Buying back toll roads

Reports that the NSW Liberal government is planning to buy back the Cross-City tunnel, following the bankruptcy of the second set of private owners mark an important step in the failure of the private infrastructure program launched in the 1980s with the Sydney Harbour Tunnel[1].

The interesting failure here is not the bankruptcy of the operators but the recognition that the whole idea of imposing tolls on a road designed to divert traffic from the city is nonsense. The most sensible plan, after buying the tunnel is to remove the toll and free road space in the CBD for a variety of initiatives including light rail and cycleways.

Unfortunately, the lessons have not been learned. The new WestConnex project in Sydney is to be a largely private tollway. The proposed East-West link in Melbourne is also a toll road but “is being procured as an Availability Public Private Partnership (PPP), with the State initially retaining tolling and traffic risk.” Whether or not these projects are economically and socially justified, there is no doubt that the use of toll funding will greatly reduce the benefits, leaving more traffic on congested, but untolled, roads.

fn1. A sham deal, which was eventually reconstructed as a publicly owned tunnel with a private operating contract.

91 thoughts on “Buying back toll roads

  1. If we’re going to toll roads, why not do it in a way that more effectively allocates the resource? There doesn’t seem to be any sense in having roads funded by public means not tolled, but private ones are. How does that take into account any of the choices of allocation? And if we’re going to toll public roads, give us a break on the registration fees please. Seems in QLD that this wasn’t part of the “cost of living” that the LNP were talking about during the election.

  2. What a model case for a cost-benefit analysis! I would bet my front teeth that the social benefits from reductions in congestion and pollution and travel time would offset the loss of toll revenue. However given the underlying economic ideology, scrapping the toll will not even be remotely considered which leaves society with a half-baked less-than ideal solution as per usual.

  3. The East-West Link in Melbourne is in fact The Ord River on Wheels. It is likely to cripple the State of Victoria’s finances for a generation and its only redeeming feature is that it will forever explode the myth that the conservatives know how to manage money.

    Given that the Murdoch press in Melbourne is cheering on this folly, I think it would appropriate to name the tunnels after Rupert.

    You’re right John about the absurdity of tolls on a road which is ostensibly meant to divert traffic away from the CBD.

    The most economically rational way of paying for the road would be to fund it by the imposition of a congestion tax on the city and inner suburbs, which would affect the 90 percent of Eastern freeways users who are not heading for the Tullamarine Freeway/Western Bypass and therefore generate sufficient income to cover the interest on the 7 billion dollars that are going to be wasted.

    An extension of Transurban’s concession when that expires – I think in 2033 – is more probably going to be a more politically palatable if not economically sensible way of meeting the costs.

  4. I don’t see that the Cross City tunnel is such a policy failure (as it turns out). Getting private investors to pay for it and then buying it back for 10 cents in the dollar, or whatever the fire sale price is going to be, seems like a pretty good deal for the residents of NSW. They get the road which someone else paid for. What’s not to like?

    The amazing thing is that private investors keep lining up for more of the same, but as P.T Barnum did not actually say, there’s a sucker born every minute.

  5. If you’re gonna make a Toll Road, Melbourne’s CityLink is the benchmark of how to do it ie: take some sections of state built freeway and convert an emergency stopping lane to a normal traffic lane and sting the motorists ridiculous fees to use it. Yes, you’re obligated to reduce the speed limit by 20km/h because there’s no emergency stopping lane, but you’ve “increased traffic flow” and that’s enough for you to get away with those wonderful tolls to render you the darling of all subsequent global toll road proposals and capital raising.

  6. Have motorway PPPs finally become debacular enough to be reacquired wholesale with finance covered by the proceeds of systematic GPS-based congestion pricing?

    As for the Sydney Cross City Tunnel, even our less economically rational major party could now sell a plan to acquire it cheap, de-toll it and cover the tolls foregone by perimeter-tolling the CBD on the successful London model.

