Aussie Analyst says toll roads heading for trouble

This is the print version of this story.

Australian Broadcasting Corporation
LOCATION: Link here.
Broadcast: 20/10/2005
Cross City Tunnel documents released
Reporter: Emma Alberici

KERRY O’BRIEN: Welcome to the program. 2,000 pages of contractual detail is not the stuff of best sellers, but right now there’s plenty of eager readers poring over the fine print of the deal that has given the nation’s biggest city its biggest traffic headache. Under intense pressure from motorists, the State Opposition, and a legion of other critics, the New South Wales Government has unlocked the secrets of the Cross City Tunnel, the east-west tollway running under the city. Nowhere near enough people are using it. But the system of feeder roads above ground is creating chaos and an enormous amount of anger. This particular tunnel is the latest in a long and winding grid of ‘user-pays’ roads in the nation’s eastern capitals – each one adding to an intensifying road rage over cost and responsibility as governments increasingly walk away from their own infrastructure responsibilities and hive them off to private enterprise. Finance editor Emma Alberici reports.

MICHAEL JOOLS, TAXI DRIVER: I’ve been driving a cab for about 20 years now. Back in those days the only toll was the Harbour Bridge and that, from memory, was about 20 cents. That was no hassle.

EMMA ALBERICI: There was a time Michael Jools remembers when roads were a responsibility of governments. It was an era before user-pays delivered to the private sector roads paved with gold. But there’s an upside for those using Australia’s latest toll road – even in peak hour it can feel like your own private piece of tarmac.

MICHAEL JOOLS: The classic ghost tunnel, at this stage. Not a car behind us, not a car in front of us.

EMMA ALBERICI: Sydney’s Cross City Tunnel, at $1.70 a kilometre, is quite possibly the world’s most expensive road and right now Australia’s most contentious. Drivers are staying away way in droves. They’re angry they’re paying privateers so much for the privilege of getting from A to B.

TONY HARRIS, FMR NSW AUDITOR-GENERAL: You can have the private sector design them, you can have them construct it, you can have them maintain it, you can have them operate it and if there are tolls you can have them collect the tolls but there is no sound reason why the private sector should own these toll roads and there are many reasons why they should not.

EMMA ALBERICI: Some of Australia’s biggest companies, even Asia’s richest man, will be hoping this isn’t the beginning of a consumer groundswell. The boom in private roads is underwriting the share market success of companies like Transurban and Macquarie Bank, the world’s biggest owner of toll roads. It’s also lining the pockets of Hong Kong’s Li Ka-shing, the biggest shareholder of the Cross City Tunnel. But while they’re all gung-ho about the future of this new form of investment, that optimism isn’t shared by everyone in the know.

JOHN GOLDBERG, TRAFFIC ANALYST, SYDNEY UNIVERSITY: I think the main concern is that the projects are not sustainable on the traffic volumes and tolls that they can collect.

EMMA ALBERICI: Traffic analyst Dr John Goldberg is one predicting doom and gloom for this growing network of private toll roads. He’s recently completed a 5-year analysis of two of the country’s biggest – Melbourne’s CityLink project and the M2 in Sydney. His reading of the financial foundations for these private roads is explosive.

JOHN GOLDBERG: The traffic forecasting is a tool of the financiers. They’re there to serve the interests of the bank modellers. I’ve been disgusted, frankly, at the ethical standards of some of these people, you know, both in Melbourne and in Sydney. They know they’re doing wrong but they’re paid to do it.

EMMA ALBERICI: CityLink is owned by the Transurban group and makes up 65% of its income. The M2 motorway was Macquarie Bank’s first toll road. It was floated on the stock exchange at $1. When it was sold to Transurban earlier this year investors received $10 a share. It looks like a licence to print money but is it? John Goldberg says the share prices of toll roads are being propped up by borrowed money and government tax breaks and he claims the long-term debt picture is much bleaker than the company’s originally published.

JOHN GOLDBERG: The prospectuses are based on the Macquarie Bank models and they’re frankly misleading or let’s say they’re deceptive and people think that in the long term super funds are going to get these huge returns when in actual fact the project themselves are drowning in a sea of debt. It’s becoming like a mini Enron, this thing.

