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As another toll road bites the dust, what is the future for PPPs?

Is there a future for privately funded toll roads? Wikimedia

BrisConections has been placed into administration only seven months after opening the Brisbane Airport Link toll road/tunnel. It has not had sufficient users to make the project viable. So what does this mean for future public-private partnerships (PPPs)?

In the short term, it will mean very little. The citizens of Brisbane have a great tunnel that (from my experience) cuts significant time off a trip to the airport. The investors have done their dough. And there may be various lawsuits about who misled whom.

However, this is the fourth in a series of PPP toll road failures, including Sydney’s Lane Cove and Cross City tunnels, and Brisbane’s Clem7. If PPPs are to have a future, we need better ways to handle the project risk.

The risk associated with large infrastructure projects can be significant. For toll roads, the viability of a project depends on projections of future traffic flows. But these flows may be highly variable, depending on a range of choices by the government and car users.

Under a traditional PPP contract, much of this risk is directly borne by the private investors. However, this risk will be reflected in the contract that underpins the PPP. So the risk will be indirectly borne by car users and taxpayers.

Most obviously, the greater the risk, the higher the tolls that will be demanded by the private participants in the PPP. So car users bear the risk of the project through high toll charges. This can undermine the social benefits of the toll road. Instead of taking traffic off congested suburban roads, high tolls may mean too few cars use the toll road.

More subtly, car users may bear the risk through limits placed on the government. The PPP contract may restrict future government transport policies that would alter traffic flows – even if these policies were in the publics’ best interest. If the government wants to implement these policies in the future then it will need to renegotiate the PPP contract. This can be a messy and costly process, meaning that desirable transport policies are left in the ‘too hard’ basket.

Taxpayers may also bear the risk of a PPP through guarantees on revenue or via ‘take or pay’ contracts that guarantee a flow of government funds.

In the extreme, taxpayers bear the risk through the potential for a government bail out. If the government decides that a PPP can’t be allowed to fail for political reasons, taxpayer funds may be used to protect private investors.

If car users and taxpayers are going to bear the risk of a PPP toll road, what is the point of using private funding? The government can fund a PPP and directly bear the project risk, even if it is built and operated by the private sector. And government funding is currently significantly cheaper than private funding. Indeed, as Michael Pascoe notes in the Age:

“Australian governments can borrow more cheaply than the private sector to invest in infrastructure. The federal government in particular can borrow extremely cheaply on very long terms”.

Unfortunately, this option for improving the nation’s infrastructure appears to be off the agenda. The current ‘budget surplus’ fetish means that long-term government borrowing and investment in public projects is ruled out on the grounds of short-term political pragmatism.

So, if we want on-going investment in public infrastructure, we need better PPPs that handle the risk in clever ways. One alternative, being investigated by Melbourne University’s Centre for Market Design, is to provide the private investors with a fixed return in current dollar terms.

Rather than specifying a length of time for the toll operator to charge road users, this approach allows the private operator to charge tolls until it receives a certain amount of money. This shares the risk between the private operator and the car users. If traffic volumes are high, the private operator will get their return quickly and the road will move back into government hands sooner than expected. If traffic volumes are low, the private operator will have a longer time to get their return.

Such an approach to a PPP will not save private investors when traffic flows are so poorly predicted that they can never get their money back. But it does protect them from short-term fluctuations.

The approach also improves flexibility over future government policies. To the degree that government policies change traffic flows, the private operator is protected. Changed traffic flows automatically change the length of time for the payback to the private investors. The PPP contract will only need to be renegotiated if the changes in traffic flows are so significant that the private operator cannot ever receive the full return on their investment.

The failure of BrisConnections does not spell the end of PPPs. If we want infrastructure investment and government budget surpluses, then PPPs are a must. But it does spell the end of naïve PPPs and it signals the need for research in order to design better PPPs. That is, unless we can find some more private sector bunnies who are happy to lose their money building roads for the rest of us.

Join the conversation

38 Comments sorted by

  1. Riddley Walker

    .

    The principle is very simple. Capitalise the profit and socialise the loss.

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    1. Riddley Walker

      .

