Tuesday, 16 November 2010

Australian report opposes private toll roads

The ABC (the taxpayer funded state broadcaster of Australia), has reported on a study by Australian economist Dr Nicholas Gruen, which essentially claims that private investment in roads is poor value for money for motorists.  He claims that governments can borrow more cheaply, that the transaction costs in PPP concessions add cost and that such toll roads can be hugely profitable for governments.  Another of his concerns is that such PPP contracts constrain planning decisions (presumably that they sometimes restrict expansion of competing corridors).

From the perspective of a developed country, he has some valid points.  Some of the main benefits of private investment in roads in developing countries is bringing expertise and accountability to highway management that may not be to a high standard in government owned bureaucracies.  However, there are some counter arguments to his points.

Governments can generally borrow more cheaply than the private sector, although some countries with particular sovereign debt problems (not Australia) may be more questionable.  The reluctance of governments to borrow when they have excessively high public borrowing already might be understandable.

However, some of his chief concerns are more a factor of allowing private investment into individual pieces of infrastructure and the difficulties and risks involved when governments own the competing infrastructure.  The problem for private investors being that it is all very well to be allowed to collect tolls on a new road, but if governments effectively subsidise competing routes that are untolled, it can seriously affect the viability of the new route.  

The ways of getting around this are either to privatise a whole network (spreading the risk and control) or to introduce pricing across a network (so diversion is not considered a real risk).   

Roads are often profitable either from tolls or from other charges/taxes collected from the use of roads (e.g. fuel taxes and roadside parking fees),  yet the lack of transparency of this seems to make private toll roads seem like "profit" that is unseen elsewhere.   In fact, such "profit" is seen in government revenues from all those other taxes, which are not linked to roads or necessarily spent on roads.

Finally, one of his examples demonstrates a key risk that private investment in toll roads takes away from the public sector - optimism bias.   The Cross City Tunnel in Sydney was one of those.  It was built, tolled, did not generate enough revenue and went into receivership.   However, the tunnel remains, the receivers are operating it more efficiently than before, and motorists have the benefit of the road, but the state government  (and taxpayers who mostly do not use the road) do not carry the debt burden.   For all of the examples of successful private toll roads, examples like Cross City Tunnel emerge from time to time to show how much can be saved by the private sector taking the risk.   

Indeed, the Cross City Tunnel actually helps to moderate expectations of motorway forecasting in Sydney.

So whilst Dr Gruen has some valid points, they should not be used (as the ABC has done) to completely rebut policies of allowing private sector investment in toll roads.  Indeed, if the private sector is willing to take on the risk, build the road, charge users directly, then it is a shining example of capitalism and entrepreneurship.   Australia has certainly demonstrated itself to be one of the world leaders in successful private investment in toll roads, particularly new motorways in major cities.

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