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Standing Committee on Infrastructure, Transport and Cities
07/03/2016
Role of transport connectivity in stimulating development and economic activity

THORNTON, Mr Peter Barrington, Managing Director, Transportation Associates Pty Ltd

[12:28]

CHAIR: Welcome. Although the committee does not require you to give evidence under oath I should advise you that this hearing is a legal proceeding of parliament and therefore has the same standing as proceedings of the House. I invite you to make an opening statement if you wish, and then we will proceed to discussion.

Mr Thornton : Thank you, Chair. The first thing I would like to do is to give you a bit of my own background because it is my journey, if you like, that is relevant to my views and comments. I have had forty years of experience in transportation across a very wide range of issues. I will go to high-speed rail because it is the elephant in the room, really, in terms of your terms of reference. I started working on high-speed rail with the French experts in the mid-1980s on that project, and then went on to undertake a lot of corridor studies for New South Wales. For the Commonwealth, there were four major involvements during the Howard era. Firstly, I led technical studies for the joint state-Commonwealth work that was done in 1996. I was then bid manager for one of the Sydney-Canberra high-speed rail consortiums during that time. If the committee has not really studied the outcomes of that particular process, I would certainly recommend it to you. I advised the Commonwealth on the cost of the speed rail proposal. I was an independent reviewer on that project. Finally, I was the project director and lead author for the Commonwealth's East Coast 'very' High-Speed Train study in 2001. Since that time, I have been a commentator and author of quite a few papers on the subject and retained an interest.

I am not going to go to my paper. You have that and I am sure if you have any questions you will come back to me. I would like to give you a message, my key message, and the first thing I would really like to say is: do not lose sight of reality. I like to say that delusion is the obverse of vision. When people come to you with a vision, you have to be very careful they are not bringing a delusion and you have to be even more careful you do not jump on-board with that delusion. There have been a lot of delusions in and around the subject of high-speed rail during the time I have been involved in it.

The second thing is that it does not matter what is being brought forward to the committee and to the Commonwealth, it will come at a price. At the very end of the day, the Commonwealth will have to underwrite the project. It does not matter whether that is a corporation, or a national government, or a corporation that is really a national government, at the end of the day the Commonwealth of Australia will have to underwrite that project in some form or another.

The real job for Australia is to decide for itself, after having listened to all the advice from whatever sources it chooses to take that advice, just what the future form of the East coast of Australia is. We need to have an understanding of how we are going to live in the East coast of Australia—in the corridor, the part of Australia that is the most populous and will continue to be the most populous. We have to plan those systems—that connectivity, to use the committee's term—that will give effect to that plan.

It is the job of government to oversee the creation of transport infrastructure and to choose the means to do that. There are many ways government is able to deliver transport connectivity, in terms of the way it interacts with the private sector and the degree to which government decides to insource risk or to try to outsource risk. As my colleague has said, we have moved on from the days when the private sector is prepared to underwrite transportation risk on the basis of patronage. I was at a conference in Chicago on financing high-speed rail in 2010. The first speaker got to his feet, he was from very major London bank, and he said, 'You can forget about banks underwriting patronage risk.'

The models that are now emerging in transport are more realistic and will allow projects to be delivered more successfully. As I said, at the end of the day it is government who is the lender of last resort, but, more than that, it is government that carries the responsibility that whatever systems are created have continuity. For example, for the Airport Link in Sydney, which I refer to my paper, there was a possibility that the New South Wales government could have simply said, 'Pull the grills across the station doors and close access to the railway. We will just run trains end to end, because you have gone broke.' You cannot do that; you have to maintain the service because you created that expectation, and government has to do that.

It is very appropriate that the government, through your committee, has commenced this conversation about the ways and means of achieving connectivity. The unanswered question, and I would like to see your terms expanded to address this, is: is this connectivity really to achieve? What is the plan for Eastern Australia? The thing about it is that it really transcends the states. This is something that really has to be driven from the highest level of government with the full cooperation of the states, as my colleague referred to in my previous comment.