      In reply to Riddley Walker

      Which gets to the essence of the problem: Australian governments can borrow more cheaply than the private sector to invest in infrastructure. The federal government in particular can borrow extremely cheaply on very long terms. We need the infrastructure and we can afford to service those cheap long-term loans of a couple of percentage points when they're spent on projects that have long-term total returns in double digits.

      Read more: http://www.theage.com.au/business/tollroad-forecasters-flights-of-fancy-20130221-2eszk.html#ixzz2LZerCzNi

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    2. Peter Redshaw

      Retired

      In reply to Riddley Walker

      Riddley, I agree, and as far as I am concerned PPPs are simply a method of avoiding and or shifting responsibility and costs to others. And in this case it may be to investors, but in reality it is a cost shift to the public who use these infrastructure items and services. Governments by not borrowing for infrastructure items and services can make the claim as they do that they have lowered taxes and or their budgets are in surplus.

      But as you have rightly said, governments can borrow at a cheaper…

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    3. Tony Grant

      Student

      In reply to Riddley Walker

      Yes, isn't that how the system has been working for 30 years?

      The "tax paying public" the old PAYG pay to use and have to carry money of the costs in these "free enterprise" companies with the bastards and their "tax deductions for various costs"?

      Maybe have all theses international companies and local billionaires having to pay for all the infrastructure...they pay bugger all in "TAX"!

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  2. Dale Bloom

    Analyst

    One could go back to basics, and ask "Why are roads becoming congested?"

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    1. Riddley Walker

      .

      In reply to Dale Bloom

      Currently 11,000 cyclists ride to work in the city (RACV Royalauto Aug/Sep 2012). Imagine if they all decided to drive their cars in on the one day. Then you would really see traffic chaos.

      What really needs to happen to make Melbourne a cycling city is to draw a 10k radius around the CBD, and make that whole area a cycling priority precinct.

      Congestion is caused by too many cars on the road, and the vast majority of these are single occupant commuters. The solution is to reduce the number…

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  3. Kevin Bain

    Teacher

    You say these fancy ways to finesse around "short term political pragmatism" are a response to budget surplus fetishism, which you appear to accept as a given. How will rational economics ever be included in political decisionmaking if economists go along with dumb, visceral prejudices? Yet it seems likely that recent statements by many economists that a deficit is not so bad at present created space for the Treasurer to accept the inevitable without too much panic.

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  4. Dave Smith

    Energy Consultant

    Whatever the future holds, I think we should celebrate these instances of State governments, for once, getting the better of the private sector bankers and spivs.

    I don't know how they did it, but it was wonderful while it lasted.

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  5. Ken Piaggio
    Ken Piaggio is a Friend of The Conversation.

    Medical Practitioner

    When there is a business failure with potential public cost it is also important to assess possible causes and remedies. I would suggest the provision of multiple 'sudden death' fixed speed cameras have created a barrier to use. Tradesmen who would love to use the tunnels report, possibly with tongue in cheek, that it would be possible to lose their drivers licence by the time they exit a tunnel. They perceive that the risk is not worth it.
    If people, who might be law abiding citizens and who depend on driving for their living, even though the cost of the tariff would have been a tax deduction, are avoiding the tunnels for this reason, then the Government will need to review any obstructions to business success that they are responsible for.

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    1. Adam Mansbridge

      IT business analyst

      In reply to Ken Piaggio

      Are the speed limits that unpredicable or the speedometers that unreliable that the tradies are afraid of using the tunnel? Or is it simply the cost?

      I'm of the opinion that the worst part of speed cameras is all the cars with speedos that 5km/h high driving an indicated 5km/h below the speed limit to be "safe" from the speed cameras knocking the speed of the traffic down by 10km/h. On a busy road with speed cameras that people are aware of you'd be lucky to get anywhere near the speed limit.

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  6. Jack de Lange

    logged in via LinkedIn

    The trouble is, we do it all wrong. Everyone knows that drivers will avoid a toll road if at all possible. And that happens all over the world.

    So if we build a tunnel under the river to get the traffic off the Story Bridge and out of the central city, why not put the toll on the Story Bridge and use that toll money to pay for the tunnel.

    At least we will achieve the objective for which the tunnel was built in the first place.

