Paul Grad, TunnelTalk Correspondent, Australia, and Peter Kenyon, TunnelTalk
While officials, politicians and investors are still reeling from the financial crisis involving several toll highway tunnels in Australia, traffic experts are providing a better understanding of what happened, and why, and what to do to avoid the same mistakes in future. Paul Grad and Peter Kenyon report for TunnelTalk.
Toll highways tunnels in Sydney
- Australia has some of the finest highway tunnels in the world, but for the private investors who trusted traffic usage projections from leading and respected consultancy firms the story has been a tale of insolvency and disappointment. Most of the privately owned toll highway projects constructed in the last 15 years in Australia have fallen into receivership or administration within a short time of opening to traffic when it became clear that toll revenue from actual traffic usage would be well short of covering its contribution to the construction costs.
- Class action lawsuits are now being initiated by investors who believe they were misled by overly optimistic usage forecasts, and construction companies are becoming wary of bidding future concession projects.
- Not all toll tunnels in Australia have failed financially. Some have been highly successful. But for all cases of failure, the traffic forecasts were two or three times higher than the actual traffic usage when opened. This has led to the conclusion that there was something wrong with the procurement concept and the financial structure of the toll concessions.
- The long-running saga of the Sydney Cross City Tunnel has taken another turn following announcement that private transport operator Transurban has moved closer to acquiring the asset at a knockdown price and expanding its growing portfolio of toll roads in the Australian capital.
Cross City Tunnel has had a chequered history
- The 2.1km twin running tunnel, completed as a 30-year PPP concession at a cost of about Aust$1 billion in 2005, is currently in administration for a second time after a consortium comprising Royal Bank of Scotland (RBS), EISER Infrastructure Partners and Leighton Contractors placed the asset into voluntary receivership in September. Their decision to pull out followed a row with the New South Wales Government over unpaid stamp duty of $63 million which became payable when the consortium acquired the tunnel from its original owners for approximately $700 million in 2007.
- The latest deal to acquire $475 million of head debt (at a discount of 21% on the actual $600 million owed by principal investor RBS), plus a further $27 million dependent on traffic volumes, values the asset at just $500 million - half of its original construction cost. It is considered unlikely that another group will come forward and make a rival bid for the tunnel now that Transurban has agreed a price to purchase the outstanding head debt.
- As 75% owner of the Eastern Distributor highway, which links with the Cross City Tunnel, Transurban is in a better position to improve traffic flows and generate increased toll income than any potential rival. Transurban also either owns or part owns the city's Lane Cove Tunnel as well as the M2, M5 and M7 motorways.
- The original concession based its financial projections on anticipated usage levels of 70,000/day in 2005 rising to 90,000 by 2013. During the first six months of this year an average of just 36,000 vehicles used the Cross City tunnel.
Peter Kenyon, TunnelTalk
- In the case of the Brisbane Airport Link, the most recent toll concession collapse after opening in August 2012, the construction joint venture suffered substantial construction losses now estimated at Aust$500 million.
- Under its bid of $4.8 billion for a 45-year PPP concession, Thiess/John Holland, as part of the Leighton Group and in partnership with Macaquerie investment bank, assumed all construction and usage risk, with the Queensland State Government contributing Aust$47 million of taxpayers' money. The Government's contribution was settled eventually at $267 million, but the subsequent collapse into administration of BrisConnections, the operating company formed by Thiess/John Holland/Macacquerie, effectively resulted in the Australian taxpayer gaining usage of a world class asset at very low capital cost.
- Meanwhile, Hochtief of Germany, as parent company of the Leighton Group and therefore of the construction JV, has revised its procurement risk strategy in a way that makes it unlikely that either it, or its subsidiaries, will become involved in future Australian projects that are offered on a PPP basis, unless the risk is shared more equally with the public sector. Former Leighton Chief Executive David Stewart said in the aftermath of the BrisConnections troubles: "We are making sure we do not automatically replicate our tendering practices through to these mega-projects because it obviously does not work." He also hinted at the problems created by fixed price contracts, admitting that the Airport Link's design took twice as long in planning and design hours than estimated in the tender, and that there had been serious underestimating of the amount of steel and concrete needed to complete the project.
Toll highway tunnels in Brisbane
- In working with Australian Federal and State agencies to examine how investor confidence in the toll highway tunnel asset class could be restored, Dr Robert Bain, Managing Director of RBconsult of the UK, said one of the reasons for so many toll project failures was that the concession award procedure was structured for the highest bidder to win the concession.
- The public sector is the concession granter, and the problem lies with the way the public sector has designed the concession procedure, explained Bain. There are now lawsuits in Australia where investors are suing traffic consultants, he said. "In one case, the receiver of the failed concession is suing the traffic consultant and, to my mind, with some justification. For sure, forecasts will be subject to error, however, error in itself would result in instances of under-prediction as well as over-prediction. This is not the pattern observed in Australia. Every toll road project built and opened in Australia since 2005 has underperformed."