I think that, finally, in the spirit of getting real—and I might say that I stood on a forum at CEDA once, as one of three speakers on the subject of high-speed rail, and my comments to the audience were, 'Look, I do not have to spruik the values of high-speed rail. I have got the CEO of the rail CRC on this side, I have got the head of the Australian railway association on that side, what I need to do is encourage you to be real. Don't be deluded. When anybody tells you anything, does it pass the pub test?'—as somebody once said to me. So I think, in the spirit of getting real, it would be well worth your committee looking at models other than those that are in the most densely populated corridors and cities in the world, because I think those projects have a lot more to teach Australia than do projects that are being driven out of those particular countries and locations. And I can suggest some of those to you, if you wish. That is what I would like to say.

CHAIR: That would be a good start. Tell us those locations?

Mr Thornton : I think a very interesting project that you could look at was one that I looked at during the 2001 high-speed rail study, and that is Madrid-Seville. That project was built as a demonstration project in Spain and it was built because Seville was hosting Expo 92, perhaps—something of that order. There are very few projects in the world where anybody has done an ex post economic assessment of the project. That is one of them, and I think it has some important lessons. Essentially, regional development or social benefits, if you like, do not cut it in terms of the overall economics of the project. But that in itself is not a reason for government not to build the project. Government has the right to say, 'We have this long-term view for our country. We think that in the very long term it will reshape the country, and we as the government have the responsibility to do those things.' You stand or fall on the calibre of that judgement. We in the private sector stand or fall as to whether or not we made a dollar today, but you do not. You have a different job to do. And you can make those decisions, because there is no doubt that transport reshapes cities and it reshapes countries, but you have to stick around long enough for it to do it, because it can take quite a while. You have got to be prepared to take that risk.

CHAIR: What is the growth of Seville since the opening of their high-speed rail?

Mr Thornton : I do not know what the growth of Seville is but I can tell you the population is 700,000.

CHAIR: Now?

Mr Thornton : Now.

CHAIR: Do you know what it was before?

Mr Thornton : No, I do not. I am happy to do the research—

CHAIR: I would like that, because that would be helpful.

Mr Thornton : I think what I can do is to refer you to that ex post analysis. I had been looking for it for about 10 years and I finally found it again, and I do have that with me. I can provide that to the committee. It is certainly worth just looking at that.

Given that you have given me an opportunity to speak about the other models, I think you need to look at Taiwan. You need to look at Taiwan because it was, for a start, predicated on the private sector being able to build the project, which it has manifestly not been able to do. It has been able to build it but it has not made money. It was also based on a sort of a form of land value capture in the sense of looking at development that was going to take place around stations that were somewhat remote from the existing populations, and this has not occurred to the same level as had been expected. That is a project that has had to be bailed out.

I would encourage you to look at Sweden. I say Sweden because it is a country that has gone its own way and done its own thing in its own kind of way. And, to go to the question that Mr Van Manen asked, it is a system that runs both freight and higher speed passenger rail. There is a project called the Bothnia-Bahn, the Bothnia railway, which runs up the coast of Sweden. That has been built both to reduce travel times and to allow freight to transit it. The issue with freight is the problem of the axle loadings and the poor state of repair that freight operators keep their wagons in, pounding the track to pieces, derailments and those sorts of things. There is a compatibility question. The Swedes are looking at that because they do not have the population densities to justify building totally stand-alone railways. They, like us, need to squeeze as much as they can out of what they build. I think they are an interesting model.

It is also worth looking at California. California has a project that is happening right now. What is interesting about California is—again, to quote my own words—they have a rationale for building the project, and that rationale is that they have 35 million people in a state which is about the same size as Melbourne to Grafton. They are building a project only in the bottom half of that state. The reason they are building it is that they have a problem about where people are going to live. Cities such as Los Angeles and San Francisco are becoming crowded, but they do have opportunities in the central valley to accommodate growing populations. So there is a rationale for that project that is related to their plan about how they are going to live.

That is the sort of plan that I think we need to have. It is also an interesting project because of the way it is being funded. It is really being funded wholly by government. If I might say so, it is a little bit like what the Commonwealth has done in the aviation sector. They said they had a responsibility, they created the project and, at some point in time, they said: 'We no longer need to be in these businesses. We've established them and we've got to the point where the private sector's accountants can come in and go through all the books. They can see what we've been doing, and they can securitise that kind of cash flow.' In California, they are looking at creating the opportunity and then saying, 'Okay, we're going to create these opportunities, and then we're going to see whether or not the private sector will come and buy us out of those opportunities.'

