Nov 14, 2012

Why does yet another toll road look like it might fail?

Brisbane's Airport Link toll road is the latest in a growing list of major transport projects in financial trouble because traffic forecasts pitched to investors now seem wildly over-optimistic

Alan Davies — Editor of The Urbanist

Alan Davies

Editor of The Urbanist

Comparison of forecast and actual traffic for major road projects (source: Courier Mail)

Brisbane’s Airport Link tunnel appears to be in serious financial difficulty only a few months after opening.

According to yesterday’s Courier Mail, the owner of the toll road, BrisConnections, has suspended all trade in the stock indefinitely, “after advising the Australian Stock Exchange the value of the enterprise may be less than the outstanding debt.”

By now, 136,000 vehicles per day were forecast to use Airport Link at the end of the initial three month toll-free period. But on October 18 – the first day tolls were introduced – traffic was only 53,000 vehicles per day.

That’s despite the toll being discounted to $2.50 for the entire length of the 6.7 km road (5.7 km in tunnel). Average traffic for all of October is only 66,203 per day.

Airport Link is not alone in experiencing traffic well below forecasts. The Courier Mail also published a table of troubled recent road projects (see exhibit).

Conveniently, it updates my equally sobering table of road and rail projects from two years ago (Why do major infrastructure projects fail?). The poor initial performance of both the Sydney and Brisbane airport rail projects suggests getting the demand right is not solely a roads problem.

Back in July, Brisbane transport modelling firm Veitch Lister Consulting released the results of (independent) modelling showing estimated traffic on Airport Link should rise to around 85,000 vehicles on a normal weekday (during school term) by April 2013. From that date the initial discounted toll will be replaced by a “medium toll”.

Veitch Lister estimates demand should drop to around 72,000 vehicles per day by October 2013 . However by November 2013 when the ramp-up to “full tolling” will be complete, the firm estimates the road might carry in the region of only 60,000 vehicles per day.

That compares with BrisConnection’s Product Disclosure Statement, which said 195,000 vehicles were expected to use the road 15 months after opening.

Veitch Lister also provided traffic modelling for Brisbane’s ill-fated Clem7 tunnel. However the Courier Mail says their modelling “was not used by the successful bidders, RiverCity Motorway.” Clem7 currently carries around a quarter of the traffic assumed by RiverCity Motorway.

There seems to be a systemic issue with forecasting demand for major transport projects. Maybe the incentives for over-optimism on the part of the promoters are too strong.

The way projects are put together appears to underestimate demand risk. As this press report from back in 2010 notes, “despite the failure of projects elsewhere, BrisConnections is sticking resolutely to the optimistic predictions for the Airport Link.”

Perhaps part of the problem is many of those involved in putting together major projects get most of their fees irrespective of what ultimately happens with patronage. The total underwriting and associated fees mentioned in the Airport Link Product Disclosure Statement were $89 million.

Professor John Goldberg says investors have put $23 billion into 11 toll roads across Australia since 1994 for a small or negative return on equity in each case. The Courier Mail reports him writing:

The public-private partnership concept has failed in Australia and should serve as a warning to superannuation funds of the high risk of investment in road infrastructure. A common flaw in the failed tolls roads and, notably, Airport Link, is the use of a “work back” philosophy to forecasting traffic numbers….The promised return on equity to investors is a starting point used to work back to how much revenue must be generated from the expected daily flow of vehicles, which has been inflated to wildly unrealistic targets.

Although I expect it’s primarily an institutional problem, there may also be technical weaknesses in demand forecasting. A key puzzle with Airport Link is why so many drivers elect to take a longer surface route rather than pay what is a very modest toll.

This phenomenon isn’t new. There’s a long history of motorists, including commercial vehicle operators, going to extraordinary lengths to avoid using toll roads.

BrisConnections estimates Airport Link provides a 12 minute journey time from Bowen Hills to Toombul, compared to 25-29 minutes on alternative routes. The toll is much lower than conventional estimates of the value of the time drivers could save by using Airport Link.

