Some time ago I wrote about the Clem 7 toll road in Brisbane, Australia. It provides a north-south tunnelled bypass of the Story Bridge and other roads approaching downtown Brisbane from the south and east.
It is a PPP toll road that went bankrupt as the demand for the road was little more than half that forecast. In December 2013, the road was taken over by Queensland Motorways, which at the time was a company owned by the Queensland State Government, but has since been privatised and is now owned by Transurban.
The road was acquired by Queensland Motorways for A$618 million (US$472 million), but cost A$3.2 billion (US$2.4 billion) to build.
Transurban's latest traffic data reports AADT of 27,000 on the road, which is notable when you consider the forecast was that up to 100,000 a day would be using it.
However, what was significant about this case was that around 1000 investors who bought shares in the project engaged in a class action lawsuit (PDF detailed) against the demand/revenue forecasting consultants - AECOM - and the original Rivercity Motorway company. The Sydney Morning Herald reports that they have won a settlement gaining a payout of A$121 million (US$92 million). The allegation was that AECOM had made traffic forecasts without reasonable grounds, and specific information had been excluded from the product disclosure (prospectus) document for investors.
AECOM's US Securities and Exchange Commission report in 2015 noted the risk on the company's books from lawsuits:
In 2005 and 2006, the Company’s main Australian subsidiary, AECOM Australia Pty Ltd (AECOM Australia), performed a traffic forecast assignment for a client consortium as part of the client’s project to design, build, finance and operate a tolled motorway tunnel in Australia. To fund the motorway’s design and construction, the client formed certain special purpose vehicles (SPVs) that raised approximately $700 million Australian dollars through an initial public offering (IPO) of equity units in 2006 and approximately an additional $1.4 billion Australian dollars in long term bank loans. The SPVs went into insolvency administrations in February 2011.
KordaMentha, the receivers for the SPVs (the RCM Applicants), caused a lawsuit to be filed against AECOM Australia by the RCM Applicants in the Federal Court of Australia on May 14, 2012. Portigon AG (formerly WestLB AG), one of the lending banks to the SPVs, filed a lawsuit in the Federal Court of Australia against AECOM Australia on May 18, 2012. Separately, a class action lawsuit, which has been amended to include approximately 770 of the IPO investors, was filed against AECOM Australia in the Federal Court of Australia on May 31, 2012.
All of the lawsuits claim damages that purportedly resulted from AECOM Australia’s role in connection with the above described traffic forecast. The RCM Applicants have claimed damages of approximately $1.68 billion Australian dollars (including interest, as of March 31, 2014). The damages claimed by Portigon AG as of June 17, 2014 were also recently quantified at approximately $76 million Australian dollars (including interest). The Company believes this claim is duplicative of damages already included in the RCM Applicants’ claim to the extent Portigon receives a portion of the RCM Applicants’ recovery. The class action applicants claim that they represent investors who acquired approximately $155 million Australian dollars of securities. On July 10, 2015, AECOM Australia, the RCM Applicants and Portigon AG entered into a Deed of Release settling the respective lawsuits.
AECOM Australia disputes the claimed entitlements to damages asserted by the remaining class action lawsuit and will continue to defend this matter vigorously; AECOM Australia cannot provide assurance that it will be successful in these efforts. The potential range of loss and the resolution of this matter cannot be determined at this time and could have a material adverse effect on AECOM Australia and the results of its operations.
Related to this lawsuit was the case on Airportlink, the subsequent toll road that failed for similar reasons to Clem 7. This resulted in ARUP (the demand/revenue forecasters in this case) settling out of court.
What's significant is the precedent in suing demand/revenue forecasters for getting such forecasts wildly wrong. This should significant increase the premium placed on getting toll road revenue forecasts correct, and affect the consulting market.
My hypothesis about both Clem 7 and Airportlink (and indeed others that have failed in Australia) is that government policy on the "necessity" of these projects is part of the problem. Issuing concessions to build toll roads that are not, actually, commercially viable, attracts private investors who may take government forecasts of demand and seek to grab the initiative to build projects that once built, wont have any realistic competition. In other words, there is a significant market for infrastructure investment keen to embrace any opportunity, because it looks, on average, a safer investment than many other sector.
Except that in these cases, they were not. Toll roads are not necessarily a "licence to print money" (although some do resemble that), and investors need to be more critical of the projects advanced by public agencies for PPPs that are wholly dependent on user revenue. It is clear in Brisbane that road users are simply not willing, in sufficient numbers, to pay for faster roads that would justify either Clem 7 or Airportlink, yet.
What would be a better approach? Could it be to simply invite interest in building and tolling the roads, making it clear that it is acceptable to get no offers? Or would the infrastructure investment enthusiasm still drive the risk takers? Or would it be better to commercialise the whole road network, and so let a commercialised road company make the decision itself whether to borrow to build new capacity (bearing in mind that the company would be getting revenue from road users across the network, even if it is existing fuel and registration fees)?
Let me be clear, I think that it is a success, for the public sector, that both roads have been built. They exist and the private sector took the risk. However, if the Queensland Government wants more private investment, it needs to think above how all roads are governed, managed and funded.