Home > Economic policy > The cost of private tollways

The cost of private tollways

September 16th, 2005

Victorian Opposition leader Robert Doyle has been forced to abandon his promise to make the Scoresby freeway toll-free. What’s really interesting about the Age report on the subject is that it starts by referring to a “$2 billion” project, but ends by referring to an Econtech report saying it would cost $4.3 billion to buy out the private contractor. Roughly speaking the first figure is the actual construction cost and the second is the present value of the amount the public will have to pay (the Bracks government estimated the latter figure at $7 billlion). This is a fine example of the excess cost associated with PPPs and private tollways.

In any case, a toll on a road of this kind makes no economic sense. What is needed is congestion pricing, as in London. Having announced an inquiry into ‘radical’ methods of addressing congestion, the Bracks government has ruled out the only workable solution in advance

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  1. September 16th, 2005 at 08:49 | #1

    Congestion charging or taxation is an important consideration for comsumers, automotive manufacturers and suppliers, and for issues concerning the urban built environment.

    ICDPA prepared a research paper last year examining international systems around congestion charging. Link to http://www.icdp.net then the Australia link for a copy of the executive summary.

  2. conrad
    September 16th, 2005 at 08:49 | #2

    I think you are thinking about toll-roads in the London sense (keep traffic out), which is different from the outer-Melbourne sense. Sticking toll roads on outer-suburban roads is a great idea in Melbourne (both environmentally and economically), since it makes the cost of living in McMansions in outer suburban sprall more, hopefully reducing the viability (and hence construction & associate long-term infrastructure costs) of such a lifestyle.

  3. September 16th, 2005 at 10:07 | #3

    If London charges five quid for congestion tax I only think you can justify 20 cents for Melbourne.

    We have had this idea floated for Sydney and people don’t understand the massive scales of difference between the two cities.

  4. econwit
    September 16th, 2005 at 11:28 | #4

    “This is a fine example of the excess cost associated with PPPs and private tollways.”

    True, another glaring example of government incompetence indicating the public sector is totally oblivious to the concept of an assets “intrinsic value”.

    “Intrinsic value is an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.” (W Buffett)

    The recently opened Cross City Tunnel in Sydney is another example, having a real poison pill attached. A toll ratchet clause that increases tolls the higher of 1% or CPI compounded quarterly. It is possible the tunnel will be debt free and providing the contractor total tolls ten years into the 30 year contract.

    “Ruled out The only workable solution in advance”

    Tax everything that moves, so nothing moves is hardly the solution. It is a scary thought giving the public sector keys to the till, let alone putting more money in it.

  5. wilful
    September 16th, 2005 at 12:09 | #5

    The PPP financing method is an absurd example of ideology run mad. VicRoads formerly had the skills and reputation to manage a project like this very successfully. For Citilink and the scoresby freeway, they could have easily tendered out the design and construction, so Baulderstone etc can still show that wonderful private sector efficiency, and tendered out the tolling system (because the entirely privately organised etags were a great success), paid for it with very cheap debt (no point having a AAA credit rating when you’re not borriwing) and paid it off with ~$2 – 2.5bn of tolls. And have the IP for the etag system so not have to apply a different system next time. And not have to ruin the rest of the road network for private gain.

    The only beneficiaries were investors looking for windfall tax gains. Treated the people of Victoria with utter comtempt and extracted several billion of cold hard cash straight into multinational consortiums. Makes me mad. And all done strictly because of ideology. DTF and the Office of Major Projects should be the ones that lose their jobs in Doyle’s scheme.

  6. econwit
    September 16th, 2005 at 12:59 | #6

    The Sydney Harbour Bridge should be a text book case of how to build and fund a toll road. Fixed price /time/building contract utilising the cheapest form of debt funding (Government debt).

    In the years just prior to the building of the Sydney Harbour Tunnel the tolls collected on the brige each year were more than the origininal loan.

    PPP Toll roads are a direct transfer of public wealth to the 300+ millionare individuals working at Macquarie Bank.

