Westconnex: Buyer beware

09 November 2017 - 12:00 am UTC

Australia’s biggest motorway, Westconnex, is up for sale to the highest bidder. But dig a little deeper and the scars of a disjointed, haphazardly planned infrastructure nightmare begin to emerge, Kate Burgess investigates.

The trouble with the dark art of traffic forecasting is that any guess as to how many cars will use a new motorway will invariably be wrong.

Sydney’s sordid love affair with cars and its ever-expanding motorway network has revealed deep flaws in the predictive ability of traffic modellers, and over the years has left a string of casualty projects in its wake. 

In Brisbane, vulture lawyers are still picking over the carcass of BrisConnections, the road company that failed building the AirportLinkM7 in 2013, as engineering firm Arup and deal mastermind Macquarie Capital sue each other over the AUD 4.8bn (USD 3.7bn) bankruptcy. 

This and three other spectacular tunnel collapses across the two cities – including Cross City, Lane Cove and Clem7 – should have taught savvy investors a thing or two about buying toll roads. Namely, that taking a punt on the traffic numbers is a mug’s game. 

Groundhog Day
Fast forward to today and New South Wales is dangling its biggest ever privatisation carrot in front of salivating infrastructure investors craving the next major deal. 

On paper, the 51% sale of the company in charge of the AUD 16.8bn WestConnex motorway network looks nothing short of irresistible. NSW is touting WestConnex as the solution to Sydney’s congestion woes, a 33km integrated network that will be “creating jobs and connecting communities”. 

Not only will the new owner be able to collect tolls from motorists travelling on its freshly upgraded existing M4 and M5 motorways, it will score the state’s lucrative E-tolling franchise and earn revenue from a future connecting tunnel between the two corridors, the M4 / M5 link. And it will put the owner in the box seat to take charge of future network expansions including the planned F6 and Beaches Link.

It all sounds picture perfect. But peer ever so slightly beneath the veneer of the state’s hyperactive PR machine, and things get ugly pretty quickly. 

WestConnex just happens to be the most unpopular infrastructure project in the state’s history, and faces a momentous community backlash over its muddled planning process, botched land acquisitions, significant scope changes and a frustrating lack of transparency. 

MPs and local governments want the controversial third stage dumped and alternative transit solutions looked at. Opposition comes from the City of Sydney as well as local governments in the city’s Inner West district – under which the planned linking tunnel travels – and councils in Western Sydney, whose residents will be slugged with up to five new tolls when the entire project is completed in 2023.

The root of the community outrage traces back to a pivot turn in the project’s design earlier in the decade. First envisioned to connect the sprawling suburbs of Western Sydney with the city centre, airport and Port Botany in the east, Infrastructure NSW advised the Liberal government in 2012 to include links to these precincts in its “First things First” strategy blueprint. 

But direct links to the port and airport were later removed, and successive changes made to the route – of the expanded M4 and M5 and new interchanges at St Peters and Rozelle – have blown out the motorway’s original AUD 10bn cost by AUD 6bn, leaving local communities reeling in angst. 

“In its most simple form, the very fact that it cannot do what [the government] said it would do from the very beginning shows that this project has lost its way,” MP for Inner West council Strathfield and a member of the opposition Labor party, Jodi McKay, tells Inframation.

The crucial port and airport link dubbed Sydney Gateway, along with the Rozelle Interchange that will link a new tunnel east of the M4 with the M4 / M5 link, have been carved out of WestConnex and will not be included in the 51% sale of Sydney Motorway Corporation (SMC), this news service understands. 

The state Roads and Maritime Service has now been tasked with building the Interchange after the government received only one bid when it first tendered for the combined works package. 

McKay argues the Gateway and Rozelle Interchange make up a sizeable part of Stage 3’s AUD 8bn cost, so the latest AUD 16.8bn estimate can’t be relied on.

“There’s been changes in the rhetoric of what portion of the funding is included in the overall project budget versus what it is going to cost.”

The route of the M4 / M5 link has morphed twice since an updated business case was released in November 2015. Planned exits halfway through the tunnel at Parramatta Road in Camperdown were scrapped, so all traffic will continue on until a planned spaghetti junction at St Peters is completed. 

Pedal to the metal
Under the Restart NSW infrastructure plan, the government planned to build the motorway in three discrete stages, wearing the construction risks and selling the first stage to fund future stages.  

The logic was that traffic on each stage would be known, making it easier for aspiring owners to predict its value. 

But the lure of a big federal funding injection in 2014 in the form of an AUD 2bn concessional loan put a rocket under the second stage. Works began almost immediately on duplicating the eastern section of the M5. 

Last year, NSW decided to hive off the motorway, including the unbuilt third stage, in its entirety. Fearing it would fail to lure enough buyers to splash out on the multibillion dollar behemoth, it later bowed to pressure from fund managers to only sell 51% of SMC.

Member for Newtown, Jenny Leong of the Greens Party, says the rushing of the later stages and the upcoming sale has invalidated earlier environmental approval processes and means the merits of the project as a whole have never been assessed. 

“As this has progressed, we have got more and more removed from what is the original plan, and the original intention, and we have got a whole lot more questions because actually the design itself keeps shifting and changing. 

“At what point do we reassess whether the benefit-cost ratio is still accurate? At what point do we say the traffic modelling made in stage one reflects the reality because of changes made now in stage three?”

All of the changes have put a wrecking ball through the original traffic estimates made in the business case, leading Citi analyst Anthony Moulder to declare last month the government figures are a full 10% too optimistic.  

Investors watching the sale reckon Sydney traffic patterns are highly unpredictable. “I think all you can say is [the traffic estimate] would be wrong,” says one infrastructure fund manager. 