- The fact that each facility, opened during the last few years, was based on overly optimistic forecasts can hardly be ascribed to chance. "It is therefore the 'hand of man' that has influenced the predictions," suggested Bain.
- Greater care should be taken with assessment of demand risk, he said, but "I would not throw the baby out with the bath water. There are many toll road successes around the world with happy investors. Looking at the broader picture, if demand risk is not passed to the private sector it remains with the public sector and I am not sure that the public sector is any better equipped to manage such risk. Understanding who has prepared the forecasts, and for what purpose, is a good start towards appreciating the situation. For this review, genuinely independent forecast auditors must be recommended and engaged."
- A number of the Australia toll road concessions were awarded to the bidder offering the largest upfront payment to the State. "That is a recipe for disaster," said Bain. "Without checks and balances in place, the bidding process simply turns into a competition on traffic numbers. Toll road traffic generates revenue and the largest upfront payments can only be justified by those with the highest traffic forecasts. The whole process becomes skewed and the numbers get bent out of shape as a result. Considerable pressure is placed on traffic consultants to come up with the 'right' numbers; numbers that meet the requirements of the financial model. So that is where I start."
Burnely (left) and Mullum Mullum toll tunnels in Melbourne
- In the case of the Brisbane Airport Link, traffic projection figures used by Thiess/John Holland/Macaquerie to bid the project were based on a $4.69 million report compiled by engineering and design consultant Arup. The same consultancy firm, in JV with Parsons Brinckerhoff, went on to complete the engineering design of the project for the design-build contract with Thiess/ John Holland. It is not suggested that the figures were deliberately optimistic in order to improve the chances of winning the complex engineering design contract, which went on in construction to cost double its estimate at bid stage, but it does emphasise the need for more independent analysis. It is not without irony that the Arup traffic projection report of 2008 states in its one line conclusion that, "the traffic forecasts for Airport Link are considered achievable and are based on reasonable assumptions".
- Equally, it is not without irony that the same Thiess/John Holland construction JV, that registered Aust$500 million in losses on the Airport Link, had to write down $132 million of losses on the ill-fated Lane Cove toll tunnel project in Sydney when the Connector Motorways consortium, in which their parent company Leighton Holdings was involved, slid into receivership shortly after the tunnel opened in 2008. Overly optimistic traffic levels were blamed once again, with Leighton's Chief Financial Officer Scott Charlton declaring at the time that, "we will learn our lessons and use them on future projects".
- Lessons however appear not to have been learned, and a new generation of litigation-ready investors are now seeking redress for failed concessions. Currently at least three class action suits are progressing against companies that made ambitious traffic projections. Aecom has been hit by a $150 million suit over its Clem 7 tunnel projections in Brisbane; Parsons Brinckerhoff and Booz Allen Hamilton are fighting a lawsuit filed against them for their traffic projections for the Lane Cove tunnels in Sydney; and Arup became the latest target in May 2013 for its Brisbane Airport Link projections (Table 1). Litigation funder IMF has agreed to fund the latest suit, subject to there being enough eligible investors wanting to take part in the case.
- When the case against Aecom was lodged in a Sydney Federal Court in 2012 by legal firm Maurice Blackburn on behalf of 700 clients, Senior Associate with the firm Richard Ryan, is reported as saying: "Our clients claim Aecom provided unreasonable assumptions that had the effect of making the tunnel project look viable when it was a dud."
- The word 'dud' here is unfortunate. The concession failures in Australia are failures in financial terms, not in tunnel construction or traffic operation terms. "The tunnels are world class and provide good service," said Bain, who has made a series of recommendations to government about best procurement practices and has redefined the bid evaluation and concession award criteria for toll concessions. "Already we have seen the role of the independent forecast auditor strengthened," he said.
- Dr John Rose, Professor in Transport and Logistics Modelling at the University of Sydney Business School, also agreed that overly optimistic traffic forecasts are a root cause of the problem and are a result of the highest bidder winning the concession. It costs $100 million or more to prepare and submit a concession proposal, he said, and "naturally, bidders are very keen on winning a concession".
- Rose also offers another reason why the patronage of toll tunnels is lower than expected for recently completed projects. "The traffic usage forecasts were prepared for most projects before the economic crisis of 2008 when the economy was going well. After 2008 the perceived value of time dropped and the commuting public became more concerned with repaying their debts than with saving on commuter time."
Brisbane Airport Link traffic projections measured against 2012 actual usage
- It is also necessary to take into account the ramp up effect, he said. "Traffic load tends to increase slowly and this is dismissed by equity partners who want, and require, a quick return on investment. Forecasts for traffic growth over ten year periods are still calculated in a simplistic way. More research in this area is needed."