  7. There is absolutely no point in having toll roads. It’s an inefficient setup. Put a tax on petrol or increase the existing petrol tax. Call it an excise or a road tax if you don’t want to call it a carbon tax. Problem solved. Next public policy question please.

  8. @Ikonoclast
    Here in NSW we already have one. Introduced by the Greiner govt as a 3×3 levy. Was meant to be 3c / litre for 3 years. Of course it was never removed after 3 years. Must have misread it, maybe it was for 30 years.

  9. Taxi from Sydney Airport to CBD on Tollway = about $48

    Taxi from Sydney Airport to CBD on normal roads = about $26 and took same time or possibly a bit less.

  10. @Megan

    There aren’t $22 worth of tolls between Sydney Airport and the CBD. You got ripped off.

    In any case, train from Sydney Airport to CBD =$15.

  11. @Uncle Milton

    I think you need to re-read the post. As I said, it’s not the losses to private investors that are the problem here.

    Overall, the bad deals for the public (mostly in the 1990s) have been matched by the bad deals for investors (mostly in the 2000s), leaving a Pareto-reduction in welfare due to

    (1) the misallocation of traffic risk to private investors
    (2) the perverse effects of pricing uncongested roads while retaining free access to congested roads

  12. @John Quiggin
    According to Wikipedia

    “The $680M tunnel was originally financed by a combination of international equity and both locally and internationally sourced debt.

    Equity of $220M was provided by three international companies, Cheung Kong Infrastructure (50 percent), DB Capital Partners (30 percent) and Bilfinger Berger BOT (20 percent). The remaining $580 million was financed through a syndicate of Australian and international banks led by Westpac and Deutsche Bank”

    so your conclusion about a Pareto reduction depends on whether you care about the welfare of foreign investors. You could argue either way.

    As to diverting traffic onto unpriced roads, the CCT did have measures in place (physical barriers) to stop this from happening, but they must not have worked.

  13. I’ll happily bite then John – if not congestion taxing, do you favour a (tax) policy that’d be likely conducive to improvement of city centres and transport options in and around them?

  14. @Uncle Milton

    To restate, I’m taking a sum over the set of PPP projects since the whole mess began in the 1980s. Private investors have lost money in some of them (like CCT), with the public getting a benefit, but not as much as the private loss. In others (Eastlink, for example), the public has had a big loss, and private investors a smaller gain. Overall, a Pareto reduction, whether or not you include foreign investors in your universe of concern.

  15. @jon frankis

    I favor congestion pricing as the best option. If that’s ruled out on political grounds, petrol tax and other general user charges are next best. After that, you’re down to traffic barriers and similar.

  16. I like a general base price for using non-congested main connecting roads plus increments for congestion, tare, surface area of vehicle, accident profile, driving record of driver , in car transponder and calculator etc.

    If fully implemented, then abandon registaration, CTP, fuel taxes and excises etc.

    Encourage car pooling by allowing people to hold public vehicle licences and then be indemnified for personal injury.

  17. @Uncle Milton

    I only got ripped off when I took the toll road. Given that there were two passengers, I would also have gotten ripped off if I took the privatised and extortionately priced Airportlink Train.

    If the train was free or even priced like the rest of the train network almost everyone would take it. Which would also free up roads for drivers.

  18. @John Quiggin
    I guess the future livability of cities is important enough to justify a proper planning framework supported by state level legislation (or regional council, if we could lose these troublesome states). Keeping to simple principles I further suppose, with you, that congestion taxing definitely ought to be a part of the mix.

    Then there’s inevitable tension between providing reasonable certainty to people and on the other hand regularly reviewing legislation and regulation to keep it as simple and effective as possible. Shame we mostly do neither well 😦

  19. Victoria is appalling in the way they manage Metropolitan Freeways, and how they address the question of public vs private ownership.

    Those freeways owned by the government (Eastern Freeway) are not tolled.

