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Sep 2, 2010

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Selected road and rail infrastructure projects (data from The Australian)

It was reported this week that the new Clem Jones Tunnel in Brisbane (known as the Clem7) is in diabolical financial trouble due to traffic levels that are well below those forecast.

Fewer than 30,000 vehicles a day are using the tunnel even though tolls were halved from 1 July (now $2 for a car). This compares with a forecast of 60,000 on opening, rising to 100,000 after 18 months. The operator of the tunnel, Rivercity Motorway, posted a $1.67 billion loss for the year to 30th June.

Clem7 joins a growing list of infrastructure projects funded on the basis of overly optimistic forecasts of initial usage. These include Sydney’s Lane Cove and Cross City tunnels, the Brisbane and Sydney airport trains, Melbourne’s Eastlink, and the 2,250 km Freightlink rail line connecting Adelaide and Darwin.

The Age’s Matt O’Sullivan is gob-smacked that Clem7’s transport consultants could have forecast traffic levels higher than those on New Yorks Midtown Tunnel, given that Brisbane’s population is a quarter of the City of New York’s:

“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”.

What strikes me immediately is that this is not a sensible comparison. It’s highly likely the Midtown Tunnel is at capacity and probably has been for a very long time.

Usage of Sydney toll roads (source: Independent Inquiry into Public Transport)

There are also quite a number of road projects in Australia that carry as many or more vehicles as were forecast for Clem7. For example, the Gateway Bridge in Brisbane carries 100,000 vehicles per day. As the accompanying table shows, the M2, M5, M7 and Harbour Tunnel in Sydney all carry around 100,000 vehicles per day (the toll on the M4 was removed this year).

Sure, Sydney’s population is twice the size of Brisbane’s but then again it’s only half that of the City of New York. It seems that the relative populations of cities is not a very good indicator of likely traffic flows on toll roads.

A better explanation for what’s really going on with these flawed forecasts appears later in O’Sullivan’s article – the system of tendering for Government infrastructure projects encourages overly-optimistic predictions.

The investment bankers and consultants who put together the deals get most of their fees irrespective of whether or not the forecast patronage materialises after construction. If their clients don’t get the project, they don’t get their hefty bonuses (total fees for the float of River City were $50 million).

Another likely reason is that the bidding process gives rise to a degree of “irrational exuberance”. I know of cases involving consultants who advised losing bidders on major high-profile infrastructure projects. In a number of cases they were gob-smacked by the size of the bid tendered by the winner and not surprised when the winning tenderer subsequently experienced financial problems.

I’m happy that investors rather than tax payers are the ones who’ve taken the biggest bath. Their failure means however that it is getting harder to attract private investors to new “greenfield” infrastructure projects. More of the risk is being put back on Government, as exemplified by the way the toll-free Victorian Peninsula Link road project has been structured. As O’Sullivan describes it:

“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 old private-public partnerships arrangement, the Victorian government will make periodic payments to the builder to maintain the 25-kilometre Peninsula Link once it’s operational, irrespective of traffic”.

It’s worth noting that overly optimistic forecasting is not confined to infrastructure companies bidding on Government projects. Lobby groups for both roads and public transport are also inclined to gild the lily when it comes to claims about future patronage and costs.

This is not really surprising – the combination of moral right and a feeling of coming-from-behind is likely to foster a degree of hyperbole (as we’ve just seen in the Federal election!). Boosters also have no ultimate financial or political responsibility and know their claims are unlikely to be interrogated by the media to the same degree as those of politicians. Exaggeration is routine on all sides, it seems.

Alan Davies — Editor of The Urbanist

Alan Davies

Editor of The Urbanist

The Urbanist is edited by Dr Alan Davies, a principal of Melbourne-based economic and planning consultancy, Pollard Davies Consulting.

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14 comments

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14 thoughts on “Why do major infrastructure projects fail?

  1. Andrew

    Interesting article Alan, but I cant help but notice your bias (or lack of balance) throughout.
    You could have just as easily titled the article “Why do major infrastructure projects succeed” using Sydney’s M4, M5, M7, Eastern Distributer, Melbourne’s Citylink, etc, etc to sustain that argument.
    Interestingly you included some of these infrastructure projects in your toll road usage stats but noticeably selectively not financial tables.
    Had you been balanced and all-encompassing with your data, I suspect you may have come to a very different argument…perhaps along the lines of comparing the success of those toll roads that have an economic purpose (linking commercial centres and critical destinations – eg M7, Eastern Distributer, CitytLink, etc) vs those with a social or political purpose (eg taking traffic off the free road – eg Lane Cove, Clem7, etc). The formers’ traffic is linked to both population and commerce, the latters’ traffic grows with only population and market acceptance. That is, commercial traffic values time immediately and can make an easy toll vs time argument, while private traffic values time after experience.
    A second element you ignored was construction, ie the outcome of having a PPP style competitive engineering process on design, utility and cost outcomes, and fixed price contracts vs unconstrained construction contracts – but we’ll leave those for another time.
    Finally, to address your populist argument of “blame the bankers”…sure, bankers get paid a fee for construction guaranteeing availability of capital and lenders get paid interest for providing debt. And many, including me, think some get paid too well, when a project is successful. Hardly earth shattering conclusions. However equally, when it comes to underwriters have to step in and pay equity commitments and lenders write off debt for unsuccessful projects, at amounts which are many multiples of the initial fees, your silence is deafening.
    In summary, I give you good marks for encouraging discussion, but poor marks on effort. I encourage you in future posts to avoid populist arguments and consider a more comprehensive analysis of all data. You might surprise yourself with what you learn.

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