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  7. Raja Junankar

    Honorary Professor, Industrial Relations Research Centre at Australian School of Business

    This is an important article by Stephen King. Since he recognises, as has been said by many economists, the government can borrow at much lower costs than the private sector it should be the government that funds infrastructure investment. The budget surplus fetish is just that: a politically motivated fetish! Some of these PPPs prevented public transport alternatives to toll roads, like in Sydney for the M5.
    Rather than dream up alternative PPP schemes we should recognise the importance of public infrastructure that has significant social benefits.

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  8. Chris Borthwick

    Writer

    Hold it, hold it.
    "If we want infrastructure investment and government budget surpluses, then PPPs are a must."
    Yes, but why would we want budget surpluses, in the short term? We're taking on a debt in order to (if we toll the road) buy an income stream that would pay off the debt. If we don't toll the road, then we're increasing public amenity by an amount that's greater than the cost and we should raise taxes to cover. Government budget surpluses are important only because people like King have fetishised them and because people like King won't hear of higher taxes. PPPs are a purely cosmetic device (and very expensive cosmetics at that).

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    1. Peter Redshaw

      Retired

      In reply to Chris Borthwick

      Chris, as someone who did a planning degree and tend to think PPPs more than often lead to bad planning decisions, I can only agree with what you say. PPPS are a smoke screen to enable governments from both sides of politics to play this game of I can give you lower taxes as well as a budget surplus. In the end all this does is leave this nation with a deficit in infrastructure and services, as well as a lack of equity of access.

      What annoys me is that both sides of politics love to talk about…

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  9. Colin MacGillivray

    Architect, retired, Sarawak

    Consultants involved with speculative building projects, including toll roads, have a vested interest in the project proceeding to completion. They get paid even if the project is a financial failure. Years ago I joined a large Sydney firm, working on a scheme in its completion phase. A 5 minute study showed it would fail and it did. The client/emperor was confident and keen, so no one told him he had no clothes on.
    Perhaps all consultants should have 20% of their fee (very roughly their profit) paid in the form of equity in the project. That would certainly indicate at the outset if it was viable or not.

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  10. wilma western

    logged in via email @bigpond.com

    Yes those dodgy traffic projections ! Good one Colin McGillivray .

    Tony Abbott's big dams for Northern Australia will be built under PPPs he thinks. I wonder who'd be keen on taking that risk?

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  11. John Davidson

    Retired engineer

    In Brisbane, all the toll roads, bridges and tunnels are on routes that bypass congested areas. There are no tolls on routes that go through the center of congested areas. After October this year a commuter who does the responsible thing and uses the airport tunnel to reduce congestion along Kingsford Smith drive will pay over $2000/yr.
    The same is true for someone who uses public transport. A commuter who travels through only three zones in Brisbane will be charged almost $2000/yr for being responsible. A fuel efficient car using 5 litres/100 km will consume less that $200/yr to travel a similar distance.
    Tolls are inherently unfair since they hit people who travel particular routes while leaving others with free passage.

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    1. Jack de Lange

      logged in via LinkedIn

      In reply to Gavin Moodie

      I'm with Gavin - sort of. See my comment from earlier today.

      We should toll those roads which we want motorists to stay away from because they are congested. That is why we build tunnels in the first place. Then the ones doing the right thing are rewarded.

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    2. Chris Borthwick

      Writer

      In reply to John Davidson

      Yes, but that's a distraction; what we're talking about here is Given that there are to be tolls, should they be PPs?

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    3. John Davidson

      Retired engineer

      In reply to Chris Borthwick

      Yep: PPs for things like toll roads are dead in the water. They still make sense for things like the new Qld executive building because the income is guaranteed for a number of years.
      With toll roads it really is anyone's guess what the relationship between toll and numbers willing to pay it are anyone's guess. $2000/yr is far too much for most potential users to pay

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    4. Jack de Lange

      logged in via LinkedIn

      In reply to Gavin Moodie

      I can see no impediment to having a contract with a private partner that asks them to build a road or tunnel over here and collect tolls over there.

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    5. Edwin Flynn

      I am a early retired executive at Worked in Local Government, Education and Financial Services Industries

      In reply to John Davidson

      "Tolls are inherently unfair since they hit people who travel particular routes while leaving others with free passage."

