Thursday, 21 February 2013

Brisconnections goes into receivership - another victim of toll road optimism bias?

It has now been reported by various Australian news outlets that Brisconnections, the company behind the AirportLink toll road in Brisbane, has gone into receivership following the withdrawal of support from the company's financial backers.  

Regular readers will remember my previous articles about the AirportLink toll road, which is now the second major toll road project in Brisbane to effectively go bankrupt.  They are below in chronological order, telling a sad tale of a road that faced construction cost overruns, but has been doomed by optimism bias in demand forecasting.

It has looked increasingly doomed (at least financially) since it was opened. It is, of course, technically superb.  
Brisbane Airport Link's complex interchange at Bowen Hills

The road cost A$4.8 billion (US$5 billion) to build and has been open for seven months.  It was meant to have an average of 135,000 vehicles a day by now, but the Sydney Morning Herald said only 47,000 a day on average used it in December (a little unfair, given the Christmas season will mean numbers are down with a lack of business traffic).  Even if you take that into account, traffic numbers are around 40% of what was forecast.  ARUP, the demand modellers in this instance, will be getting legal advice and checking its insurance for fear that it may be in front of a court as AECOM now is over the Clem 7 toll road.  You can review ARUP's report to investors on its demand modelling here, on page 110.   That is worthy of a look, as you can see some of the assumptions used look now, in hindsight, to be worthy of questioning (i.e. comparing toll prices on a per km basis with other toll roads, which is not how people value time and trips, and treating historic traffic growth as reflecting future growth).

Bear in mind that the toll on the road right now is at a discount of around 45% on the full estimated price, and it still can't get the demand levels that were forecast (it is expected that the price would increase in April 2013 to about halve that discount, and increase again in October 2013, both increases testing the elasticity of demand).

The report said "a consortium of 10 banks, including ANZ and European heavyweights Deutsche Bank and BNP Paribas, finally appointed PPB Advisory as receivers on Tuesday. The banks lent about $3.3 billion to BrisConnections, and stand to lose a sizeable chunk of their money."

Of course, the road remains open.  The asset is fixed and there is nothing else that can be done with it, beyond some incremental cost trimming and some price incentives to encourage demand.  The road's true market value will be below its construction and financing costs, suggesting that it simply wasn't an economically viable project.   It would be interesting to see if there was a recent public sector comparator cost-benefit analysis to compare with the financial business case, which now looks dire.

The Courier Mail reports that Professor John Goldberg of the University of Sydney claims the modelling was used to "work backwards" from expected returns to what figures were needed, which is an outrageous assertion to make.   He has himself undertaken his own financial modelling (pdf) of toll road PPPs in Australia and is suspicious of the entire approach. However, his call for a Royal Commission to investigate this is ludicrous, as it is not a matter for the government to be specifically concerned about private companies making malinvestments and losing money.  It would be preferable for the state, if it wishes to promote specific projects as PPPs, to commission its own demand forecasts based on determining if a project is worth proceeding with.

The Product Disclosure Statement claims that debt servicing can withstand a 40% reduction in forecast traffic each year.   What happened is 60%.

What now for AirportLink?

Not much, it will continue to operate.  The receivers will commission a review of its performance to find a way to maximise revenue and minimise costs.  It will remain a prime piece of infrastructure for Brisbane.

The question is whether any legal action will occur, and what long term owner it will have.

What now for future toll road PPPs in Australia?

Following Clem 7, you would think this debacle should deter most investors from any future projects.  It certainly should give rise to a rethink of the strategy both from government and investors.  Bear in mind this isn't just a small gap between actuals and forecast, but a chasm.  I've said before that what is needed are a number of steps by investors which could include:

1.  Get a completely independent demand/revenue modeller on top of the assigned one.  Treat it as peer review, and let it undertake its work from scratch.  Ensure all assumptions are tabulated from both the original and independent demand modellers, and have both firms peer review the others critically, with explanations as to why they think the other has got it wrong if they differ.

2.   Ensure both demand/revenue modellers give confidence assessments of their forecasts (this should be standard practice of course).

3.  Seek demand/revenue modellers on the basis of payment for success, so that a portion of fees are retained if the forecasts prove to be accurate within a specific range.  This is a new business model for them, so make the work entirely conditional on this.  Recognise you will pay a premium for this, but it will be peanuts compared to billion dollar failures.  The premium will be seen in academics and more research being undertaken to underpin forecasts.  Be careful not to incentivise overly conservative forecasts (the obvious response of modellers will be to forecast very low figures), or otherwise no project will be worth pursuing.

4.   Use stated preference surveys to verify the value of time estimates used for forecasts. Do this every time for every new project in different locations, because it is clear that value of time is far more fluid and individual than is often assumed.

Meanwhile, local government continues to borrow and build its own toll roads.

The Courier Mail notes that:  

Brisbane Lord Mayor Graham Quirk insisted the under-construction Legacy Way remained viable because of more conservative traffic modelling.

But Brisbane City Council has moved to offload tolling rights for Legacy Way and the Go Between Bridge to the Queensland Investment Corporation and Queensland Motorways, in order to shield ratepayers from $650 million in operating expenses.

The Legacy Way connects the Western freeway to the Inner city bypass and is a Brisbane City Council, not a private PPP project, which is to be a toll road.

