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How could they get it so wrong?

February 25, 2011

Brisbane accepts the inevitable:

ONE of Queensland’s largest initial public offerings, Rivercity Motorway (which operates Brisbane’s Clem Jones tunnel*)  has collapsed, owing $1.3 billion. …

Rivercity’s initial traffic forecasts predicted the road would carry 60,000 vehicles a day and that this could increase to 100,000 within 18 months. But traffic volumes are closer to 20,000 vehicles, despite initial moves to discount the toll by as much as 50 per cent to encourage motorists.

Rivercity was forced to write down the value of its assets by $1.56bn to $258 million last year, based on revised traffic forecasts for the $3bn tollroad. Actual traffic on the road in the first year of operation was less than a third of the originally forecast 60,000

Major banks including Commonwealth Bank, National Australia Bank and ANZ sold out of Rivercity’s debt at less than 50 cents in the dollar.

Hedge funds now hold more than a third of the debt after several lenders chose to exit their positions, taking hefty losses on their toll road investment. …

Brisbane’s Lord Mayor thinks the problem was “poor marketing.”  He’s still pushing for more billion-dollar tunnels.

* Here’s what I said in Price Tags last May:

Just this March, Brisbane opened the “Clem7” – a tolled tunnel under its central area almost five kilometres long, a distance sufficient to take a Vancouver driver from Lost Lagoon to Main and Broadway. At a cost of well over $3 billion, it’s only one element in a scheme that includes an even longer tunnel to the airport, along with bridges and bypasses that make up the largest road project in Australia. Financed as a public-private partnership to be paid for by tolls, there’s no doubt that if Clem7 works, it will be pointed to by enthusiasts as a model for Vancouver.

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11 Comments leave one →
  1. February 25, 2011 10:05 am

    Wonder about parallels with Seattle’s tunnel.

  2. Ron permalink
    February 25, 2011 2:50 pm

    Ditto.
    Seattle’s tunnel will act largely as a bypass of the downtown (it will not have any exits directly to the downtown core) – so the question is whether drivers will pay the toll or risk the unknown and get caught in surface street traffic (which will not be a circuitous detour). Personally, I see it as the same recipe.

    WRT large ventures failing – that’s the nature of the (risky) business. Didn’t the Channel Tunnel go bankrupt? As did the Las Vegas Monorail? And historically, many cities’ subways are consolidations from previously bankrupted private rail transit systems (even before commuters moved to private automobiles). Many enterprises benefit from the bankruptcy of those preceding it.

  3. Michael Kluckner permalink
    February 27, 2011 10:37 am

    This is the same fate as Sydney’s cross-city tunnel which was effectively bankrupt a couple of years ago. Too high a toll for too short a trip, perhaps.

  4. Greg Hamilton permalink
    March 1, 2011 11:54 pm

    Thats a classic cost benefit sunk cost boondoogle. And one that might just find its way into Transportation Economics 101 courses — but then again, there are oodles of similar tunnel projects with similar outcomes: Had the projected ridership numbers been accurate then the project would likely never have been constructed. Here’s a short list of similair sunk cost transportation infrastructure whoopsies: 1. The Chunnel. 2. The Mississippi in-land waterway. 3. The Mackinac Bridge, 4. Golden Ears Bridge (?). Once the debt is written off, all is good — its just the “initial” losers who bought into the project who pay for it. Everyone else gets to receive the benefit of it without having to actually pay for it.

    Ever looked at how the Grand Trunk Railway was financed? The GTR was financed with government backed loan gaurentees — and the GTR issued debt up to the liquidation value of the firm PLUS the value of the loan gaurentees the federal government gave them. Guess what? The revenue generated from railway operations failed to support the debt payments necessary to keep the GTR viable. It went belly up, but the country got a railway. Some of those rights of ways are still being used by Railways in Canada, well over 125 years later. A bunch of investors lost their shirts, but thankfully most of them were Americans, rather than Canadians.

    I bet that in 125 years from now, Brisbanians will still be using the tunnel. Sounds like a long term win to me.

    • Nathanael permalink
      March 3, 2011 1:45 pm

      Not so sure about that “still used in 100 years”. The trend away from car use means Brisbane may well have to retrofit the thing for trains. Does it have grades and curves suitable for that?

    • March 3, 2011 1:58 pm

      “Once the debt is written off, all is good — its just the “initial” losers who bought into the project who pay for it. Everyone else gets to receive the benefit of it without having to actually pay for it.”

      I believe that it is illusory to suggest that a financial loss for others is a gain for society as a whole. The stock of “money” (dollars, credit, confidence) is in fact diminished by the world in general.

      It may appear so but if the numbers don’t work now under current conditions — even assuming a 30-50 year amortization period at, say, municipal bond finance rates — then there may be good reason to forego making the investment.

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