      John that is precisely the problem of the user pay system. If the infrastructure benefits the community as a whole, invariably they do, than the charge should be upon all members of the community whether they derectly use the infrastucture or they befefit from the economic and environment spin offs.

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    6. Peter Redshaw

      Retired

      In reply to Gavin Moodie

      "But I would toll all roads and make the toll higher when the road is congested".

      So tolls as currently levied may be unfair, but you want to make them even more unfair by putting tolls on all roads? So you want to put a de-facto tax of a toll on everyone no matter their income or capacity to pay, because that is what a toll is. Instead of doing it through the normal tax system, where we tax people according to their earnings, we instead impose toll of an equal amount to hit everyone who needs…

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    7. Gavin Moodie
      Gavin Moodie is a Friend of The Conversation.

      Adjunct professor at RMIT University

      In reply to Peter Redshaw

      I also would prefer core infrastructure and services to be funded from general revenue, but unfortunately that was lost in Australia some 3 decades ago and even most optimistically is unlikely to return for at least a decade.

      In the mean time governments are spending billions on roads for private transport for which users pay very little, while public transport is starved of funds for which passengers have to pay substantial fares, which however are only about a third of the cost of the service.

      Extending tolls to roads would at least treat car drivers more neutrally with public transport patrons and would raise useful revenue to free funds for investment in public transport.

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    8. Peter Redshaw

      Retired

      In reply to Gavin Moodie

      Ah, Gavin, that is why we used to have a tax system. And it was why it was scaled according to how much you earned from the economy and therefore how much you pay back to it. Now of course we could have a flat tax system as many of the top income earners would like, but that would only work is we had a more flat income level.

      But of course as we know the market system does not work like that as it has no concept of equity. We have a tiered tax system to make up for that lack of equity…

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  12. Edwin Flynn

    I am a early retired executive at Worked in Local Government, Education and Financial Services Industries

    PPP's became the economic rationalists perceived answer to reducing "Government Debt" in the 80's. Let the user pay became the catch cry and government debt is the ogre in the cupboard that must be controlled. So we have seen government after government proclaim their financial control capablilities by producing surplus bugdet yeat after year and at the same time unfairly loading specific tax payers with tolls and charges just for going about their business that in the end benefits the community…

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    1. Peter Redshaw

      Retired

      In reply to Edwin Flynn

      Edwin, I agree. PPPs and user pay principle is just as flawed a concept by the economic rationalists as their belief that the market operate in a rational way. Both ideas are irrational and fail at the slightest scrutiny.

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  13. Kevin Cox

    logged in via LinkedIn

    Debt in itself is not a problem. The problem is the way we repay long term debt and the way we create debt to build new assets.

    Debt created to fund long lasting toll ways (or almost any public infrastructure) is long term. An interest rate of say 5% on $100 where the interest is only paid on the capital over 30 years results in $150 of interest. Using compouding of debt means $100 will cost $332 in interest payments or double the cost.

    This happens because we assume that money does not depreciate…

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  14. Lincoln Fung

    Economist

    The solution mentioned in the second last paragraph is a bit of too one sided in terms of risk bearing, because it would leave the future users and the government bear all the risks and the private partners virtually none.

    A more balanced one is that a solution also make the private partners bear at least half of the risks and the government as the public partner bears half, similar to the Henry mining tax design, but differs to that design in a crucial and fundamental way, that is, the risk sharing…

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    1. Lincoln Fung

      Economist

      In reply to Lincoln Fung

      As to the case that Australian governments can borrow at much lower rate, why don't they borrow and then quasi lend to the private partners to share the savings?

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    2. Edwin Flynn

      I am a early retired executive at Worked in Local Government, Education and Financial Services Industries

      In reply to Lincoln Fung

      "As to the case that Australian governments can borrow at much lower rate, why don't they borrow and then quasi lend to the private partners to share the savings?"

      The economic rationalsts have argued that it is not OK for the Australian Government to borrow to fund infrastucture and the PPP's were/are the new panacea. Now an economist (you (;)) ) proposes that the Government should become a lending institution.

      Lincoln, has the argument now has gone full circle? Is the experiment over? I note that there are now TV programs promoting Keyne'seconomic teaching. Poor guy his name became mud in the 80's through to the present. Now he is once again being promoted as a genius.

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