Investors back model to fund roads
Former superannuation minister Nick Sherry also cautioned that super funds that opted to put money into infrastructure had to deliver returns that justified the investment, and stay divorced from political whims.
"Having been a politician, I know plenty of ... colleagues who've got their favourite road projects and bridge projects, generally to nowhere, carrying very little traffic, who would love you to invest in their political backyard infrastructure project," Mr Sherry said at a lunch in Melbourne on Tuesday.
After the failure of toll roads built under a private-public partnership model, the NSW government has been forced to adopt a new funding strategy for the $10 billion to $13 billion WestConnex road project in Sydney.
As outlined in the state budget on Tuesday, the government plans to fund the first stage of the 33-kilometre motorway as an equity investment rather than a capital grant. It then wants to fund the next stage by raising money from the private sector against the tolls on the roadway.
This model is expected to be closely studied by the Victorian government, which is committed to the yet-to-be funded $6 billion to $8 billion east-west link.
The NSW government emphasises that raising private capital once traffic volumes are known can significantly reduce the risk of forecasting usage by motorists. Toll roads such as Brisbane's Airport Link and Sydney's Lane Cove Tunnel failed because the traffic forecasts were radically overestimated.
White Funds Management managing director Angus Gluskie said retail and wholesale investors could be willing buyers of toll roads such as the WestConnex once traffic volumes were known, and the project had been "de-risked" under the NSW government's plan.
"Right at the moment we have infrastructure projects that have to be done, and we have an unwilling and gun-shy private sector - this gets around that road block," he said.
"It is exactly the right thing the government should be doing. It really just means the government holds the risk on their books for a couple of years and then just passes it on."
But he warned that future governments could be saddled with large liabilities if their predecessors underestimated the risk of construction and overstated the likely traffic volumes.
"If it is done irresponsibly, you can be creating a bit of a time bomb for future governments," he said.
"It will be important for the government to make sure, as they cost it and construct it, that they still believe it makes longer-term financial sense. They have to make sure the forecasts make it stack up."
Danielle Press, chief executive officer of the $6 billion Equipsuper, said infrastructure investments by super funds required the right return, the right risk structure and the right liquidity structure.
Frequently Asked Questions about this Article…
The NSW government plans to fund the first stage of the 33-kilometre WestConnex motorway as an equity investment rather than a capital grant, then raise private capital for later stages by securitising toll revenue. In short: government takes initial construction risk and waits until traffic volumes are clearer before selling toll-backed investments to the private sector.
Institutional investors support the model because it ‘de-risks’ projects by letting the government carry early construction and demand uncertainty. Once traffic volumes are established, private and retail investors may be more willing to buy toll assets with clearer revenue forecasts and lower forecasting risk.
Key risks include construction cost overruns and overly optimistic traffic forecasts. If costs are underestimated or traffic volumes are overstated, investors and future governments can face large liabilities. The article warns this could become a ‘time bomb’ if not rigorously assessed.
Super funds should demand the right return, the right risk structure and the right liquidity profile before investing. Former super minister Nick Sherry cautioned funds must justify investments by returns and remain independent of political pressures that might favour marginal projects.
‘De-risked’ means the government has absorbed the early uncertainties—such as construction and initial traffic risk—so that when private investors purchase the toll-backed assets later, there is more certainty around expected cash flows and usage levels.
Failures like Brisbane’s Airport Link and Sydney’s Lane Cove Tunnel show that radically overestimated traffic forecasts can destroy project economics. Investors should scrutinise independent traffic modelling and contingency plans for lower-than-expected usage.
Yes. While shifting early risk to government can unlock projects, if initial costings or traffic forecasts are optimistic, future governments (and ultimately taxpayers or investors) could inherit large liabilities. Prudence in costing and forecasting is essential to avoid creating a ‘time bomb.’
Retail investors should check whether traffic and revenue forecasts are conservative and independently verified, review construction cost contingencies, understand the timing of when the government plans to sell toll-backed assets, and assess whether the expected return compensates for liquidity and operational risks.
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