    Those owned by private operators are tolled (Citilink and Eastlink). Even for those sections that the private operator upgraded (rather than built from scratch) are tolled by the private operator. I reasonably sure the government does not get any of the toll for the previously built freeway. (I am prepared to be corrected in this)

    I would have thought that once the decision was made to toll any metropolitan freeway (this was done when Citilink was built), the Government should charge all users of freeways regardless of ownership. This massively biases the decision on new freeway projects towards private ownership, becasue it appears only private owners are politically able to charge tolls.

  20. The east-west link project in Melb just makes me want to ignore everything beyond my front fence for the sake of my mental health .I give up -just do it to us !. The Libs went to the last election with a fair sort of a public transport platform (like the people want ), now its all roads and secrecy about the business modelling that got them there .Stage 1 costs 6 billion (I think). The Murdoch press cant campaign hard enough for it. If they went to the election with the east-west plan they may have lost .
    Troy P is correct about our city link PPP- its the bit that all the publicly built freeways funnel cars onto.
    As an aside -the vic govt has announced the doubling of size of the new prison to be built as their paranoid law and order push has overcrowding problems already . future=USA.

  21. @kevin1

    Pointless. A huge scar across the inner North-Eastern suburbs so people can pay to save a few minutes getting to the airport (an hour before their flight leaves).

    Again, the train should either be free or the same price as the rest of the network – it would solve any traffic congestion issue around the airport.

  22. @Mr T # 23

    My recollection of the political narrative was that existing freeways were financed from state govt revenue so new freeways should be financed separately. But the contract with privates was that actions to improve govt roads near tollways (or rail upgrades) would allow compensation for lost revenue to Citilink. This really inflamed the public transport lobby.

  23. I remember the narrative. But it still remains that early freeways were a capital asset paid for out of funds not to do with people driving on them. So car users in the Eastern Suburbs get the use of the Eastern Freeway with no tolls. Freeway users from other parts of Melbourne pay tolls.

    When the decision to build Citilink was being made, the option for the Government to build own and toll the new road was not considered. This appeared to be because the government was not able to put a toll on the new road. so it had to built and operated by a private operator in order to have tolls to pay for the road.

    I see no reason why the model of the government owning and tolling new roads is not viable.

    I also see that from an equity perspective, the government is missing out on revenue by not tolling the Eastern Freeway and the the Ring Road.

  24. @Megan $ 26

    A huge scar across the inner North-Eastern suburbs so people can pay to save a few minutes getting to the airport (an hour before their flight leaves).

    # 24

    From your estimate, the saving approximates 3 mins. (“a few”) X 20,056,416 passengers p.a. (Brisbane estimates of outwardbound passengers – from Wikipedia) divided by 60 mins/hr. equals 1,0002,800 hours. (The one hour waiting period is there whichever option is used, so is an irrelevant comment.) At a conservative $30/hour for executive time, this is $30.084 mill., a saving worth having at one airport.

  25. @kevin1

    Twisted logic utilised in the service of a pre-disposed ideological (or ideo-illogical) position.

    1. You assume that every single traveller is an “executive” – fine, they can get to the airport quicker on the virtually empty road because the vast majority of non-executives are travelling on the free or affordable train;

    2. The taxpayers of Qld are not “saving” your posited $30 million because the “executives” are getting paid regardless of where they spend that 3 minutes;

    3. If you are an “executive” and you are getting $30/hr you are earning about 30% more than a casual in a bottle shop.

    I had a feeling you were itching for a fight, but I gave you my considered opinion anyway.

    Is it correct to say that you think toll roads and tunnels are great things?

  26. @Megan

    Since all projects (including under socialism or whatever your utopia is) involve digging holes, how about putting a figure on the cost of “a huge scar across the inner North-Eastern suburbs” so we can compare it to the benefits? If you can’t do this, why don’t you spend some time understanding opportunity cost, or do a course or something to improve your mind? The way that rational economists approach such proposals is to include economic values on time usage – in a high employment economy $30 per hour, being roughly average f/t income, seems close enough. Some of this will flow through in lower prices to consumers.

