The case against the NSW Government’s road building agenda in the Sydney region

This article explains the main reasons why the NSW Government's road building agenda in the Sydney region is seriously flawed. Since the 1990's all major road building in Sydney, Brisbane and Melbourne has been carried out by private consortia that have designed, funded and managed the projects and, in some cases, have proposed them as well. The Federal government's assistance to such projects as WestConnex and NorthConnex may have also encouraged the process. However, questions need to be asked about whether a proper evaluation has been carried out of the economic and operational factors as well as the social costs in the planning of the currently proposed toll road projects.

It also needs to be asked whether these projects represent the best allocation of capital resources. The privatisation of roads in Australia is a politically driven agenda. It is inspired by the desire of politicians to promise the electorate free flowing traffic which is unattainable for reasons explained later in this article. The true cost of privatisation to the road user has largely been ignored by the government. A quantitative example given in this article shows that road users collectively are paying very large sums of money through toll payments for which there is little or no return in travel time savings.

The financing of roads

To raise capital to build roads and other infrastructure,the Premier of NSW, Mike Baird is proposing to sell public assets despite the fact that the cost of capital is now very low for a government with an AAA credit rating.

A misplaced belief in the advantages of privatisation in the form of public private partnerships has resulted in the expenditure of very large sums of money to construct 11 toll roads in Australia. Between 1994 and 2011, I have estimated that a total of $23.17 billion was spent in this period of which $13.98 billion was project debt and $9.19 billion equity (2011 dollars). Four roads out of these eleven have financially collapsed. The remainder only appear to be viable to investors because of financial engineering, an example of which is provided by the Transurban Group as discussed below.

Are there any advantages for the road user in privatising roads?

The stated advantage of private sector involvement in road building was that the roads would be built more quickly and efficiently, pleasing the electorate who did not understand the hidden social costs and other implications. Nor was it understood that privatisation was laying the foundations for a more rapid increase of future congestion.

This undesired outcome arises from an uncontrollable phenomenon known as traffic induction. New road space attracts new traffic and its advantages in terms of travel time savings are eroded in a short space of time. A road system is very much like a system of interconnected pipes carrying fluid. As the amount of fluid increases the available space gets taken up. This analogy was used in early studies of traffic flow and forecasting.

The performance of the M2 Motorway in Sydney is a good illustration of the effect of traffic induction. It only took a few years after it opened in 1994 before congestion during peak hours became apparent. In 2010 a decision was made to widen the M2 to try and cure congestion. At a cost of $550m, the advantages of widening were greatly overstated to justify the project. For example, annual crash rates were not reduced by increasing the number of lanes. Now quite frequently throughout the week, queuing and delays can be observed during peak periods. The widening was approved by the NSW Department of Planning and Environment which had apparently predetermined that it should proceed while ignoring any submissions that disagreed with its predetermination.

A short history of failed toll road projects

As stated above, four toll roads out of 11 in Australia have financially collapsed. These are the Cross City Tunnel and the Lane Cove tunnel, both in in Sydney, and the CLEM7 tunnel and Brisconnections Airport Link tunnel in Brisbane. Accounts of these failures are available on the internet.

The most serious of the four was the collapse of the Brisconnection Airport Link which I forecast in 2012 (see Brisbane Courier Mail, 12/11/12). Investors and bankers incurred losses of $4.8 billion. I considered that this case of financial collapse warranted an investigation by a Royal Commission into this disaster. (See The Australian Financial Review, 20/11/2012, 21//2/2013). The role of traffic forecasts in these failures was critical as shown below.

The traffic forecasts for toll roads

Forecasting the traffic usage of a road has always been uncertain. This has special significance in relation to the promotion of private roads where tolls are imposed on road users and large debts are undertaken to pay for constructing the road. Privatisation has been assisted by government subsidies and tax concessions.

Financial collapse came about mainly because of false and misleading traffic forecasts .The technique used to develop the forecasts usually involved two stages. The first stage was to employ a proprietary computer program which could simulate the interaction of land use and transport. This is the interaction that produces traffic. Generally the forecast traffic numbers generated by this process are too small to provide the toll revenue needed to pay equity investors, operating expenses, management expenses, debt repayment and other demands on the toll revenue collected. Therefore these forecasts were discarded. The second step to obtain the traffic "forecasts" was to use the desired investment outcome as a starting point and then to calculate the traffic numbers and tolls that would satisfy these outcomes. This methodology is known as work back or reverse engineering.

