Transburban and its toll road empire

March 8, 2018
Transurban can put up its tolls by 4% a year when inflation is only 1.5%.

Karl Fitzgerald, 3CR’s Renegade Economist, spoke to independent investigative journalist Michael West ( about Transurban and its control of Australia’s toll roads.

* * *

Let’s start with some numbers: traffic was up just 1.4% on Transurban toll roads over the past six months, but toll revenues were up 9.6% and the earnings before tax trickery by 11.6%. But its net profit was up a staggering 280% in just six months. What does that mean?

That means they are doing very nicely. Transurban is the classic barometer for a successful public private partnership. Here they are the toll road operators, who the government effectively outsourced to build roads, who are taxing motorists to build those roads.

Ultimately the government was too generous in the deal they made with Transurban. The deal was prices on toll roads could go up 4% or the rate of inflation, whichever is higher. So if inflation suddenly went up to 7% they would be getting inflation, but in this low inflation environment they are getting 4%. The deal is way too generous because the escalator is 4% so it can put up its tolls by 4% a year when inflation is only 1.5%. 

If we have traffic at 1.4%, revenues at 9.6% and profits of 280%, it must indicate Transurban is engaging in incredible forms of tax avoidance. 

Transurban doesn’t pay any tax. It has a trust structure and the way its financial model is structured, it says it will pay a lot more tax at the end of the concession period. All its debt is in the construction phase. That's how it gets its tax bill down. The more debt you have, the more money you are paying in interest before tax is due to be paid so you make a loss and don’t pay any tax.

These margins are going to get even greater. In Melbourne its group margin is 88.5%; in Sydney it is 81.2%. Now, for a normal business you are lucky to get 8 to 10%. This is so wrong. It is extraordinary how it has hoodwinked a government into believing this is the best way to finance infrastructure.

In Sydney the WestConnex project, at $16.8 billion, is the biggest infrastructure project in Australia's history. What are some of the shenanigans going on behind the scenes there?

What I'm reading is there is a lot of “commercial in confidence” secrecy so the people footing the bill are not finding it easy to get any of the information.

WestConnex makes City Link [in Melbourne] look like a back street lane. That figure of $16.8 billion is the forecast of how much it will cost NSW to build this thing. It is a massive network of roads and tunnels: 10 gigantic tunnels with 30-metre smoke stacks; spaghetti junctions; underground interchanges.

$16.8 billion is what the government has been saying it will cost for a couple of years, but others say that it will be much higher. All taxpayers across the country have skin in this game because the federal government is giving loans to the NSW government to pay for it.

They love their roads, but apparently have little regard for public transport. There is more money in roads and more consultancies. There are no consultancies in railway building: all you need is a couple of big rail developers. But there are a lot of different consultants in road projects: merchant bankers, accountancy firms and lawyers, as well as builders. They prefer roads because there are more fees in them than in rail so they go with the roads option.

The secrecy surrounding WestConnex is unbelievable. To stop journalists and residents action groups snooping on the project via Freedom of Information requests, the government put WestConnex under the ownership of a private company called Sydney Motorways Corporation (SMC). SMC is a government-owned entity but there is no visibility. The head office is apparently in George Street in the CBD but there is no address on the website and no phone number.

It is a completely secret, clandestine operation and the government has given Goldman Sachs the gig to sell a 51% controlling stake in the SMC — for a $16.5 million fee — by mid this year. The state election is in March next year and they want the deal to be done before then.

Transurban, of course, is the front runner to buy SMC and Macquarie Bank has switched from being the government advisor on the sale, to Transurban's adviser on buying SMC.

Transurban will end up with part if not the whole lot because it is already dominant in terms of roads. In Melbourne it has a monopoly and in NSW it has 70% or 80% of the tollroads. They will be in this game and they will make money out of it.

It is so frustrating that these public private partnership models continue to be pushed when they are a lot more expensive than public financing. In Britain, the Treasury investigated and found the shareholders often receive up to a 60% return on their investment and it's more than 40% more expensive than the public option. Are the public ever going to really care about this issue do you think?

A lot of people care, but chiefly self-interest reigns. There are people who lost their houses when were compulsorily acquired in Haberfield, Concord and other areas. Other people have cranes around their homes and noise in the middle of the night. If you are a local resident, then you care.

Otherwise not many people care and they have community stakeholder management teams — public relations people —which are constantly diffusing issues and trying to confuse the media. I wouldn’t say the media have been bought off, but there is no information, although there have been leaks here and there.

It looks like the poor old motorist has been forgotten in all this. It’s a feeding frenzy of thieves but the government just wants to get the risk off its hands and put it onto the private sector. That means the private sector will bid for this thing at a huge discount, probably get it on the cheap and then be allowed quite a bit of scope in tolls. As somebody famously said: "A toll road is a licence to prepare for the next toll road” because once you have one, it needs to keep extending and becomes potentially a license to print money.

Tell me about the on/off ramps and the big land purchases and windfall gains around what will become infrastructure hub surrounding these key locations.

There are heaps of individual stories about road widening and there are also parts of this project that are not included in the SMC sale. There is the F6 extension south of Sydney, the $3 billion NorthConnex tunnel to connecting the M1 Pacific Motorway to the M2 Hills Motorway, the $10 billion Northern Beaches Link that goes up to Palm Beach past Manly and the Sydney gateway for the airport. There are four major parts of this project that may or may not be eventually included in the sale.

Prime Minister Malcolm Turnbull has talked about the concept of capturing the value that landowners enjoy when a massive infrastructure project like this is developed. Has there been much discussion about it and is that coming into play in this example?

This is such a huge project that has not been properly scoped out and even in an engineering sense it’s not bedded down. It’s a huge uncertainty. The taxpayer sometimes wins in these deals but not often.

In Sydney they built a cross city tunnel that was a complete white elephant because the estimate of traffic was 15% overcooked. The same thing happened in Brisbane in the famous airport link, where there was a fraudulent traffic forecast that ended up in court.

People close to this SMC deal are going to look at it and say they don’t believe the traffic forecast and there is a lot of risk, therefore we are only going to bid $X billion.

Will big international companies come in and set up some sort of shelf company to ensure they are protected if they win the contract?

We don't know exactly because there is such secrecy around the bidding process, which is due in the next couple of weeks. This is the biggest infrastructure deal in Australia and we still don't even have confirmation of the names of the bidders or who is involved in which consortium.

The level of secrecy is so great that we don't even know what's going to be included in the sale. The speculation is that they will include the transport department’s e-tolling company to sweeten the package for the buyers. There are also legitimate environmental concerns, engineering concerns and many others.

It is probably the most secret privatisation I have seen in my couple of decades as a finance journalist covering these sorts of things.

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