Tuesday, 26 July 2011

Clem7 toll road bankruptcy has not been disaster for Brisbane

The Clem 7 urban inner city toll tunnel in Brisbane was doomed from the start financially, not least because projects associated with it were not completed on time, and it was built on the back of grossly optimistic demand forecasts. It is an impressive piece of urban infrastructure, as I reported previously here, with 4.8 km of tunnel on a fully electronic free flow inner city highway. 

However, forecasts of 60,000 vehicles a day did not come to pass, with demand peaking at 27,000 a day at best. The A$3 billion (US$3.25 billion) project simply ran out of cash, as revenue couldn’t meet operating costs and debt repayments, so the owners – RiverCity Motorway group – went bankrupt owing A$1.3 billion (US$1.41 billion). One big problem for the road was that the Airport Link motorway, which would feed traffic from the airport onto the project, is not due to open until 2012. That is also a toll road project, and given RiverCity’s massive writedown of the value of Clem 7 from A$1.56 billion (US$1.69 billion) to A$258 million (US$280 million), Airport Link faces a similar risk.  RiverCity was publicly floated in 2006 at a price of A$1, but its final trading value was A$0.01 before going into administration. The risk with Airport Link is the Queensland government is a part investor in the company responsible for that A$5 billion (US$5.4 billion) project. According to the Sydney Morning Herald, ARUP is responsible for the demand forecasts for that road.

Hedge funds now own a third of the debt associated with the toll road, but the road still functions. The website is here with all the details about how to pay the toll, noting that it is operating under administration with the firm Korda Mentha. One report notes that once the Airport Link is opened, it is a chance to bail out of the road and sell it on to realise what little value is left. However, the big losses have been taken, and investors have been looking for those to blame for the overly optimistic demand forecasts. Engineering consultancy AECOM is being blamed because it was responsible for two sets of forecasts of demand, which reportedly gave different results to different client.

Lord Mayor of Brisbane, Campbell Newman is buoyant though as was reported by the Australian Broadcasting Corporation:

"My reaction is of course that I'm very sad for small investors who've lost money, but having said that, the fact remains that this project, this tunnel will be open for 100 years," he said.
"It'll deliver congestion-busting benefits for many generations of Brisbane motorists.
"It can't be taken away, it can't be shut down or closed, so it will be here delivering what it's meant to deliver in the future."

He's right of course, still, the bankruptcy is expected to reduce interest by investors in new Australian toll roads according to Queensland Treasurer Andrew Fraser, simply by the fact that it raises the risk profile (but should also raise the due diligence activity) around such investments. You see, paying for road use is not quite like paying for other activities!

Yet all of this vindicates the policy of putting this out to the private sector. The capital cost has not been born by taxpayers, but by private investors who, in this case, made a mistake. The risk has indeed been successfully transferred, and a bankrupt owner has still left a first class asset for motorists and the city.


  1. With the downfall of AirportLinkM7 now, I assume that investors will be wary of funding toll roads in Queensland.

  2. I would have thought so, there will have to be a radical change in business practices to provide confidence. The issue being whether the toll road concessions the state and city advance in future are actually viable propositions in the first place.