On the face of it, drivers who don’t use the toll road are behaving “irrationally”. Perhaps many aren’t as good at estimating the value of their time as theory assumes. Or maybe there’s a quirk of human psychology at play – possibly many simply don’t see money and time as being readily interchangeable.

That’s one reason why congestion pricing is a more effective way to manage traffic demand than congestion. Direct charges are a psychologically more potent deterrent to driving than the “equivalent” time lost sitting in traffic. That understanding might also have implications for the way estimated travel time savings for proposed major projects are valued.


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12 thoughts on “Why does yet another toll road look like it might fail?

  1. Ben Aveling

    “On the face of it, drivers who don’t use the toll road are behaving “irrationally””

    I’ve come to the conclusion that (up to a point) people don’t actually mind being in cars. You’ve got privacy, you’ve got the radio, you’ve got aircon. You’re sitting down. You don’t have to do anything more physically or mentally difficult than turning the wheel occasionally and pressing a few pedals. No-one and nothing is bothering you as much as if you were at work (or at home, for some people).

    Tolls come out of after tax salary. The average wage might be $28/hour, but the median wage is less than that. How much time can you save in 6.7km? 5 minutes? 10 minutes? If you could pay $2.50 to save 10 minutes, that’s still the equivalent of paying $15 per hour to avoid an activity that most people find, if not pleasant, than far more pleasant than (say) being at work. And if you’re a worker on the average wage paying $2.50 to save 5 minutes, then I’d suggest you’re possibly the one being irrational.

  2. Dudley Horscroft

    Re Scott Grant at 8. The takeover of the Sydney Railway Company was not a Public Private partnership. A straight forward takeover of a bankrupt organization – one badly run and gold plated. Badly run – why else did they go for standard gauge, change to Irish gauge and then back to standard. Gold plated – double track and massive works for a railway with no traffic! NB, the first railway in Melbourne – Flinders Street to Port Melbourne – was profitable and remained so till it was nationalized.

    That said, the overestimation of demand for road projects and the willingness to pay seems to be worldwide, or at least an anglospeak problem. Back in the dark days, the Ministry of Transport (UK) decided that the cost of time for motorists should be four times that of bus users, hence savings of time for motorists were grossly overvalued. The trouble is that people are economically logical. If they don’t consider that saving a minute is worth $X they won’t pay it, no matter that someone has guessed that it is worth $2X.
    Demand forecasts for busways in the USA have been woefully excessive, whereas forecasts for new light rail systems have usually been underestimated. Busways in Pittsburgh and Los Angeles have rarely managed to get 50% of the forecast demand. Costs are also wildly underestimated, witness the Big Dig in Boston, which was supposed to cost around $2.5B and is actully costing around $24B. In LA the Long Beach light rail is now carrying up to 80 000 passengers per day, whereas the parallel busway is lucky if it manages to carry 5000 in a day. Most light rail projects in the States have exceeded their expected traffic – Charlotte has I believed doubled the forecast. People prefer rail and will use good rail services if available, while they will prefer a car to a good bus service (if they can park at the other end) and will happily sit in their airconditioned car listening to the radio rather than pay $5 to get a move on. There are reports of motorists in SF lining up at the approaches to the Bay Bridge when a peak hour charge was added to the normal toll to wait till the peak was over, even for as little as $2.00 (think that was the extra cost). Similarly the first buses after 6 pm in Canberra were far better loaded than the last buses before 6 pm when ACTION operated peak fares.

  3. Steve777

    While Public-Private partnerships have delivered some fine and essential pieces of infrastructure (and I count the Sydney harbour Tunnel, M2/M7 and Lane Cove Tunnel among these), the model being used is highly flawed. I can’t see it lasting, given the history of investors losing their investment. The other fault is the nature of the contracts, which require restrictions on local roads and public transport in an attempt to force people onto the new road, although of course it is not acknowledged that this is the purpose of the restrictions. The strangulation of Epping Road in association with the Lane Cove Tunnel and restrictions in local roads in the Darlinghurst area for the Eastern Distributor are examples. In effect, the new piece of infrastructure is in part replacing rather than adding to the road system. Part of Epping Road was turned into a bike path, but I suspect that flower beds or market stalls would have been just as good from the point of view of the contractors, as long as the alternative to using the tunnel was severe congestion.

