Patronage Risk

Release of the report Disincentivising Overbidding for Toll Road Concessions

On 7 September 2012, the report titled Disincentivising Overbidding for Toll Road Concessions, prepared by the renowned international expert Dr Robert Bain and Oxera Consulting for the Department of Infrastructure and Regional Development was released.

Patronage forecasts for some Australian toll road projects have proven inaccurate and over-optimistic in recent years. Improving approaches to managing demand forecasting and patronage risk for infrastructure projects is essential to increase investor confidence and deliver the transport infrastructure required to boost economic growth.

In 2011 the Australian Government undertook a suite of work to gain a better understanding of the causes of over-optimistic traffic forecasts for PPP/toll roads in Australia. The Infrastructure Finance Working Group (IFWG) was also tasked with investigating ways to improve the capacity of government to invest in infrastructure projects, as well as explore possible improvements to the ways in which the private sector currently invests.

The Infrastructure Finance Working Group Report recommended that Governments should take a more flexible approach to the allocation of risk, including demand risk, for high net public benefit projects that have the capacity to generate revenue streams for users.

This report draws on lessons learned through international experience and practice within the toll roads sector. It presents conclusions and outlines best practice principles on how overbidding for future concessions might be disincentivised for future toll road projects in Australia.

Key conclusions highlighted in the report are:

  • Key policy objectives should focus on forecasting realism rather than accuracy, with the elimination of clearly biased overinflated submissions;
  • Procurement practice needs to ensure that the downside for submitting unrealistically high traffic and revenue forecasts are greater than any upside;
  • Incentives for excessive risk taking should be avoided in concession design, yet concessionaires should not be insulated from traffic risk;
  • Greater attention needs to be directed to capital structures of bids with potential focus on greater equity or ‘skin in the game’;
  • Bidding processes need to be realigned to avoid aggressive price-based competitions and deal scarcity that often drive overbidding; and
  • Greater use should be made of independent technical and commercial oversight of bidders' plan.

The Australian Government, through Infrastructure Working Group (IWG) is currently assessing this report in detail, with a view to progressing its recommendations.

The full report is available below:

  • Disincentivising Overbidding for Toll Road Concessions PDF: 13491 KB ReadSpeaker

The suite of work undertaken on patronage forecasting includes:

  • BITRE's Review of traffic forecasting performance of toll roads PDF: 607 KB ReadSpeaker
  • Patronage forecasting symposium: summary of outcomes PDF: 433 KB ReadSpeaker
  • An investigation by GHD in association with Dr Bain, of the causes of over-optimistic patronage forecasts for selected recent toll road projects PDF: 970 KB ReadSpeaker
  • An investigation by GHD identifying initiatives that may improve toll road data and modelling (Stage 1) PDF: 1660 KB ReadSpeaker
  • GHD's suggested implementation plans for initiatives that may improve toll road data and modelling (Stage 2) PDF: 904 KB ReadSpeaker

Public Consultation on Patronage Forecasting

As part of the review of patronage forecasting in Australia, in 2011–12 the Commonwealth Department of Infrastructure and Regional Development consulted with Industry Participants and other interested parties on the issues and potential remedies for managing demand forecasting and patronage risk in PPP/toll road projects. The Department released a discussion paper on the issues and received a number of written submissions.