Victoria state election: East West Link’s true cost $17.8 billion

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The Age: Victoria state election: East West Link’s true cost $17.8 billion. November 10, 2014 Josh Gordon State political editor for The Age.

ANALYSIS

Last month Denis Napthine claimed the cost to Victorian taxpayers to build the eastern half of the East West Link was “only” $2 billion.

What a bargain. For that relatively modest sum we get a beautiful piece of urban infrastructure that will “solve” Melbourne’s congestion woes and add to urban amenity. How could voters refuse an offer like that?

But as they say, if it sounds too good to be true, it probably is. Three weeks from the election, the project remains alarmingly opaque. (This week federal Assistant Infrastructure Minister Jamie Briggs called for full disclosure.)

The only thing that is clear is that the true cost to taxpayers will be far greater than $2 billion, as the report by 10 leading transport planners and financial analysts from three universities makes clear.

The $2 billion hit referred to by Dr Napthine relates to the direct hit to Victoria’s budget during the construction phase. The Abbott government – read federal taxpayers – will chip in a further $1.5 billion, while the consortium will stump up about $3.3 billion, making a total of $6.8 billion for construction.

But this is not where it ends. The consortium, led by construction giant Lend Lease, isn’t going to be spending $3.3 billion for nothing. In exchange for building, operating and maintaining the road, it will be handed a cheque from state taxpayers every three months for 25 years.

Despite the massive commitment of public money, the government is refusing to say how big each of these 100 cheques will be, claiming this would compromise the government’s bargaining position when negotiating with the private sector for the more crucial western half of the road, which is due to be completed in mid-2023.

Estimating the availability charge is a difficult yet not completely impossible task, requiring some assumptions about interest rates and the rate of return expected by the consortium. Add in some assumptions about the likely tolls to use the road, and you can make a fairly educated guess about the total cost to taxpayers.

According to the report, the “availability payments” to the consortium tally to about $12.7 billion in nominal terms over the 25-year contract, assuming an average annual inflation rate of 2.5 per cent and an annual return on investment of 9.5 per cent for the consortium.

Add in the budget contribution of $2 billion referred to by Napthine, total state interest costs of $2.2 billion and $900 million for operating and maintenance payments, and you get a total bill of $17.8 billion.

Quite a road, in other words.

The cost will be offset by the toll revenue. Assuming tolls are $5.67 in 2021, the academics estimate the annual financial loss would still be about $250 million.

Of course, in the real world, we don’t measure the cost of investments like this. Buy a house, for example, and you don’t tally up all the annual expected interest payments over a 30-year loan when quoting the price.

The government may well whinge about using the nominal costs in such a way, yet this is exactly the same methodology it has used to attack Labor over the desalination plant.

Indeed, on Monday Treasurer Michael O’Brien was busy reminding voters the plant will cost $18.3 billion over 27 years, a figure that is similar to the estimated total cost of the first half of the East West Link.

The government can only hope voters are more forgiving this time around.

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