Academic knew best all along
"Dr Goldberg speaks as an individual and the university accepts no responsibility for his comments, which it does not endorse," the vice-chancellor, Gavin Brown, said.
This came as something of a shock to Goldberg, an academic in his 70s with doctorates in four disciplines. Via a freedom of information request with the university, Goldberg found that this disavowal followed complaints by a lobbyist for Macquarie Bank.
At the time, the infrastructure fraternity was recoiling in indignation at a Goldberg research paper that had the cheek to claim that Australia's toll-road projects were flawed and likely to fail. Goldberg pressed on.
In September the following year, he issued another paper arguing that Sydney's Cross City Tunnel, Lane Cove tunnel and the M2 motorway would not survive without continuing government subsidies and were likely to fail even then. Melbourne's City Link was in the same basket, he said.
Too much debt, a flawed financial model, inflated traffic forecasts, the lot of them. The equity would go up in smoke, he said. It was brutal stuff. Here was one man against the system - against a multibillion-dollar franchise and the finest minds in banking. Their PR people were veritably fulminating with disdain.
But Goldberg was right. One by one they tipped over: the Cross City Tunnel, Lane Cove, Rivercity's Clem7 tunnel and, as of this week, the mightiest flop of the lot, BrisConnections.
The operator of Brisbane's Airport Link bit the dust on Tuesday morning with $3 billion in debts.
As a sharemarket performer, BrisConnections is quite peerless. Not only did the share price head promptly to zero, it had the uncommon distinction of trading well below zero as its hapless shareholders were obliged to stump up for another two instalments.
Goldberg had always said that the financial model for these things was not built on traffic forecasts, rather the traffic forecasts were built to fit the financial models.
In the case of BrisCon, the traffic expert was ARUP. ARUP forecast 135,000 vehicles a day would use the Airport Link a month after it opened. That would swell to 190,000 within six months of operation.
At last count, about 45,000 vehicles a day were using it, 90,000 fewer than forecast. ARUP was paid $4 million.
In virtually every toll road deal the traffic forecasts overshot by a mile.
Governments don't come in for a lot of praise, especially around these parts. Though when it comes to toll roads, the bureaucrats have the better of the bankers. The public has been well served in negotiations - in Queensland, Victoria and NSW alike.
It has been, in every case, the equity holders in the projects - the likes of BrisCon shareholders - who were carted out first. Then the big lenders took their haircut. Yes, assorted governments have tipped in here and there with a leg-up on the tax front or a spot of cash as was the case with BrisCon, but the public has ended up with some seriously good pieces of infrastructure while shareholders and banks have worn the losses.
Take Sydney's Cross City Tunnel. It may be unperturbed by the presence of cars but it is a first-class piece of engineering nonetheless.
John, if you're reading this, don't worry about answering those questions. It's a bit late now anyway; we'll just have a stab at the story. Better to use a spot of imagination anyway than write some turgid financial services yarn.
The last time we tried to contact John Brogden, chief executive of the Financial Services Council (FSC), one of his assistants said she didn't know where he was. This sort of thing happens a bit. We tried back a couple of times.
Alas, John's spokesperson still didn't know where he was. It was then that your correspondent began to get a mite concerned. We suggested to the assistant that, as John had been missing for three days, it might be time to contact the police. She said she didn't feel it was necessary to file a missing-person report.
This was last year. This week, John happened not to be about again, so one of his assistants said they would answer on his behalf. Mysteriously, this never ended up happening. No matter. It was just a question or two about the loopholes in the Future of Financial Advice reforms that might allow for conflicted remuneration to continue in financial planning. You know the thing, dirty big trailing fees and so forth.
No big deal. The loopholes would not be open to every financial planner, only the big "platforms" - the big banks in other words. And they would only pertain to a few lazy billion in volume rebates.
On a closing note, you would have thought that the FSC - which is the peak body for the financial services industry - would be crowing from the rooftops this week since it just had a big win. Its nemesis, the industry super mob, likes to publish tables showing their investment returns are superior.
On a rolling one-year basis though, the median return of retail master trusts was 12.4 per cent compared with the industry fund return of 11.86 per cent. They finally won? Although, on a three-, five-, seven- and 10-year basis, industry funds still beat their glamorous rivals - a difference in performance that is thought to come down to fees.
Frequently Asked Questions about this Article…
John Goldberg is an academic cited in the article who argued that several Australian toll-road projects were deeply flawed. He warned that too much debt, inflated traffic forecasts and a flawed financial model meant projects like the Cross City Tunnel, Lane Cove Tunnel, M2, Melbourne’s CityLink and BrisConnections were likely to fail without ongoing government subsidies.
BrisConnections, the operator of Brisbane’s Airport Link, collapsed under about $3 billion of debt. For investors this meant the share price fell to zero and some shareholders were forced to pay further instalments, wiping out equity holders while lenders later took losses — a cautionary example of how toll-road investments can fail when traffic and finances don’t match forecasts.
The article highlights that traffic forecasts were widely optimistic and often overstated usage. In many deals forecasts 'overshot by a mile' and, according to Goldberg, forecasts were sometimes shaped to fit financial models rather than the other way around. This mismatch between forecasted and actual traffic undermined revenue and contributed to project failures.
ARUP forecast 135,000 vehicles per day a month after opening, rising to 190,000 within six months, and was paid $4 million for its work. In reality about 45,000 vehicles a day used the Airport Link — roughly 90,000 fewer than the initial ARUP forecast, illustrating the scale of the forecast error described in the article.
According to the article, equity holders (shareholders) were usually the first to be wiped out. After shareholders were carted out, big lenders often took haircuts. Governments sometimes provided tax or cash support in places, but overall the public ended up with infrastructure while shareholders and banks absorbed most of the financial losses.
The article mentions several toll-road projects that struggled or failed: Sydney’s Cross City Tunnel, Lane Cove Tunnel, the M2 motorway, Melbourne’s CityLink, Rivercity’s Clem7 tunnel and BrisConnections (Brisbane’s Airport Link).
The article notes concerns about loopholes in the Future of Financial Advice reforms that might allow conflicted remuneration to continue for big 'platforms' — effectively the big banks. Those loopholes would reportedly affect only a few large volume rebates and not every financial planner, raising questions about trailing fees and conflicted pay in financial planning.
On a rolling one-year basis the article reports median returns of retail master trusts at 12.4% compared with industry fund returns of 11.86% — a rare short-term win for retail trusts. However, industry funds still outperformed on three-, five-, seven- and ten-year bases. The article suggests the longer-term outperformance of industry funds is thought to come down largely to lower fees.
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