Private Investors Can't Get A Ride
Sydney Morning Herald
Wednesday February 27, 2002
State Rail will have to change its mindset if it wants the private sector to help fund its $20billion upgrade, writes Brian Robins.
A new high-speed express train service from Sydney to Gosford, new signalling and train protection systems are all on the agenda of private investors hoping to invest in Sydney's urban rail system.
The hold-up, however, appears to be right at the start of the line in the Department of Transport.
In a confidential report to the Government last year, the former deputy head of State Rail, Ron Christie, recommended that as much as $20billion be spent upgrading the urban rail network over the next decade.
When the report's contents were revealed in the Herald this week, the Minister for Transport, Carl Scully, said the Government was willing to consider tapping private sector funds, via so-called public-private partnerships, but the poor track record to date leaves this suggestion open to doubt.
The fund-raising method has been used with some success for the Metro Light Rail link between the city and Lilyfield, although it failed with the Airport Link, because of overly optimistic passenger forecasts, and with the Bondi Beach extension from Bondi Junction.
In the case of an express service to Woy Woy and Gosford, travel time would be cut from 80 minutes on a good day to about 30 or 40 minutes, but there would be a surcharge.
Premium cost rail services are common abroad, where the improved service attracts more customers, but NSW rail authorities are focused on cutting costs rather than growing revenues.
Victoria went some way down this track three years ago by auctioning off its train, tram and bus services. The move enabled it to cap public subsidy levels as successful bidders undertook to introduce new trains and trams.
The Victorian Government still controls the network, and actively monitors service levels to ensure they meet contractual commitments.
The Christie report's demand for new rail lines in NSW, and the sheer capital cost involved in the plans, mean private investment is essential.
As the cost of the Chatswood-Parramatta link has blown out, from the initial estimates of about $1.5billion to closer to $4billion, State Rail reacted by implementing the project piecemeal, which led to further delays in completion.
When private investors were locked out of the project, some investment banks shifted specialist staff overseas to chase lucrative deals with, for example, the privatisation of the British rail network. The key for investors when assessing prospects is how the State Government would share the risk.
``It has to be done in partnership with State Rail, and how it interacts with the network," one senior banker said. ``To work, it needs a clear understanding of the rights and responsibilities.
``The Melbourne rail/tram franchise is the model that works, and has been exported worldwide. The Victorian Government is outlaying the same amount of funds, and it is getting new rolling stock.
``With a new railway, the construction is easy put it out to tender. The issues are operating and maintenance. For example, if there is passenger risk, then integration with the network is vital. If the Government owns the rolling stock, then there is the issue of supply."
New lines built with private capital can involve ceding control to private investors for, say 20 or 30 years before it is transferred back to the state.
This technique has been used for toll road developments such as the M5 or the Hills Motorway, with private investors taking all of the development risk and reaping handsome rewards as demand outstrips early forecasts.
But bankers complain that the lack of commercial expertise at State Rail and CityRail means that when proposals are put forward by private investors there is barely a response from the bureaucrats.
The head of a management consulting firm said: ``We take a project to the RTA; it has a budget; it is used to handling these proposals. But you go to the SRA, and there is no real response."
The difficulty with State Rail has been arriving at a risk sharing model the rail authority can use to tap private funds. An example is the fraught negotiations over the Bondi Beach line, a 3.2-kilometre extension from Bondi Junction to the beach.
The line was buried by a lack of rolling stock and the need for a surcharge on the use of Bondi Beach station, if the project was to be viable. And if investors put up the funds they want to ensure that competition from rival modes of transport is limited and that they are insulated from policy changes.
``Preferred tenderers always put in additional conditions," said Peter Abelson, Professor of Economics at Macquarie University.
Another difficulty is the complexity of Sydney's rail system, which makes it difficult for State Rail to guarantee the minimum level of service to attract maximum private funding.
The cost burden for Sydney's train network is the urban sprawl and the lack of urban population density.
Density gives railway operators the ability to cover costs, so that high frequency services are assured. The economics of urban rail travel in Australia is the reverse.
© 2002 Sydney Morning Herald