Transurban : response to NSW Toll Review Interim Report

INTERIM REPORT - TRANSURBAN RESPONSE

NSW INDEPENDENT TOLL REVIEW

1. Executive summary

Sydney's toll-road network has been instrumental in supporting the liveability and prosperity of a sophisticated, growing city. It has played a critical role in the effective movement of people, goods and services, providing travel-time savings, and safer, more reliable journeys.

This infrastructure is the result of significant achievements by multiple governments, dating back almost a century to the Sydney Harbour Bridge. While keeping the sector heavily regulated and setting the toll price, governments have turned to the private sector for support, especially when under pressure to meet competing needs such as funding schools, hospitals and public transport links.

The result has transformed the way we move. Despite Sydney's population growing by around one million people in the past decade, morning peak travel time between the CBD and Parramatta has decreased by nearly 50%, or 25 minutes. Similarly, NorthConnex has reduced morning peak travel time between the M1 and M2 by around 72%, or 21 minutes.

However, the evolution of Sydney's toll roads has also resulted in a patchwork of different tolling regimes. The Independent Toll Review Interim Report is an important step in the process of understanding how we can deliver even better value and outcomes for Sydney into the future. In the past 20 years, Transurban and our partners have built a track record of working with both Labor and Coalition governments to successfully deliver and manage city-shaping infrastructure, and we look forward to that continuing, to deliver benefits to our customers and communities.

To assist in our review of the Interim Report, Transurban has consulted with Professor Graeme Samuel AC, former Chair of the Australian Competition and Consumer Commission, especially on matters related to competition and regulation.

Our response

Transurban has always been open and willing to discuss opportunities to improve Sydney's toll-road network, with a focus on finding practical solutions that meet Government objectives. Along with our investment partners, we have long been open to reform - to developing a more consistent approach to the development of tolling regimes to enhance efficiency, fairness, simplicity and transparency for users; and to joining the NSW Government in our shared focus on enhancing customer experience.

We continue to look for ways to create more value for motorists, approaching our business through a customer lens to deliver real and clear value on and off the road.

The Interim Report includes ideas that we've long advocated for, such as recommended changes to the NSW enforcement process regarding toll notices. We also support on-road signage improvements to help drivers make informed decisions. We have already taken steps and will continue to invest in and work on initiatives to improve this experience for our customers.

The Interim Report notes that, in the process of undertaking reform, existing contracts should be respected - another point we support. Following discussions with our investment partners in Sydney toll road concessions, there is a commitment from all parties to develop a suitable network-wide solution. We believe the principles of such a solution could be agreed within a short period of time within existing regulatory frameworks.1

Transurban remains open to finding alternative pricing regimes that are simpler, that result in more efficient network performance and that are equitable. This may include a range of measures such as distance-based rates, with infrastructure

1 Refer to separate submission, titled Submission to Toll Review from NSW Toll Road Partners. The views in this submission are Transurban's only

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charges for major tunnel structures and time-of-day pricing, noting solutions may vary on different roads to better achieve these objectives. Transurban believes this will deliver better overall network performance with a fairer and more equitable outcome.

Customer research commissioned for this response found that drivers are receptive to a peak/off peak (night and inter-peak) pricing approach. More than 60% of those surveyed were supportive of peak/off peak pricing and 57% thought this approach would improve toll pricing fairness. Any such solution would require discussion with our partners and require their consent.

Our response to the Interim Report also raises areas that need to be explored to help the public, the NSW Government and other stakeholders understand potential impacts of the draft findings and recommendations.

We have genuine questions about how some of the proposals in the Interim Report would work in practice.

Investment in our roads is supported by a complex funding structure (Figure 3) with numerous co-investors and lenders who, alongside us, have invested more than $36 billion into Sydney's road network. There have been times when contracts have been altered by agreement, to support the delivery of new road or public transport infrastructure.

However, these are investments and contracts lasting several decades, that should be viewed through a long-term lifecycle lens. This structure gives price transparency and consistency. Viewing these investments only from a short-term perspective would result in higher tolls and fluctuations based on the economic environment, which is not efficient and provides less price transparency for motorists.

Our analysis also shows that other aspects of the Interim Report's proposed solutions need to be reconsidered as they would run contrary to the NSW Government's objectives of improving the efficiency, fairness, simplicity and transparency of the toll road networks.

Our preliminary modelling of the Interim Report's proposed tolling solution suggests that overall, motorists in some areas of Sydney will pay more than they would under current arrangements as a result of: the proposal for distance-based tolling; the proposed introduction of two-way tolling on roads that are currently tolled in one direction; and the removal of toll caps. People who both live and work in Western Sydney, for example, would face higher tolls due to the increased prices on Westlink M7 (Figure 6).

Our preliminary modelling also suggests the proposed solution is likely to create unintended congestion consequences, with a preliminary estimate of 1.3 million hours2 of additional travel time per year compared to current arrangements. The current tolling network is well established, so consideration should be given to the practical impacts of the proposed solution in terms of network congestion.

The proposed toll model would increase toll prices for some trips, which is likely to encourage motorists off some toll roads onto neighbouring arterial roads, increasing congestion on roads that are already at capacity.