“The inclination as an investor would be to say ‘let’s start with somewhere really low and say let’s share the risk’ because let’s be honest, nobody knows where that is going to land. And the reality is there are very few people with the knowledge and information to assess Sydney traffic and this is where there is not a level playing field.”

Fluid dynamics
ASX-listed Transurban is widely tipped as the favourite to win the auction, which kicks off on Monday after bidders lodge Expressions of Interest. Owning WestConnex would cement the toll road company’s dominance in Sydney, where it owns the bulk of network roads including the existing M5 and M7 Orbital, and has multiple concessions in Brisbane and Melbourne. 

Rivals are keenly watching how Transurban will assess the potential for traffic flows on the unbuilt third stage and M4 East tunnel that is under construction, and say this will be the deciding factor in the contest. 

This is where the winner of the auction may well “blow their brains out”, as those in the industry describe the tendency to over-juice the traffic numbers and pay too much. 

“What are bidders actually buying? You’re buying a partially completed upgrade of the M4 and M5 and then you’re buying two greenfield projects,” another fund manager says. 

“For [this] element of the project there is no direct observable traffic history. There’s lots of assumptions needing to be made and the government has been mindful of that.”

The government is cannily dressing the project’s greenfield and brownfield elements in what it terms “khaki” in an effort to lure bankruptcy-scarred investors back into the sector. 

How motorists are going to react when WestConnex is finished is anybody’s guess. Those heading to the airport may be slugged an extra toll for using the Sydney Gateway, which Lendlease is understood to be angling to build separately. NSW has pre-empted any fallout by saying it will cap tolls on WestConnex at AUD 8.60, but other motorists will also pay tolls on feeder roads such as the M7 and M2. 

Western Sydney councils are already on the attack about the planned toll increases, leaving investors worried about demand “elasticity” – put simply, the risk that motorists will boycott the road if they believe they are being ripped off. 

Sydneysiders have form in voting with their wheels. They sent the Cross City Motorway bankrupt in the mid-2000s on anger about changes to surface roads designed to force more to use the tunnel. 

RBC Capital markets analyst Paul Johnston has described WestConnex as “the last meaningful opportunity” for a big infrastructure group other than Transurban to enter Australia and pursue other growth options such as Sydney’s proposed Western Harbour Tunnel.

The Netflow consortium is the sole credible rival whose members have amassed enough chest hair in Australian toll road projects. The pairing of Spanish concessions group Cintra and developer Plenary Group has backing from Canadian pension funds. And some of its bid team can trade their DNA back to ABN Amro masterminding the now-defunct Lane Cove and Cross City deals in the mid-2000s. 

Other internationals, including Spain’s Globalvia and China’s Shandong Hi-Speed Rail group, are also understood to be circling. Local infrastructure managers are either steering clear (such as AMP Capital and Hastings Funds Management) or are yet to show their hand (including QIC and IFM Investors). 

NSW has said it wants to wrap up the sale in time to bank the proceeds for the 2018-19 state budget in June next year. It will allow the money raised to be ploughed into a plethora of new transport schemes including the Sydney Metro, Parramatta Light Rail and Sydney West Metro, as well as future motorway extensions. 

Heavy lifting
While it would take a lot to derail the third stage, as the Greens and City of Sydney are lobbying for, it will be far from smooth sailing for the new owner when it takes control of WestConnex. 

A tender for the contractor to build the third stage hangs in the balance, as does the tunnel’s final design and environmental approval. NSW has shortlisted two contractors to build the M4 / M5 link and has had to use a public contractor for the technically difficult Rozelle Interchange after receiving only one bid.

Local councils say the new contractor for the M4 / M5 link will have the right to more changes in the design, which may involve more properties being acquired, and claim there are no plans to consult the community again if this happens. 

A spokesperson for WestConnex Minister Stuart Ayres said the community had been “adequately consulted” throughout the project, so further engagement was not needed. 

NSW will still manage community relations for WestConnex because it will remain a 49% shareholder in SMC, but the new owner will face reputational risk as the public face of one of Sydney’s most reviled infrastructure projects ever.

Opposition and minor party MPs say NSW is anxious to move on from the successive WestConnex scandals and would sell the whole of SMC if it thought enough bidders would compete for it. 

“It’s become clear that this project is a toxic one and has a whole lot of risks associated with it, simply because of the huge community campaign that has been exposing huge problems about this,” Leong says. 

McKay says Labor is opposed to the third stage but declined to confirm whether the party would tear up the Stage 3 D&C contract if it wins government at the March 2019 state election.

“My advice to companies looking at bidding for this is Labor has a very different agenda to this government. You’re 13 months from an election, when this is finalised you’re nine months out.”

“The government hasn’t convinced people in Western Sydney of its value, which is what they intended to do. No matter where you look in Sydney, it’s an unpopular project. It’s a fire sale.”

Labor state governments have in the past torn up signed PPP contracts, including the AUD 5.3bn East West Link in Melbourne which Premier Daniel Andrews annulled after winning office in 2014. 

If investors are concerned about sovereign risk, they are hiding it well. 

“It’s a heavy lift if you’re going to [own WestConnex]. It doesn’t frighten us though because this is what you do if you buy into an operating business,” the first fund manager said. 

While the sale may seem like a good option for the government to rid itself of WestConnex, time will tell if it can break Sydney’s losing streak of epic tunnel project fails. 

“You can think you’ve transferred the risk if you’re government but if you haven’t structured the sale and thought deeply about it, it will come back to you like a boomerang,” the investor says.

“And this has a real boomerang feel to it.”