Selling Tolling Rights

by Matt Lowrie

The idea that our existing transport taxes will fully cover the cost of maintaining and expanding our transport system has long been false. Governments of all stripes have pumped billions of additional spending in to fund major transport projects like motorway extensions.

Central govt transport funding by source. Te Waihanga

This government are taking that to the extreme with their obsession for mega roads and the many billions they will need to fund all of their roading wish list is money that can't be spent on other things, like hospitals, schools or any of the myriad of other things the government do.

In order to help fund some projects, they have said they're open to tolling and have confirmed that three roads under construction (or soon to be) - Penlink, Takitimu North Link, and Ōtaki to North of Levin - will all be tolled, joining the Northern Gateway in Auckland along with Tauranga's Takitimu Drive and Tauranga Eastern Link.

Now they're looking at whether they can sell off tolling rights for a quick funding hit, with Transport Minister Chris Bishop last week announcing:

“Although existing toll roads are currently managed by the NZ Transport Agency, the Government is, for the first time, considering private sector involvement in the operation of toll roads. This includes the potential use of toll concessions as part of a broader approach to infrastructure delivery.

“A toll concession involves a private entity—known as a concessionaire—being given the right to manage and maintain a toll road for a specified time. During this period, they collect toll revenue to recover costs and earn a return. In exchange, the Government receives an upfront capital payment which can be used to fund additional road projects and potentially deliver them years earlier than would otherwise be feasible.

“Concessions may apply to existing toll roads to operate and maintain a road, or be integrated into the development of new roading infrastructure. In the latter case, a private partner could be contracted to design, construct, operate, and maintain the road, and recoup operations and maintenance costs through toll collection.

“There are several advantages to toll concessions: they can provide immediate capital that can be used to deliver more infrastructure projects sooner, draw on private sector expertise and innovation in areas like construction and tolling technology, and can help government to share and manage risks more efficiently.

“It is important to note that the Crown continues to own the toll road under a concession arrangement. The private operator manages the road for the duration of the concession, after which control reverts back to a government agency.

“Next week, my officials will begin market sounding discussions with toll road investors, operators and financiers to test opportunities for private firms to operate and maintain toll roads through concessions. The officials will meet with a cross-section of market participants – from international toll road operators to domestic and international investors and iwi – to get a range of perspectives on the opportunities available. If work on concessions is taken forward, there will be wider opportunities to be involved in any transactions stage.

“Market sounding discussions will give us deeper insight into whether toll road concessions are viable here, under what circumstances, and the different ways they could be structured and phased.

“The Government will test concession opportunities on:

• New Zealand’s existing three toll roads – the Northern Gateway in Auckland, and Takitimu Drive and Tauranga Eastern Link in Tauranga

• Three roads in development that Cabinet has confirmed will be tolled – Penlink, Takitimu North Link, and Ōtaki to North of Levin

• All future Roads of National Significance

“Officials will also seek to understand the extent to which concessions could support private investment and involvement in delivering other future projects beyond the immediate RoNS programme, including an alternative Waitematā Harbour crossing, where the significant scale of such projects and investment needed means different delivery approaches may deliver greater value for New Zealanders.

“The Ministry of Transport has appointed global investment bank, Citi, as its financial and commercial advisor to support this market sounding process.

“Citi has extensive experience advising on toll road concessions overseas and we’re pleased to have access to their expertise, connections and insights to ensure we run a high calibre market sounding process.

“The insights we get from the market sounding will inform my decisions about whether and how to take toll concessions forward, including which ones are viable and have value. I look forward to hearing what the market has to say,” Mr Bishop says.

The Government expects to make decisions on toll road concessions later this year.

I'm certainly not opposed to tolling these new roads, and in cases like the Waitematā Harbour crossing we should probably even consider bringing back tolls on the existing bridge as a demand management tool which will help in assessing if a new crossing costing tens of billions is actually needed. But selling off tolling concessions risks locking New Zealand into poor long term outcomes. That is certainly the case in Australia where private tolling company Transurban has been able to secure extremely lucrative control over the urban highways in Sydney and Melbourne, not without its critics, see this from The Age, for example:

"CityLink gave Transurban financial clout. After overcoming a difficult and controversial beginning, Victoria's first private toll road has generated $5.78 billion in revenue since it opened in 1999. By the time its Kennett-era contract ends in 2034, that figure is likely to be well over $20 billion (in nominal terms). This, on a project that cost $1.8 billion."

As noted above, selling a tolling concession would see a third party pay the government an upfront fee to manage the tolling system for one or more roads. Despite what people might think when they're paying a toll, most toll roads don't collect all that much money. Furthermore a big chunk of the money collected goes straight back into paying to operate the system in the first place. This can be seen in the NZTA's Annual Report which shows the tolls off the existing three toll roads was $41.3 million in the 2023-24 financial year but of that, $14.1 million - around 34% - went back towards running the tolling system.

That $41.3 million was quite a jump from 2023 and is in large part due to increases in the toll charge - though the increase in the Northern Gateway is also in part due to increased usage following the opening of Puhoi to Warkworth in mid-2023.

Most of the government's RoNS projects are on routes that currently have traffic volumes less or maybe equal to the two Tauranga roads. Any third party operator is obviously going to want to make some profit from the deal. Maybe they could use some existing systems to help significantly lower the cost of operations but it's likely the majority of that profit would need to come out of the remaining revenue and means on a like-for-like basis the government are bound to get less than they do today.

Sure, if you take what's left after operational costs and profit are taken out and multiply over a long period, say 30 years, it will look like a big amount, possibly hundreds of millions of dollars. I'm sure the government would proudly proclaim this as a great result for the country even keeping the existing system would collect more over the same period.

Hundreds of $millions will also not go all that far when many of the projects are expected to cost billions each.

Perhaps a bigger concern would be what secondary impacts these tolling concessions could bring. Could they for example argue against or even prevent projects or policies that might offer additional options in how they travel, be it by road or other mode. Could they sue if traffic predictions don't turn out as expected?

Will these third parties also be able to set toll fees? Surely the more control they have over that the more interested companies will be in getting involved but what happens in the future if they start cranking up those fees. Notably New South Wales are currently in the process of looking how they can get more control of tolls

Perhaps the only real reason for this comes from the notes at the bottom of the announcement. Is this all just to appease one coalition party?

Exploring toll concessions gives effect to the National-ACT coalition agreement to institute long-term city and regional infrastructure deals, allowing Public Private Partnerships (PPPs), tolling and value capture rating to fund infrastructure.