Deal maker connecting Sydney's west
The proposed three stages of the A$12bn WestConnex project in Sydney comprise one of the most ambitious and arguably one of the largest toll road projects in the country’s history. It will see a state government taking traffic risk, the Australian government providing a concessional loan and the private sector funding the rest. PFI’s Australian Editor John Arbouw talks with the chairman of the WestConnex Delivery Authority, Tony Shepherd.
To see the full digital edition of the PFI Yearbook 2015, please click here.
To purchase printed copies or a PDF of this report, please email firstname.lastname@example.org
Tony Shepherd has had a long association with Australian toll roads and infrastructure projects. He was appointed director of Transfield Services on March 2001, becoming chairman in 2005. He served as president of the Business Council of Australia from 2011 until early 2014.
Shepherd spent 15 years in the Federal Public Service before becoming an executive of Transfield Holdings Pty Ltd, where he held the position of chief executive officer, project development until 2000.
He was responsible for the development of many landmark projects, including the Sydney Harbour Tunnel, Melbourne CityLink, and a number of other build-own-operate-transfer projects, as well as the redevelopment of Walsh Bay. He chaired the consortium that won the Lane Cove Tunnel Project and was an inaugural director of Transurban Ltd. He has served as the chairman and an independent non-executive director of ConnectEast Group since October 5 2004.
It wasn’t only roads. Shepherd was involved with the A$650m Walsh Bay Urban Development; the Collinsville and Townsville Power Stations; Brisbane Airport Rail Link; Yarra Trams, and as a director of Transfield he helped make the deal on Australia’s first PPP contract, the Yan Yean water treatment plant in Melbourne.
And if that wasn’t enough, he is current chairman of the Commission of Audit, whose report into the Australian economy is now the blueprint for Australian government policy. He sits on a number of boards and is an adviser to BTMU.
But it is the WestConnex project that is occupying Shepherd’s current time. The WestConnex Delivery Authority (WDA) was established to manage the delivery of the 33km WestConnex motorway.
The role and functions of WDA are set out in the Transport Administration (General) Amendment (WestConnex Delivery Authority) Regulation 2013; however, its core responsibilities include procuring and managing contracts relating to the development, construction, funding, operation and maintenance of WestConnex; developing and making recommendations on scope, staging and any other matter in connection to the WestConnex scope of works; seeking planning approval, management of environmental assessments and related community consultation for each stage; and administrate agreements relating to the development, construction, funding, operation and maintenance of WestConnex.
The basics of the project involves state and federal government funding for the first stage, and after ramp-up the project will be sold to the private sector, which will then partially fund the second stage that will also involve private-sector funding. The third stage, which involves a new tunnel across the Sydney Harbour, will cost about A$4bn and will also need private-sector funding.
The entire project involves 19km of tunnels and 14km of surface roads. It will provide a three to four-lane motorway in each direction. WestConnex has three stages of construction, with Stage 1 the M4 widening and extension from Parramatta to Haberfield. Leighton Holdings won the M4 widening contract on December 5, which marked the first contract awarded.
Stage 2 involves the M5 East duplication from Beverly Hills to St Peters and Stage 3 will involve construction of the M4 South from Haberfield to St Peters. On December 1, the NSW government announced plans to integrate Stage Three of WestConnex with Rebuilding NSW projects for a proposed northern extension of the motorway and a Western Harbour Tunnel.
WestConnex is a project with many strands, not least the reason why the government thought it necessary to establish the WestConnex Delivery Authority (WDA). We meet in the offices of Macquarie Bank, which happens also to be the financial adviser to the WestConnex project.
“Having a separate authority with its own board that does not have direct responsibility to any department meant you could focus exclusively on the project,” said Shepherd. But an independent authority is always in danger of internecine attacks from government departments jealous and/or anxious about losing control.
“There is no doubt that this happens, but we have solved this problem by having a board of directors with an outstanding record of delivering of delivering infrastructure projects as well as key representatives of the government. We have the unqualified support of the government and without that leadership from the top, it wouldn’t work”
So what is the model being used to fund the WestConnex?
“What we have learned from previous projects that have got into trouble in NSW and Queensland is that the gearing was obviously too high and that traffic projections were woefully wrong. However, someone still needs to assume traffic risk until such time as the project ramps up,” said Shepherd.
“This is where the government has stepped in and it will build the first stage of the project and assume the traffic risk. The NSW Government is providing A$1.8bn worth of funding for WestConnex and the Australian Government A$1.5bn. In addition there will be a concessional loan of up to A$2bn from the Federal government to fast-track Stage 2 of WestConnex from Beverly Hills to St Peters.
“Once Stage One is completed it will be sold to the private sector. I would imagine that this would appeal to super funds, which are often reluctant to invest in greenfield projects. However, having said that we have not ruled out asking the private sector to finance part of Stage One.
“The government has established an SPV under the Department of Transport that will be off-balance sheet and this will be used as the funding vehicle. This is the first time that such a structure has been used,” said Shepherd.
As a keen observer and participant in the toll road industry, Shepherd believes that lessons have been learned.
“Too many of the early projects were dominated by contractors who as minor equity providers did not have a long-term focus. What people also didn’t realise is that there is tariff fatigue. Motorists will only pay for convenience up to a point and then start using alternative routes,” he said.
“We will be using distance-based tolling on the WestConnex, but we are very conscious on ensuring that tolls do not reach a level where motorists start avoiding the road. We will also be talking to super funds to come in on both a debt and equity level because their time-frame is different to banks’. Unfortunately, banks are reluctant to extend tenors beyond the current three and five-year time-frame.
“This is understandable in the current context because of the push by the Australian government to increase the capital adequacy of banks as a safeguard against a future financial crisis. However, this also becomes an impediment on banks becoming long-term lenders,” said Shepherd.
With WestConnex in the headlines on a daily basis as the project gets under way, controversy and opposition is inevitable. The NSW election in March 2015 will see the government use the sale of the poles and wires as a platform for re-election.
The funds gained from the sale will be used to build roads, rail and other infrastructure. The November elections in Victoria was run on an infrastructure issue namely the proposed East West Link. The election of a Labor government has now put this project in limbo. So what happens if there is a change of government in NSW in 2015?
“I can’t see any Labor government in NSW trying to reverse this project. We are in constant contact with them and their federal counterparts, and I do not get any sense that there is opposition to the project,” said Shepherd.
WestConnex is a project with at least a 10-year time frame. So will the 70-year-old Tony Shepherd stay the course.
“The short answer is no. My function is to put the board, the process and some of the early works in place, and then it will be time for someone else to take it to conclusion. I estimate that I will be here for around three years,” he said..
“But I have no intention of retiring. I like to be busy and I see too many of my contemporaries who have retired simply declining.”
There is no fear of nothing to do. If the WestConnex isn’t enough, then he has his hands full as chairman of the fledgling Greater Western Sydney Giants AFL football team, he is also a trustee of the Sydney Cricket Ground and a director of Virgin Airlines.
Anthony F Shepherd seems to be Tony everywhere and the go-to man by governments of both persuasion to make deals and facilitate the building of infrastructure. But it will be many years filled with inevitable controversy before the WestConnex project will form part of his infrastructure legacy.