that this means other areas must have their priorities reduced in order to achieve that goal.
The government has not considered deficit spending to build new infrastructure, and this is a shame. A budget deficit now means spending tomorrow’s money today. If spending that money today results in a stronger economy tomorrow, one that creates greater tax revenues tomorrow, then deficit spending makes sense. Spending on infrastructure or education, things that create a more productive workforce and/or economy, are different to spending on social programs or handing out tax cuts. But don’t expect that to happen if it puts our AAA credit rating at risk.