    That you respond in such a visceral and personal way (“I had a feeling you were itching for a fight…”) to my sober attempt to quantify the cost of a toll road shows you are are an enemy of measurement/evaluation, and therefore economics, and that you prefer jumping at shadows. This is not twisted logic (your term) but standard economic evaluation whatever paradigm you support.

    Outside welfare support, yes I believe in user pays – ie. taxing the beneficiaries of govt support, such as companies enjoying govt provided mining, transport and ports infrastructure. This is not radical and hypothecation promotes transparency – I note that Eastlink in Melb charges up to 2.6 times the tariff for heavy commercial trucks compared to passenger vehicles. If there is a way to measure the full (social) costs and benefits of toll free provision I would like to see it – AFAIK, there haven’t been measurements yet, but let the policy change according to how the cards fall.

    The way to get JQ’s worthy ideas into the mainstream and driving change is exactly that. The measured social benefit of your feelgood self-indulgence will always be nil.

  27. “The most sensible plan, after buying the tunnel is to remove the toll and free road space in the CBD for a variety of initiatives including light rail and cycleways.”

    I think the most sensible plan is to congestion price all access to the city.

    If only certain roads should be priced they still should be but at lower rates than if all roads were priced. The point about constraining the capacity of the unpriced roads seems right.

    By the way AFAIK the only congestion pricing anywhere in Australia is the (limited) peak load pricing of the Sydney Harbour Bridge. In every other case there is a cost-recovery plus profit-margin approach to pricing. Congestion pricing should price congestion with tolls zero when there is no congestion and at their maximum during the peaks.

    All pricing contracts in Australia should be redrawn to achieve this. This should always be possible by (if necessary) compensating private operators to get rid of daft initial pricing designs.

  28. @Megan
    “A huge scar across the inner North-Eastern suburbs so people can pay to save a few minutes getting to the airport”

    My trip to and from Brisbane airport has been cut from 50 minutes to 25 minutes, and that is well worth the toll to me. But to each his or her own.

  29. @Megan #32
    I don’t have a yes or no answer to this as I can see some advantages sometimes. I can’t see any consistent rationale on why new major roads are tolled or not, with the Vic state govts regularly changing their minds over the years.

    Looking at Melbourne Eastlink , there was a huge struggle around whether there should be a surface road or tunnels at the Mullum Mullum creek valley, a very significant ecosystem in suburban Ringwood. The outcome was to go for tunnels to protect it, the second most expensive and second most environmentally friendly option. My recollection is that access to tunnell tolling was a big plus in raising the bar as to outcomes, and it’s now $2.61 each way, 4 or 5 times the toll on other parts of the system. The state govt at the time would have balked at the cost if on their account. Eastlink and M M Creek wikipedia entries give more info.

    The existence of Peninsula Link (untolled, but feeding into tolled Eastlink at its southern end) seems superfluous, running for 40 km or so from Seaford to Dromana in close proximity and parallel to Mooroduc Rd, and Nepean Hway as a third north south option near the coast. Congestion never a problem here! And the builders made a big loss.

    The weak business case for many of these projects suggests anything which limits govt discretion for dumb “development” such as Abbott’s road mania is good, and the appetite for PPPs shrivelled when the traffic risks to privates became apparent. As recently as last month people close to the Lib govt here (Rod Eddington, Kennett, Ian Dobbs head of the Public Transport Corp) were advocating govt borrowing for infrastructure including road and rail projects rather than PPPs, yet now they’re going for PPPs again and transferring the traffic risk back to govt, which sounds like the merchant banks are dealt back into the game. (Herald Sun Aug 30th, “Public Transport Victoria chief Ian Dobbs urges Government to fund crucial upgrades by borrowing”)

    On road congestion pricing, John B Cox has been writing lengthy submissions and books for 20 years for the BCA, AAA etc. but apparently with no traction, although it seems to be happening in air, rail, port facilities, and in other countries. Why is it politically ignored in Australia?

