[This article was originally featured in Innovators in Action 2009.]
Between 1990 and 2005, Sydney built for itself a ring road system—you'd call it a beltway—that would be the envy of most American cities. It did so with political argument and contention, and at least one negative newspaper campaign. But no-one would imagine the city today without this road system. The city would not function.
A business traveler from Sydney's northern suburbs can now reach the airport without a single set of traffic lights. Ten years ago the journey would have been a frustrating stop-start, high-polluting trip taking quadruple the time it now takes. A motorist can now drive all the way from northern Sydney to Canberra, even the Victorian border, without a single set of traffic lights (comparable to the journey from Washington, DC to Cleveland, Ohio).
A report by Ernst and Young in 2008 concluded that the eight Sydney toll roads had increased Gross State Product by AUD$22.7 billion. It said this road system offered advantages to the state economy equivalent to that of Sydney's big container terminal. A study by Sinclair Knight Mertz in 2006 found that Sydney's toll roads gave a cumulative travel time saving of 38 million hours per annum, 15 fewer fatal accidents each year, and greenhouse gas emission reductions of 17 percent due to smoother traffic flows.
But here's the remarkable feature: the six major motorway projects opened in Sydney since 1995—that is, under my government—represented a total capital value of AUD$5.4 billion in new infrastructure. Of that grand total, AUD$4.6 billion came from the private sector. The capital cost to government was only AUD$800 million.
In other words, by far the bulk of capital was mobilised from private sources. The ring road system is a working example of how public bodies can leverage PPPs to achieve important mobility and capital investment goals.
I know the arguments from the inside. After seven years leading the Labor Party in Opposition, I was elected Premier of NSW in 1995 by a one seat margin in a state assembly of 99. I was elected on a promise, among others, of lifting the tolls on two private roads built by the previous conservative government: the M4 and M5 linking the city to the western suburbs. It was not the decisive issue in the election campaign but it was, as election promises go, a reasonably prominent one.
Within months of taking office, my government was in negotiations with the owners of the toll roads. We aimed to remove the toll gates and pay the consortia shadow tolls from the state budget based on vehicular traffic numbers. To our surprise—to everybody's—we found that the consortia would need to be compensated for an additional amount equal to the tax advantage that accrued to them from their tollway investment. This would have doubled the cost of keeping our promise.
The outcome was not happy. It involved a doleful concession by me as the new Premier that we couldn't honour this commitment, couldn't keep the promise. There was a backlash that went far wider than the communities affected by the toll. The issue became a "character issue." Our honeymoon poll ratings took an instant dive. There was speculation about whether we could be re-elected when our four-year term was complete.
The backlash was worsened by the fact that we then announced a decision to build an additional tollway from the centre of Sydney to the airport, a project needed in any case but particularly needed for the 2000 Olympics. An idea first floated in the 1950s, the Eastern Distributor was an engineering challenge requiring the widest tunnel in the world, three lanes each way. Bypassing 19 sets of traffic lights and fitted with the latest electronic tolling, it now provides a 15 to 20 minute journey from the airport to the CBD outside rush hour. "We'll pay the toll," a neighbour had told me, "just get on and build it."
Our political embarrassment over tolls was resolved in 1997 when we introduced a direct subsidy to owners of private motor vehicles who used the M4 and M5. They were compensated on a quarterly basis for the tolls they had paid. We called the scheme "cashback." This reduced the political temperature of the issue, and in the 1999 state election I apologized to the state's voters and said we'd learnt from our mistake in making too rash an election promise and would not do it again. We were re-elected in a landslide. We went on to build the Cross City Tunnel, the M7 Westlink and the Lane Cove Tunnel, linking the M2 from Sydney's northwestern suburbs to its major northern freeway. All as private tollways.
The first toll to be lifted will be that on the M4. The concession expires next year. Motorists from Sydney's west therefore will no longer have to pay what is currently a $2.75 toll. One lobby group has urged the government to maintain the toll to fund other road improvements such as the construction of the M4 extension (the missing link in Sydney's ring-road system and a road long overdue). This would be consistent with the government's introduction of a congestion charge—the first in the state's history—on the Sydney Harbour Bridge and Harbour Tunnel at the start of the year. What to do at the end of the 20-year concession is altogether a political decision. Especially for a government facing a tough election, as this one does in March 2011.
The Sydney PPP model was adopted in Australia's next two largest cities: Melbourne, the capital of Victoria (population 3.8 million), and Brisbane, the capital of Queensland (1.8 million). Two Brisbane projects, one a motorway connecting the central business district and airport, the other an inner city bypass for long-range commuter traffic, total 12 kilometres and have been estimated to slash traffic volume on surrounding radial roads by some 40 percent.