  7. Uncle Milton
    September 16th, 2005 at 17:12 | #7

    i don’t see what the problem is in having the buy the private contractor for more than the cost of building the Scoresby freeway. The buy out cost is presumably the the revenues they would get from tolls over the life of the contract. Over that time they would expect to get their capital back ($2 billion) plus a return on the capital.

    It’s like the repayments on a hoan loan. If I borrow $500K at 7% repayable over 20 years, my total repayments are going to about $940K. I’ll have paid a lot more than I borrowed, but that doesn’t mean the bank is ripping me off.

    It all comes down to what rate of return the project owners are planning to get. Maybe it’s a rip off, maybe it isn’t. If it ia rip off, and the tolls are at rip off levels, drivers could always take another road. Or maybe the government is going to fix things so that that would be a real headache. I don’t know. But the fact they planning to get more in revenue than they are investing means nothing.

  8. jquiggin
    September 16th, 2005 at 17:32 | #8

    Uncle Milton, the $4 billion is a present value, not an undiscounted cash flow.

  9. Uncle Milton
    September 16th, 2005 at 18:34 | #9

    I’d like to know how the $4 billion figure is derived. If the company discounts its revenues at its cosy of capital, say 12%, it might value the revenue stream at $2 billion. But if the government uses its borrowing rate, sat 6%, to dosiunt the same cash flows, then the present value to it might be $4 billion.

    I don’t know if this makes sense though. If the government is, in effect, converting an uncertain toll revenue stream for the company to a certain stream of government payments, then they should be prepared to accept a smaller stream of payments.

  10. Uncle Milton
    September 16th, 2005 at 18:34 | #10

    That should be its cost of capital, though the deal might be cosy!

  11. gordon
    September 16th, 2005 at 18:38 | #11

    Wilful, it’s not ideology, it’s a scam to put public money into the pockets of powerful people. Nationalise the freeway without compensation. Seize it. Now.

  12. September 16th, 2005 at 19:48 | #12

    Anyone who wants to help us stop the Brisbane North South Bypass Tunnel (NSBT), which will be run as PPP, please visit the web site of Communities Against The Tunnels (CATT) at :

    http://www.notunnels.org

    The NSBT and associated tunnel projects will destroy the health and lifestyles of many Brisbane residents, cost Brisbane ratepayers and road users a fortune and will ensure that that there are little remaining public funds for more worthy areas including health, education and public transport in coming decades.

    Given that world oil stocks will be effectively exhausted by around 2035 at the latest and, long before that, regular transport by car will become beyond the means of most ordinary people, the NSBT stand to become an incomparably greater monument to the stupidity of our governments and councils than even the Suncorp stadium.

  13. fatfingers
    September 16th, 2005 at 20:14 | #13

    “i don’t see what the problem is in having the buy the private contractor for more than the cost of building the Scoresby freeway. The buy out cost is presumably the the revenues they would get from tolls over the life of the contract. Over that time they would expect to get their capital back ($2 billion) plus a return on the capital.”

    The problem is, if you buy them out one week after the start of the contract, then you shouldn’t have to pay the revenue they expected over several years or decades, because they can re-invest immediately. Otherwise, it is double-dipping.

    Take your home loan example – if you pay it off in three years, you don’t pay $940k (the 20-year contract price), do you? No, you pay the principal and the rate of return for three years, not twenty.

  14. SJ
    September 16th, 2005 at 20:58 | #14

    No, you pay the principal and the rate of return for three years, not twenty.

    Well, not if the contract stipulated otherwise, and you stupidly signed the contract anyway. I guess one could feel sorry for a young, financially ignorant couple who signed such a contract. A state government on the other hand…

  15. September 16th, 2005 at 22:58 | #15

    Conrad, “since it makes the cost of living in McMansions in outer suburban sprall more, hopefully reducing the viability (and hence construction & associate long-term infrastructure costs) of such a lifestyle.”

