Born out of Melbourne’s first private toll road deal, CityLink, in the 1990s, the publicly listed company has grown to become the overlord of this country’s toll roads. The wheeling and dealing has been profitable. Within the last decade, Transurban’s share price has almost doubled, giving it a market value of more than $25 billion. Of the 99 kilometres of toll roads in Sydney, 95 kilometres are either majority or half-owned by Transurban. These include the M2, the M7, the M5 South West, the Eastern Distributor, and the Lane Cove and Cross City tunnels. The Harbour Bridge and Tunnel remain the only ones Transurban does not have its hands on. By late next year, Transurban will be operating Sydney’s next toll road known as NorthConnex, a nine-kilometre tunnel between the M2 and the M1. Transurban has a stranglehold on Sydney's growing labyrinth of toll roads such as the Lane Cove Tunnel. Credit:Bloomberg People wary of Transurban’s rise refer to the way in which the company has appeared able to get governments to do what it wants. “Road owners have more patience than governments,” says one source who has sat on both sides of recent NSW infrastructure deals. When a politician makes a promise – say, to widen a road – the road owner is in prime position to extract a favourable deal. “They’ve been able to invest so that they’re in a monopoly position for the future,” Tony Harris, a former auditor-general, says of Transurban.

“They may pay more money than you would think is reasonable at the moment, but they will make that money back in the future, when, for example, the road has to be expanded.” Three Sydney road projects have been approved after negotiations conducted from this position. In 2009, the former Labor government agreed to grant Transurban the right to toll the M2 for another four years, plus an almost 8 per cent toll increase, in return for a $500 million widening. In 2011, the Coalition government agreed to a deal that allowed the owner of the M5 West motorway, in which Transurban has a half stake, to widen that road, in return for another 3.3 years of tolling rights, and an increase in truck tolls. A spokesman for Transurban points out that such projects could have been delivered by any owner. “Transurban's only point of difference is that we have shown a desire to continuously improve and upgrade the assets as the need arises,” he says.

The third instance is NorthConnex – which was initiated by Transurban, the first and only toll road so far to be initiated under the Coalition government’s unsolicited proposal framework. Under this deal, $810 million of the cost of the $3 billion road comes from the state and federal governments. The rest of the funding largely comes from Transurban’s right to levy tolls for longer on its existing roads – 11-year extensions to the M7 and Lane Cove Tunnel tolls – as well as higher truck tolls, and the right to toll NorthConnex. From a value-for-money perspective, the state’s auditor-general gave the NorthConnex transaction a clean bill of health. But that established operators are initiating projects is intensifying interest in the WestConnex sale. If Transurban and its consortium – which includes AustralianSuper, Abu Dhabi Investment Authority and Canada Pension Plan Investment Board – win the sale, would they not then be in prime position to claim other road projects spun off WestConnex?

These represent another $23 billion-odd series of works: the so-called Western Harbour Tunnel and Beaches Link to the Northern Beaches, and F6 extension to southern Sydney, plus potentially the right to toll the Sydney Harbour Tunnel on a reconfigured deal. “There aren’t that many road projects in Sydney,” says one infrastructure advisor. “If Transurban wins WestConnex, they have effectively locked up the east coast tollway market.” It’s a fear that has attracted the attention of the competition regulator. Australian Competition and Consumer Commission chairman Rod Sims says there has been concern expressed that, if Transurban buys WestConnex, it ‘‘will get the inside running on other projects, particularly those self-initiated projects which are being increasingly accepted by governments’’. Sims is running an inquiry into whether to give clearance to a Transurban bid, or require a “statement of issues” outlining concerns about a potential acquisition. The latter would delay an outcome by two months.

The Berejiklian government's desire to complete the WestConnex sale within the next four months is a departure from the original plans. When WestConnex was first conceived, the plan was to sell three stages sequentially. Importantly, the sales were to occur once the volume of vehicles using the roads was known. The updated business case for WestConnex in late 2015 states that ‘‘maintaining full ownership of [stage two] during construction is expected to maximise the return to the state on eventual sale’’. Under those plans, money raised from selling early stages would pay for the construction of latter. “This [latest] process was never ever put forward in the original business case. It indicates that this would be a sub-optimal outcome,” says Labor’s transport spokeswoman Jodi McKay. Much of the construction of WestConnex is still a long way from completion. Credit:Nick Moir

The decision to fast-track the sale of a 51 per cent stake in the entire project in one swoop means the government is forcing the bidders to finalise their price based, to a large extent, on traffic forecasts. While it will lower the government’s exposure to construction risks and traffic failing to meet forecasts, the bidders will factor that into what they are willing to pay. “In order to get it away, the government might have to accept a discount on government traffic figures or accept higher rates of return [for the buyer],” says Martin Locke, an adjunct professor at Sydney University and former investment banker and infrastructure adviser. “The sale price is perhaps going to be lower than what it might otherwise have been under the government’s original base-case scenario of a later sale. In return for that, government is reducing its risk.” A NSW Treasury spokesman says the sales process means WestConnex “can be built sooner”. And on Friday, the government approved the third and final stage of the project, despite the fact that final plans for the Rozelle interchange are yet to be completed.