The Interim Report suggests that toll pricing regulation is needed. However, toll roads are already one of the most regulated public assets in Australia, with prices set by governments at the start of concessions. Neither Transurban nor any other private toll-road operators set the prices of tolls, and tolls do not change according to ownership.

The Interim Report's proposal for a unified, network-wide price structure and a state-owned tolling entity - State TollCo - would add a level of bureaucracy that we believe would provide no meaningful benefit for toll road users. The proposal to set toll prices via declining distance-based tolling may appear simple at face value, but it raises challenges in its implementation for both motorists and toll road concessionaries.

2 Analysis based on Transurban internal traffic modelling

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Currently, our customers can calculate and readily understand the cost of each trip on a toll road. A switch to declining distance- based tolling would not make price transparency simpler, with different costs per kilometre applying to motorists for each trip, depending on their origin and destination.

Our research shows drivers choose to pay for toll roads for their convenience, and because these roads help drivers get to their destinations faster and more safely3 - not because of a lack of alternative transport options. On average, Linkt customers travelling in a private vehicle spend $13.21 per week on tolls, with two-thirds spending less than $10 per week.4

It is important for the Toll Review to consider the benefits drivers are already experiencing each day. The existing model has created connections that make moving around the city more efficient, predictable, and safe, ensuring Sydney remains one of the most liveable cities in the world.

Priorities may change with governments but we have a demonstrable track record of willingness to explore reforms and of working with the State on solutions that benefit motorists and communities.

1. Transurban, August 2023, Industry Report: Urban Mobility Trends, page 21
2. Transurban (internal data), April 2023 to March 2024, Linkt Sydney consumer customers

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2. Public-private partnerships (PPPs)

Summary

• PPPs are an effective model for delivering toll roads. PPPs have a track record of providing outcomes which benefit the community, freeing up Government to spend more money on schools, hospitals and transport links.
• Toll roads are one of the most highly regulated public assets in Australia with toll prices and maximum escalation rates set by Government at the start of concessions.
• Demand-basedPPP models deliver reduced construction costs and improve customer service relative to other regulatory regimes.
• Compared to other forms of regulation assessed in the Interim Report, demand-based PPPs typically result in substantially lower toll prices in the critical early years of operation, where traffic volumes are lower and demand is ramping-up.
• There are significant risks inherent in large-scale infrastructure projects undertaken under a PPP arrangement. When risks materialise they are typically born by private investors, without impacting the motorist's experience.
• Changes to tolling regimes mid-concession hold significant risk. Investments have been made in good faith, and a shift in regulatory model to change existing contracts would call into question the State's reputation as a safe and stable region for future investment.

PPPs are used globally, and Australia has been a longstanding proponent of this model, which account for around 10% of the share of Australia's infrastructure spend.5

Planning for what is now the Sydney orbital road corridor began more than 70 years ago, under the 'County of Cumberland' planning scheme and was further developed by various policy measures implemented by both sides of government, including the then Labor government's 'Action for Transport 2010' plan (1998) which introduced cashless electronic tolling with new alignments for Western Sydney Orbital, Lane Cove Tunnel and Cross City Tunnel. Since then, network and motorway upgrades in Sydney have primarily been completed using the economic PPP model.

2.1 Benefits of private sector involvement

The ability of governments and the private sector to work together to create city-shaping infrastructure has been critical to the prosperity and liveability of Sydney.

Sydneysiders depend heavily on private vehicles, with our research finding most people surveyed (55%) commute to work or study via private vehicle.6 The city's population is growing, and by the early 2040s it is estimated to rise by around 25%,7 which will see more than 1.4 million additional people living, working and commuting around the city.

Despite this likely growth, the NSW Government is facing a road funding shortfall over the next decade. Additionally, loss of revenue from declining fuel excise (due to the uptake of more fuel-efficient cars and as people transition to electric vehicles) means even less revenue available for road funding.

1. Infrastructure Partnerships Australia, 2019, Australian Infrastructure Audit 2019
2. Transurban, August 2023, Industry Report: Urban Mobility Trends, page 15
3. DAE September 2022 Land Use Forecasts, January 2023 Release

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Economic PPPs have allowed the government to provide tangible outcomes for the community, while transferring the significant patronage risk to the private sector. This frees the public balance sheet for other priorities, such as health, education and public transport services (Figure 1).

Figure 1. Transurban investments in NSW8

Since 2005, Transurban and its investment partners have injected more than $36 billion (Figure 1) into Sydney's motorway network.

This has included upgrading existing assets such as Westlink M7 through the M7-M12 Integration Project which will improve connectivity in Western Sydney by reducing travel times on the M7. The new M12 will improve connections to the new Western Sydney Airport and also benefits from the upgrade to the M7.

It also has seen the delivery of new infrastructure such as NorthConnex and WestConnex that has fundamentally changed the way people and freight move around the city. Private sector investment in WestConnex has allowed the NSW Government to fund a range of other initiatives for the benefit of the NSW population.

