The private toll road model is not broken – despite the challenges of the sub-prime crisis or the much publicised demise of Sydney's Cross City and Lane Cove tunnels. In fact, these so-called 'failures' are exemplars of the value to the public of private sector delivery of infrastructure. Sydney now has two excellent pieces of transport infrastructure delivered by the private sector at no cost to the public sector. Indeed the public sector pocketed A$97 million ($77 million) in the case of the Cross City Tunnel (CCT) and A$79 million from Lane Cove Tunnel (LCT).

On CCT and LCT, the equity investors took on commercial risks with commensurate return opportunities and overall in the sector, this model is successful with many examples of solid financial returns including City Link in Melbourne, M7, M2 and the Eastern Distributor in Sydney. It is business as usual, albeit with some stirring of the model to refine the risk/reward proposition, but there hasn't been the proverbial shakeout. All the players are still around and competing head to head for the next opportunity.

Revised model with government subsidies

The model has shifted from governments collecting a payment in return for the concession, to paying a subsidy to offset the cost of additional enhancements added to the projects.

The value and innovation derived from private sector involvement is still there despite the shift towards government subsidies. As shown in the graph below, the private sector has delivered value that far exceeded expectations on EastLink (Melbourne) and both the North-South Bypass Tunnel (NSBT) and Airport Link in Brisbane. At a time when the sub-prime crisis has been occurring and resources required for design and construction have been stretched due to the infrastructure and resources boom in Australia, the budgeted government subsidy amounts have been beaten by hundreds of millions of dollars on each project.

The Richmond report (2005) prepared for the NSW government outlined a series of reform recommendations that have largely been adopted both within NSW and in other states including:

• Continued use of the Public Private Partnership (PPP) model

• Abandoning the policy of toll roads being built at no cost to government

• Public disclosure of motorway contractual terms

• Preserving government control over all local roads and public transport

• No funnelling of traffic into tollways

• A mandatory introductory toll free period on new motorways

• Revised assessment criteria including independent review

Government payments/subsidies and additional enhancements

Government subsidies budgeted and actual on recent toll roads

Cross City Tunnel transformation

Cross City Tunnel is a perfect example of the value the public sector derives from private tollroads. Like any commercial investment, the original owners/developers built their business model using forecasts, including economic and demographic trends. They got their traffic forecasts (revenue projections) wrong but there are many examples where the traffic projections on other tollroads were sound. Ernst & Young (2008) have compared actual traffic numbers against Environmental Impact Statement (EIS) forecast numbers and found that across all Sydney tollroads the actual numbers average 6% higher than EIS forecasts.

The original design for CCT was refined and extended beyond the government design to provide a better facility. For the people of Sydney, CCT is providing quick access across the city avoiding 18 sets of traffic lights and over one million drivers per month are taking advantage of this. Meanwhile, the surface roads have less vehicles, less exhaust emissions and virtually all the unpopular restrictions placed on competing routes have been reversed.

Leighton Contractors and ABN Amro purchased CCT from the receivers in 2007 at a price that covered all of the original debt. A new board and management team was appointed including Ken Dawson as CEO and Ed Sandrejko as Chairman. Both Ken and Ed bring a wealth of experience in the successful management of other toll roads such as Eastern Distributor and Westlink M7, and have been instrumental in transforming CCT into a successful tollroad operation.

Leighton Contractors were appointed to undertake the roadside maintenance and operation of the tunnel and managed a smooth transition from the previous operator.

By any measure, the transformation that occurred as a result of the takeover is nothing short of remarkable. Prior to September 2007, a number of factors had combined to create a situation where CCT was struggling to deliver against expectations, including construction defects, ineffective systems and operating procedures, as well as low traffic volumes, poor marketing and very negative publicity.

These issues were addressed and remedied whilst the tunnel continued to operate seamlessly. This below-average performer has been turned into a role model for how to effectively operate a modern tollroad. CCT, is now a vital part of the Sydney road network and operates at the highest safety and environmental standards. These achievements have been recognised by the Chartered Institute of Logistics and Transport Australia with a highly commended certificate issued at their annual achievement awards in July 2008.

Strong revenue growth

The CCT is exhibiting strong traffic growth at 6% to 7% in the last year, second only to the M7 at 12.5%. Tollroads are sound investments, with Transurban reporting in July 2008 strong revenue growth for their Australian tollroad portfolio, including 9.2% for CityLink in Melbourne, 7.7% for the Hills M2, 14.9% for the M7, 7.7% for the M1 Eastern Distributor and 4.7% for the M5 (Transurban, 2008). Revenue increases at a faster rate than traffic growth, because the tolls are indexed to inflation. There is also a faster growth rate for heavy commercial vehicles that usually attract a higher toll rate than cars.