- John Goldberg, Honorary Associate at the School of Architecture, Design Science and Planning at the University of Sydney, analyses similar flawed concepts in the processes used for estimating the value of toll concession proposals based on projected toll revenue. These are explained in the paper he prepared and presented at the Australasian Transport Research Forum (ATRF06) in Brisbane in 2006 (see References).
- As private investors count the cost of bankrolling the construction of the Brisbane Airport Link, and major construction companies, including Thiess and John Holland, rethink future bidding strategies, focus now turns to Brisbane's Legacy Way toll highway project. Tunnelling on a project that is based also on traffic projection figures, is largely complete by contractor Ghella, in JV with Acciona and BMD Constructions, however, this time, it is the Federal Government and the Brisbane City Council (BCC) that stand to lose should the toll concession fail. Between them, the Federal Government and BCC funded the $1.5 billion construction costs.
- BCC is now in the process of finding a buyer for the 50-year toll rights for Legacy Way. To this effect it has approached Queensland Investment Corp (QIC), the holding company of Queensland Motorways (QM) and manager of most of Brisbane's toll highways. A possible sticking point, however, is the Council's Legacy Way traffic projection of 24,000 vehicles a day, which it considers conservative. QIC is likely to challenge this as its own projections predict significantly less usage when the link opens in 2015.
- With the Council keen to recoup money to the public purse, and with a limited number of potential buyers of the toll rights, it is likely that the Legacy Way sale will fall short of covering the construction costs. The question is then, will the public sector be prepared to take a risk on its own traffic projections and retain the toll rights, or face the possibility of underselling the project to the benefit of a private infrastructure company. Either way, traffic projections in Australia have become something of a lottery. This is a situation that is far from encouraging if investors and construction companies are to bid and finance future infrastructure investment projects in the country.
|Table 1. Toll highway and tunnel concession projects in Australia and their current status|
|Concession partners or Constructors|
|22km section of the M2 Western Link and the Southern Link that comprises the Burnley and Domain Tunnels under the Yarra River.||2000
|Transurban, a partnership of Transfield Services, Australia, and Obayashi Corporation of Japan|
|Financial difficulties were experienced due to exuberant traffic forecasts although a spokesperson for Transurban told TunnelTalk that CityLink has been very successful.|
|A 39km toll section of the M3 freeway.||June 2008
Final project cost $2.5 billion
|Thiess and John Holland|
|In the first six months of operation, EastLink suffered a loss of about $93 million. In 2010 the road had to be refinanced and its traffic forecasts rewritten, due to lower than expected traffic volumes.|
|The 2.8km long immersed tube harbour crossing built to alleviate congestion on the bridge||August 1992
|The New South Wales Government and private investors. Transfield, Australia, and Kumagai Gumi, Japan, built the tunnel under contract. The tunnel will be handed back to the State Government after an operating contract in June 2023.|
|A few years ago there were jitters about the Harbour Tunnel with traffic forecasts also suspected as being too optimistic. However, General Manager Bob Allen of the tunnel's owner and operator Sydney Harbour Tunnel Company, told TunnelTalk that the Company is presently very happy with the tunnel's financial performance. It is "perfect", he said.|
Cross City Tunnel
|2.1km long link between Darling Harbour and Rushcutters Bay Build-own-operate contract awarded to Cross City Motorways in 2002. Current E-tag toll $4.32 and $6.75 without.||August 2005
|Equity of Aust$220 million provided by: Cheung Kong Infrastructure (50%), DB Capital Partners (30%), Bilfinger Berger BOT (20%). Remaining Aust$580 million financed by a syndicate of banks led by Westpac, Australia, and Deutsche Bank, Germany|
|As of December 2006, the tollway was insolvent with debts exceeding A$500 million. The insolvency firm KordaMentha was appointed as receiver and managers for Cross City Motorway Limited. On June 2007, Leighton Contractors and investment bank ABN AMRO were chosen as preferred purchaser of the tunnel for A$700 million. The Office of State Revenue (OSR) has saddled the tunnel's owners with a large stamp-duty which has not been paid. The owners have retaliated by taking the OSR to the Supreme Court. The tunnel is still in trouble because toll revenues are well below forecast levels.|
|6km long motorway with a 1.7km long tunnel linking the city centre with the airport. Current toll $6 for cars/motorbikes, $12 for other vehicles||December 1999
|Constructed by Leighton Contractors for motorway owner Airport Motorway Ltd. Privately built, owned and operated by Transurban with State Government planning, support and management during construction.|