Another project that occurred to me that is worth looking at—because sometimes you learn more from things that go wrong than you do from things that go successfully—is a project called the Bangkok Skytrain. It was a case in which a private sector developer said to the government of Bangkok, 'I will build you a railway into and out of Bangkok.' That project went broke. I think that these things are important in terms of the process of developing a keen understanding of what is real and what is not real.

CHAIR: In regard to your position that the government will have to, in some form or other, underwrite high-speed rail—there are varying opinions; you have one opinion; an old friend of mine said, 'Opinions are like noses; everybody's got one'—there are those who think that the entirety of the cost can be funded by value capture, whether it is private or public. However, as the responsible entity in government, it should be our task to seek to mitigate our risk to the highest possible extent by getting as many interested parties who will agree to accept some part of the risk to reduce government's exposure.

With the risk, private enterprise expect to make proportionate profit. We would need to enter into an arrangement or a process to find groups to form a consortium of those who wish to build, those who wish to operate and those who wish to develop around these terminals, stations and the next urban area beyond over a period of time. It would be done with some understanding and input into what form of value capture we should be developing.

What can we do to partner with the private sector to give them certainty and stability with regard to the location of stations, zoning and planning approvals, which can bring developers undone entirely?

By creating the optimal situation for these players, we mitigate our exposure and give the greatest chance of this being a commercial success, possibly at no cost to government or, at worst, at minimum cost to government but with certainty of delivery. Is that a reasonable way to look at what our job is and to determine at what point in time this is a real project that has a way of being able to substantiate that it is really a viable proposition for us to enter into over a foreseeable period but knowing that there is going to be an ongoing benefit?

Mr Thornton : I will try to answer the question. In 2000, I wrote the East coast very high speed trainscoping 'study'—I did actually write a hell of a lot of it, but not necessarily all of it; I had some mates who gave me some help along the way. Up to that point, high-speed rail was being pushed at the government by the private sector. It was not till that report was written that it was a report which was written from the perspective of government. As I said, I think it has to be the Commonwealth and the states together. I say that because one of the things that came out of the Sydney-Canberra high-speed rail project was that it was perceived to be a way of Canberra being tied by a steel string to Sydney. Of course, other people in other states said, 'What about us?' and, actually, it was a very unhelpful process. The main three east coast states have to be involved, but I think it has to be driven from government down. There is a lot of testing to be done to find out where your risk point is and you can say, 'Yes, government is prepared to take the risk on this.' As an example, it might be, say, that government is prepared to take the risk on acquiring a certain amount of land in certain strategic locations because it is committed to this project; and, by acquiring that land, government will then add value to it. In the same way as the Commonwealth added value to airport sites in its various different ways by various improvements until they had a value to the private sector, the government will add value and then, at some point, will be confident that it will be able to on-sell that to the private sector.

Could I take you back to America. There is a piece in my paper about the way the American railroads got funded. It was a realisation that I had only just come to myself. What it says is that the government made available land owned by the government. It did not take somebody else's land; it took land that was owned by the government. It was land that had a low value in the hands of the government but, when put into the hands of the private sector, had a much higher value. So, while I do not think government in that case captured the value of that land as such, what it did was make a contribution to that project to achieve its ultimate aim of getting the connectivity in the United States. It used what it had, which did not cost it much, to see that it happened.

This is where a project gets planned and you decide what your strategic locations are going to be and then the government acquires that land. Then, government having taken that risk, it packages it to the private sector to develop. I think you have to always try to keep industries doing what they do best. Government does some things much better than the private sector; the private sector does some other things better. What the private sector does not like to do is take certain sorts of risks that it says only government can take.

There is an example—I have referred to it—with what is happening to the Sydney Metro. The New South Wales government have been through the calling for tenders on the basis of patronage risk and seeing what happens. They have seen what has happened on tollways; they have also seen what has happened on railways—they do not do that anymore. What they have done is to call tenders for people to take the risk on building trains. People know how to build trains. They know how to build railways and they are paying on a fee-for-service basis for the actual operation of a railway.

But what they have done is to acquire a number of strategic sites which are needed to actually give effect to the project, one of which is not very far from here. It is a multistorey building, and my understanding is that they will redevelop that or they will call for the private sector to redevelop that site. By having been acquired it will be redeveloped to some higher and better land-use form.

I think government has the ability to do that. It has the ability to construct a project where they can get the different bits of the private sector into their most efficient parts, whether those are building a tunnel or building a railway and so on. So I think that there is a role for government. I do not think this is the sort of thing that can be delivered by government saying, 'Well that's very nice, private sector. Thank you very much. We'll have a high-speed rail, tell us when you're finished.' I do not think that government can do that.