    Maybe we should have separate contracts for building and for managing new infrastructure. A new model for managing new infrastructure without distorting decisions regarding existing roads or public transport is essential.

  4. Krammer56

    All so true!

    Financiers run the bids and get massive fees for success, so try and win at any (body else’s) cost.

    Winning a competitive process requires a massive optimistic bias, so costs are under-estimated and revenues over-estimated.

    Many modellers really don’t know what they are doing in this space. They are often mathematicians, not transport planners, so don’t recognise patently silly answers (same with the financiers, lawyers, bankers, builders, etc).

    The economist’s view of the value of time does not match the user’s view.

    However, the backers of future bids will eventually learn. This doesn’t bode well for the suggested EW Tunnel in Melbourne.

    And Eddington alreasdy acknowledged it couldn’t be built without the State tipping in – I suspect the State’s share just got bigger (again)!

  5. Scott Grant

    In 1849, the Sydney Railway Company was incorporated to build and run a railway between Sydney and Parramatta. In 1851 work began on the first stage from Haymarket to Haslam’s Creek (now Lidcombe). By 1854, two subcontractors had failed, and an act of parliament was passed for the NSW government to acquire the Sydney Railway Company. The first train arrived at Parramatta in 1855. Thus began the NSW Government Railways. An early example of a Public Private partnership.

  6. dazza

    I have no confidence at all in financial wizards/economists making decisions they know nothing about. It’s outrageous how Campbell Newman could fall into this trap, considering the world wide damage done by these same fraudulent bankers/financial institutes. These mafia types are responsible for the fraud they have created, and yet are protected by the governments…

  7. pedals

    So now we have an ever growing infrastructure backlog and paralysis about which projects to choose. Seems certain however that any future ppp that got up would be seriously stacked towards the private sector. The public sector would get squeezed but somehow still be expected to be grateful for the ‘deal’.

  8. johnb78

    Pretty much for as long as there have been privately funded infrastructure projects, promoters have massively oversold them for the reasons Alan identifies, and investors have lost money. The first ever heavy rail boom and the first ever mass transit boom are excellent templates for everything that followed.

    The same sorry pattern will continue for as long as governments are cheapskates and investors are gullible, ie forever.

  9. Gavin Moodie

    @ Regional Resident

    A great point, which I have filed for future reference, which will be cited appropriately.

    Let us not forget that the Mayor of Queensland lumbered BrisVegas with this tunnel, and several other very expensive private road developments, when he was Mayor of Brisbane.

  10. suburbanite

    “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”

    The reluctance to pay for tolls is probably a psychologically barrier created by the fact that we are not routinely required to pay to use roads. It does seem illogical in the grand scheme of things, especially given the small amounts tolls are compared to total ownership and running costs of a car.

  11. melburnite

    Sounds like economists (in this case the forecasters) still assuming that people will behave in a ‘logical’ manner, when of course, people are often illogical, even to their own detriment. Some focus groups would have helped !

  12. Regional Resident

    Alan I’m not sure that it’s a ‘quirk of human psychology’ for alot of people to not think of time and money as interchangable, at least not in both directions.

    While it’s easy to turn money into time, such as driving versus walking, or devlivery versus pickup, alot of people don’t have an easy option for turning excess time into money. Alot of wage slaves (myself included) don’t get paid more for putting in more hours at work. It may factor in at a performance evaluation and result in more money in the future, but for me it never results in more money in the bank in the short term.

    Sure I could try and find a second job, or make money from a hobby or some such, but those are never easy options, they can take large investments of time, and the time to money ratio may be relatively poor.

    So while it’s generally held that “time = money” for alot of people they don’t have to practical way of turning ‘excess time’ into money. They are instead more likely to avoid turning money into time as a method of ‘making’ money (a dollar saved in a dollar earned!).

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