The toll roads that turn into money pits

It is not easy finding people who will put Brisbane in the same league as New York. For a start, its population is less than a quarter of New York's five boroughs, which include Queens and the Bronx. In virtually every respect, the Big Apple dwarfs the Queensland capital.

Yet traffic forecasters predicted that thousands more motorists would use the new Clem7 tunnel under the Brisbane River every day than another four-lane artery in New York linking Queens with central Manhattan.

Running under the East River, the two-kilometre Midtown Tunnel has had about 80,000 vehicles passing through it each day. And it has been that way for much of the 70-year-old tunnel's life. Half a world away in the Sunshine State, well-paid traffic forecasters had predicted that 91,000 vehicles daily would use the Clem7 by now and, by late next year, more than 100,000.

Maunsell, the consultancy firm that did the forecasting for the 6.8-kilometre tunnel, was so bullish that it even predicted the Clem7 would notch 116,000 daily trips within six years. All this in a state where the locals are known for their disdain for dipping into their own wallets for basic infrastructure such as roads.

As it has turned out, fewer than 28,000 vehicles are now using the Clem7 - less than a third of the original predictions - even after RiverCity Motorway, the operator and builder of the tunnel, halved tolls and introduced other incentives in a desperate bid to entice motorists.

With those ambitious traffic forecasts now seemingly impossible to meet, the tunnel named after former Brisbane lord mayor Clem Jones is on the verge of following the lead of Sydney's failed Cross City and Lane Cove tunnels.

Yesterday RiverCity revealed the extent of its predicament when it posted a $1.67 billion annual loss and conceded it will have to work overtime to persuade its bankers to prop it up until mid-2012. By then, it is hoping against hope, the opening of the $4.8 billion Airport Link tollroad will channel more motorists into its tunnel.

It will be a tough ask to win over its syndicate of 24 banks. After all, RiverCity is burning through about $10 million in cash a month and, to cover its interest bill alone, needs traffic to double from its dire levels while at the same time it must reinstate full tolls.

The Brisbane tunnel highlights yet again a tragic episode in Australia's history of partnerships between governments and the private sector to build much-needed roadways and tunnels. Investors are now shunning so-called greenfield projects, pushing the burden directly back on to taxpayers. It has left governments, financiers and the industry grappling to find an alternative funding model.

So how did traffic forecasters, charging millions for their expert opinions, conclude that thousands more motorists would use the $2.8 billion Clem7 than the Midtown Tunnel? Put simply, the traffic forecasts here were made to fit the financial models.

John Goldberg, an honorary associate of the University of Sydney and a leading critic of the toll-road model, says the predictions for the Clem7 and other projects such as BrisConnections' Airport Link are the result of a "work-back from the financial outcome promised to equity investors".

"They worked out what the investor was going to be happy with in terms of rates of return, and they worked back to a set of numbers which would produce that return for investors. Such forecasts do not properly relate to the interaction of land use and transport, and it is not surprising that they are not fulfilled. Moreover, the forecasts usually correspond to congested conditions during the peak periods."

Goldberg has brought his concerns to the attention of investors and politicians for nigh on a decade yet they largely fell on deaf ears - as RiverCity's latest woes show.

In the case of the Clem7, RiverCity's then boss, Peter Hicks, said in 2006 that the company had adopted a more conservative approach to traffic forecasting after the Cross City Tunnel debacle. "We have always had a very careful approach to traffic forecasting," Hicks told The Australian at the time. "If anything, the example in Sydney has led us to put more emphasis on traffic forecasts."

After it was paid at least $2.75 million for its expertise, Maunsell (now AECOM) was replaced as RiverCity's traffic forecaster by IMIS, a Melbourne consulting firm that has been charged with reviewing the original modelling and estimate traffic volumes to 2016.

Maunsell, which has also done traffic forecasting for the Cross City and the Lane Cove tunnels, and

the CityLink in Melbourne, has refused to comment despite the former client, RiverCity, approving of it talking to this newspaper about its off-target traffic forecasts.

Traffic forecasters were not the only ones to bank handsome payouts from the project. Fees in excess of $50 million were dished out to the legion of advisers for the public float of RiverCity - ABN Amro Rothschild pocketed $39 million in underwriting and development fees, and the now failed Babcock & Brown took home a financial advisory fee of $11 million.

Even after the well-publicised failure of infrastructure projects in Sydney and Brisbane, fund managers have doubts about whether a better model will be found. "I think something has been learnt, but whether this translates to an improvement in the way things are done remains to be seen," says Will Seddon of White Funds Management. "There is definitely a place for the private sector in these type of projects, but it probably means there has to be a rethink in the way the deals are structured."

Meanwhile, governments will have to meet the huge shortfall in funding as investors run scared from putting equity into greenfield infrastructure projects. Kyle Mangini, the global head of infrastructure at Industry Funds Management, agrees the model of a bid team selling a greenfield tollroad project to retail investors is "going to be off the table for a very long time".

Toll roads that have been operating for some time are "quite dependable assets", but Mangini says "when you have no history [for greenfield projects] at all it's very difficult to predict traffic with any degree of certainty".

One option now on the lips of industry leaders is the so-called availability model used for the $750 million Peninsula Link highway in Melbourne. Unlike toll-road projects under the public-private partnership arrangement, the Victorian government will make periodic payments to the builder to maintain the 25-kilometre Peninsula Link once it is operational, regardless of traffic volume.

It also means that if motorists fail to use the Peninsula Link after it is completed in 2013 the Victorian government, rather than the private sector, ends up with a white elephant.

"What is happening is that the patronage risk is being pushed back onto government. Capital markets are saying, 'We don't want to guess what the traffic is,"' an Austock analyst, Andrew Chambers, says. "In the case of the Sydney and Brisbane tunnels, it is the equity investors that have borne the brunt of a shortfall in traffic. It is now falling back on government or it won't get built."

The chief executive of Leighton Holdings, Wal King, agrees the appetite for companies such as his investing in greenfield projects has been "very much reduced" after the recent failures. He believes projects will be able to be done under the likes of the Peninsula Link model but says governments will have to stump up more.

"The issue for government will [be whether they] have the courage to implement these under some sort of [public-private partnership] arrangement or builder-owner-operator arrangement that in fact provides a fair return for investors."

Before a better model emerges, more pain is likely in the next few years. BrisConnections grabbed the headlines over the past two years after its failed public listing in 2008 but the project it is building, the Airport Link toll road, still must meet challenging traffic forecasts when it opens in two years.

BrisConnections, through its traffic forecaster Arup, has predicted that the Airport Link will attract about 135,000 vehicles a day just a month after it opens, rising to 291,000 vehicles in 2026. But despite the failure of other projects elsewhere, BrisConnections is sticking resolutely to the optimistic predictions for the Airport Link.

As much as the legion of advisers, traffic forecasters and companies behind the failed projects share the blame, governments, too, deserve to take much of the criticism for creating a model that enabled the group with the most optimistic forecasts to win the project bids. Ultimately, taxpayers will have to shoulder a larger burden if their demands for bigger and better public transport infrastructure are met.