West Gate Tunnel project risky for Transurban, Labor

By raising equity and inking contracts for Melbourne’s West Gate Tunnel, Transurban and Labor are taking a calculated risk.

An artist’s impression of an entrance to the West Gate Tunnel.

Transurban is raising $1.9 billion of new equity to fund its $4 billion share of Melbourne’s $6.7 billion West Gate Tunnel Project.

In raising that equity and finalising the contracts for the controversial project, both Transurban and the Andrews Labor government are taking a calculated risk.

With Victorian Opposition Leader Matthew Guy vowing to block any extension to Transurban’s core CityLink concession — a major component of the funding agreement for the project — and the Greens likely to vote with the opposition and provide the numbers in Victoria’s upper house, the decision to press ahead is provocative and potentially quite risky.

While the government has pledged to press ahead with the legislation required to facilitate the 10-year extension, to 2045, of the existing concession deed and to line up the toll enforcement regime with that of CityLink, the parties have purported to put in place fallback arrangements in case parliament votes Plan A down.

In effect, contractually the state has agreed to make good any adverse financial impacts Transurban might suffer, relative to the preferred arrangements, if the government can’t enact the required legislation.

The parties don’t need legislation for the construction of the project or for its tolling arrangements but the project could be vulnerable, without legislative support, at the point of its completion in 2022.

So the state has agreed to replace the CityLink funding sources in the event that the government can’t enact the required legislation by making “completion/substitution payments’’ to cover the cost of constructing the project and by committing to make up any losses from inconsistencies in the toll enforcement regime.

The completion/substitution payments — which would be made at the completion of the construction — include an agreed return that Transurban described as consistent with its investment metrics, commensurate with the capital it will have invested and the risks it is taking on a project of the scale of the West Gate Tunnel project.

Transurban’s Scott Charlton. Pic: Stuart McEvoy

Transurban’s Scott Charlton said he was very comfortable with the returns if that were to occur, saying they were commensurate with the risks the group was taking.

What they appear to be counting on is that, while Guy has said the opposition will oppose any extension to the CityLink concession deed, saying that Labor had no mandate for the project and that it was unfair that motorists in the southeast and north of Melbourne would help pay for roads that wouldn’t be using, he has also said an elected Coalition government would honour any contracts that were entered into validly.

Validity is in the eye of the beholder, but having criticised Labor so vehemently for tearing up the contracts for the East-West Link project when it gained office, at a cost to Victorian taxpayers of more than $1 billion, the opposition will feel an intense obligation to act differently.

With a state election due late next year Transurban has moved quickly to ensure that the project is as well advanced as possible, with contractors CPB Contractors (CIMIC) and John Holland already on site and the first of the tunnel boring machines scheduled to be ordered within weeks.

The project itself, which Transurban took to the state government under its version of an “unsolicited proposals’’ regime, is quite complex.

It involves twin tunnels, with three lanes in each direction, constructed beneath Yarraville to connect the West Gate freeway to the Port of Melbourne precinct, a widening of the freeway, a bridge over the Maribyrnong River, elevated connections to CityLink and the edge of the CBD, an upgrading of the Monash freeway, better access to the docks and upgraded cycling and walking paths.

There’s little doubt that there is a need for enhanced road transport infrastructure to relieve the pressure on the choke point of the West Gate Bridge, improve road access to the port and keep trucks out of residential areas.

There has been an explosion of population growth and development along the M1 corridor between Melbourne and Geelong and a continuing and large-scale expansion of the Port of Melbourne to cater for growth in container volumes.

Transurban claims the project will take about 28,000 vehicles a day off the West Gate Bridge, 22,000 off the Bolte ridge and more than 9000 trucks off local streets.

There’s also no doubt that, while there was no tender for the project given that it was Transurban that developed it and took it to the government, it is also best placed to build it given that it connects into its existing network of toll roads. Transurban also has considerable experience in constructing and funding similar projects, having emerged as the dominant operator of toll roads in the country.

Whether the government should help fund its share of the project (there’s an additional $1.2 billion of state government costs that are associated with the non-construction aspects of the project, like land acquisitions, that increase the overall cost to $6.7 billion) by extending the CityLink concession out to 2045 will, however, be hotly debated.

The options for the Opposition, if it isn’t prepared to legislate to override the contracts entered to today are, however, unpleasant.

As Charlton told analysts, either it reluctantly allows the concession to be extended and motorists using the tollways to pay for the West Gate Tunnel project from 2022, when it is scheduled to be completed, or Victorian taxpayers generally will have to pay for it.

Under the agreement with the state, Transurban will have the right, from 2022, to charge tolls that will escalate at a rate of 4.25 per cent a year until 2029, after which they’ll rise with inflation.

An interesting response to concerns that the project could pour more traffic into the CBD is a new toll for city access for cars and light commercial vehicles existing the new infrastructure via the of ramps into the city during the morning peak.

Both the equity and debt components for Transurban’s share of the project costs have effectively already been secured.

The equity raising — a 3-for-37 accelerated renounceable entitlement offer at an offer price of $11.40 per new security, with retail entitlements trading — is fully underwritten. The debt element was put in place by adding a new $550 million tranche to an existing $1.1 billion syndicated bank debt facility.