By Matt O'Sullivan
The state government is under pressure to sweeten the sale of a majority stake in the WestConnex toll road project after investment bank analysts warned that actual traffic volumes were unlikely to meet forecasts.
In a detailed report to large investors, Citi analysts have calculated that actual traffic on WestConnex in 2031 will be 10 per cent below forecasts made in the project's business case due to factors such as lower spending by households in Sydney's west and new public transport such as a metro railway offering alternatives.
The updated business case, released in late 2015, forecast average weekday traffic of almost 164,000 vehicles on the widened M4 motorway between Parramatta and Homebush, 132,400 on the so-called M4 East tunnels, and between 100,000 and 111,000 on the M4-M5 link between St Peters and Rozelle.
The Citi analysts said WestConnex was unlikely to deliver an "appropriate return" for a bidder such as Transurban unless better terms on the sale process were reached with the government.
An artist's impression of part of the WestConnex project.Credit: Sydney Motorway Corporation
They attributed the difficulty in achieving targeted returns on "significantly greater construction costs", higher operating costs, and lower than expected traffic volumes.
Overly optimistic traffic forecasts have been blamed for the financial failure of a raft of toll road projects in Australia over the years, such as the Lane Cove and Cross City tunnels in Sydney, and the Airport Link and Clem 7 in Brisbane.
In order to make WestConnex more palatable to investors, the government is expected to extend the right to charge tolls on the M5 South West motorway from 2026 to 2060.
However, the Citi analysts believe the cash-back scheme for motorists who drive on the M5 is unlikely to be extended beyond 2026, which would put a dampener on future traffic volumes because it would make trips more expensive.
Tunnels will make up a large portion of the WestConnex toll road.Credit: Nick Moir
They also said motorists' use of WestConnex to get to Sydney Airport could "underwhelm", while the opening of Western Sydney Airport at Badgerys Creek in 2026 would "result in switching of some existing underlying demand within the M4 and M5 corridor".
Transurban is considered best placed to buy a 51 per cent stake in the toll road from the state government. Australia's largest toll road company would be able to operate WestConnex more cheaply than others because it has a stranglehold over Sydney's other toll roads including the M2, the M5, the M7 and the Eastern Distributor.
However, the analysts said Transurban might be better off waiting for a lower "entry price" if favourable terms could not be reached with the government.
Transurban did this when it bought the Cross City and Lane Cove tunnels at fire-sale prices following their financial collapses.
The government has given potential bidders until November 13 to lodge their interest in WestConnex. It wants the sale completed by the middle of next year, the funds from which will be used to help pay for the estimated $7.2 billion cost of stage three.
The distance-based tolls for motorists using the 33-kilometre motorway are capped at $8.60 in today's dollars, and will rise annually at 4 per cent or the rate of inflation, whichever is greater.