The view is mesmerising. As you alight from the elevator at the Goldman Sachs headquarters, the serpentine bays of Sydney harbour unfold before your eyes; beyond them rear the rugged cliffs of North Head before the vast, distant sweep of the Pacific Ocean.
Gazing down upon this vista from the 46th floor of Governor Phillip Tower, you will see Sydney’s wealthiest suburbs deep below; and among them the wealthiest of all, Point Piper, where former Goldman Sachs partner, Prime Minister Malcolm Turnbull, resides in his harbourside mansion.
It is up here, high in the Sydney eyrie of the Wall Street investment bank, that the covert operation to sell Australia’s biggest infrastructure project is in full swing. NSW Treasury is desperate to sell the controversial and still largely-unbuilt WestConnex project by July this year, well before the next state election in March 2019. To get the job done, it is paying Goldman Sachs $16.5 million for less than a year’s work.
What exactly is up for sale? It is hard to tell … exactly.
“It’s all clouded in secrecy,” says Martin Locke, Adjunct Professor at the University of Sydney’s Institute of Transport and Logistics Studies. “Getting the facts is very, very difficult. “You’ve got bids coming in this month. The Minister is saying we are going to conclude the sale by June 30 but, as a community, we don’t know what’s going on. Who are the short-listed parties who are going to be putting in bids?
“They are selling off an asset which costs $16.8 billion,” says Locke, who once advised the government on the sale of the Lane Cove Tunnel. “They could at least outline the process”.
“Has the information memorandum gone out? Are there indicative bids? Is there a valuation benchmark so you know what value is being created for taxpayers?”.
What we do know is that the state is selling 51 per cent of Sydney Motorway Corporation (SMC), the secretive private company which it established in 2014 to build and manage WestConnex. So, it is not just auctioning off the decades-long toll concessions for seven separate roads but also the ownership and control of the construction and financing of the project. And according to unconfirmed newspaper reports, the state’s E-tolling company may be tossed in for good measure.
The sale process has ramped up in recent weeks as international bankers, superfund managers, construction executives, and corporate lawyers have gathered in Goldman Sachs’ meeting rooms for confidential briefings. From the windows on the other side of the office tower, they can see across the seemingly endless spread of Sydney’s Western suburbs. They can imagine the 33 kilometre web of toll-roads, the spaghetti interchanges above and beneath the earth, and the ten huge smoke-stacks dotting the 22 kilometre slew of tunnels which will criss-cross the harbour city..
This is the WestConnex plan, an engineering feat of supreme ambition. Yet the engineering, indeed the roads themselves, are but a means to an end. The end is money.
The government wants to maximise its sale price and return to office triumphant at the next election. Investors want to pay as little as possible for the greatest possible return; and the bankers, lawyers and assorted advisers want to harvest as many fees as they can. The roads and tunnels are the product. It is the cashflow from these assets which captivates the dealmakers and the three consortia now rumoured to be kicking the tyres.
Amid the money and the political agendas, one set of stakeholders seems to have been lost, a very large set, motorists. As actuary and transport infrastructure specialist, Ian Bell points out, the NSW Auditor-General’s report of May 2006 on the Cross City Tunnel noted state toll-road projects need to have “value for money for motorists as an explicit objective of the bidding process”.
“There is no real tension on toll levels, apart from some elasticity of demand concerns,” says Bell. “Both parties, the government and the investors, negotiating under cover of secrecy, are happy to set higher tolls as they both benefit. They can even push some of that impact into the not-so-viewable future by using the 4 per cent escalation provision, above expected inflation”.
Like Melbourne’s Citilink toll-road, the government has agreed to a generous toll escalation arrangement in a low inflation environment. It has been a bonanza for Transurban, and Transurban is the front-runner in the bidding for WestConnex.
But back to the business: what is this future cash-flow worth? What is the construction risk, the toll risk? And the cost of building the thing? What are the conditions, that is, what assurances are to be made to those buying the assets to defray their risk and enhance their financial returns?
