Financial arrangements for toll roads
This section considers financial arrangements for building roads
including contracts for future tolls and the way they are framed, negotiated
and changed. According to Infrastructure
...through facility-based tolling on urban motorway
networks...the government competitively tenders the right to levy tolls for a
fixed period (a concession) in return for the provision of infrastructure. In
turn, the tolls collected reflect the cost of designing, financing, building,
operating and maintaining the asset, plus a risk-weighted return to investors.
Separating the decision to build from the method of financing
Infrastructure Australia's description suggests a private provider
building the asset and then getting its money back. However, there is no
necessary link between the contract to build a motorway and the tolling
arrangements later. The successful takeover and operation by Transurban of
several toll roads built by other companies (see the table in Chapter 2)
demonstrate that the two activities can be quite separate.
Transparency would be improved if the two decisions were made
At present, it is difficult for the public to know what the relationship
between tolling and investment is:
One of the other things with tolling is that it's an
important input in understanding the VCR [value to cost ratio] and other
aspects of an economic appraisal for a candidate project. The states and
territories are always very careful about the extent to which they want to
share their tolling arrangements with the Commonwealth. For example,
Infrastructure Australia tried a number of times, with the East West Link, to
obtain information from the Victorian government on what the proposed tolling
arrangements for the East West Link would be. It couldn't [get] that
information out of the Victorian government.
Error in traffic forecasts is a well-established phenomenon. A paper by
the Bureau of Transport and Regional Economics notes that forecasting errors are
asymmetrical: they are much more likely to forecast too high rather than too
low volumes of traffic. Significantly, forecasting for toll roads is worse than
for toll-free roads. BITRE suggests that:
Forecasting errors can be caused by many factors including
inadequate models, data limitations, uncertainties in socio-economic and land
use forecasts, ramp-up risks, and optimism bias and/or strategic
In some cases the successful bidder for a toll road contract makes an
up-front payment to the government. This distorts the whole process. In
particular, it creates an incentive for a proponent to increase its traffic
In Australia, a number of the toll road concessions were
awarded to the bidder offering the largest upfront payment to the state. That’s
a recipe for disaster. 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 be justified by those with the
highest traffic forecasts.
Inflation of traffic forecasts, for this reason or for other reasons,
does not merely distort the projected returns to businesses, leading to
numerous failures of toll road ventures including the Cross-City Tunnel and the
Lane Cove Tunnel in Sydney, the Clem7 and Airport Motorway projects in
Brisbane, and the EastLink project in Melbourne. It also distorts the whole
cost-benefit analysis, suggesting at the decision stage that a project is
actually of more value to the community than it really is.
Professor David Hensher suggests that traffic forecasts have
been so inaccurate, especially for the first few years after the opening of a
toll road, that:
...there is a case to be made for focusing on debt financing
until the risk profile of patronage is better established and stabilises and
then invite private equity...
Often the tolling contractor does not pay the whole capital cost of the
road but shares it with government. There is no theoretical reason why this
should not happen, as long as it is transparent and the private returns from
tolls reflect only the capital and maintenance contributions of the private
Many submissions complained of the lack of transparency in negotiation
of toll contracts.
Generally the arrangements surrounding tolls are very specific and
They set out a starting price per vehicle, and permissible increases over the
years. For example, tolls for WestConnex, including stages not yet opened, are
specified on its website. They can be increased at 4 per cent or the CPI,
whichever is higher, until 2040, after which the CPI will be the maximum
The arrangements negotiated in 1995 for Melbourne's CityLink provided for
increases at 4.5 per cent or the CPI for the first fifteen years, then CPI for
the next 15 years.
The logic of indexing the payment is not clear, but it is worth noting
that since March 1995 inflation has touched 4 per cent once (during the Asian
financial crisis) and has exceeded 3 per cent on only one other occasion.
But it is very likely that the expected increasing value of the toll road, as
other roads get more congested, also justifies the increase in real prices.
The practice of specifying tolls in detail has been criticised for
reducing flexibility in road pricing, given that the contracts are generally
for 30 years or more. Such flexibility might be required in order to use tolls
for demand management or other purposes.
The tolling contracts also specify how unpaid tolls will be dealt with.
This has resulted in different arrangements from state to state, and has had
some perverse results. It is considered further in Chapter 4.
Many people accept tolls as a way of paying for a particular road that
they use and value. But they resent changes to arrangements which extend the
tolling period or increase tolls for a particular road in order to pay for a
new road. This has happened with CityLink tolls in Melbourne, which will be
extended to part-fund the Westgate Tunnel project. Transurban proposes to
increase tolls on roads in Brisbane to fund the upgrade to the Inner City
Bypass (which will not itself be tolled).
At the time of writing there is anger at the re-imposition of tolls on Sydney's
M4, which has been widened as part of the WestConnex project.
In addition, the owner of WestConnex will apparently be granted the toll
concession for the existing M5 West from 2026 (when the current concession
ends) until 2060.
