In 2003 the AA Motoring Trust labelled the northbound bore of the Blackwall Tunnel the fourth most dangerous tunnel in
Europe. Major concerns included a lack of lay-bys, emergency lanes and emergency lighting and no automatic closure of tunnels or activation of fire ventilation after a blaze is detected. In fact, the northbound bore of the tunnel, still in use today, was designed for horses and completed in 1897 — high vehicles using the tunnel today have to keep to the left-hand lane so that they do not hit the tunnel’s inner lining.
Transport for London (TfL) is currently spending £24m on safety improvements designed to extend the life of the northbound tunnel for “a further 30 years” and, although this expenditure is welcomed, it is merely a drop in the ocean compared to the spend required to bring the tunnel up to standard.
The scale of investment required to maintain and expand infrastructure across the UK is vast: £16bn for Cross Rail; £9bn for the Olympics; £2bn for new trains under the Inter-City Express Programme; and £5bn is being spent on widening the M25. And all this does not count the £26bn the Treasury plans to invest in public finance initiative (PFI) projects over the next five years in sectors such as education, health, defence, prisons and waste management. Substantial further investment is also required to repair, renew and expand crumbling airports, docks, water systems, bridges and tunnels. The amount of investment required is almost too large to comprehend. Whatever anyone says, and leaving aside political views, it is simply impossible for the Government to even try to meet all the expense or try to manage all the procurement itself. Radical ideas and innovation are required to break the current inertia and get things moving.
Tax payers will not be willing to pay significantly higher taxes to meet the cost. No-one wants to pay yet more fuel duty. Motorists are sick of ever-increasing congestion and ever-increasing motoring costs. An e-petition to the Prime Minister was signed by 1.8 million people to scrap the planned vehicle tracking and road pricing policy. At the same time, UK national debt now teeters at more than £500bn — the highest in western Europe. So where will all the money come from?
The City of London is the obvious answer. Having identified the infrastructure funding gap in Europe and the US, banks and funders are keen to invest. From a business or risk perspective they see captive customers, with little room for competition — there are high barriers to market entry (not everyone can build a road or tunnel) — with cash flows virtually guaranteed. Investors are therefore drawn by steady cash flows, monopoly advantages and very low risk. Projects closed already are producing low bond-like risk levels with returns likely to exceed the stock exchange by a significant margin. Likely investors include Goldman Sachs, Morgan Stanley and Citi. Goldman Sachs recently raised $6.5bn (£3.25bn) for its new infrastructure fund — twice the amount that it was seeking. Investors are therefore keen to lend — and the Government needs the money. The 172-mile Pennsylvania Turnpike project put out to tender in December last year attracted 48 expressions of interest.
Experience in the US shows what can be done if politicians are willing to think radically. They need real guts to take on the doubters, minority groups opposed to any major road development and car drivers opposed to tolls. Former Governor of Indiana, Mitch Daniels, who signed the highly-successful Indiana toll road project, stated that realistically his state had only four options:
1. triple petrol tax;
2. borrow until the banks would not lend anymore;
3. allow the infrastructure to crumble; or
4. come up with innovative projects to raise capital.
Daniels closed his deal, the Indiana Toll Road, in 2006 despite huge opposition from truckers and environmentalists. The tollway is 253km in length with an annual toll revenue of $85m (£42m). The winning consortium was made up of Macquarie and Cintra which paid $3.8bn (£1.9bn) for a 75-year lease. The concession ends in 2081. The private sector retains all the tolls and takes over full operational and lifecycle risk for the road. Cars are tolled one cent per mile with an agreed formula for toll increases over the life of the concession. The state of Indiana is using the proceeds raised from the project to fund a 10-year road programme to improve many other roads in the state. The winning consortium is required to invest $4bn (£2bn) in road maintenance over 75 years. In relation to the 600 staff, all had the option of remaining with the state but 540 took jobs with the private operator for the same or better pay. One banker estimated that the Indiana Toll Road Project could break even in year 15 of the 75-year lease — leading to as much as $21bn (£10.5bn) in profits for the investors.
Another successful project in the US was the Chicago Skyway. Built in 1958 and comprising 7.8 miles of elevated road, 50,000 vehicles use the Skyway each day. The project was advertised in 2004 — offering a 99-year concession. Macquarie and Cintra also won this auction with a winning bid of $1.83bn (£914m), which was 250% higher than the next highest bid. The concession ends in 2104. Cars pay a toll of $2.50 (£1.24) — heavy vehicles pay more with a 40% hike between 4am and 8pm to assist with congestion. The tolls are indexed by agreed increases specified in the contract. To protect road users and ensure the road is kept in good condition the project agreement has a mind-numbingly detailed specification including for example: how quickly potholes must be filled (24 hours) and how rapidly dead squirrels must be removed (eight hours).
The City used the proceeds from the project to create a reserve fund for the City and has used $100m (£50m) for local neighbourhood projects. The City states that the interest from the reserve fund generates the same amount as the tolls previously received — about $25m (£12.4m) per annum. Although critics say hidden costs are the loss of toll revenues for decades, this needs to be offset against the risk transfer in relation to operation, maintenance and repair of the road transferred to the operator and investors.
So how could this work in the UK? There would no doubt be a degree of both political and grassroots opposition. But, if the pricing was right and the tangible benefits immediately visible, logic, if backed by sufficient courage, could and should win the day.
Using the hazardous Blackwall Tunnel as an example, what in theory could it be worth if it was tolled and privatised? Actual traffic volume figures are hard to find, but let us say for the sake of argument that 70,000 cars use the tunnel each day. (The M25 QE2 bridge at Dartford has double this number). If a toll was introduced at £1 per vehicle, it would raise £70,000 per day. Over a year this would equal £25.55m. Assuming a 99-year concession was let, at auction the asset value could well be 40 times the annual toll, which is £1.022bn. This amount of money would by itself fund two new bridges over the Thames in east London (the new Thames Gateway Bridge to be built under PFI is estimated to cost £450m) or seven new hospitals (at £150m each) or 10 new schools (at £100m each).
Experience from the US and these very rough numbers show what can be done given the political will and courage to challenge conventional thinking. Funders are champing at the bit and teams of lawyers and consultants, with the key skills, are available having gained experience on more than 600 completed UK PFI projects. The Millennium Dome wasted £800m and is situated just next to the Blackwall Tunnel. Why not turn current liabilities into assets and use the money raised to fund new infrastructure projects and other worthy causes? I for one would be willing to pay a toll if I knew the money would be well spent on better infrastructure.
Michael Scott is a partner at White & Case.