    Why should those people be punished simply because they have chosen a certain lifestyle? Living in a large house in the outer suburbs is just as valid a lifestyle choice as living in a terrace house in Newtown.

  16. conrad
    September 17th, 2005 at 07:09 | #16

    Cameron : Because it costs huge amounts in infrastructure to support people living in unviable areas, which is indirectly subsidized by people that don’t live in such places, since the goverment is forced to put subsidized doctors, roads, public transport etc. out there (and telecommunications services, it appears). If you lived in the Melbourne equivalent of Newtown (Fitzroy?), doctors would move there without incentives, public transport might actually make a profit (and trains/buses might come more than once every hour, making you think about taking them). It also destroys the environement directly (land use), indirectly by increasing the amount of driving which people are forced to do (and hence the assumption that there is a need for more and more roads), and so on. You can look at the failed policy of the Victorian governement if you want to see the benefits that it thinks of better planned cities.

    I don’t think this is an all or nothing thing, incidentally (the population, of, say, most European cities gets into much smaller areas without super-high rises), but I think by almost anybodies standards (including the Victorian governement), Melbourne is a spralling disaster. If you want to stop this, you either need to stop developers developing stuff (unlikely), or make it less viable to live out there, by not putting new infrastructure there.

  17. September 17th, 2005 at 08:59 | #17

    Conrad, Newtown was an outer suburbs once. So was Kensington, Kingsford, etc. As the population moved there, so did their dollars – commerce and industry soon followed. The inner city suburbs are also on prime agricultural land.

    Castle Hill in Sydney had bugger all infrastructure when the new developments started going in. Same with Schofields and Parklea. Now that there are a bunch of people out there, who are taxpayers, infrastructure is going in. The missing one for Castle Hill is rail. But Old Windsor Road is no longer a goat track.

    Sprawl is an issue, and I do personally believe that towns should have edges, however, I dont think people in outer suburbs should have to pay a fine simply because inner-city folk think their way of life, and lifestyle is superior and that town planning in the outer-suburbs should reflect that inner-city choice.

  18. Stephen L
    September 17th, 2005 at 11:42 | #18

    Cameron Riley, those living in the outer suburbs shouldn’t pay a fine, but they should pay at least some portion of the extra infrastructure costs involved in having them live where they choose, rather than closer in. It’s not so much the Newtown/Fitzroy dwellers who are subsidising them (although those of us living in such suburbs make easy targets). The main subsidy comes from people living in middle suburbs like Glen Waverly or Doncaster.

    As populatation grows expansion is inevitable, but population growth is slowing, yet the sprawl continues apace, largely because many of the costs of living in huge blocks on the edge of town have been externalised. Tollroads may not be the best way of dealing with this however, and in the case of the Scoresby it is clear the thing is a white elephant that should never have been built – tolls or no tolls.

  19. September 17th, 2005 at 13:10 | #19

    But, that “extra” infrastructure isn’t an intrinsic part of the outer suburbs, it’s something that the government is wishing on them.

    There is absolutely no ethical reason why the government shouldn’t confine its commitments to those it made, and consider the people who moved out as having voted with their feet to opt out. This chasing after them in fact removes anyone’s option to opt out.

    The old style approach to this sort of thing was that when an area’s population found it needed more formal organisation, it got organised. This current approach thrusts existing arrangements on them and prevents any true democracy and liberty under the pretence that they already “chose” what is to be thrust upon them.

    In this case, it comes down to not having a freeway or a tollway, unless and until some local initiative actually asked for it and provided necessary underlying guarantees. But it never happened.

  20. mark white
    September 17th, 2005 at 14:10 | #20

    It is a tragedy that the only proven solution to congestion is ruled out by default by the political stumblebums running this country into the ground. This is because car-captured politicians and planners assume all traffic on the road needs to be there, just like municipal waste engineers once assumed all household waste needed to be there – until they discovered the idea of recycling.

    Traffic speeds in London have increased 37 percent, congestion has dropped 40 percent during charging hours, and round-trip journey times have reduced 13 percent. How do we know if this model is unsuitable for Brisbane or Melbourne without a debate of the basic research? This is a political decision, not a sensible one.