2.2 Toll contracts and tolling regimes

Each privately owned toll road is governed by a concession deed - the contract between the NSW Government and private sector participants. We are pleased the Interim Report notes that, in the process of undertaking reform, the Government should respect these existing contracts.9

These deeds dictate the commercial arrangements for the ownership and operation of each road and set out the concession term and tolling regime including toll prices and escalation.

As outlined in our previous submission to the Review (pages 14-15), toll roads are one of the most highly regulated public assets in Australia, with toll prices and the maximum escalation rates set by Government at the start of concessions.

Price increases essentially smooth the recovery of costs incurred in constructing, operating, and maintaining a toll road over its full concession period. Concession deeds are usually agreed before construction commences and some years before a road opens or before a road is acquired. Deed terms are based on detailed assessments of alternative toll price paths and regimes,

1. NSW Government budget (2023-24) Budget Paper No.01: Budget Statement. Calculations based on the following: $1.4 billion for 19 new and 35 upgraded regional schools (over four years); and $700 million for Rouse Hill Hospital development. Audit Office of NSW, 11 June 2020, NSW Auditor-General's Report: $3.1 billion for the CBD and South East Light Rail
2. NSW Independent Toll Review Interim Report, page 20

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including consideration of their network impacts and overall community benefits. Who the government has chosen to own and operate a toll road does not affect the toll price.

In setting the initial toll price and escalation rates, the government decides how to best meet the objectives of funding a project and provide a value-for-money toll proposition that will make paying the toll attractive to motorists through travel-time savings and reliability. Competitive procurement processes run for the concessions were based on these toll parameters as well as risk profiles set by Government. This has ensured governments have received fair market value for each concession, reflecting both cost of capital at the time of the bid and the risks being transferred to the private sector.

The Interim Report states toll prices are currently set 'administratively by governments'10 with a view to minimising the funding burden to government. This overly simplifies the approach that governments adopt in setting toll prices. We do not agree that there is lack of transparency on key elements of toll determinations.

The process that is currently adopted is consistent with the Interim Report's recommendation that 'any new road should be justified on the basis that the community benefits to be obtained outweigh any associated costs'.11

It should also be noted that under the NSW Government's current procurement process, it is mandatory that all new NSW toll roads are subjected to detailed cost-benefit analysis under Treasury Policy Guideline 23-08NSW Government Guide to Cost-BenefitAnalysis (CBA).

CBA 'aims to measure the full impacts of any government decision or action on households, businesses, governments, non- government organisations and natural assets in a specified community…'.

NSW Treasury currently publishes summaries of all concession contracts on its website. Further, Transurban's traffic data is released publicly every quarter, and tolls can be forecast years in advance. Toll road signs are clearly marked and toll prices are widely available on Government, Linkt and E-Toll websites, Google Maps and via digital tools such as Linkt's Trip Compare. We remain advocates for further transparency measures, including decision-point signage, which we believe gives drivers the ability to make more informed choices.

2.2.1 Investment partners

Since Transurban entered the NSW market, several other investors - including leading Australian superannuation funds - have partnered with us to invest in established toll roads as well as development projects (Figure 2). More than 70% of our investors are Australian. In addition, many Australians hold Transurban shares through industry superannuation funds including UniSuper, AustralianSuper and Aware Super.

1. Independent Toll Review Interim Report, page 8
2. Independent Toll Review Interim Report, page 8

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Figure 2. Toll-road asset ownership in Sydney

Demand-basedtoll-road PPPs attract capital from global pension funds due to their stable, long-term contracts where revenues grow by CPI or a proxy for real income growth (for example, CPI + 1.0%). The PPP model provides these organisations with the ability to match long-term liabilities in pension funds with steady, long-term revenues.

The benefit of these escalation factors is that they have allowed governments to set toll prices at lower levels in early years than would otherwise be available in the absence of such escalation.

Any reforms that negatively impact toll-road concessionaires will adversely affect the returns of these investors, shareholders and lenders.

The Interim Report notes that the current cost of capital is lower now than when some toll roads were initially established in the 1990s and 2000s.

This simply reflects that cost of capital changes over time depending on factors such as interest rates and inflation. There would also be times where the cost of capital is higher than when the investment was made. Under a PPP model, this risk is borne by the private sector rather than the government.

The fact remains that at the time these assets were put to market, they were competitively bid from a cost of capital perspective given the ability of demand-based PPPs to attract significant investor interest. Private sector involvement also transfers a considerable amount of risk from governments, including higher interest rates. Further, each individual asset has its own complex funding structure (Figure 4) which may involve a combination of bank, capital market and government debt as well as institutional term loans.

These investments have been made in good faith and reflect the confidence of these partners in Sydney's growth and prosperity.

A significant restructure of the Sydney toll-road network, that does not allow investors to realise their investment value according to the investment parameters established at the time of their investment, could undermine the perception of acceptable risk for NSW infrastructure projects in the future.

If the NSW Government were to unilaterally impose changes to investment structures and returns during the term of existing toll- road concessions, it would call into question the state's reputation as a safe and stable region for investment, introducing 'sovereign risk' as a factor for future private infrastructure investment in NSW.

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