Some freeway agreements have included clauses which restrict the
government's freedom of action, in order to reduce risk for the private
operator. The original tolling contract for the Sydney M2 (later revised)
included 'no compete' clauses which would discourage the building of a
competitive railway line for decades to come.
The agreement for CityLink in Melbourne included the right to seek
redress if improvements to public transport reduced the traffic using the road
or if freight was carried on the airport rail link. Transurban used this material
adverse effects clause to sue the Victorian Government over the 1.9 km
Wurundjeri Way road Docklands Development, claiming it was competing with
CityLink. Transurban was unsuccessful in this case.
However, the government did agree to pay compensation for the widening of the
Westgate freeway and the Monash freeway.
Transurban resisted deletion of the CityLink clause as a condition of the
Westgate Tunnel project agreement.
No provision of this sort was included in Melbourne's Eastlink
agreement, but the agreement is framed in terms which create an incentive for
government to increase road traffic.
The clauses mentioned above transfer the patronage risk to the
government. In the case of the extension to the CityLink tolls to fund the
Westgate Tunnel project, the Grattan Institute's submission suggests [p. 3]
that the tolling period can vary according to the actual cost, not the
contracted price, of building the road. That is, the project risk is also transferred
to the government.
Specific example: Westgate Tunnel project, Victoria
The submission of Mr William McDougall makes a detailed criticism of the
processes the Victorian government used in assessing the proposal for the
Westgate Tunnel project. He also argues that the actual model used does not
allow sufficiently for changes in traffic flows as a result of the effect of
the new road on the transport network, and thus has produced higher forecast
traffic flows. He asserts that reviewers' comments on this were not addressed
Mr McDougall also criticised the methodology for a cost-benefit analysis
prepared by PwC. Specifically, he took issue with the assumptions regarding
motorists' valuation of time saved, the treatment (or non-inclusion) of induced
traffic, and the treatment of land use changes which produced more favourable
results in the early years of the project.
He concludes that the work of assessing the Westgate Tunnel and other
projects was actually a process of justifying them after the decision was made.
He considers that there was at least 'optimism bias'—and possibly deliberate
distortion and misrepresentation of traffic forecasts and the economic benefits
that flow from them in the appraisal process. He asserts that the process lacked
transparency, objectivity and completeness.
The Grattan Institute also criticises the processes associated with the
Westgate Tunnel project. It argues that the cost of financing the project
through a PPP is higher than if it were funded by government, because
government can borrow more cheaply than private players. This higher cost would
be justified if the private sector were bearing the risk, but in fact:
...there is a reasonably foreseeable risk of a cost overrun,
such an overrun could be substantial, and this risk is being borne by future
The Grattan Institute also says that there has been a lack of
transparency in the processes. It asserts that the government committed to the
project '...before the newly-established Infrastructure Victoria was in a
position to assess its merits'. It notes that the business case that has been
released is heavily redacted, and that funding the project through extension of
concessions on other projects makes it difficult to work out how much the Victorian
public will be contributing. It notes that the consultation on the
Environmental Effects Statement is limited to 30 days.
Setting the levels of tolls
Tolls are set at the outset of an agreement. It is primarily a
commercial negotiation, not a policy decision:
Sydney’s motorway tolling arrangements are an easily
demonstrated eclectic mix of policy and protocols substantially based on
specific financing arrangements driven on the day by questions of economics and
politics. The public see this and are frustrated by those patronising assurances
that toll roads and the method of charging are necessary and appropriate, they
want transparency and genuine dialogue.
One result of the separate
project-linked tolling agreements is that there is little relationship between
a specific toll and the cost of provision or the added amenity of the road.
Another is that the rules vary from state to state, so that some vehicles that
are classified as cars in Queensland and New South Wales are classified as
'commercial vehicles' in Victoria and charged twice the car toll.
Tolls for heavy vehicles are usually higher than those for cars. On an
uncongested road, the marginal cost of an extra car is virtually zero, whereas
heavy vehicles cause pavement wear and damage. The amount of wear and tear
increases exponentially with weight.
However, there are often only two rates of tolls, for cars and trucks, even
though truck sizes vary considerably.
Despite the explicit contracts, the National Road Transport Association
says that tolling methods are not transparent. It says that there is in effect
no competitive alternative because in many cases trucks are banned from side
roads. If the gains to the user were sufficient, there would be no need to
force trucks onto the motorway.
In particular, it seems that specific tolls such as those for heavy
vehicles can apparently rise much more than the formula. For example, the day
rate for light and heavy commercial vehicles on the CityLink in Melbourne were
raised by 128.2 per cent on 1 April 2017.
Similarly, in Brisbane:
...the latest toll increase publicized for HV in Brisbane on
the Clem7, Legacy Way, Go Between Bridge toll roads. A comparison was made with
car tolls, which was now 2.65 times for HV and will reach 3 with the new hike.
All these examples highlight the fact that there seems to be no scientific
basis or model available for governments to negotiate with toll companies in
PPPs or to determine optimal toll for trucks looking at system optimisation,
which leads to [a] very inefficient HV transportation system.
Navigation: Previous Page | Contents | Next Page