It's up to governments to make decisions about how "pure" a roads PPP they want. The one contentious Sydney private toll road was the Cross City Tunnel. This is a 2.1 kilometre tunnel (a short stretch of road) running east to west under downtown Sydney. It bypasses 16 sets of traffic lights westbound and 18 eastbound, carving 20 minutes off travel time, which is an astonishing saving on a journey of only 2.1 kilometres. It presented an opportunity to revive William Street, the traditional entrance to Sydney from its eastern suburbs.
But it would never have been built by the public sector. There were other priorities. My government decided to make it a pure private sector project—no subsidies to reduce the toll, even an up-front payment of AUD$100 million from the winning consortia to government and no subsidies for ancillary road works. In other words, no contribution from the public purse, and, at AUD$3.56, a relatively high toll for a short journey, but a huge environmental and mobility gain: the removal of tens of thousands of vehicle journeys each day from the grid-like street pattern of downtown Sydney as cars were streamed underneath the city.
Some of the very journalists who had written glowing stories about the project when it was unveiled turned viciously on it when it was opened, as it happened a month after I had retired as Premier. The street re-alignments that the state government had adopted at the insistence of the Sydney City Council were branded attempts to "funnel" traffic into the tunnel. The toll was denounced by relatively affluent commuters from a section of Sydney who had never faced a toll before.
Public relations were worsened because the road works that were beautifying William Street were uncompleted and at their messiest in the weeks the tunnel opened. Moreover traffic only checked-in at 30,000 rather than 90,000 vehicles a day. And my inexperienced successor was understandably overwhelmed by his first taste of a Sydney media panic. The government appeared to wobble rather than stand firm in defence of a superb piece of infrastructure delivered at no cost to taxpayers.
The government could have explained that in line with the principle of PPPs every element of risk would fall on the private sector. In other words, when daily usage of the tunnel was below projections no subsidy was paid to the private consortium which owned the project. They built the project as a private toll road, they bore all the risk. This risk transfer is one of the great advantages of the PPP model.
Today no Sydney motorist would imagine Sydney without this tunnel. The infrastructure investment was worth AUD$680 million dollars and was achieved without a cent from the public sector. The tunnel has not made a profit and has changed ownership but that has had no implications for taxpayers. The tunnel cannot be airlifted and packed off somewhere else. It works for Sydney.
Three months later Sydney got another privately-funded toll road, the Westlink M7. It was readily accepted. It represented inarguable value for money. The road links Sydney's south western and north western suburbs—42 kilometres at a construction cost of AUD$1.5 billion, all borne by the private sector. Completed in 30 months, and opened eight months ahead of schedule, it is the final piece of Sydney's high quality ring road system. It features high-speed tolling, calculated by the distance, the toll being AUD$6.07 for the full distance. For travellers in Sydney's far west, it meant 48 sets of traffic lights avoided, and travel time savings of more than an hour, incredible as it sounds.
The government had said to the community, "You can wait another 15 years for this road and get it for free. Or you can have it in three years with a toll, although one that varies with distance." From the start the project was supported by both sides of politics, by every layer of government and by the Western Sydney Chamber of Commerce.
In going for the PPP option a government has various policy tools such as:
- The length of the concession. For example, that for the Cross City Tunnel runs from 2005 to 2037.
- The adjustment mechanism for tolls. For the Cross City Tunnel the toll will increase by 4 percent per annum up to 2012 or CPI whichever is greater and from 2012 to 2018 by 3 percent per annum or CPI whichever is greater and thereafter by CPI until the concession period ends.
In NSW there has not been a marked tradition of government toll roads. Our experience is all with greenfield projects rather than the privatisation of state-owned tolls.
The overwhelming lesson of the Australian experience is that motorists will accept a value for money argument. In short they will pay tolls to get a road now rather than face a decade or more stuck in traffic.
Ask whether tolls are popular and the answer will be no. Ask whether anyone could imagine Sydney without a privately provided, pay-as-you-go ring road system and the answer would be, not on your life. It is a model that provides an option for U.S. cities struggling with both infrastructure demand and budget pressures.
Between 1995 and his retirement in 2005 Bob Carr was the Labor Premier of New South Wales, Australia's most populous state. As well as pioneering private public partnerships in roads, schools and hospitals his government overhauled the literacy performance of the state's school system and introduced a curriculum based on traditional disciplines and academic rigor. In 2003 the government launched the world's first carbon-trading scheme and comprehensively reformed the tort law system, as well as delivering the 2000 Sydney Olympics. The former Premier now advises Macquarie Bank and undertakes other business activities.