Saturday, August 29, 2009

"The toll-road fee game is over. Next please."

End of the road for greatest fee grab in Australian infrastructure history

Maquarie stock drops


The Age (Australia)
Copyright 2009

DRIVING through Sydney's Cross City Tunnel is a majestic experience - and one that is certainly unimpeded by the profusion of other motor vehicles. Outside peak hour, a trip through the CCT can verge on the hallucinogenic. It is as if you are the last motorist in the world, racing along a gleaming, neon-lit tunnel like a kid in a video-game parlour - until the unnerving apparition of another motorist jolts the senses.

This is one fine feat of engineering. It cuts the trip time from east to west by 90 per cent. As a business proposition though, it went bust long ago. Motorists in the east and the west tend to drive to the city rather than through it, save perhaps the odd tradie from the west or an eastern suburbsite en route to the fish markets on a Sunday morning, or someone going to visit a long-lost auntie in hospital.

The consortium that slapped this deal together was banking on daily traffic of 90,000 by the end of the ramp-up period in 2006, whereas the actual traffic numbers barely surpassed one-third of that.

British mob Hyder Consulting was the expert that did the forecasts. And it is Hyder once again that is under scrutiny as forecaster for ConnectEast Management. ConnectEast built the EastLink Mitcham to Frankston toll road in Melbourne, whose forecasts have also proven fanciful and whose financial future hangs in the balance. And the Lane Cove Tunnel too, for that matter, whose equity has vanished and whose traffic volume projections were also inflated.

This is not a story about Hyder, though. It is but one consultant in the greatest fee grab in the history of Australian infrastructure. It has become increasingly clear that the traffic projections for most toll roads have been built around the financial model, not vice versa as it should be. And that financial model was structured in such a way as to ''upfront'' or bring forward the project cashflows so the bankers and all their hangers-on could pocket billions of dollars in fees before even a cent was earned in tolls.

BrisConnections, which is building Brisbane's $4.8 billion Airport Link project, is bound to be in the same class. Already arguably the most farcical public float ever, BrisConn's forecasters Arup appear to have ignored reports from Queensland Transport in coming up with its traffic numbers. Arup was paid $4 million for its service to the syndicate. It is not speaking.

To this day, the project operators and the Queensland, NSW and Victorian state governments continue to hide financial information. Not one has even produced an oil price assumption for public purview. And these are supposed to be public concessions, struck in the public interest.

The spotlight was on ConnectEast this week. Since its $1.2 billion float in 2004, ConnectEast has been back to the market no less than six times. The latest ask is aimed at paying down debt.

Even after paying down $560 million, it still has another $810 million due in 2012. Meanwhile, actual traffic on the EastLink road is running more than 35 per cent below the estimates touted in the prospectus. Yet the operator's woes now extend to lawsuits, possible breaches of banking covenants and material disclosure foibles.

On top, the construction giant - Leighton's Thiess John Holland - has a claim against the operator for misleading and deceptive statements relating to the traffic projections. There is also a potential disclosure breach in this. Thiess itself bought 226 million units last March under a deferred equity deal and has already taken a $130 million bath.

On the calculations of Sydney University academic Dr John Goldberg - who got on to the dubious toll-road model early in the piece - the EastLink peak-hour forecasts are almost twice the level the road can bear.

For the year 2011, for example, the Mitcham-Frankston section is projected to generate 47,503 trips both ways during the morning peak period of two hours. This means that if one assumes an even split for traffic proceeding north to Melbourne with that proceeding south to Frankston, there would be 23,752 trips each way. This equates to 3959 vehicles per lane per hour. This is called the lane loading.

But as Goldberg points out, the Austroads (1988) Roadway Capacity Manual suggests a loading of 2000 vehicles per lane per hour corresponds to a level of service F, which corresponds to flow breakdown.

''Of course, the reason for this conduct is to be able to generate the maximum possible financial outcome from tolls so that investors can be promised a certain rate of return which the project cannot possibly generate. Hence the need for capital raising,'' says Goldberg.

The big player in Australian toll roads, Transurban, remains in losses after eight years despite its portfolio of mature assets, and the grandaddy of the sector, MIG, is mooted to hither forth soon with some sort of internalisation proposal. No wonder the toll-road fee game is over. Next please.

© 2009 The Age:

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