While the battalion of cuff-linked warriors pores over financial models and traffic models, the taxpaying public itself, those who actually own the assets and will be smacked with the tolls, remain in the dark. This may be the largest deal in the country, it may be a deal of enormous public interest, but it is also unfathomable.
Ian Bell says if the government put enough information in the public domain it would be possible to model all the stages of the project and get a reasonable view on costs and potential revenue but there is simply not enough information.
“You can’t tell even how much debt is in each structure under SMC right now, even though we can get to see the M4 and M5 concession deeds if you google hard enough. But there is no information on progress payments and their escalations, or future debt drawdowns, or interest costs. There are just not enough numbers released.”
Estimates of cost swing wildly. Back in 2013, WestConnex was forecast to cost $10 billion to build. Two years ago, it was revised to $16.8 billion. Official cost estimates have stuck there since, at $16.8 billion, no matter the change in circumstances, no matter the mooted extensions. The City of Sydney put the entire number: that’s WestConnex plus the Western Harbour Tunnel, the Northern Beaches link, the F6 to the south and Sydney Gateway, at $45 billion.
“Macquarie recently estimated it at around $18 billion – for the parts of the scheme within SMC, including interest during construction,” says Ian Bell. “That is probably closer to the mark … but it puts aside the future commitments for other roads to feed into or off the WestConnex”. Although the public data is “sparse … fragmented … difficult to assemble,” Bell has done what he can with available data and drawn on his previous tollroad analysis to make some “rough and ready” calls on costs, future tolls and overall project viability.
We reveal his findings in coming instalments of this series on WestConnex. Suffice to say that the intense secrecy over the project does not bode well for taxpayers and citizens of NSW.
So, who does know what is going on? Goldman Sachs knows, NSW Treasury knows and Sydney Motorways Corporation (SMC) knows too. Yet the people who are financing the whole caper, the people who are paying the multimillion dollar bankers’ fees, the people of NSW, are kept in the dark.
For this story, interview requests were made of the Sydney Motorways Corporation, NSW Treasurer Dominic Perrottet, Goldman Sachs and Macquarie Bank. Aided by their phalanx of PR people keeping taxpayers in the dark on the taxpayer chit, all interview requests were rejected. Taxpayers, motorists, those who have already been forced to sell and move house; all are being asked by the state of NSW to have blind faith.
Meanwhile, the Great Vampire Squid, as Goldman Sachs has been famously monikered, has donated large licks of money to both major political parties, and won myriad government contracts besides this, but pays no tax in Australia and files financial statements which are meaningless.
This is at least the third job that Goldman Sachs has done for NSW Treasury on Westconnex alone but working out who gets what on the WestConnex gravy train is hard. Macquarie Bank also has intimate knowledge of the deal and now appears to have switched sides, reportedly working for Transurban, Australia’s leading toll-road group and the front-runner to win the bid.
Investigative journalist and WestConnex activist Wendy Bacon says the secrecy and the dearth of information about the deal does not inspire confidence. The fees to consultants have been enormous but even these are impossible to establish with any precision due to poor disclosure. Bacon, who has blogged WestConnex every step of the way, and is primarily concerned with the environmental risks, believes there is an untenable conflict of interest.
“Macquarie played a vital role in WestConnex from day one when, having decided to run with the Infrastructure NSW recommendation to build the project, the then Liberal/National party government of Barry O’Farrell set up the Sydney Motorway Project Office and in early 2013 invited a number of companies to help plan the project.”
It was then, in 2014 says Wendy Bacon, that the shutters of public scrutiny were well and truly drawn. SMC is owned by the government but is a private company so is shielded from Freedom of Information (FOI) requests on the Government Information (Public Access) Act legislation. Look for phone number on the website, look for the address. You won’t find one.
