Some interesting news coming out of Australia today, with yet another transport public-private-partnership (PPP) on the brink of collapse, due to over-optimistic traffic forecasts. This time it’s the Airport Link toll road in Brisbane:
THE operators of Brisbane’s Airport Link have gone into a trading halt, amid increasing speculation about the company’s financial future following much lower than expected traffic volumes…
…It comes as the operator struggles to achieve even 50 per cent of its forecast traffic volumes of 135,000 vehicles a day.
Since a discounted toll took effect in late October, Airport Link carried 53,172 vehicles a day down from 85,000 in its first six weeks of operation when motorists were able to use the tunnels for free.
BrisConnections had projected a figure of 135,000 from the end of the toll free period, rising to 160,000 within 18 months of opening.
A retired Sydney academic notes that this failure is far from unusual and all comes back to that same vexed issue that we discuss so frequently in blog posts: overly optimistic traffic predictions:
Professor John Goldberg has written a complex 24-page analysis of the project and his findings are unswervingly grim. He says that Brisconnections, the listed company which oversaw the $4.8 billion project, faces “inevitable financial collapse”.
Skewed traffic forecasts, poor cash flow and unmanageable debt will prove its undoing, he believes.
Until recently, the listed company had insisted that everything was fine.
That reassurance came even though vehicle numbers have fallen far short of expectations since the 6.7km road opened in late July with an introductory free tolling period which ended last month.
But Brisconnections acknowledged on November 2 that its bankers had appointed insolvency and restructuring firm PPB Advisory to conduct an independent business review. Investors were warned that there may be “adverse implications”.
Is Brisconnections heading for the same fate as RiverCity Motorway Group, which collapsed about $1.4 billion in debt less than a year after the 2010 opening of Brisbane’s cross-river Clem7 tunnel?
That’s what Prof Goldberg thinks. Normally, such a dire forecast might be met with skepticism.
But Prof Goldberg, who taught at Sydney University and worked as a senior researcher at CSIRO for 30 years, has form.
He correctly predicted the failure of the companies operating the Cross City and Lane Cove tunnels in Sydney. That foresight earned him a place before a 2005 NSW Parliamentary inquiry.
“The public-private partnership concept has failed in Australia and should serve as a warning to superannuation funds of the high risk of investment in road infrastructure,” he writes in his current paper.
Investors have poured more than $23 billion into 11 toll roads across Australia since 1994 and the net return on equity has been small or negative in each case.
On the one hand I’m not fan of PPPs for transport because I think they’re just a form of “creative accounting” that benefits nobody but the lawyers drawing up the complex contracts. However, on the other hand if these high profile PPP failures in Australia had just been public sector roads we may well have never known about them, because the horribly inaccurate traffic predictions wouldn’t have been an issue. So it seems that – perhaps by learning the hard way – the PPP system might end up bringing a bit more rigour to the process of assessing whether projects are actually needed or not.
But that will be too late for the Airport Link, where it seems the process of working out how many vehicles were going to use the road each day was based on a rather convoluted process:
A common flaw in the failed tolls roads and, notably, Airport Link, is the use of a “work back” philosophy to forecasting traffic numbers, Prof Goldberg says.
The promised return on equity to investors is a starting point used to work back to how much revenue must be generated from the expected daily flow of vehicles, which has been inflated to wildly unrealistic targets, he says.
Brisconnections had forecast 135,000 vehicles a day would use Airport Link from the start and the numbers would eventually climb to 195,000 daily.
The most recent average traffic count showed a dip to just 66,203 a day in October, a period when the road’s use was still free for more than half the month.
The Clem7 traffic performance has been equally dismal, with an average of just 24,000 vehicles a day, less than a quarter of expectations.
The ‘work back’ philosophy seems utterly bizarre, to say that least.
Given the numerous failures of PPPs in Australia, for reasons which seem to be happening in New Zealand too, it is interesting that our government seems so keen on pursuing them for projects such as Transmission Gully and perhaps the future Puhoi-Wellsford road. The worry I have is that if private investors in PPPs are so burned from the Australian experiences then all the “demand side risk” (i.e. whether the road will have enough use and generate enough toll revenue to make it worthwhile) is likely to end up sitting with the public while the private investors make out like bandits through ‘creative accounting’. Pretty much the worst of both worlds.
Why do we never learn from the mistakes of others?