MARK BIRRELL, INFRASTRUCTURE PARTNERSHIPS AUSTRALIA: What we’re trying to ensure, I think, in Australia is that people will invest in more infrastructure, knowing very well we can’t just rely on governments to provide infrastructure – we need more than that.

EMMA ALBERICI: As far as the infrastructure industry is concerned, there’s plenty of practical, sensible reasons for private enterprise to take on big ticket public projects. Mark Birrell, who chairs the Industry Group, is a former minister for Major Projects in the Victorian Kennett government.

MARK BIRRELL, INFRASTRUCTURE PARTNERSHIPS AUSTRALIA; For a large risky investment like this to go ahead, the private investor has to know that, say, over 20 to 25 years they’re going to get a fair return. That is their call. But they’re taking a risk on that as to how many people will want to use the tunnel. They’re the ones if it doesn’t work who pay the price.

EMMA ALBERICI: Well, not exactly. There are some pretty solid taxpayer-funded guarantees that protect the private operators against losses. Here in central Sydney, for example, the State Government is acting to make sure the toll tunnel gets its share of traffic by closing and narrowing alternative routes. They call it “traffic calming” but it’s anything but.

MARK BIRRELL: This one has been controversial. I think in many ways we’ve learnt a lesson, the operator has learnt a lesson, that you have to have more communication with the public about what is going to occur. There shouldn’t be any surprises.

EMMA ALBERICI: The roads in the Macquarie Infrastructure Group and Transurban portfolios struggle to make a profit on toll revenue alone but they still manage to pay out generous dividends to investors of 25% plus hefty fees to investment banks. That’s helped make Macquarie the share market darling it is. They’ve relied less on actual traffic flows and more on notional cash flows, money generated by big bank loans and a generous tax deal called the infrastructure borrowing tax offset scheme.

JOHN GOLDBERG: They’re getting 40% – Transurban is – 40% of its revenue from the tax offset scheme, 35% in the case of M2. And yet what is most interesting, particularly for the Transurban case, is that there’s no net profit even with that contribution from the infrastructure borrowing scheme.

EMMA ALBERICI: Transurban and Macquarie reject the house of cards analysis. They declined our requests for interviews but in a written response MiG says there are a number of fundamental flaws in the Goldberg critique, claiming criticisms of its accounts demonstrates a lack of understanding of accounting standards and the group claims the M2’s annual revenue covers the debt interest bill twice over.

TONY HARRIS: There is no reason why the Government could not have borrowed and, if it found it necessary, impose a toll the same way that the private sector is doing. One of the advantages of that is the absurd profits that the private sector is making out of these tollways would have accrued to the public.

EMMA ALBERICI: The analysis Tony Harris relies on comes from the inside as an economist with the Commonwealth Government and as auditor general of New South Wales until 1999. He was at the table for many of the discussions about proposed private public partnerships. He doesn’t buy the argument that governments simply can’t afford to fund the roads themselves.

TONY HARRIS: We don’t have to run a deficit. All we have to do is not pay off the debt so assiduously as each of our governments is doing. New South Wales now has no debt, the Commonwealth is virtually debt-free. Victoria has no debt and this is the same for other States – Queensland has no debt. And yet the population is going without quite important infrastructure.

EMMA ALBERICI: And the privateers are now learning to go without, losing some of the glowing support from key investment banks. Goldman Sachs JBWere has raised questions about the true value of Transurban and has had a sell recommendation on the company since May. The bank is further worried about disappointing traffic growth. And just yesterday Goldman Sachs downgraded its rating for Macquarie Bank, which earns the bulk of its income from the fees it charges its array of infrastructure projects.

JOHN GOLDBERG: As the thing gets bigger and bigger in terms of debt what are you going to do, what are you going to sell it for? Who is going to buy it?

EMMA ALBERICI: And if you want to know what the punters are thinking, ask a cabbie. Michael Jools is no investment banker or traffic academic but he knows what he sees and hears each and every day behind the wheel.

