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NSW government to shoulder risk of $10b WestConnex motorway

Sydney Morning Herald, 18 June 2013

The first stage of the $10 billion WestConnex motorway will be solely funded by the NSW government in an effort to shore up private sector confidence in the project before possibly offering it for sale. In a significant departure from the traditional model for public private partnerships for major infrastructure projects, traffic usage levels on the road would be established before private investment is sought.

The approach, which turns the traditional funding model on its head, means the state will shoulder all of the initial risk for the new project. Once it can be demonstrated motorists will use the road at a particular toll level, it will be offered to the private sector to invest.

The O'Farrell government has set aside $1.8 billion for the motorway, which will link the M4 to the M5 via Sydney Airport and Port Botany.

It is likely the first section to be built by a government-owned company will be a widened section of the M4 on which a toll will be reintroduced.

Once traffic patterns are established, the state-owned company will then be able to borrow against toll revenue forecasts and eventually raise private funds.

The decision to shift the initial risk for the project from the private sector back to the taxpayer reflects the recent difficult history of privately funded infrastructure projects.

Both the Cross City Tunnel and the Lane Cove Tunnel – constructed under a traditional public private sector model – went broke due to inaccurate traffic forecasts.

It is widely acknowledged such examples have sapped private sector confidence in investment in public infrastructure.

NSW Treasurer Mike Baird told the Australian Financial Review that the global financial crisis had significantly changed financial markets.

"We have seen a marked reduction in both the amount of the private capital available and the level of risk the private sector is prepared to take," he is quoted as saying.

The budget papers are expected to say that raising money from the private sector once traffic volumes are known "can significantly reduce forecasting risk".

"In turn, this would reduce the required rate of return for private investors and lenders, and so lower the project's cost of capital".

The budget is expected to allocate the $1.8 billion across four years, including $111 million in 2013-14.

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