Toll-road lessons from the “Clem7 lemon”

Recent news that Brisbane’s Clem Jones* (Clem7) road tunnel which opened only a few months ago is now on the verge of financial collapse has a familiar ring, confirming a pattern of losses in a string of privately-owned toll roads and other infrastructure projects across Australia.

As part of this growing pattern, a key factor has been what turned out to be a huge over-estimation in forecasts of the tunnel’s use. According the Sydney Morning Herald, the projection for the Clem7 was that 91,000 vehicles would be using the tunnel every day by now, with numbers exceeding 100,000 by late next year.

However, even with a prolonged toll-free period and a current halving of the tolls, less than 28,000 vehicles are now using the tunnel.  As a result the owner, RiverCity, has slashed tunnel’s value by $1.56 billion to only $250 million and is still losing $10 million a month. The Herald article claims the company has just $106 million in cash reserves and needs patronage to double and tolls to return to their normal levels just to meet its interest bills.

The Herald concludes that the forecasts turned out so wrong mainly because they were shaped by the financial models required to fund the project and not vice versa, a problem exacerbated by their apparent reliance on peak-hour demand. As Melbourne Urbanist also points out, this sort of exaggeration is not confined to infrastructure companies – lobby groups and other project promoters are sometimes guilty of the same sin, resulting in a climate of hyperbole in which such exaggerated claims become plausible.

Whatever the cause, investors are going to be understandably more reluctant to go anywhere near private-sector toll-road projects for the foreseeable future. It seems we are at last reaching the end of an era in which toll-roads and motorways were embraced as the answer to all our transport problems.

For a long time they seemed like the ultimate solution. Governments, construction companies and investors combined to give punters what they wanted, or thought they wanted – better roads – and they then got the punters to pay for it through tolls. The toll companies also ran the roads themselves, which was another attraction for governments who didn’t want to put money into boring, unsexy things like railways which they increasingly disliked because of their ongoing costs, unions, public complaints, etc.

Like all get-rich schemes, however, the toll-road bonanza was ultimately good to be true. The music was always going to stop sometime and now it has – leaving the owners of the Clem7 and similar projects holding some very expensive babies.

Motorway_1

However, there are a few hopeful conclusions that can be drawn from this mess. First is that there appears to be belated recognition of the need for some rationality and planning to be applied to process of developing major infrastructure proposals. If governments are ultimately going to carry the can – which one way or the other, increasingly seems to be the case – then surely they should exercise more say over what gets built and when, where and how it is built. After all, that’s what they were once elected to do.

One alternative investment approach is the so-called “availability model”, which is being used for Melbourne’s Peninsula Link. Under this arrangement, the Victorian government will make periodic payments to the road’s builder irrespective of volume, thus leaving the government to bear the consequences if the project is a white elephant.

Although at first glance this approach may seem more expensive to governments, it will lessen the incentive for toll-road promoters to exaggerate patronage forecasts or to make the outrageous demands that that accompanied some projects such as Sydney’s M2 that operators be compensated if “competing” public transport projects are constructed to serve the same corridor.

It will also force politicians to be more realistic about some of the hard choices that have to be made about transport funding. For too long the obsession with lower taxes has swept the problem of infrastructure funding under the carpet, which is one of the reasons why toll-roads were seen as such an attractive option. Ultimately, as the Independent Inquiry into Sydney’s public transport (in which I was involved) established, there is no easy way out – extra money will have to be found, from taxes, levies and increased fares – to pay for new infrastructure.

And if governments are going to explicitly shell out the funds for major road infrastructure, either upfront or on an ongoing basis, then from a financing perspective these road proposals lose a lot of their perceived advantages over the proposed rail projects that these same governments have neglected over the years.

Without the hype of exaggerated patronage projections, project costs and anticipated rates of return, both road and rail projects can be considered on a more equitable footing, one that takes into account externalities such as environmental impacts and social outcomes as part of a proper planning process. One result of that should be the realisation that the government abdication of its responsibility to plan and provide public transport in favour of a user-pays toll-road model has grossly distorted transport investment decisions over the past 30 years.

*     Clem Jones (1918-2007) was Lord Mayor of Brisbane, from 1961 to 1975. Although he did much to modernise the city, he also presided over the closure of its tramways in the late 1960s, very much part of an era that saw trams as an impediment to the modernist ethic of the car –based city. There is an obvious irony in a major road project named after him facing financial failure over 40 years later.

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