Meanwhile the Courier Mail notes that "The Go Between Bridge, linking Coronation Drive to West End, also continues to lose money, ending 2011-12 $14.3 million in the red"

This project was publicly financed, and I wrote about it here.  Its fundamental problem should be obvious, as it is an inner city river bridge not far from another such bridge that is untolled.  It not only isn't recovering enough from tolls to pay for the financing costs, but it can't pay the maintenance costs and operating costs.  

That shows that the public sector is not immune from optimism bias in highway forecasting, but it will be telling if the Legacy Way fails to meet forecasts, as taxpayers will be up for any failures there.

Bear in mind that the Legacy Way, the Go Between Bridge, Clem 7 and the AirportLink are all parts of a five project TransApex plan produced by Brisbane City Council.  In other words, they meet planning objectives, which may not correspond to being driven by business opportunities.

Royal Automobile Club of Queensland spokesman Paul Turner said to the ABC (Australian Broadcasting Corporation) that the Airport Link was the last such project to be financed before the global financial crisis, but the road has been a "success" for motorists.

Beyond this the question will be whether governments in Australia want to "de-risk" such investments in the future, or if they would rather stand back and encourage the industry to be more careful.  However, what would have been the official response if no consortia came forward to build and operate the Clem 7 or the Airport Link projects in Brisbane?  Would the state and city governments have offered to share the risk, or simply accepted that their ambitions for the Brisbane highway network were beyond what is currently viable?

For what both cases demonstrate is the closest I've seen in recent years to a true free market test of the viability of tolled highways.  In both cases the roads built should, in hindsight, not have been built.  If the public sector builds such roads, taxpayers bear the cost of failure, but few recognise the failure or the mistakes made (so they risk happening again).  In these cases, lessons should have been learned.

Yet I have one suggestion for supporting such roads, in a small way, which is really a matter of equity.  Whilst fuel taxes are not hypothecated for transport in Australia, a proportion can be calculated which is equivalent to what governments spend on roads.  It would not be enough in itself, but a claim could be made, on a shadow tolled based, for a fair proportion of that revenue to be provided to the toll road owners, on the basis that had they used the untolled routes, this is what they would have paid anyway (except the government picks up the cost of maintaining the untolled route).  You see the biggest distortion with toll roads like Airport Link, is that the capital and maintenance costs of the competing untolled roads, are not transparent, and are charged not only to the users of those roads, but the users of Airport Link as well.

A case can be made that this fuel tax revenue, should go to the owners of private toll roads (or be deducted from the tolls paid by users).

However, there is another dimensions, which is what is happening to traffic growth.   Matthew Burke from Griffith University told the ABC that:  

people are driving less. We don't know fully why, but there has been a decline in the vehicle kilometres travelled by Australian drivers per person for about five or six years now and that's also the case in the US and in Europe. 

It's not just the economy, it's also the young people getting their driver's licences much later than they used to. It's telecommuting, it's e-shopping, it's a whole range of other things that are actually leading to us driving less. And that's great for society as a whole, it means less congestion, but it's not real good if you're a toll road operator. 

It may simply be that scope for new highway capacity is shrinking, as demand for motoring peaks.  Still, it will not reduce the demand for projects that resolve long standing bottlenecks either side of free flowing stretches of highway.


  1. Mr Scott Wilson, whom I assume is the author of this material asserts that my call for a Royal Commmission into toll road failures in Australia is "ludicrous". In the UK you have standing Royal Commissions, for example the 1993 Houghton RoyalCommission into Air Pollution from transport. But our main problem in Australia has clearly been the systematic dishonesty of the entire sector.My motive for calling for a Royal Commission is that the regulatory authority has failed to act on behalf of investors. The author needs to know much more about the sector in Australia before attempting to deny the need for proper investigation.(see AFR Letters, 21/2/13)

  2. Professor Goldberg, thank you for your comment.

    I understand you claim "dishonesty", which is a loaded term that may be deemed defamatory by some. You have undertaken substantial work on this issue, so I presume you have confidence in your claim. It is one thing to make mistakes in hindsight or to be incentivised to undertake work that is aggressively optimistic in forecasting, it is another undertake analysis and simply lie. If that were the case, then I would expect the AECOM lawsuit to be damning.

    A Royal Commission is ludicrous because it pre-empts the outcomes of the AECOM lawsuit (which the entire demand modelling industry is watching) and it is inappropriate in cases which are effectively between investors/banks and those that gave reliance on their demand/revenue forecasts. The "regulatory authority" in this case is the courts. A Royal Commission is appropriate for matters of clear public policy and interest, air pollution falls into this category. A failed investment and bankruptcy, when there is a pending lawsuit over information supplied to induce investment does not come close to this threshold.

    Those who have lost are investors and banks. Indeed, the public have gained considerably from the private sector effectively subsidising several large pieces of infrastructure. I'd suggest it is far more appropriate for the private sector to litigate and settle itself for a solution, than for taxpayer money to be spent on an expensive exercise.

    I understand the sector in Australia, it has delivered enormous economic benefits to the cities that have gained major highway improvements in the past 15 years. I understand there is public policy concern that the series of PPP toll roads that have not delivered demand that was forecast will deter future investment. The question is whether that reflects market failure that needs to be resolved through intervention or if the projects that are being advanced are in fact, not viable.

    Bear in mind that the Go Between Bridge is a government financed project that has shown itself to also have been a disaster as a toll road. In Brisbane it suggests that the entire TransApex strategy may be akin to Boston's Big Dig, as an overly ambitious series of projects that have been prematurely advanced.

  3. hi there just wanting to know what is the actual definition of a future tolling right

    1. I understand it is the legal authority to levy a toll on a specific road for a specific number of years.