  30. @kevin1
    An interesting article at Crikey “Peak demand for road and rail: Is that all there is?” by Alan Davies on May 28, 2013 shows the amplitude of Melb and Sydney traffic peaks have increased greatly over the last 20 years, making congestion pricing to shift demand more relevant than ever, to save huge money and reduce unnecessary theft of space for more roads.

  31. @hc

    Of course, congestion prices are best. I meant the most sensible of the options any Australian government is likely to consider.

  32. A possibly useful way of levying a congestion tax would be to electronically “tag” each car such that the time it’s engine is running is counted, logged and transmitted. The time you are on the road is a good measure of the congestion you are causing. Or again, even the amount of petrol you use is a good guide. Just price it in the fuel.

  33. as long as it is cheap enough and convenient enough to travel short distances by automobile there will be congestion.
    what’s new?

    icono?

    over engineering a response complicates the simple.
    your last sentence is bang on but hits anyone who wants or needs to take a long journey.

    plus the way the food distribution is set up in this country with (unneccesary?)interstate food going all over the place.

    OT
    i really can’t see the point of buying eastern states eggs and can’t see how after coming all the way across the Nullabor they can compete on price with local ones.

  34. @kevin1

    Because taxes are evil, because cars equal freedom, because how dare you charge me for something that used to be free, and other assorted stupidity. One good thing about the increased use of tolls on some roads, however inefficient they are at managing demand on the road network as a whole, is that they might over time facilitate proper congestion pricing by reducing the resistance that many people have to paying to use roads.

    What is it about the fate of recent economic reforms (e.g. carbon tax, mining tax) that makes you optimistic?

  35. @Luke Elford

    Luke, I thought maybe there’s something more than this. I could be out of touch but my impression is that Eastlink and Citilink in Melb are generally regarded now as a fact of life and without monopoly status to irk commuters, and have clearly moved some of the heavy trucks off suburban streets which was the major goal. Wasn’t the 3×3 program in NSW hypothecated to road funding and introduced by “dry” Premier Nick Greiner fairly popular? It used to be that about half of the petrol excise went to roads, half to general revenue, I don’t know what the balance is now. Be that true or not, you would expect the demonstrated success at some level to improve acceptance of these taxes.

    Carbon tax and minerals tax had different problems in linkages to outcomes, the first a big picture vision with much confounding noise, the second gutted at inception, revenue forecasts discredited and powerful opposition. Can’t see these factors applying for congestion pricing.

    Commuters accept it for planes and congestion pricing of infrastructure at producer/wholesale level happens – for roads, is the lesser productivity benefit (presumably mainly consumer benefit) not worth the political risk? I’m not optimistic just puzzled that with all the jurisdictions within Australia no-one has tried it.

  36. Along similar lines we have Turnbull running a red steer through the NBN. It seems obvious that there will be some breakup with private interests to replace some if not all of govt participation.

    This will undoubtedly result in initially lowering costs then having the govt bailout or buyback NBN. Plus a loss of quality.

    You watch, it happened before with telstra.

  37. Congestion pricing.

    Personally, I would not mind congestion pricing for the feeder roads to Sydney CBD because I live on the North Shore train line. I don’t have to deliver parcels to the CBD, and I don’t have to go anywhere in the Metropolitan Sydney area unless I want to. This almost always includes my choice of time. So my personal choice set is non-empty. (Or, as my introductory micro-econ teacher used to say to mystify the problem: We assume we are in the interior of the budget constraint, forgetting to note that the diagram he showed happened to show a budget constraint away from zero, the bigger problem.)

