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In 1981 at Van Nuys Airport Los Angeles, David Copperfield made a LearJet disappear. While Copperfied didn’t actually make the plane vanish, his brilliant sleight of hand made it appear as if the jet liner didn’t exist at all.
Forty years on Australia is looking to a different type of illusion with the way we pay for new airport rail links in Sydney and Melbourne.
To be clear, the federal government’s intent and motivation to deliver rail links to our major airports is commendable. What should be challenged, however, is the vehicle through which the money could be deployed and the illusion that there is a commercial return available.
In this case, the illusion takes the form of public finance. Public finance, or “innovative finance” as it has come to be known, is simply a loan or equity investment by taxpayers (like shares) where the government retains an ownership stake in the infrastructure in which it is investing. The appeal of public finance lies in the ability of the commonwealth to keep the cost of the investment off the budget bottom line.
The problem is, like any form of finance — a mortgage, car finance or a business loan — the money eventually needs to be repaid. And, in the case of suburban rail lines, ticket sales won’t come close to meeting the repayments.
The reason is simple. There are no profitable passenger rail lines anywhere in Australia. And if equity is to be viable it has to earn a return. If there is no profit, there is no return, making the commercial case for such an investment invalid.
Despite these commercial realities, we had an indication last month that the commonwealth intends to invest up to $5 billion of equity to acquire joint ownership of the future Melbourne Airport Rail Link with the Victorian government. Speculation suggests that NSW could see a similar approach adopted for the North-South Rail Link to connect the new Western Sydney Airport into the suburban rail system.
Of course, connecting major airports by rail to the city they serve is a good thing and the government’s focus should be applauded. Airports and their surrounding ecosystems generate millions of land side trips every year, and mass transit like rail is the best means to do the heavy lifting on those journeys.
Timed right, delivering rail can dramatically enhance the economic contribution an airport makes and offer world-class services for users. The global rule of thumb is that rail to airports stacks up economically from around the 40-million-passengers-a-year mark. That means, in western Sydney, the focus is better placed on preserving the corridor and making the airport “rail ready”, rather than having the first plane met by an empty train.
But the transport planning and economic merits of airport rail links are only part of the equation. The critical question is how do we pay for this infrastructure. For the commonwealth there is an understandable, but perverse, incentive to shift the costs by using public financing.
Our accounting rules say that if there is a reasonable prospect of a commercial return on an investment, government can work “off budget” with their investment matched by a notionally profitable asset. These rules only hold if the investment is commercially viable — and for passenger rail in Australia, it isn’t. Typical cost recovery on Australian passenger rail is about 25 per cent, or put another way, every train trip costs the taxpayer three times what it costs the punter.
For a commercial return on Melbourne or western Sydney airport rail lines, tickets would need to be hundreds of dollars a trip, which means no one would catch it. So in addition to being commercially unviable, the high ticket cost would extinguish the economic and transport planning merits (and there are many) of both projects.
The lesson here is that commercial and economic viability are two different things. The taxpayer can, and will, make a return on airport rail links, but it will only ever be an economic one. And that’s the right place for the taxpayer to be making returns. If the economy grows, and the project makes sense, society wins. But to get that return, the taxpayer — through the commonwealth — needs to commit hard dollars, not public “equity”.
To this day, there is dispute about exactly how David Copperfield pulled off one of the greatest illusions in popular memory. Fortunately, the “innovative” finance illusion won’t be nearly so captivating — because the audience simply won’t buy it.
Adrian Dwyer is chief executive
of Infrastructure Partnerships Australia
This article first appeared on www.theaustralian.com.au
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