Study in state toll road funding
Without an election to fight in the next 12 months, Tuesday's NSW state budget was always going to be a low-key affair: continued tight restraints on spending as it squeezes the public sector for greater efficiencies while looking to the private sector to fund selected projects.
At the macro-level, the government reckons the nation's biggest state will largely sidestep the fallout from the slowdown in the resources boom, which will play out more intensely in Queensland and Western Australia since both of these states enjoyed large upswings from the boom.
Perhaps. More notable is the optimism that the fall in interest rates will be good news for the property market and push up revenues from stamp duties. Revenue is already running at record levels, with $5 billion projected for 2013-14 and strong growth expected over the four-year forward estimates period, to top $6 billion a year.
The other fillip to revenue in the year ahead will be the sale of part of the revenue stream from state lotteries, which is yet to be finalised. This could raise several billion dollars depending on how much of this revenue stream is sold off.
After raising $4.3 billion from selling Port Botany and Port Kembla, the Port of Newcastle is now on the block. The government reckons this will raise $700 million but the final figure could move closer to $1 billion given that Newcastle hosts the largest undeveloped deep-water port in the state.
The real take-out from the budget is the funding of the proposed $13 billion-plus WestConnex road link that will run from the M4, which runs west of the city to Sydney Airport.
The proposal holds the potential to make or break the political future of state Treasurer Mike Baird. It is also something that will be studied closely by Victoria's Napthine government, which is committed to the $6 billion to $8 billion East-West link.
The government has earmarked $1.8 billion for WestConnex over the next four years, starting with an initial $111 million in the 2013-14 budget. This matches the amount put on the table by the federal government, which has insisted no toll be attached, a condition a Coalition government would remove if elected.
Key studies on how to stage this project are yet to be finalised, but the government will take the first stage on its "balance sheet" before selling it on, once toll revenue flows are known. The government has played down the risk, but it is significant.
Given the patchy record of traffic forecasts for toll roads - remember Brisbane's airport link and Melbourne's EastLink? and the initial owners of both the Cross City tunnel and the Lane Cove tunnel lost most of their money - and with investors wary about assuming too much risk in the present financial environment, the government had little choice but to fill the breach itself.
Along with construction risk, there will be political risk for the government of the day if it has to wear a sizeable "loss" from the gap between what the private sector pays for the completed project and the amount already outlaid.
Given some stages of the project will run to several billion dollars, the cost, or "losses", from sunk capital will not be small and will be exacerbated to the extent that tolls cannot capture all of the economic efficiencies from capital works projects.
Political risk will also emerge if traffic is "funnelled", or forced to use the new links, the same way the former Carr government of NSW suffered a backlash when the Cross-city tunnel was built.
InvestSMART FORUM: Come and meet the team
We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free