    The Founder of the Urban Design Institute of Queensland wrote in the Brisbane Institute, August newsletter an article that clearly outlined the folly and misplaced priorities of TransApex, the most massive road building plan in Australia.

    The article drew attention to the fact that there has been no city-wide public debate over the sort of city we wish to create, even as TransApex threatens to carve up the region into fuel-hungry patterns of urban growth that are clearly dangerous to human health and well-being.

    It would be well worth the government’s time to actually take a closer look at these critics, and look again at the many sensible, proven options that can no longer be ignored by decision makers, such as a major funding boost for the Travelsmart program and urgent reform in the taxi sector to encourage more innovation (both currently unfunded BCC Transport Plan strategies).

  21. conrad
    September 17th, 2005 at 22:04 | #21

    Mark, obviously you don’t come from Melbourne. The goverment has been looking at ways to stop urban sprawl for longer than the Sydneysiders have been deciding where to build their next airport, with much the same result (lots of documents, and no action).

    Public transport isn’t viable in outer (or possibly most of) Melbourne for most people, since most of the major roads have very little traffic on them most of the day (let alone people that would also want to take public transport), due to the size of the place (excluding of course peak hour), and thus you end up with bus services that go once an hour and travel half way around the city before they get to their destination. Given that taxi’s cost about $20 for 8 kilometers last time I took one in Melbourne, I doubt people are going to be to enthusiastic about anything to do with them either. The only method that might work is car pooling, but since it doesn’t work anywhere else, I’ll just assume that that would be a failure too.

    The London analogy is also false. Sticking a toll in London is a good idea that doesn’t cost you much, and people can still get in to the centre of London easily (although admitadely the public transport in London is expensive and fairly crappy in comparison too many similar sized cities like Paris). Alternatively, looking at my Melways, the road people are talking about goes from somewhere about 45 kilometers out from the CBD to somewhere about 35 kilometers out — its a no-where road for people living in a no-where place that connects two no-where places. Thus success in London has no relevance to success in Melbourne.

  22. September 18th, 2005 at 09:18 | #22

    conrad wrote : Mark, obviously you don’t come from Melbourne. The goverment has been looking at ways to stop urban sprawl for longer than the Sydneysiders have been deciding where to build their next airport…

    What conrad is saying is that public transport is also expensive, and I would agree.

    Public transport is not a solution in a world in which there will soon no longer be cheap abundant energy, however, it should still be capable of being cheaper than having almost every individual commuter being obliged to travel at least many kilometres to work each day inside his/her own heavy metal box.

    If our governments were prepared to use their imagination they should be able to come up with public transport solutions which are still better than the current practice.

    However, public transport will only ever be a second rate, and ultimately unsustainable, solution.

    We should stand back and ask how our governments have allowed a situation to develop, in which it is necessary for millions to travel long distances each day in order to earn their livelihoods, to do other necessary chores, and be entertained.

    The reasons are twofold :

    For at least the last fifty years our governments and councils have largely abandoned their responsibilities to properly plan our urban environments to suit the people who live there. Instead, they have effectively handed these powers across to land speculators and property developers.

    If our governments had planned properly, we should have easily been able to have achieved a situation, in which all but a few of us should be able to walk or cycle to work.

    Given their first failing, our governments have allowed our population numbers to increase well beyond the point where our major cities are sustainable, let alone pleasant to live in.

    We are now reaping the terrible whirlwind that we have sown. If (or, rather, when) we are hit with either natural disasters such as hurricane Katrina or unaffordable oil prices, the consequences will be too awful to contemplate.

    It is time that we recognise that currently practised urban planning and population policies have been completely misguided and begin the urgent task of rectifiying the terrible mistakes that have been made.

    However, if they are to do so, thery must begin to think well outside the box that has been imposed by economic ‘rationalism’ (and, I would also add, Keynesian economics and Marxism).

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