For bidders, there are potentially other motivations at play. The prospect of being included in any future re-organisation of road tolls in Sydney is a further reason for companies to pitch for a stake in the new roads. If Transurban purchased WestConnex, Macquarie analysts wrote to clients last year, it could be “strategically important”. What will the impact of driverless vehicles be on Sydney roads? If Transurban owns the majority of them, it is sure to be part of that discussion. Similarly, Transurban’s knowledge of the city’s congestion issues “will allow it to pre-empt traffic challenges in conjunction with government, without loss of value”. The same foot-in-the-door considerations are no doubt being mulled over by Transurban’s competitor bidders such as a consortium spearheaded by funds manager IFM Investors. Because it has no power to change the tolls it charges, or even change the design of the roads it manages, Transurban has denied it is a monopoly.

And though Transurban has pulled off three successful negotiations for new or expanded road projects in Sydney, it has also missed out on others. Transurban has previously disclosed that three “formal” unsolicited proposals were rejected by the state government between 2013 and 2015. These proposals were to duplicate the existing M5 East – a project now taking place as part of WestConnex – to take over the tolling services for WestConnex, and to lower the Eastern Distributor and Cross City Tunnel tolls to ease traffic while a light rail line is built in the heart of Sydney. Government sources say another Transurban proposal – a motorway to the northern beaches – was rejected in 2015, though Transurban denies having made such an unsolicited proposal. Either way, for those more sanguine about the company’s reach, that so many of its proposals have been rejected suggests that the number of kilometres it controls does not directly equate to control of the political process. Indeed, there are some that could see a benefit from one company owning so many toll concessions.

The way Sydney’s roads are tolled is, by any objective measure, unfair and arbitrary. A motorist driving to the central business district from the city’s north-west suburbs might have to pay three tolls, while someone driving from the south-west might – with the cash-back scheme on the M5 – not pay at all. Transurban CEO Scott Charlton has declared he will not overpay for WestConnex. Credit:Pat Scala There are fairness arguments, therefore, for consolidating the way in which tolls are charged in Sydney. “If you've only got one major player, or two major players, that’s not complex at all,” says Charles Casuscelli, a former head of the NSW Transport Management Centre. With Transurban part of the bidding for WestConnex, chief executive Scott Charlton declined to be interviewed for this story. But the silver-haired Texan, who counts one of his first jobs as designing laser-guidance systems for smart bombs, has spent the past few years positioning himself as a thought-leader on future urban transport options. What should governments do when more fuel-efficient vehicles erode petrol excise revenue? Should governments not consider a more holistic view of road tolling – charging people according to the time of day they drive, or whether they use congested routes? These are all issues on which Transurban and Charlton have shown a willingness to engage.

A spokesman for the company, meanwhile, lists the investments it has made in back-office technology, and “intelligent transport systems which help manage the network more efficiently. “These bring technology from the roadside to the control room, which helps drive efficiency of how the roads flow,” he says. Charlton has made clear he will not overpay for WestConnex. His company has been willing over the years to wait patiently on the sidelines before pouncing on distressed assets. More than a quarter of the toll roads in Australia that Transurban controls have been acquired out of receivership, for half the construction costs footed by the previous owners. Loading

While the original investors in those toll roads lost their shirts, Transurban has benefited handsomely from snapping them up at fire-sale prices. And there are unknowns about the WestConnex project that complicate the bidding. One uncertainty is the traffic that will – or won’t – eventually pass through the tunnels linking the M4 and M5, which make up stage three of the project. It is inherently difficult to forecast traffic for tunnels; the initial commercial failure of the Cross City and Lane Cove tunnels are evidence of that. In addition, construction of the $1.5 billion underground interchange for WestConnex at Rozelle promises to be hugely challenging. Also difficult will be how WestConnex links to the promised motorway link known as the Sydney Gateway from Kingsford Smith Airport at Mascot to St Peters. Bidders will also be wondering how the state will manage two conflicting post-sale roles: as a holder of 49 per cent of Sydney Motorway Corporation – the corporation that owns and operates WestConnex – and the entity that has granted the tolling rights.

“Firstly, that exposes the government to a conflict of interest and, secondly, if you’re the private sector looking to buy into Sydney Motorway Corporation, what level of involvement do you want the government to have?” Martin Locke says. “If the project is experiencing some sort of difficulty, are you comfortable having the government rep sitting at your board table taking notes?” In the case of Lachlan Macquarie’s early tolls, not everyone in the colony submitted to them. When a new Supreme Court judge arrived in Sydney in 1815, that judge – Jeffrey Hart Bent – was so offended by the tolls that he started to argue they represented an illegal tax unsupported by legislation. What followed was a flurry of correspondence between London and Sydney.