Wednesday, 10 August 2011

Ireland pays for poorly performing toll roads

I’ve written a few articles celebrating the benefits to governments from PPPs that transfer risk of failure to the private sector. Examples most recently being in San Diego, USA and Brisbane, Australia. However, if PPPs are not so attracted by bearing all of the risk, they may demand risk sharing if usage is below a minimum level. That, of course does mean that the PPP bears all of the upside, but taxpayers bear much of the downside. Ireland has adopted this model for two expensive toll roads and is now paying for it.

The Independent in Ireland reports that the Irish National Roads Authority (NRA) is paying €5.7 million this year to privately owned toll operators because traffic figures are not meeting estimates. The two routes suffering from low traffic are the Limerick Tunnel and the M3 motorway from Clonee to Kells. Similar guarantees do not apply to other toll road PPPs in Ireland.

The Limerick Tunnel is part of the N18 Limerick Southern Ring Road, effectively an east-west bypass for the city. It costs €1.80 for cars and up to €5.70 for the heaviest trucks. It was expensive by Irish standards, at €600 million, one correspondent to the Irish Times claims traffic figures are 25% below what is needed to avoid state subsidies. The concession is owned by the DirectRoute consortium comprising Strabag AG, John Sisk & Son (Holdings) Ltd, Lagan Holdings Ltd, Roadbridge Ltd (Mulcair), and two third party equity providers - Meridiam Infrastructure Finance S.C.A. SICAR and Allied Irish Banks p.l.c.

The Limerick Tunnel was meant to be part subsidised in any case, with €180 million paid for construction, and another €60 million to be paid over the life of the operation of the road (31 years out of a 35 year concession). However, if the road succeeds it is also mean to be revenue sharing between the NRA and the concession, so there is a potential upside, with a similar arrangement for the M3.

The M3 cost €650 million and is essentially a northwest corridor from Dublin. The toll costs €1.30 per toll plaza for cars and up to €3.30 per toll plaza for the largest trucks. The concession is owned by Eurolink M3 a consortium of Spanish company Cintra Infraestructuras SA and Irish contracting company, SIAC Construction.

It has traffic figures 22% what is the minimum to avoid state subsidies.

However, there are Irish toll roads that do make money. The NRA said it was paid €1.47 million in revenue sharing from successful concessionaires (though this still means a net loss). The N1/M1 (from Dublin to the northern Ireland border towards Belfast) and M4 motorway (west from Dublin towards Galway).

The NRA justifies its decision to guarantee minimum usage of those routes because of their expense, in that if it didn’t happen the prices would be higher as the bidder would factor in the risk. The interesting question would be whether that escalation would be more than what is likely to be paid by the state in the coming years. Under the current economic climate in Ireland, it may be some time before traffic figures recover sufficiently to avoid such subsidies.

Meanwhile, Dublin wont be getting congestion charging soon according to Transport Minister Leo Varadkar, saying that the public transport alternative isn’t good enough. A better reason is that an economic recession is not the right time to impose new charges on road transport.  However, I suspect the real reason is politics.  The Independent in Ireland also reported that the National Transport Authority said there had to be congestion charging in Dublin by 2020 or the city faces gridlock.

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