Outsider proves savant on toll-road projects
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 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 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.
But Goldberg was right. One by one they tipped over: the Cross City Tunnel, Lane Cove, Brisbane'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.
Goldberg always said 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 BrisConn, 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. At last count, about 45,000 vehicles a day were using it. Arup was paid $4 million.
GOVERNMENTS don't come in for a lot of praise. 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.
In every case, equity holders in the projects - the likes of BrisConn shareholders - were carted out first. Then the big lenders took a 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 BrisConn. But the public has ended up with some seriously good pieces of infrastructure while shareholders and banks have worn the losses.
JOHN, if you're reading this, don't worry about answering. It's a bit late now anyway, we'll just have a stab at the story. Better to use a spot of imagination than write some turgid financial services yarn.
The last time we tried to contact John Brogden, chief executive of the Financial Services Council, an assistant said she didn't know where he was. This happens a bit. We tried back a couple of times.
Alas, John's spokeswoman still didn't know where he was. We suggested 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's report.
This was last year. This week, John happened not to be about again, so an assistant offered to answer on his behalf. Mysteriously, this never ended up happening. No matter. It was just a question or two about 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 the FSC - the financial services industry's peak body - would be crowing from the rooftops this week since it had 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 rivals - a difference in performance that is thought to come down to fees.
Frequently Asked Questions about this Article…
John Goldberg is an academic who argued that several Australian toll-road projects were financially flawed and likely to fail without ongoing government subsidies, warning that equity would be wiped out because projects were built on unsound financial models and inflated traffic forecasts.
The article cites Sydney's Cross City Tunnel, Lane Cove Tunnel and the M2 motorway, Melbourne's CityLink, Brisbane's Clem7 tunnel and BrisConnections (the Airport Link) as projects that tipped over or underperformed relative to expectations.
The article identifies too much debt, flawed financial models, and inflated traffic forecasts — including the practice of shaping traffic forecasts to fit financial models rather than the other way around — as key causes of the failures.
Traffic consultant Arup forecast 135,000 vehicles per day a month after opening, rising to 190,000 within six months, but actual usage was about 45,000 vehicles per day; the article notes Arup was paid $4 million for its work.
According to the article, equity holders (shareholders) were wiped out or 'carted out' first, then major lenders took haircuts — meaning shareholders and banks bore most of the financial losses.
The article says governments in Queensland, Victoria and NSW negotiated outcomes that sometimes included tax concessions or cash support, and the public ultimately gained useful infrastructure while shareholders and banks absorbed much of the financial pain.
The article notes a possible loophole that could allow conflicted remuneration to continue for big 'platforms' (essentially major banks), limited to a few large volume rebates, rather than applying to every financial planner.
On a rolling one-year basis the article reports the median return of retail master trusts was 12.4% versus 11.86% for industry funds, but industry funds outperformed on three-, five-, seven- and ten-year horizons — a long-term edge the article links to lower fees.
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