    Thinking of other circumstances, the picture looks very different and under some conditions a congestion tax results in no reduction in congestion but merely in a tax that is levied on people who have no choice and is regressive for many.

    Consider the following circumstances: The North-Western suburbs of Sydney have no train connection. The Northern Beach Suburbs have no train connection. This reduces the choice set of alternative transport modes significantly. Furthermore, people in these suburbs who have fixed working hours or delivery or other work related appointments with children to be delivered to somewhere along the route have a transport management problem which is very different from mine. That is, the actual choices available for people not only involve alternative transport modes but also many parameter value constraints regarding time of day.

    To put it in another way. What are the theoretical conditions for congestion pricing being an optimal (or even desirable) solution? These conditions (if they have been worked out for a sufficiently complex models to capture reality) should be compared to the actual conditions and only if the actual conditions sufficiently closely approximate the theoretical conditions would I conclude this is the way to go. I’d be happy to get a reference to the theoretical conditions. I have not discovered one.

    I know I differ on this one with the owner of the blog-site. But I also differ from Greiner’s ideas on transport infrastructure for Sydney and I don’t agree with Uncle Milton’s argument that tolls are a fair price for travel time saved. So I am the odd-woman out.

    Travel time saved enters as a non-cash item in the cost benefit analysis of roads. But the cost benefit analysis does not include costs for negative externalities such as traffic noise and air pollution. The method is biased in favour of roads.

  38. A pity that the NZ government did buy back kiwirail for $600m. The current book value on the crown balance sheet is $1.

    State owned mining company solid energy is insolvent and is been bailed out by the long suffering NZ taxpayer.

    The state owned enterprise portfolio as a whole in NZ earns a return less than the government bond rate.

  39. @Jim Rose

    That’s interesting.

    I had no idea about the NZ rail system and ‘Kiwirail’. Interestingly, its most stable years seem to be the 102 years it was simply a good old fashioned government department. As in this country, everything started to go pear-shaped after they ‘corporatised’ it in the early 1990s.

    Extract from Kiwirail Wiki:

    KiwiRail was created from a number of entities that date back to the 19th century. Prior to KiwiRail, rail transport in New Zealand has been under both public and private ownership. Government operators included the Public Works Department (1873–1880), New Zealand Railways Department (1880–1982), and the New Zealand Railways Corporation (1982–1990). New Zealand Rail Limited was split off from the Railways Corporation (which continued to own the land beneath the rail network) in 1990, privatised in 1993 and then renamed in 1995 to Tranz Rail. In 2004 Tranz Rail’s rail, ferry and trucking operations were taken over by Toll Holdings and renamed Toll NZ, with the central government buying back the rail network under the New Zealand Railways Corporation (trading as ONTRACK). The government then bought back the rail and ferry assets in 2008, renaming them KiwiRail. Toll retained ownership of its trucking operation.

  40. Amazing coincidence, I looked into ‘Solid Energy’ and (according to the ‘coalnz’ industry website):

    In 1901 the Coal Mines Amendment Act allowed the State to open and work coal mines and to set aside any Crown land, which might be required for coal mining. State Coal Mines ran for many years as a Government trading enterprise until 1987. In 1987 State owned enterprises were established and Coal Corporation of New Zealand was incorporated as a private company. It purchased a large part of the business of State Coal Mines. In 1996 Coalcorp as it had become, was rebranded Solid Energy New Zealand Ltd. Coalcorp and Solid Energy inherited many of the liabilities and assets of State Coal Mines.

    Yet again, everything was going fine until the neo-cons arrived! And as always, it starts with a harmless sounding corporatisation of structure and rapidly goes to pot.

    Got any more examples?

  41. @ Megan,

    Typical neolib obfuscation but sadly par for the course for old JR. Things went pear shaped as soon as the hard-nosed private industry bean counters moved in. Or maybe government must have blackmailed those innocent investment bankers to force them to purchase such terrible overpriced assets. Either way, it MUST be the fault of the public sector.

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