The other thing I might say—and, again, this might perhaps be a reflection of my own journey on this subject—is that we need to start with a realistic piece: a realistic-scale project. The corridor that is realistic in scale is Sydney-Newcastle, or possibly Sydney-Canberra. Certainly, the two are linked. With Sydney-Newcastle, though, what I can tell you from other work that I have done recently is that in the sector between Hornsby and Wyong the passenger-minutes saved by building a much better alignment in that corridor exceeds 50% of the sum total of all the passenger-minutes saved by every rail corridor improvement project leading in and out of Sydney. That is in that one sector alone.

That is, as my colleague said, the fact that we built an 1880s railway and it has served us very well, but we have squeezed everything we can out of it.

CHAIR: That would also speed up the F3 road as you speed up the rail—as one of our earlier witnesses said.

Mr Thornton : Potentially it would, but people have all sorts of different reasons for using the transport mode that they do. The one concern I have about that sector—well, I have a number of concerns about it. At some time I made a proposition that Transport for New South Wales should actually run a much better train service out of Gosford. I said, 'Why don't you put on a buffet car?' They said, 'People will not pay for it.' The people of the Central Coast will not—it is not the stockbroker belt; it is not Surrey. It is not the commute from Brighton into London. People live there for a reason and that is because it is much, much cheaper to do that.

So I do have those concerns, if you like, certainly about the viability of any private sector party saying, 'Actually, we can make this work,' in that sector, and that is the most densely-populated sector we have.

CHAIR: If it went any slower you would need a sleeper rather than a buffet car!

Mr Thornton : In fact, there are a lot of people who take advantage of that, I might say.

CHAIR: They sleep on it, yes.

Mr Thornton : Yes, they have a sleep on the train.

CHAIR: I know someone who slept right past their stop, recently. It was not the Prime Minister! At the beginning of what you said you mentioned that you were rushed by the private sector—it was in relation to the Canberra to Sydney high-speed rail, I think. What was the purpose of their rushing to want to get involved?

Mr Thornton : In Sydney-Canberra?

CHAIR: Yes, I think that was it. You started off your—

Mr Thornton : With Sydney-Canberra, as I said, the whole issue of high-speed rail was one that was being pushed at the Commonwealth. I think that in the end the Commonwealth finally said, 'Look, we've got a whole lot of people who are saying, "We can do this," we'd better give them a chance.' So they called for a competition.

To my knowledge, that is the only time in the world that there has been a competitive tender to build a high-speed train project. There were four consortia, all of whom said that they would build it at no net cost to government and who offered four totally different business cases. That is a very unique model that we have in that.

They did it for all sorts of reasons. They did because they believed in it. At one end of the scale there are people who simply love high-speed rail. At the other end of the scale there are rolling stock manufacturers who want another opportunity to sell rolling stock.

What is remarkably scarce on the ground is anybody who actually wants to operate these as long-term businesses. If you think about it another way around—I should try to make this a good analogy—there are very few people who say: 'We're in the transport business. We're in the high-speed rail operating business. We want to operate this transport system.' If you do that—there is one example. and I will come to that—then everything is driven by creating and operating the project. It is not being driven by construction companies. To date PPPs in Australia have been largely driven by civil engineering contractors who want another project to build. They certainly do not want to stick around and operate them.

Mr VAN MANEN: I might add they do not build them very cost-effectively either.

Mr Thornton : That may be a different story I guess—or efficiently. But they are not like people who say, 'I want to create and airline.' What they are saying is, 'I want to create the transport business.' I think that if I were the Commonwealth, or any state, I would be looking for an organisation to partner with for the long term to run a transport business. I would then plan that project. I would do a lot of the design for it. I would put the construction industry in a hard-dollar tender to build that project and drive it down to the lowest possible dollar. What I would not do is to put all sorts of risks into the deal, if you like, where the construction companies have to price in, or even the consortium have to price in.

In terms of the delivery process, it is really important for the Commonwealth to consider that if you go further down this track you have to be up-front about what it is you are going to put in. Let us say the Commonwealth has decided that it will do as the US government did years ago. It will put this package of goodies and you have to make that clear. You say, 'The Commonwealth will undertake to acquire this many hectares of land in these locations' and you put that in the deal. Then you say, 'Now, who is prepared to come along on this journey?'

