Corporate Culture: Budget Roads To Ruin

Kenneth Davidson - The Age

The 2014 budget is a budget which has been designed as a desperate attempt to win the November election for the Napthine government and, if it loses, create a minefield for an incoming Labor government which has said it will not renegotiate any contracts signed by the government before the election.

The budget commits the state to $27 billion in new infrastructure spending. Some of the projects for public transport are defensible, however the $18 billion for the complete East West Link from the end of the Eastern Freeway to the Western Ring Road is indefensible. But the financing of all the projects by public private partnerships opens the door for secret deals which have the capacity to impoverish the state in the future.

The East West Link is three times the cost of the Wonthaggi desalination plant, which will cost Melbourne water users some $18.6 billion over the life of the public private partnership. The East West Link PPP will cost $36.1 billion to $41.7 billion over the 20-year life of the PPP, based on whether the discount rate (effective interest expense) is 8 to 10 per cent. According to the budget papers, existing PPPs worth $7.8 billion are paying $770 million a year, equal to 9.8 per cent.

The East West Link will be a financial and environmental disaster. Like the desal plant it can’t pass a benefit-cost analysis and the government still hasn’t released its business case for the project – clearly because it couldn’t pass the credibility test. PPPs amount to the privatisation of future streams of tax revenue which will displace social and economic infrastructure options for future generations.

There is no way the road could be financed by tolls. As a toll road it would need to cover an annual charge of about $2 billion a year paid to the private owner or $72 per car based on 80,000 vehicles a day.

Even if the link was financed by public debt, presently costing 3.6 per cent due to Victoria’s AAA credit rating, the toll would still need to be $45 to cover the cost of the borrowing. Either way it is not viable as a toll road.

No private investor would be prepared to take the risk of financing the road via tolls. The risk will be borne by Victorian taxpayers via an ''availability'' charge, which means that, providing the road is ''fit for purpose'' irrespective of traffic, the private partners would be guaranteed an annual payment of just $2.1 billion per year.

Victoria’s own revenue is expected to be $28 billion in 2014-15. This means that overall state taxes and charges would have to increase by 9.4 per cent for just one road. The Abbott government has promised $3 billion for the project but in reality this money still comes out of the pockets of Victorians unless Abbott is prepared to take infrastructure money rightfully belonging the other states.

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