Australian governments need to introduce a new robust structure to address the financial failure of recent public-private toll road partnerships and attract investors to future projects.
Competition for toll road projects is fierce because the prize for success is great. A bid can cost tens of millions of dollars and there is always the possibility that the competition will break ranks and bid with an aggressive traffic forecast.
However investors have shied away from toll road projects since overly-optimistic traffic forecasts caused large losses in infrastructure ventures like the Cross City Tunnel, CLEM7 and Lane Cove Tunnel.
Therefore Corrs is proposing a revised mandated structure that involves:
- A requirement for the servicing of project debt to be based on government traffic forecasts;
- The ramping up of capital reserves;
- Only permitting reserves to be reduced, and financing re-geared, once traffic flow levels are stable.
Such a structure would instil confidence in the bidding process as it would be based on conservative government, rather than individual bidder, traffic forecasts.
In the early years cash flow risk would also be significantly reduced, and the structure could cover greater downside risk than the market would normally take into account.
However toll road ventures are not the only projects susceptible to optimistic bidders underestimating construction and whole-of-life costs, delivery time frames and benefits. There is a need for a change in internal government project approval processes as well as traffic forecasting methodology.
Public-Private Partnerships are superior to other procurement models because of their ability to harness private sector innovation and be completed on time and on budget.
Major road infrastructure can also be delivered earlier because funding is not subject to government constraints or the need for resources to be used to meet other policy considerations.
However governments must ensure that proposed change to the existing PPP structure does not require them to give up key PPP benefits by investing significant funds of their own or taking back significant risk.
The proposed prudential structure retains the best aspects of PPPs. There will be no government cash payments to reduce traffic forecast risk, no contingent liability giving rise to uncertain budgeting impacts and therefore minimal or no impact on government borrowing capacity or ratings.
The structure will guard against the private sector gaining windfalls at public expense. Investors will continue to undertake their own due diligence of the traffic forecast as they will still carry risk.
There is a danger that alternative models could replace unacceptable traffic forecasts with new problems that would stop projects proceeding for different reasons.
The Corrs team has a long history and ongoing involvement with toll road projects throughout Australia. It has acted for government on projects such as CityLink and EastLink and the private sector on projects such as CLEM7, Airport Link, Eastern Distributor and Cross City Tunnel.
That experience, and discussions with private sector investors, has led us to believe that short to medium term investors will not invest in future toll road projects if the projects have similar structures to past projects.
But equity investors and debt providers do see toll roads as a highly attractive asset class if the actual patronage, and therefore revenues, reasonably correlates with the financial modelling on which investment decisions are made.
Last year’s takeover of ConnectEast shows that, once a steady state of traffic flow is reached, toll road assets represent relatively low risk, long term stable investments.