Failures cost investors not the state

More road users are needed to increase the value of infrastructure like tunnels and motorways. Photo / Thinkstock

Sydney's motorway ring route has been largely built on PPP projects.

But amid all the successes, two failures loom large: the Cross City tunnel and the Lane Cove tunnel. Both failed to generate enough revenue to support debt repayments and the investors and banks took a bath.

Further up the coast, Brisbane's Clem7 tunnel looks headed for a similar fate, after owner RiverCity Motorway Group reported a A$1.6 billion loss after an asset impairment writedown of $1.5 billion.

What happened? Private providers went a bit doolally during the feverish boom years leading up to the global financial crisis, according to Infrastructure Australia's infrastructure co-ordinator, Michael Deegan.

Morrison & Co executive director Steven Proctor, whose PIP fund has invested in Melbourne, puts it this way: "Everyone thought they were very clever, and a lot of people were desperate to procure the business and they basically overcooked their estimate of how much that road would be used."

When not enough cars came, the vultures started circling.

As the New Zealand Government tentatively embarks on its own PPP projects, it is instructive to look at the aftermath of the Lane Cove and Cross City tunnel failures.

"All of the equity was wiped out - that's 20 per cent of the value of the infrastructure" reports Proctor. "Some of the debt was wiped out, say 5 per cent, so the Government got a project at 25 per cent off and they've still got a functioning bit of kit."

Deegan reports: "In Sydney, the Cross City tunnel is a magnificent asset that is still working and people still use it every day."

Transurban Group, which bought Lane Cove after its original owner went into receivership, got it "at a discount", Proctor adds. "The banks have lost money, the people who developed it have lost money. But the state got their road, and that is the good news."

It's the kind of deal to warm the cockles of a politician who's minding his public pennies. Finance Minister Bill English: "One of the benefits of PPPs is it's the private sector that does its money, so we're not worried about a private operator falling over."

Even the Opposition agrees. "If the private sector takes all the risk, you might say congratulations to the government contractor," says Labour finance spokesman David Cunliffe.

The bad news, according to Stephen Selwood, Council for Infrastructure Development chief executive, is that the private sector is now gun-shy about taking on the lion's share of PPP risk.

"You're not going to put your head in that bucket of sand every time," comments Deegan.

Melbourne's new peninsula motorway link is one of the post-PPP-failure models, where the state assumes the traffic risk and collects the toll, Deegan adds.

"The private sector are providing the asset with various key performance indicators, and there's an understanding about how the revenue is shared," he says. Similar but different shared-risk models are being used for Melbourne's desalination plant and Brisbane's northern link road.

Traditionally, Australia used PPPs as a means to get expensive and complex deals off the ground. Now, says Deegan, they are looking at smaller projects, including in New Zealand.

"We're brothers in arms on these issues," Deegan says, with more than a hint of a wolfish tone. "There are plenty of Australian companies interested to see what the new Auckland Council arrangement will do for their infrastructure requirements."

It's only fair that Australia gets a crack at New Zealand PPPs, he adds, as "Kiwis are in here bidding for work, which is terrific".

"It's a good way for us, collectively, to build our expertise in these areas," Deegan says. "That gives us more competitive tension and there's a transfer of skills . .. We have some terrific new road assets operating and it's making a big difference to our traffic position."

PPPs had to be a chance for Auckland. "There's got to be a serious meeting of the minds to resolve these transport issues."