The financial collapse of Brisbane’s airport link tunnel last week adds to a growing list of failed road projects funded as a Private Public Partnership (PPP). Brisbane’s Clem7 tunnel, as well as Sydney’s Cross City and Lane Cove Tunnels have all gone into receivership following lower than predicted patronage and thus an inability for the operator to pay its debts. In each case the road continued to operate and was sold to a new owner at a discount price.
NOTE: You can also add Sydney’s Airport Line to that list of failed PPPs, but it’s a different case and so won’t be discussed here
As this is a private company, the financial burden is on the investors and lenders, rather than the government. Queensland Premier Campbell Newman commented that “one thing I’ll say about Airport Link is this is one decision…that the taxpayers won’t end up paying for, thankfully”.
Campbell Newman should be applauded for his stance abc.net.au/news/2013-02-2… the moral hazard of PPPs underwritten by Gov has to end—
David Caldwell (@roodave) February 19, 2013
There is nothing stopping the Queensland Government from being the one to buy the road, something which previous Queensland or NSW Governments have not taken up the option of doing despite the . Even if it doesn’t, the infrastructure is now built, and will eventually revert back into public ownership.
.@MayneReport nails it on Airport Link tunnel: "Brisbane gets a world class infrastructure while private sector wood ducks lose their shirt"—
Mark Ludlow (@M_Ludlow) February 19, 2013
The problem appears to be with the traffic forecasting. This is roughly how it works.
First, the private company works out how much the project will cost to build. Although there can be cost blow-outs, this is still the easiest bit to estimate so let’s assume it’s 100% accurate every time. They then multiply this amount by a percentage deemed to be a sufficient return on investment (usually the going rate of interest plus a few percent) to gives the necessary revenue.
The government then provides the company with traffic forecasts, their estimate of roughly how many cars are expected to use it. The company then divides the revenue figure by the traffic forecast to get a toll amount.
EDIT: It’s been pointed out in the comments section that these estimates can sometimes come from a private consultant, rather than the government. Where it comes from isn’t really all that important, and there was a reason that the description above was “this is roughly how it works”. But it’s a valid point and is noted.
Where it all went wrong is that, for a number of reasons including poor forward planning, freeway construction in Australia has been requiring more use of tunnels (all 4 examples above were tunnels). These cost about 4 times as much as surface construction. So, 4 times the cost means 4 times the necessary revenue, and 4 times the necessary toll. This assumes static traffic forecasts.
In reality, they are not – they are sensitive to price. Higher tolls mean lower traffic. And what happens if you revise that traffic forecast downward? The required toll goes up even further! A vicious cycle if there ever was one.
There are only really 2 solutions to this.
One is to go back to having the government build roads. Michael Pascoe points out that this also has the added benefit of allowing access to cheap debt, as government loans have a lower interest rate than loans to private businesses. However, government debt is now a dirty word, and so this is an unlikely option to be chosen.
The other is to reduce the cost of construction. Good planning can do this in the long term. The M2, which is entirely on the surface thanks to the maintenance of a dedicated reservation for it decades in advance, made an after tax profit of $38 million last year (Source: page 74, Transurban Annual Report). Whereas plans for the M4 East portion of WestConnex have it slotted like the Eastern Distributor rather than tunnelled in order to cut down on costs. While there remain a number of concerns over WestConnex itself, the aim of finding ways to bring down its cost of construction is definitely a welcome one.