Kenneth Davidson: Government fixated on the costly east-west link

Kenneth Davidson: Government fixated on the costly east-west link (2 May 2012)

Completely ignored is the option of a rail line out to Doncaster, up the Eastern Freeway.

Where it really counts, planning for big infrastructure projects, the government appears incapable of making a rational decision.

It is fixated on a determination to make the construction of the east-west link connecting EastLink to CityLink even though it is already floating the idea that in order to make it pay as a Public Private Partnership it would, for at least part of its length, put the road on stilts rather than underground and incorporate off-ramps to the city.

Putting most of the road above ground would save construction costs and the off-ramps would boost traffic and tolls as most traffic coming off EastLink wants to go to the city area rather than be swept out to the north-west suburbs.

Completely ignored is the far more cost-effective option of a rail line to Doncaster up the middle of the Eastern Freeway, which could take far more commuters right into the city where most want to go while reducing congestion and probably at greater speed with less stress.

Two studies by the previous government failed to make a case for the new link. In fact, a cost benefit study showed that every dollar spent on the link would return benefits (social, economic and financial) of only 50¢

So how does the government plan to get round this? According to the budget papers, ”new infrastructure projects are subject to the high-value high-risk process to improve business case development and project implementation, protecting the budget from cost over runs on major projects”.

Behind this meaningless flummery is an attempt to recycle the now thoroughly discredited argument to justify the massive additional financing costs of PPPs compared with conventional tendering financing by public borrowing because ”risk” is transferred from the taxpayer to the private operator.

Now that some PPPs are losing money, the investment banks and others promoting PPPs are arguing that in the case of toll roads, instead of charging tolls, these projects should be financed by ”shadow tolls” or an ”availability charge”, ie the government counts the number of cars using the tollway and sends a monthly cheque to the government or, even better, because the road exists, and provided it is maintained so that cars can use it if they so chose, the government pays a regular fee irrespective of usage.

In other words, the highly skilled and highly paid financial engineers who dream up these schemes want the PPP method of financing infrastructure to continue so they can generate a return of 10 per cent or higher on the funds they manage, rather than earning the risk-free rate of return of 4 per cent on bonds, but without assuming the risk that was the rationale for PPPs in the first place.

Victoria is the leading exponent of PPPs and it still leads the pack. The Peninsula Link, which is the first PPP to be financed by an availability charge, is seen as an exemplar for the industry going forward.

After his second state budget brought down yesterday, the new Treasurer, Kim Wells, appears to have settled into the same financial rut established by Alan Stockdale and John Brumby.

While banging on about a current account surplus of $155 million, the largesse for the investment banking industry continues under the radar.

In fact, the Australian Accounting Standards/Auditor-General-approved measure of the total non-finance state sector deficit shows that the deficit increased from $6.1 billion in 2011-12 to an estimated $9.9 billion for 2012-13.

Of the $9.9 billion deficit in 2012-13, about $4.9 billion is accounted for by ”acquisitions under finance leases” – the Peninsula Link ($750 million), which is of dubious social or economic value, and the Wonthaggi desalination plant ($4.1 billion), which will produce water that is not needed.

Kenneth Davidson is a contributor