A different funding approach for the Australian’s major road project WestConnex

New South Wales Government’s key infrastructure project, WestConnex is one of the largest motorway projects in Australia, connecting Sydney’s west and southwest with the Central Business District (CBD), Sydney Airport and Port Botany (Australia's second busiest container port). The project is expected to ease congestion and reduce travel times between the airport and the business district of Parramatta (located 23 km west of the CBD) by 40 minutes while bypassing up to 52 sets of traffic lights. The total project cost is estimated to be A$11.5 billion and its procurement should start in 2015.

Initial funding for the project will be provided by the Federal and State governments. In this respect, the Australian Government announced in May 2014 that it will provide A$2 billion of concessional loans in addition to the A$1.5 billion (grant) already committed, while the NSW Government is providing A$1.8 billion as equity investment in the project.

Having the project initially funded by the Government is a significant departure from the traditional public-private partnerships (PPPs) model which has been widely used for major road projects in Australia. In this case, the idea is to seek private funding at a later stage by issuing non-recourse debt once traffic is established (i.e. a debt secured by the future revenue generated through collection of tolls, but for which the State is not liable). Private funding can also be raised by selling Government equity investment in the state-owned operator once the project has proven to be profitable. Some analysts have described this model as a “Government Builds, Tolls then Sells (GBTS)”.

The decision to shift initial “traffic risk” back to the public might reflect the problems encountered by several high-profile road projects like Sydney’s Lane Cove and Cross City tunnels or Brisbane’s A$3bn CLEM7 tunnel, which have suffered from inaccurate traffic projections (or too aggressive bidding) leading to insufficient collection of tolls to cover the cost of the private operator.

To address concerns related to traffic projections, other projects like the “East West Link” mega-project in Melbourne are being procured as “availability payment” PPPs. Under this PPP model, the State sets and retains all tolls and pays the concessionaire a predefined sum at regular time intervals (for example, every six months) over the life of the project contract, provided that the road is available for users and meets predefined quality standards. In other words, while the private partner designs, constructs, finances, operates and maintains the road, its revenue stream does not depend upon the amount of tolls collected.

Overall, PPPs have been widely used to develop transport infrastructure in Australia with around 25 projects contracted since the late 90’s for a value close to A$37 billion (this represents more than 50% of the total cost of PPP Projects awarded in Australia). What the two cases mentioned above, “WestConnex” and “East-West Link” demonstrate is that different PPP structure might be needed to adjust to evolving market circumstances and risk appetite.

For an overview of recent trends of PPPs, please see the Chapter 3 of the Review of Developments in Transport in Asia and the Pacific - 2013 (page 66 to 77).

(Main source: Infrastructure Australia www.infrastructureaustralia.gov.au, WestConnex www.westconnex.com.au and Linking Melbourne Authority http://www.linkingmelbourne.vic.gov.au/ )