PPPs and renegotiation: Citylink and Scoresby
One of the big questions about Public Private Partnerships is what happens, when the deal needs to be renegotiated in some way, 10, 20 or 30 years after it was signed. This story about changes to an interchange affecting CityLink in Melbourne is of interest. The deal is being financed in part by replacing some payments due to be made by Transurban (the Citylink operator) with a smaller upfront payment. The financial arrangements are too complex to permit a clear assessment, but one point is striking.
Last year Transport Minister Peter Batchelor said the Government wanted $200 million for the upgrade. Transurban said it wanted to pay only $150 million – the eventual figure.
So, starting with a a $50 million gap between the initial positions, Transurban got the whole $50 million and the public got nothing.
Related to this is an interesting kerfuffle over the Scoresby (Mitcham-Frankston) motorway. As many will remember, the Bracks government initially promised not to impose tolls, then reneged, copping a lot of flak in the process. The Opposition leader, Doyle, has promised to renegotiate and remove the toll. This has presented the Bracks government with interesting incentives. Usually governments involved in PPPS want to stress what a good deal they have got for the public, in terms of the toll revenue that has been promised the private ownership. But now the situation has been reversed. Faced with Doyle’s promise, the government and its agencies commissioned a PwC report which said that scrapping the tolls would cost $7 billion, with a cost of $4.5 billion for buying out the project. By contrast, construction cost is about $2.5 billion plus “other financial costs” of $1.3 billion.
It appears from these reports that the value of the tolls that have been alienated is nearly three times the cost of building the road. Of course, the government’s report has been produced under pressure to make the repurchase option look as unfavorable as possible. But then, the vast majority of published analyses of PPP projects suffer from the opposite bias.
What’s even more striking about this is that, in PPP circles, the Mitcham-Frankston project is being touted as a huge success, evidence that we are finally getting these things right. Something does not add up here.
fn1. The conclusions have been released, but the interesting bits like the traffic projections are, as usual, commercial-in-confidence. At least, when I asked for them, that’s what I was told.
fn2. Using the $4.5 billion buyback cost and accepting that some of the “other financial costs” would be incurred under standard procurement would give a less extreme result. But the $7 billion number is the one the government has been touting.