Wednesday, 12 January 2011

Irish toll road operators caught between law and the economy

As part of the concession agreements between private companies and the Irish government (through the National Roads Authority - NRA) are rules around when and by how much toll rates must vary according to inflation.  Whilst typically that allows increases, it also requires decreases if there is deflation, which has been the case in Ireland in the past year.   The Irish economy is in serious recession as its property bubble has burst, and the Irish government's public finances have been ruined by a reckless promise to provide 100% state backing for its over-extended banks. 

Five operators have been directed to reduce tolls in 2011, only one has done so and the others face threats of legal action.  According to the Independent of Ireland:

The five tolled routes on which the NRA directed cost cuts are the M1 between Julianstown and Drogheda; the M4 between Kilcock and Kinnegad; the M6 from Galway to Ballinasloe; the M8 between Fermoy and Watergrasshill; and the N25 Waterford city bypass. To date only the company operating the M6 Galway to Ballinasloe motorway has dropped its tolls from €1.90 to €1.80 for a car.

Motoring organisations are calling on motorists to boycott the overcharged roads, yet the problem is fairly fundamental for the private companies responsible for these concessions.   Concessions will have been entered into based upon Ireland maintaining the high level of economic growth it had sustained, fueled by low-interest credit through the Euro, a low tax environment.  With that bubble burst, unemployment has sky-rocketed, along with repossessions of homes, property prices have dropped by up to a third, and with declining incomes have come reduced business, leisure and commuting trips.

Ireland's toll road companies are suffering from declining demand.  This is obviously hurting revenue.  However, those resisting reductions in toll are anticipating that these wont generate enough demand to offset the cut, because the economy means there are low elasticities of demand for the affected roads - which is probably correct.

Yet they have entered into concessions under certain conditions, which are now being legally challenged (as the concession firms believe they are not breaking the law).  Whilst this is likely to be concluded through a combination of negotiations and legal action, the Irish government will not want concessionaires to go bankrupt, nor will it want them to be seen to be profiteering from not fairly applying rules on increases that were agreed to.

However, if they fail, they will simply be onsold to creditors, who will be able to sell the concessions at a major discount.

When Ireland's economy eventually recovers, it will be to the relief of concessionaires, but I doubt if the forecasts for those concessions will remain remotely valid, as they were based on a view of demand that simply is no longer realistic.  Still, Ireland has an excellent, virtually complete motorway network.  They wont get closed, all that will happen is that tolls will vary, and the roads will remain.

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