|A spokesperson for Transurban said that in comparison with other Australian toll toad tunnels, the Eastern Distributor has been a financial success story.|
Lane Cove Tunnel
|Twin tunnel tollway, connecting the M2 Motorway at North Ryde with the Gore Hill Freeway in Artarmon. Current toll $2.94 for passenger vehicles, $5.87 for heavy vehicles.||March 2007
|Connector Motorways, a consortium including Leighton Holdings, Mirvac and the Hong Kong millionaire Li Kashing, awarded a design-build contract for the tunnel construction to the Thiess and John Holland JV.|
|The tunnel went into receivership in January 2010. KordaMentha was appointed the receiver to Connector Motorways. Transurban bought the tunnel in May 2010 for Aus$630 million and became the new operator. The tunnel is also the subject of a lawsuit. Two superannuation funds, REST Infrastructure Trust and AMP Capital Investors, contributed $80 million of the $500 million in equity raised for the project in 2003. In 2009 AMP started a lawsuit against the two consultancies that provided traffic forecasts for the tunnel, Parsons Brinckerhoff and Booz Allen Hamilton (now renamed Booz and Company). AMP claims the two companies "failed to exercise reasonable care and diligence" and that it made "misleading or deceptive" traffic predictions. AMP said Parsons Brinckerhoff predicted that 187,700 cars would use the road every day by 2011. Booz predicted that 149,900 cars would use the road every day by 2011. In 2012 a little more than 70,000 cars passed through the tunnel each day. The litigation is expected to continue for years.|
|4.8km M7 motorway grade toll road tunnel built under the Brisbane River. Current toll between $2.27 and $12.03.||March 2010
||Operated by RiverCity Motorway. Built by the Leighton Contractors and Baulderstone/Bilfinger Berger Joint Venture|
|An economic fiasco due to incorrect predictions of traffic volume. Unable to collect enough toll revenue to pay the interest on its $1.3 billion debt, RiverCity Motorway went into receivership. The company's shares became worthless, costing investors millions. Receiver KordaMentha has launched a $2 billion Federal Court action against Aecom, the Los Angeles based consultant that prepared the traffic forecasts for the toll tunnel crossing, accusing the company of "misleading and deceptive conduct" and of making "negligent misstatements" by forecasting traffic of more than 100,000 vehicles/day, while the actual traffic volumes have totalled only 22,000/day. Aecom said it would defend its actions vigorously and dismissed the allegations as "totally without merit". The project is also the subject of a $150 class action lawsuit, also against Aecom. Law firm Maurice Blackburn has lodged a damages claim in the Federal Court in Sydney on behalf of some 700 investors. The lawsuit again centres on the gap between the traffic volume predicted by Aecom Australia and the actual patronage.|
|6.7km of twin tube tunnels that connects the Brisbane city centre to the Clem 7 Tunnel to the East-West Arterial Road, which leads to Brisbane Airport. Recent toll level $4.90 per vehicle||July 2012
Construction cost $4.8 billion
|The construction concession was awarded to the consortium BrisConnections comprising the Macquarie Group, Thiess and John Holland.|
|Earlier in 2013, BrisConnections announced that it had decided to place the tunnel into administration due to low traffic levels and debts of more than $3 billion, worth more than the tunnel. According to the latest traffic figures (December 2012), an average of almost 48,000 vehicles used the link each day, a quarter of the original forecast by Arup of a daily traffic load of 179,000 vehicles after six months of operation. McGrath Nicol will manage the company and PPB Advisory will operate the tunnel.|
|4.6km of twin tube tunnels connecting Brisbane's Western Freeway and the Inner City Bypass.||Tunnelling completed June 2012. Due to open to traffic by 2015.
Construction cost $1.5 billion
|Construction is being completed by the Transcity JV, a JV of BMD Constructions/Ghella/Acciona, under an agreement which includes operation and maintenance for a period of 10 years.|
|Funding for construction of the tunnels was provided from the public purse: $1 billion from Brisbane City Council and $500m from the Federal Government. The council is now actively seeking a buyer to purchase the 50-year rights to charge tolls, but traffic projection figures are proving a sticking point. State-owned QIC has been approached to buy the concession, but no deal has yet been done. The council estimates daily usage at 24,000 vehicles, but QIC is understood to have made its own projections that are considerably lower. It is likely that, if sold, the council will receive considerably less for the concession than the construction cost of the tunnels.|
Brisbane awards airport highway tunnel link - TunnelTalk, May 2008
Tunnels at the heart of Sydney transport vision - TunnelTalk, October 2012
Lane Cove collapse investigations - TunnelTalk, February 2007
Brisbane awards Northern Link highway - TunnelTalk, September 2010
The fatal flaw in financing of private road infrastructure in Australia; John L Goldberg;
Executive Summary pdf download; ATRF 2006 Conference Paper pdf download
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