"Forecasts" derived in this way have no transportation meaning. The use of the work back process is usually covered up by falsely attributing the engineered forecasts to the methodology used in the software which originally failed to produce forecasts of the desired magnitude. This process may be observed, for example, in Product Disclosure Statements for a number of toll road projects. This process is reminiscent of the one known as "two sets of books" that was sometimes used in fraudulent accounting. When financial collapse occurs it is usually attributed to "traffic risk "as a cover story. Years after financial collapse the responsible parties are being brought to account in legal class actions. Given the flawed traffic forecasting methodologies used by traffic engineers I believe that it is highly unlikely that the traffic forecasts for current road proposals will be reliable. .

The current government if re-elected may pursue the same approach to road development and financing that has been a comprehensive failure.

The current projects: NorthConnex and WestConnex

The financial arrangement of both appears to be based on public private partnerships involving debt and equity. The taxpayer may end up paying for the it is likely financial shortfall as public money is involved in both these projects while it is likely that road users may gain little or no travel time advantage from using them

NorthConnex.

NorthConnex provides an excellent illustration of the desire to sell the electorate the illusion of free flowing traffic even though it is supposed to carry in excess of 5000 heavy vehicles per day as well as large car volumes. The 9km twin tunnels will be used as a bypass between the M2 Motorway and the M1 freeway. There was no assessment by the NSW Department of Planning and Environment of road safety in the tunnel. The Department appears to have been unaware that comprehensive European studies of crash costs in tunnels have shown that there is at least 10 times the probability that these costs will exceed those from equivalent surface roads carrying the same amount of traffic. Perhaps the Department had predetermined that to consider the critical issue of road safety would detract from the politically inspired image of a safe free-flowing roadway.

The government had accepted an unsolicited proposal by the toll road group Transurban to build and run the tunnel as a toll road. Transurban's agenda was to portray itself as an infrastructure provider of substance, with the help of over $800m of federal and state funding. Transurban contributed $1.05 billion and there was an additional $1.05 billion from two equity partners. There was no cost benefit analysis for this project, despite the fact that public money was involved.

The NSW government clearly did not understand Transurban's impaired financial position or has ignored it. Its total liabilities have increased to $8.9 billion in 2014 but more importantly its security price has been manipulated to produce a gross over statement of the Group's market value. I wrote a brief summary of this matter which was published in the letters section of The Australian Financial Review on 16 January 2015. This letter was based on an earlier submission in 2013 to the Senate Inquiry into ASIC and may be viewed on the website of the Senate Economic References Committee. (Submission (no. 148 Supplement).

The case of Transurban highlights another key aspect of privatisation. An examination of the financial statements over a seven year period between 2008 and 2014 reveals that toll revenue collected from its seven toll roads in Australia amounted to $5433.77m. Road users have collectively paid this huge price while not receiving any substantial benefit in terms of travel time savings because of congestion.

Moreover, if Transurban collapses the government in office may have to compensate the shortfall. There has been no published financial risk assessment of NorthConnex. We do not know if there are any hidden agreements over funding. I was recently informed by the NSW Auditor-General's office that there are no plans to investigate NorthConnex at this time.

WestConnex

WestConnex is part of a wish list of roads enunciated by Infrastructure NSW. The economic case for it is entirely unconvincing. Its operation after construction is claimed to return $2.55 of benefits including travel time savings, for every $1 spent on construction. These benefits have been greatly inflated by including non-standard contributions such as "productivity" and "reliability".

How can a long road tunnel be economically productive when it leads to dispersion of economic activity, the very antithesis of the agglomeration needed for increasing economic activity?

How can a tunnel enhance travel time reliability in the presence of congestion as it must interconnect with other parts of the road network which may be congested? I refer the reader to the already explained analogy of traffic flow to fluid flow in a system of interconnected pipes.

No competent practitioner in cost-benefit analysis would have included such items as "productivity" and "reliability". It is understandable that there was no mention of the likely role of induced traffic in curtailing these "benefits". The WestConnex project has incurred severe criticism from the NSW Auditor-General (The Sydney Morning Herald, 18/12/14). There was no risk analysis of traffic projections, project cost, economic benefits and financial analysis. I agree with this criticism and have given independent evidence to the Productivity Commission at hearings in April 2014 that to fund WestConnex would be a serious misallocation of scarce capital.

The Auditor-General's report suggests that the NSW government and the WestConnex Delivery Authority seem unable to come to terms with the complexities which have been created by the proposal. Given the history of toll roads in Australia, this is not surprising.

Concluding remarks

I conclude this article with the following two questions for both the present and future NSW governments.

Is the flawed road building agenda described here being driven by a fear of the economic and political consequences if employment in the construction industry is not maintained?

Is the agenda also being driven by the desire to convince the electorate that effective remedies are being implemented to alleviate traffic congestion in the Sydney region?