MICHAEL JOOLS: The roads are there for the public to use. Why doesn’t the Government just shoulder the burden, build the roads, run them and that be the end of it. All this nonsense about private infrastructure here, Macquarie Bank there, tolls for this, expenses for that. Just get on with the job and do it simple.

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This is the print version of this story.

Wednesday, 19 October , 2005 08:30:00

Reporter: Stephen Long

TONY EASTLEY: It wasn’t so long ago that toll roads were seen as a sure way to make money but now questions are being asked about whether even some of Australia’s busiest toll roads will make enough in the long run to pay their debts.

One expert says the traffic targets set by the companies are far too ambitious, and he wonders how they’ll turn a profit.

Finance Correspondent Stephen Long reports.

STEPHEN LONG: There’s a lot of millionaires at Macquarie Bank thanks to roll roads and until recently, tollway companies have been darlings of the stock market.

But now there are claims that toll road debts are skidding out of control.

JOHN GOLDBERG: I don’t think it’s sustainable in the long-term at all.

STEPHEN LONG: That’s Dr John Goldberg of Sydney University. He’s analysed the accounts of the M2 motorway in Sydney’s north-west, and Citylink in Melbourne – both now owned by Transurban.

He says the way they value future cash flows is optimistic and implausible, and as to the long-run estimates of vehicle use, well, they’re one big traffic jam.

JOHN GOLDBERG: You’re talking about traffic which corresponds to gridlock, particularly in the peak two hour period in the mornings.

STEPHEN LONG: So basically to make the kind of revenues in the future that the toll road companies are predicting, they would have levels of traffic that would just be choking, amounting to gridlock?

JOHN GOLDBERG: Exactly. Exactly.

STEPHEN LONG: Dr Goldberg claims there are similar problems with Macquarie toll roads.

JOHN GOLDBERG: If you take Connect East, it’s structured the same way. The Eastern Distributor in Sydney is structured the same way.

STEPHEN LONG: Toll roads cost a lot to build and generally don’t make a profit for many years. So to make their stock attractive to investors, toll road companies borrow against future earnings, and pay that yet to be earned money out to shareholders in dividends today, often refinancing and upping the debt again and again.

Of course those debts eventually have to be repaid. So to keep investors fed with dividends, toll road companies have to buy new assets and start the process all over again. It’s a model widely accepted by the financial markets but that doesn’t convince or surprise the critics.

JOHN GOLDBERG: You know, you’ve got the analysts, stockbrokers and nobody wants to know.

STEPHEN LONG: In fact, some investors are raising concerns.

Goldman Sachs JBWere recently rated Transurban a long-term “sell” because it’s so heavily geared, that nearly half of its future payments to shareholders will come from debt.

But few seem to buy the claims that Transurban’s toll roads won’t make enough to pay their debts or Dr Goldberg’s claim that the projects are only viable because of tax breaks.

A spokesman for Transurban said Dr Goldberg was a lone voice and his analysis was full of fundamental mistakes. He pointed out that the company’s debt has a robust “A-minus” credit rating.

TONY EASTLEY: Stephen Long reporting.

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Well, looking into TxDOT’s toll feasibility studies, you can see our toll system isn’t real viable either (regardless of what the toll companies want us to believe like Transurban above). See article on Macquarie’s downgraded status on the stockmarket due to its heavy investment in toll roads: link here. So though Transurban would have us believe Mr. Goldberg’s analysis is a lone voice, it appears the stock market agrees with him.

Based on TxDOT’s own studies, tolls will only pay for the maintenance and operation of the toll roads. NONE of the toll revenues cover the cost of construction. Hence there’s the need to infuse $661 million of taxpayer money into constructing the toll roads along with yet more taxpayer money through the selling of bond debt as well as a heap of private money…all of that private money is likely leveraged to boot! So this explains why these private companies want to steadily increase toll rates and get control of the surrounding free lanes to create traffic jams horrific enough to ensure they get their projected level of toll revenues. It’s a nightmare and, indeed, a taxpayer revolt is in order!