“According to the NSW Tender database, Macquarie still has a $3.6 million contract which runs from December 2012 until 2017 to advise NSW Roads and Maritime Services (RMS). Since then, Macquarie like Goldman Sachs has continued to benefit from Sydney Motorway Corporation and RMS contracts to push along the mega project.”
Transurban is seen as the strongest contender of the three bidding teams, with the trio of Morgan Stanley, UBS, and Macquarie Capital on hand to advise. On releasing its interim financial results this week, Transurban was curiously reluctant to confirm that AustralianSuper, Abu Dhabi Investment Authority and the Canada Pension Plan Investment Board were its partners in the bid.
Chief executive Scott Charlton was also “jawboning” down Transurban’s interest in the bid, telling reporters his company would not be over-paying for the assets. Goldman Sachs will not be happy. It is a strange challenge to sell a gigantic project with so much construction and future revenue risk.
The original plan for WestConnex was to build each stage and then sell it and use the proceeds to build other stages.
But by the end of 2014, the NSW government was very keen to push ahead with the second stage of WestConnex, a tunnel to duplicate the old M5, which is widely regarded as a dud.
The tunnel goes from Kingsgrove to a massive interchange at St Peters. In June 2014, the federal government then under the stewardship of Tony Abbott, announced an extra $2 billion dollar concessional loan for the new M5 tunnel, on top of the $1.5 billion federal grant for the project.
A year later, in June 2015, the NSW government decided that private funds were also needed and appointed Goldman Sachs to seek private backers, which they did, to the tune of $1.17 billion, to meet the rising costs of the project which had already climbed from $10 billion to $14 billion – and by November 2015 to $16.8 billion.
The amount which SMC paid Goldman Sachs to raise this money has never been published because at around the same time, the NSW government decided to turn the WestConnex Delivery Authority (WDA) into a private company, the Sydney Motorway Corporation. Previously, the WDA had been required to publish its contracts and be subject to Freedom of Information requests. No longer.
Goldman Sachs was successful in raising $1.5 billion from the Commonwealth Bank, National Australia Bank, Westpac and France’s Credit Agricole. When it came to signing the final terms of the $2 billion concessional loan, these private lenders were ranked above the Commonwealth loan, an arrangement costly to the federal taxpayer and one which was roundly criticised by Federal Auditor General Grant Hehir in a report last year.
Encouraged by these results however, and still lacking money for the third and most expensive stage of the project – the M4 M5 link between the M4 East and New M5 – SMC’s next move in June 2017 was to contract Macquaire to get a feel from investment bankers, infrastructure investors and tollroad companies about interest in buying WestConnex. Goldman Sachs got the job.
As Wendy Bacon describes it, a good deal of the more useful public information on the WestConnex deal has come from leaks to Fairfax Media. These have taken two forms: business-friendly newspaper the Australian Financial Review has picked up many of the investment mandate snippets. These are often couched as speculation in the Street Talk markets column.
The other main form of news has come via leaks to the Sydney Morning Herald from deal insiders who have become so concerned about the project as to take the career risk of leaking to the media.
Despite this being the biggest infrastructure project in the country, a project financed by both state and federal taxpayers and a project whose fees to bankers, law firms and other consultants is already in the vicinity of $200 million, there is very little transparency and accountability. The public of NSW is in the dark.
Former NSW auditor-general Tony Harris said recently the state’s toll network has been “poorly based and poorly organised” since tolls were imposed on the M4 in the early 1990s.
“This has led to motorists paying the private sector significantly more than the economic or efficient cost of those roads,” he says. “It has also meant that the government has not been able to introduce a soundly based system for pricing the use of tolled roads.”
Harris is dead right.
In the coming instalments of Blind Faith, actuary and infrastructure transport expert, Ian Bell, will look in detail at the available numbers and the historical precedent in toll roads to work out just how hard hit will be NSW motorists and taxpayers by WestConnex and what sort of profits may be in the pipeline for the victorious buyers.