5.1 Introduction and Scope
A key component of this stage of our study on dedicated freight infrastructure involves gauging the potential level of market interest from the private sector in delivering the project, as well as
understanding the potential to involve users and other project beneficiaries in funding the project.
Organisations identified as market participants in the supply of infrastructure can be considered as those that provide goods and services and those that provide finance. The former represent the designers, builders and operational and maintenance service providers that contribute to the project.
The latter group include debt, potential project sponsors and equity financiers. More traditional methods of procurement will often involve a combination of private goods and services, with the public sector funding the project. Alternative methods of financing infrastructure projects utilise private sector debt and equity, such as Public Private Partnerships (PPPs).
Other important market participants include the potential customers that will want to use and benefit from available infrastructure. As we have seen from the analysis above, this includes the freight sector, and, in particular, those using heavy vehicles in the movement of containers and other freight to/from the PoM. Private vehicle owners are also important market participants if tolling scenarios are to be considered.
Understanding the benefits that a project will provide to its customers is an important consideration when evaluating their potential willingness to pay for infrastructure use. For example, if benefits are low and there are alternative options they can use, then the scope for cost recovery through user charges would be limited. A further consideration relates to any potential operating restrictions, such as curfews or other measures that restrict the choices of infrastructure users. Unless the benefits of the project can be demonstrated, the industry may resist or undermine its
implementation.
Other beneficiaries of the project could also include those that do not actually use the infrastructure.
For example, in this case study project, nearby residents would receive the benefit of having fewer trucks on local streets, and the businesses that rely on the efficient and growing operation of the PoM over the longer term could benefit through the connectivity the project would provide and the reduced conflict with residents.
Given the context (above), the scope of our analysis includes:
► a general discussion of the key factors that influence the market’s appetite for participation and investment in major transport infrastructure projects;
► the market’s current views and perspectives regarding those key factors based upon EY’s involvement in a range of formal and informal market sounding exercises over the last 12 to 24 months; and
► how the freight industry may perceive the project and the issues associated with the provision of funding support to private investors and/or government.
Based on these considerations, we then outline some conclusions for the case study project and its potential to be delivered through alternative delivery and funding models.
Australian Government Department of Infrastructure and Regional Development
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5.2 Private Finance and PPPs
A primary consideration for the delivery of priority freight infrastructure is whether there is scope for it to be provided in full by the market or whether there is a role for PPPs in achieving better outcomes in infrastructure delivery.
As we have seen from the previous analysis, the case study would not be something that could be implemented and funded through user charges alone, and it is difficult to see how the market would want to provide the project on its own. The potential for it to deliver welfare benefits beyond those that would accrue to the users of the project suggest that some level of government intervention is justified, potentially in partnership with the private sector. A further consideration is whether
alternative funding models involving a wider mix of project stakeholders could be found, such as with the PoM and/or the local community. These could be pursued if those beneficiaries would be willing to pay to receive the benefits the project would deliver.
5.2.1 PPP value drivers
The utilisation of private sector finance is suited where the project represents a significant upfront cost to the State (which may ordinarily be budget constrained), combined with achievable
efficiencies, optimal risk allocation and value for money through adopting a whole-of-life approach to costing. PPP delivery is typically more appropriate for projects that require service delivery that extends beyond the completion of asset construction.
The Infrastructure Australia National PPP Guidelines provide an outline of the key value for money drivers of the PPP model. Projects that may be suitable for delivery incorporating private sector finance will typically exhibit value when compared to a public sector delivery of a project via some or all of the following characteristics:
► Complex risk profile and opportunity for risk transfer
► Whole-of-life costing
► Innovation
► Measurable outputs
► Asset utilisation
► Better integration of design, construction and operational requirements
► Competitive process.
Based on the consideration of these value for money drivers, it is difficult to identify the ways in which a PPP model would be of significant benefit for the case study. The project does not constitute an overly complex infrastructure investment compared to other transport projects that are delivered using the PPP model. There also appears to be little scope for innovation in operations and whole of life costing.
However, should the government pursue the delivery of the project as a tolled link, then there may be scope to deliver it through an ‘availability PPP’ where a private entity is compensated for the upfront investment costs through a mix of toll revenue and an availability payment regime provided by government.
5.2.2 Factors affecting market interest
The private sectors’ interest in public transport infrastructure projects will be guided by their assessment of risk and achievement of an appropriate return commensurate to those risks.
Australian Government Department of Infrastructure and Regional Development
In relation to the interest of the private sector to invest in public transport infrastructure under PPP models, EY’s interactions / soundings with the market have identified the following recurrent factors which influence the market’s appetite to participate in procurement processes and invest:
► Risk Transfer (Demand)
► Market Capacity
► Financing – Size and Terms
► Quality of Government Interaction and Planning
► Procurement Process Investment (Time and Cost)
► Political Risk.
The remainder of this section provides our high level assessment of market perspectives on these key factors.
5.2.2.1 Risk transfer (demand)
The market’s appetite in taking demand risk on toll road projects can only be assessed on a case-by-case basis which will be underpinned by the market’s assessment of traffic forecasts, project cost / complexity, the ability for toll revenue to recover construction, operating and financing costs and the extent of risk sharing offered by the State.
There is a heightened concern at present, amongst financiers and others in the toll road
development sector, concerning the transfer of traffic risk to the private sector. This concern has arisen due to the significant financial losses flowing from recent toll roads in Sydney and Brisbane that have not met traffic expectations.
The financial assessment suggests that toll revenue would not be sufficient to recover all of
construction and operating costs. As such full risk transfer based on acceptable toll price would not be viable under a standard BOOT model. We expect that private sector would seek a more proven demand profile in order to accept some demand risk.
