User-funded PPP models could expand the pool of funding available for some freight and logistics infrastructure projects, but they won't work for all projects.
Like most industries that rely on infrastructure that has traditionally been publicly funded, the Australian freight and logistics industry has a long list of infrastructure projects that it would like to see developed. Though these projects would undoubtedly improve the efficiency and productivity of the logistics industry, and in turn accelerate Australia's economic growth, the lack of available funding presents a significant barrier to breaking ground.
Unfortunately, most transport infrastructure projects simply aren’t financially viable as solely private sector investments, so funding must be generated, at least in part, from an alternative source – namely from the infrastructure users and beneficiaries. This is where a Public-Private-Partnership (PPP) could be a viable option.
How can a PPP assist with the funding task?
PPPs come in two basic forms. First, there are "government-funded" PPPs where the operating revenue stream takes the form of a service payment or availability payment from government. These forms of PPP don't really assist with the funding task, as the government still needs to fund the service/availability payment. Government payments in respect of the capital cost are simply deferred until the operations phase, and the additional financing costs must also be funded. From a balance sheet and credit rating perspective, the government's commitment to pay the service/availability payment is treated as a liability on the government's balance sheet. Accordingly, government-funded PPPs are not a "magic pudding" when it comes to funding new infrastructure.
However, if a PPP can be fully funded by user charges, it can be viewed as a magic pudding. Examples of this include the Cross City Tunnel, the Lane Cove Tunnel and the Westlink M7. Each of these toll roads were wholly funded from forecast private sector toll revenues. No government funding was provided for the construction of these projects, aside from government funds used to buy the land which government still owns. Indeed, the successful bidder on each of these "user-funded" PPPs paid an up-front amount to the NSW Government for the right to undertake the project and collect the tolls. Moreover, the private sector investors accepted the demand risk, and so bore the losses when the actual toll revenues on the CCT and LCT were less than forecast.
Unfortunately, the days of fully user-funded toll road PPPs are probably over. The projects that remain are generally very expensive to build and can't be funded from toll revenues alone. However, while user charges can't fully fund most of the road and freight projects on our wish lists, they can contribute to the funding task, thereby reducing the ask on government for funding, making such projects more affordable for government.
When would a PPP work in the freight and logistics space?
Not every infrastructure project can be delivered as a PPP. Historically, the PPP model has not been often used in the freight and logistics space, as many infrastructure projects that will improve the logistics supply chain are not well-suited to this model - particularly the user funded "magic pudding" variety. However, a user-funded PPP model may be appropriate for some logistics supply chain projects. The box below lists some factors that should be considered when considering the use of the PPP model.
Is a PPP suitable for my freight/logistics project?
- Will the users/beneficiaries be prepared to pay?
- Will the infrastructure/ technology remain the same over the medium/long term (i.e. unlikely to soon require a technology upgrade which would render upfront pricing uncertain)?
- Is good maintenance essential to desired project outcomes?
- Is the PPP asset part of an integrated network, and if so will the investors control the other parts of the network that will impact upon the performance of the PPP asset?
Some likely candidates for PPPs
So what are the projects in the pipeline that will improve the logistics supply chain that are being or could be delivered as a PPP? Australia has a long history of delivering motorway projects as PPPs. And there are several new motorway projects underway or being negotiated that are or perhaps could have been partially funded by way of a user-funded PPP. The CityLink Tullamarine Widening is being partially funded through changes to existing tolling arrangements on CityLink. Likewise, the proposed $5.5b Western Distributor project, which includes upgrades to the Monash Freeway and access improvements for Webb Dock, is to be funded through a combination of tolls on the Western Distributor, an extension to the CityLink concession and State government contributions.
Infrastructure Australia has previously suggested that a number of projects, including the northern section of the CityLink Tullamarine Widening and M80 Ring Road, could be partially funded through tolls. However, both of these projects would have required the introduction of tolls on roads which are currently freely accessible – an unpopular concept with voters – so the State government chose instead to push for Federal funding (which was ultimately received). On the other hand, the East West Link road was to be delivered as an availability payment PPP, with government to levy and collect tolls to help fund the availability payment. Looking forward, it is plausible that we may again see a user-funded PPP structure adopted to deliver that road in due course.
Rail: a special challenge
The user-funded PPP model has also previously been applied to help close the funding gap on rail projects. The Adelaide to Darwin railway is a good example. The $1.3 billion capital cost was paid for by a mixture of government funding and private sector finance based on forecast future user charges. The government funding amounted to $800 million. The forecast user charges funded the balance of the capital cost.
Rail projects can be more difficult to deliver as user-pays PPPs as many of the benefits of such projects often accrue to people other than the users of the railway. The business cases for both the Inland Rail and Murray Basin rail projects state that one of the major benefits will be the removal of trucks from the highways that presently carry freight to and from the destinations that these railways would serve. Major beneficiaries would therefore be the users of the highway and the road authority that maintains it - neither of whom would contribute to the rail project under a user-pays model. Indeed the prospect of further investment in the highways that will compete with these railways is a major impediment to private sector investment in the rail projects.
One element of these rail projects that may be capable of being partially funded by a user-funded PPP is the intermodal terminals. The ability of the private sector to generate income by appropriately developing and leasing land and warehousing space around an intermodal terminal has made projects like the Moorebank Intermodal Terminal and the Victorian International Container Terminal viable. It may be possible to apply similar models to the intermodal terminals that will be required for the Inland Rail project.
Solving the funding dilemma
User-funded PPP models could expand the pool of funding available for some freight and logistics infrastructure projects. However, it won't work for all projects. For some, governments will need to consider other ways of generating the funds needed to pay for the infrastructure, such as additional taxes, cutting other government services, broad based road user charging, government borrowings (for investment in productive infrastructure that will generate future taxes in excess of the interest expense), and value capture.
This is an abridged version of the presentation Owen delivered on "Leveraging PPP Financing Mode for Transport Infrastructure Enhancement" at the 2nd Annual Integrated Logistics Hub Conference in Melbourne, 17-19th August 2016.
Thanks to Blair McEwan for her contributions to the presentation and this article.