Worrying financial signs for the road ahead

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The Age: Worrying financial signs for the road ahead. October 1, 2014. Josh Gordon State political editor for The Age.

Denis Napthine is surely gilding the lily when he claims the cost to Victorian taxpayers to build the first part of the East West Link is “only” $2 billion.

You can quibble about the words “Victorian taxpayers”, but the actual cost to the public of the 5.5 kilometre road link will be much greater.

The total direct bill for the road, as the government revealed on Tuesday, will be about $6.8 billion. That includes the $2 billion hit to the state budget’s bottom line during the construction phase referred to by Napthine.

An additional $1.5 billion will come from federal taxpayers via the Abbott Government, while the remaining $3.3 billion will be financed by the consortium.

But that’s not where it ends. There is an awful lot we still don’t know about this project, but at least one thing is clear: the consortium isn’t going to be spending $3.3 billion of borrowed money out of the goodness of its heart. It will be aiming to turn a decent profit.

In return for agreeing to build, operate and maintain the road, the consortium will get a guaranteed cheque from taxpayers every three months for the next 25 years.

Treasurer Michael O’Brien say he can’t tell us anything about these 100 payments because of “past practice”, and because it might undermine the government’s bargaining position when haggling with the private sector to build the second stage of the link, connecting the Tullamarine Freeway to the Western Ring Road.

(It’s worth noting at this point that the Government has been only too happy to talk about availability payments for Labor’s desalination plant. It cost about $4 billion to build, and the regular payments to the consortium will end up costing state taxpayers about $19 billion over 27 years, even with no water ordered).

How much will taxpayers fork out for the East West Link on an ongoing basis? It’s difficult to say, but Labor’s 27 kilometre Peninsula Link, opened in January 2013, provides some clues. That particular public private partnership cost about $759 million to build, about nine times less than stage one of the East West Link, with an availability charge of about $80 million a year.

Under fairly conservative assumptions, the annual charge paid to the consortium for the East West Link might be roughly $200 to $300 million.

The Government will collect the toll revenue from the link, which will be used to offset the availability charges. The net cost to taxpayers will depend on the toll charged and how many motorists use the road (the official prediction is that between 80,000 and 100,000 vehicles a day will use it).

The first stage of the East West Link is certainly an impressive piece of infrastructure, with its sweeping “Sound wave” overpass allowing motorists to turn right from Hoddle Street to the Eastern Freeway, numerous off-ramps, greenery and “ribbon” design.

But it will also be expensive, costing us through state and federal taxes, tolls and ongoing payments for the next quarter of a century. Let’s at least be upfront about that.

The Department of Treasury and Finance estimates that using a public private partnership arrangement to build the road will end up costing about 24 per cent less than if it had been done by the state. It is difficult to assess this hypothetical, but one obvious drawback associated with the private sector contract is a loss of transparency.

The government is essentially asking the public to trust it. The danger is that immediate political imperatives encourage the government to transfer risk and expense to future taxpayers.

History would suggest we should at least be cautious. CityLink may have been a great project for Melbourne, but this does not mean the contract was. In his 2008 assessment of Melbourne’s transport needs, Sir Rod Eddington noted there were provisions in CityLink’s contract agreed to by Kennett-era treasurer Alan Stockdale allowing Transurban to claim compensation for road network changes that had “material adverse effects” on its profits.

The company has, understandably, already attempted to exercise its rights here. This leaves open the possibility that future public transport or road upgrades might result in a hefty compensation bill – including an airport rail link.

Likewise, the political urgency with which the former Labor government pursed its desalination project almost certainly inflated the cost, with taxpayers forced to pay the consortium a minimum of $1.8 million a day over 27 years.

The Napthine Government’s recently re-negotiated contract with Crown provides another example. The deal boosted future tax collections by an estimated $910 million, which is good for the budget.

But in a major drawback limiting the ability of future governments to tackle gambling addiction, the Government also agreed to make future taxpayers liable for up to $200 million in compensation for any regulatory changes – including new problem gambling or smoking rules – adversely affecting the casino’s profits.

Once again immediate political imperatives appear to have trumped the interests of future taxpayers and governments.

The arrangements surrounding the East West Link contract are so opaque it is difficult to determine what the public might be liable for in the future as a result of the deal. But if the sense of political urgency surrounding the project is anything to go by, there are worrying signs.

Josh Gordon is State Political Editor.

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