The last year has seen dramatic increases in fuel prices with some commentators predicting a negative impact on tollroad revenue. There is no hard evidence of this occurring other than strong growth in public transport usage. Tollroad traffic in Australia continues to increase with growth in population and employment. Whilst there is some overlap between tollroad and public transport trip demand, generally these two transport modes are catering for different market sectors and are complementary rather than competitors.

The public transport network in most major cities, including Sydney, Brisbane and Melbourne, is designed as a radial system providing bulk commuter capability to and from the CBD. A substantial component of tollroad traffic is not commuting to the CBD, in fact the main Sydney network is a ring road that enables congested city areas to be bypassed. Brisbane tollroads including the Gateway, NSBT (RiverCity Motorway) and Airport Link enable vehicles to bypass the city.

Commercial traffic growth

Growth rates for commercial traffic on toll roads – including heavy vehicles – is outstripping that of private cars. The redevelopment of Port Botany in Sydney with increased truck movements to and from the port is a major factor driving planning and delaying delivery of the proposed M4 East tollroad. The Sir Rod Eddington report commissioned by the Victorian Government (2008) has identified heavy vehicle traffic growth from Port Melbourne as one of the key factors driving the need for the proposed East West Link.

Melbourne's road freight task, for example, is predicted to grow from approximately 11 billion tonne kilometres now to about 20 billion tonne kilometres per annum by 2020. Each day in Melbourne there are currently around 9,000 truck movements for Port Melbourne and a total of about 500,000 commercial vehicle trips Melbourne wide (Eddington, 2008). Tollroads improve the efficiency of commercial vehicle operations and provide a positive boost to the economy that far exceeds the cost of the tolls.

Economic value for toll roads

Ernst & Young (2008) has produced an independent report on the broader economic contribution of tollroads to the NSW and Australian economy. The study was commissioned by Transurban, who are the largest tollroad operator in Australia. The study is based primarily on publicly available data and uses the same methodologies used by the state government departments when examining the cost and benefits of proposed projects. E&Y consulted with Government, industry and community stakeholders.

The study objective was to determine the economic contribution of Sydney's motorway network inclusive of the network benefits associated with increased connectivity and industry cluster developments. The evaluation period of the study is 1986 to 2046, which represents the Sydney tollroad construction and operating period.

The key E&Y findings are:

• Total direct benefit contribution to the economy of NSW through the Sydney tollroad network is A$22.7 billion (NPV A$2007), a sum approximately 15% higher than the aggregate of the original EIS estimates

• Tollroads increased Gross State Product by A$1.6 billion in 1986 rising to A$3.4 billion in 2020 (0.89% of NSW GSP)

• Indirect network benefits with improved connectivity are in the order of A$600 million in 2007 rising to A$900 million in 2020.

The direct benefits are significantly higher than original estimates because of:

• Higher than forecast traffic numbers

• Larger vehicle operating cost savings than estimated

• Travel time savings greater than anticipated

• Increased accident reduction benefits

• Higher than forecast environmental benefits.

Some of the indirect benefits are identified as follows:

• Economy wide benefits through socio-economic improvement with reduced commuting times, improved access to employment and services

• Reduced congestion and accidents in the broader network

• Enhanced liveability and property prices through improved transport

• Freeing up government funds for other community uses through private financing of tollroads.

Conclusions

The economic health of large modern cities is dependent on their transport arteries and tollroads free up congestion thus improving the flow of good and services and the economy as a whole.

Private consortiums competing for tollroad concessions provide for efficiencies in finance, design, construction and operation. For a tollroad to succeed it has to attract enough traffic over the concession period to pay for itself and the commercial case is focussed on optimising the balance between traffic revenue and delivery costs.

Three consortiums submitted underwritten bids for the recent A$4.5 billion Airport Link tollroad in Brisbane and numerous consortiums are lining up for the upcoming Northern Link tollroad, Brisbane's third tunnel. The variables change but the private tollroad model still delivers outstanding value to the end users and to government.

Governments in New South Wales, Victoria and Queensland, as well as New Zealand, are actively investigating future toll roads including:

• M4 East (possibly with an M5 east duplication) and the F3 to M7 link in Sydney (Pearlman, 2007)

• East West Link in Melbourne (Eddington, 2008)

• Northern Link in Brisbane (Shortly to commence EOI phase)

• Waterview in Auckland NZ (Transit New Zealand, 2008)

The total value of these projects is in the tens of billions of dollars and the Australian Federal Government is becoming more closely involved with potential funding contributions through the Building Australia Fund (BAF), set up to finance critical national transport and communications infrastructure. The BAF will receive an initial allocation of A$20 billion, largely from the 2007-08 and 2008-09 budget surpluses and BAF capital and earnings will be invested in key infrastructure projects (Albanese, 2008).

Toll roads in Australia are still attractive to investors and will continue to be as long as consortiums base their bids on investment grade traffic studies underpinned by a rigorous analysis of trends in demographics and economic fundamentals.