Based on market perspectives, an availability PPP may be more suitable for the case study project should the State wish to involve the private sector.
5.2.2.2 Market capacity
We expect the market to have adequate expertise and capacity to construct and maintain this project.
The size of project packages has been a key issue in the market in recent years. However, the current cost estimate for the case study suggests that most of well-established and reputable organisations have the capacity to undertake this Project.
5.2.2.3 Financing – size and terms
At a construction cost of approximately $449 million (May 2013) the finance market should be able to raise finance (if the project is deemed to be bankable). However, should the State elect to toll the new link, the size of financing offered by the private sector would have to be commensurate with the potential tolling revenue.
5.2.2.4 Quality of Government Interaction and Planning
The Victorian Government and its related road transport agencies have a strong track record of procuring complex road infrastructure with the private sector across a range of procurement models.
Australian Government Department of Infrastructure and Regional Development
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We expect the market would be interested in a procurement process managed by the Victorian Government.
5.2.2.5 Procurement Process Investment (Time and Cost)
We expect potential market participants would request that all (or part) of bidding costs would be reimbursed based on recent projects that have set precedents (e.g. North West Rail Link, New Zealand PPPs).
5.2.2.6 Political Risk
The current Victorian Government has shown a preference for the East West Link project as a means to relieve congestion in Melbourne and enable improved access to the Port of Melbourne precinct. As such the lack of political support for the project may have a negative impact on the market’s
perception of this risk.
5.3 Freight industry perspectives
The relevant participants in the freight industry that would be affected by the implementation of dedicated road freight infrastructure include the Port of Melbourne Corporation (PoMC), as developer and manager of the Port, and the array of road freight operators that deliver containers between the Port, the west of Melbourne and beyond.
5.3.1.1 Port of Melbourne Corporation
PoMC is responsible for the sustainable development and management of the Port. In striving to fulfil its role of growing the economic prosperity and social and environmental wellbeing, the PoMC has identified a series of goals to guide its actions. Their high level goals are to achieve:
► Efficient and high quality facilities and services within a competitive environment
► Integration of the port with land transport systems
► Trade and trade-related business facilitation and expansion
► Sustainable financial performance
► A shared port-city vision for sustainable growth and prosperity.
In line with these goals, the PoMC is taking an increasingly active role in recent years in supporting the strategic planning and integration of the Port with the planning for the State’s transport network. The Port also played a lead role in the channel deepening project and is responsible for managing the interfaces with nearby land uses.
Given this, we would anticipate that the PoMC would be supportive of proposals aimed at enhancing access to and from the Port gate. A key consideration for the PoMC is the extent to which any proposal is seen to meet the objective of a better connected Port.
In addition, while the Port is becoming more integrated with State transport planning activities, we are yet to see it take a direct role in identifying and funding landside transport infrastructure proposals such as the proposed concept project. Instead, the Port has been able to share the benefits of the State’s ongoing program of improvements to the strategic road and rail networks, which is enhanced by the Port’s proximity to the city’s CBD. However, as transport congestion continues to grow, we may be reaching the point where the Port takes a more direct role in infrastructure development so that the Port can continue to exist in its current location without excessive conflict with nearby land uses and complex patterns of transport congestion.
However, for this case study, there are questions around the capacity of the project to deliver sufficient value to the Port.
Australian Government Department of Infrastructure and Regional Development
5.3.1.2 Road freight operators
Road freight operators play a critical role in connecting supply chains to/from the PoM. As we have seen, the majority of freight that is moved through the Port is linked to destinations in and around Melbourne, making it highly suited to road haulage instead of rail.
The case study project has the potential to improve the efficiency of freight movements between the Port and the western parts of Melbourne and beyond, which would be of significant value for the industry.
However, using approaches to delivering and funding the case study project that claw back some of that industry value (i.e. through user charges or other funding mechanisms), could risk losing the industry’s support for the project and, if tolls are excessive, undermine the effectiveness of the project in meeting its objectives for industry growth.
The example we have provided in this case study includes a toll on heavy and private vehicles, and the imposition of a curfew on Yarraville streets for heavy vehicles accessing the Port. In doing this, we have attempted to set the tolls at a level commensurate with the user benefits of the project.
However, that may not be how the tolls are perceived by users.
5.4 Key findings – Implications for the Case Study Project
The market’s interest in delivering this project would be dependent upon how the State structures and procures the project. Based on our understanding of the market, three procurement models appear to be suitable for the Project. These models are as follows:
► State Funded Design and Construct - We consider that the construction market would show strong interest in this procurement model. We assume a State Government authority such as VicRoads would undertake maintenance.
► Availability Style PPP – While we consider the market would respond positively to the State retaining patronage risk under this model, the market’s interest may be tempered by the high bidding costs relative to the value of the project (considered small by comparison to recently procured road PPP projects). In addition, in this instance, a PPP is unlikely to demonstrate value for money from the State’s perspective.
► Availability Style PPP followed by a sale of tolling rights – The market’s interest is uncertain at this stage and would be dependent upon traffic demand and its assessment of risk and likely returns. However, this type of model is currently being tested by the Queensland government under the Legacy Way project and recent market sounding processes suggest this model has the potential to attract interest from the market.
The views of the freight industry, including the PoMC and road freight forwarders, would depend on the benefits the project provides, set against the scope of any cost recovery measures such as user tolls or direct contributions. As the benefits of the project are spread across different users and to landowners in nearby suburbs, the industry would not support fully funding the delivery of the project. Dedicating the link to heavy vehicles could alter that position to some degree, but as we have shown, the level of demand for the link would not provide enough toll revenue to pay for its construction.
Australian Government Department of Infrastructure and Regional Development
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