West Gate Tunnel Project to benefit Transurban and to a lesser extent, motorists

TWO points are absolutely clear cut and now locked in contractual, well, cement in relation to what is now titled the West Gate Tunnel Project, writes Terry McCrann.

An artist’s impression of noise walls for the West Gate Tunnel project. New Melbourne freeway tunnel to cost $6.7b

TWO points are absolutely clear cut and now locked in contractual, well, cement in relation to what is now titled the West Gate Tunnel Project.

The first is that it is a project which has to be done and once you accept that fact — it has to be done now.

WEST GATE TUNNEL PROJECT GETS PLANNING TICK

‘SERIOUS CONCERNS’ OVER WEST GATE TUNNEL PROJECT

Any delay would only make the project more expensive and motorists would have to cop extended gridlock costs.

Arguably, it was necessary in the “old” Melbourne of around 3 million people; it is now absolutely mandatory in the “new” Melbourne of 4.5 million people, heading inexorably and quite rapidly to 7 million, and then who knows what.

I’m not in any position to make, and I am not making, any judgment on the detail of the project as a “road”. Simply that we have to have both a second crossing to the southwest and a better integrated road network to the west of the CBD.

Just ask yourself: could we really rely on the West Gate Bridge as our only link to the southwest into that infinite mega-Melbourne future? With all the negative additional consequences that are already imposed on the network to the east and southeast of the CBD?

The second is that it will be built by Transurban. The specific financial terms to one side, it would now be sheer lunacy and one of the most irresponsible things — in both financial and infrastructure terms — any state government could do, to attempt to go back to the start.

After those two truths, it gets more problematic or at least fit for argument: specifically, most obviously, should the Opposition (and the Greens) carry through with their threat to block the extension of tolls on the existing Transurban network from 2035 to 2045.

Plans for the westgate tunnel project in Melbourne.

The first thing to understand about that is that Transurban would still get paid an equivalent amount, directly out of the Budget, in lieu of the lost toll revenues on the existing network. Either taxpayers pay for the road — and Transurban’s profit — or motorists do.

Further, Transurban would still get the tolls on the new tunnel part of the network through to 2045. That can’t be stopped by the Upper House without tearing up the contract entirely East-West style.

The annual escalation in the tolls is pretty hefty. Indeed it — almost — equates to those for electricity and gas; a single year’s increase might be smaller but it ticks over every year remorselessly.

Importantly, not only will the tolls on the existing network now run through to 2045 instead of — theoretically — terminating in 2035, they will now escalate (along with the tolls on the new road) at 4.25 per cent a year until 2029 and then at CPI after that.

The tolls had previously been rising at 4.5 per cent a year but had reverted to just CPI this year.

All this should deliver a very handsome profit to Transurban; it did not and has refused to disclose what is called its Internal Rate of Return (broadly, the profit it will — it is estimated to — make over the life of its concession deed to 2045).

That will be very attractive in this low interest rate world.

But that and the way the cost of the project is split between Transurban ($4 billion) and the state ($2.7 billion) — with Transurban pocketing all the tolls — does not make it a “bad deal” for the state, for taxpayers and for motorists.

I don’t accept the government’s claim that it couldn’t “afford” the full $6.7 billion cost. After all, only this week it’s been boasting that it’s spending a record nearly $10 billion every year on infrastructure; adding a little less than $1 billion a year for a few years would not have “broken the bank”.

What is persuasive is that Transurban will do it better and almost certainly cheaper. It also assumes all the risks — the build risk and the traffic risk.

Further, because of its existing network only Transurban could do it.

But it all comes at a cost to motorists, and it is higher than government could borrow the money at — and then either charge directly to motorists or absorb in the Budget.

The best way for Victorians to “get some of it back” is to ensure their superannuation is invested in Transurban securities.

LOWY COMPLETES JOURNEY

CANNY as ever, the 87-year-old, newly knighted Frank Lowy is cashing in a 60-year journey at the intersection of two seminal societal shifts — on the one hand, the previously surging and now plateauing property values; on the other, sliding bricks-and-mortar retail.

Over those six decades Lowy built a near $10 billion fortune on the alignment of property and retail in shopping centres.

The centre attracted consumers and their ever-increasing spending; the money they poured through the tills underwrote ever-rising Westfield property values. And throw in the development profits for good measure.

Recently, and still right now, the underlying property is an attractive investment in a world of near zero interest rates and massive investment liquidity looking for a positive return.

But that is arguably peaking under the twin assaults of the cyclical rise in US and so global rates and the secular shift to online retail. The latter will increasingly punish shopping centre metrics.

Arguably Lowy should have sold in 2016. You don’t usually get a second chance, and when he did he snapped it up. No sentimentality.

A similar secular wave in entertainment, media and distribution is bringing Lowy’s almost exact contemporary, Rupert Murdoch, to a similar seminal life inflection point and the sale of much of 21st Century Fox.