CHAIR: Earlier today we had evidence to the effect that the marketplace must drive infrastructure and the marketplace was the purpose of infrastructure driving property values. While part two of the recent study spent very little time, a handful of words, on the possibility of value capture—it is all about an operational business—it would appear there are others who are in a different business and see high-speed rail as the essential infrastructure to unlock incredible value out of land that has a very low value because it now would be competing with some of the most expensive real estate in the world. Therefore, you take the weight off the operator. At a certain price this is a viable operation, should the equation be more to look at the capital uplift funding the construction, the operation funding and the maintenance ongoing—to separate the two a little.

Mr Thornton : Quite possibly that would be the case, because in a lot of the studies that have been done the ability of the system to run at some level of profitability once it is in place has been demonstrated. There is a view—even from the work that we did—that once it was there the project would wash its face in a financial sense. It is certainly the capital cost of putting in place the platform on which that service can operate. To that end—and I heard some of the evidence earlier on, with discussions about section 94 contributions analogy and that sort of thing—I think that mechanisms that do hypothecate some of that value uplift back to pay for the infrastructure that has created them is justifiable.

I suspect that it could be a very tricky mechanism, and a difficult mechanism. Maybe a better mechanism is to find a way for the Commonwealth, or the states, acting jointly, to find a way to actually acquire what it needs. What does a land developer do? A land developer buys land as cheaply as possible. Incidentally, I have referred to the fact that if you do build a high-speed rail then some of that land will be blighted and you can be absolutely sure it will be bought by developers who will then try to lift it up to a higher level. That is their job. Their job is to buy cheap and sell as expensively as they can. So I think there are instances where the government, within reason, is able to follow the same model. It can acquire property on fair and just terms for what it believes for the project. It can have the value by creating the transport systems to then give better access to it. Then it can in due course take a profit from it. That to me is absolutely the simplest model.

To do it on the basis that we tried to do in North Ryde, whereby you securitise a future cash flow that comes from the promise that you will get this little piece of value every time it goes from a three-storey walk-up development into an eight-storey—that has added a lot of value. That is a complex mechanism and I do not know that anybody has come up with a formula for it yet.

Mr VAN MANEN: Unless the government owns the land and does the development and sells it off.

Mr Thornton : But, again, that is not a game that government really wants to play in. I think it is much better for government to be able to say, 'We have added the value to this piece of land by doing all the headworks in terms of transport connectivity. What we now want to see is a new town centre develop around here. We have a master plan for it and we are now going to call for interest from the land development industry and the property development industry to take this on and deliver it.' It is a part of your job to say, 'This is what we want to see happen. We have created the way for this to happen.'

Mr VAN MANEN: Part of the value can be picked up in the increased rates and land taxes, infrastructure charges, development fees and all those sorts of things.

Mr Thornton : On that point, in my submission I mentioned that the New South Wales government, and particularly Treasury, justified the government's investment in that project on the basis of avoidable costs. It actually said, 'In South Sydney we already have all the services that are pretty much needed and it is cheaper for us to have more people live there than it is to build more housing out on the fringes of the city.' So it is actually the reverse argument.

CHAIR: With the idea of the government acquiring land and therefore gaining the full uplift of the value as a form of value capture, that, partnered with any private acquisition of land that was subject to either capital gains tax or some sort of value-capture because of infrastructure, then we have a broader spread of risk and revenues to go towards the cost of the infrastructure. It seems obvious.

Mr Thornton : Yes. That seems to be what is happening in California. The project itself seems to be being built by a variety of federal funding, state bonds and also hypothecation of what I will call green bonds—when people buy permits for gas emissions. That is being hypothecated against the project. But they are certainly buying land in and around their strategic locations. Andy Kunz's comment to me is that they use them for car parks to start with and then use the uplift in the value.

CHAIR: Thank you for your evidence. Did you have anything more to add?

Mr Thornton : Probably, but I do not want to take up your time!

CHAIR: We could talk for days I am sure!

Mr Thornton : I am very happy to reappear before the committee, if that is of any assistance.

CHAIR: Thank you for attending today. The secretariat will send you a draft transcript of proceedings so that requests can be made to correct any errors of transcription.

Mr Thornton : Thank you for the opportunity.

Proceedin gs suspended from 13:04 to 13 : 33