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Where to now for toll roads?

There have been some monumental disasters in recent Australian toll roads, virtually putting to an end to the public-private partnerships between the government and private enterprise to build major infrastructure.

Sydney’s Cross City Tunnel has gone into receivership for the second time in eight years. The Tunnel which runs just 2.1km from Darling Harbour to Rushcutters Bay, was originally forecast to attract 70,000 motorists a day back in 2005 when it opened. Only around 20,000 used it that year, and an estimated 37,000 motorists use it nowadays.

Brisbane’s Clem Jones Tunnel went into receivership in 2011, and was sold for less than one third of its $2 billion estimated construction cost. Another Brisbane toll road, Airport Link, went into administration earlier this year, while Sydney’s Lane Cove Tunnel has also gone under.

The failure of these projects has prompted state governments to review the funding model for toll roads and private sector investment in major infrastructure projects. Two new proposed tollways, WestConnex in Sydney and Melbourne’s East West Link are expected to have totally different funding models.

The NSW government has proposed a new strategy, with federal and state funding to build the first stage of the road, which will be tolled. Once real world traffic flows and cashflows have been established, the toll roads can be progressively sold off to fund subsequent stages of development.

MSW treasurer Mike Baird says the private sector would then be willing to invest because the traffic flows will be proven, reliable and bankable. That has worked out well for Sydney Airport (ASX: SYD), the owner of Sydney’s International and domestic airport.

Lend Lease (ASX: LLC) head of construction and infrastructure, David Saxelby has told the Australian Financial Review that contractors were no longer willing to take on traffic volume risk, and says the current model is broken. Thiess, which is owned by Leighton Holdings (ASX: LEI), says NSW’s model for WestConnex is the way to go.

Transurban (ASX: TCL) has expressed interest in Sydney’s Cross City Tunnel, to add to its stable of other Sydney toll roads including the Hills Motorway M2, a stake in the Lane Cove Tunnel, the Eastern Distributor, the M5 and the M7.

Foolish takeaway

A new model was needed after most toll road failures came about after overly optimistic traffic volume forecasts. Maybe NSW has found a potential solution that works well for taxpayers as well as shareholders.

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Motley Fool writer/analyst Mike King owns shares in Leightons and Sydney Airport.

 

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