Port Botany: is privatisation the key to infrastructure development?

The NSW Government’s proposal to privatise Port Botany raises a couple of interesting questions about the objectives of the sale and the likely outcome.

The stated objective is to generate funds to be used on a variety of infrastructure projects, such as the Pacific Highway. However, it’s hard to see how the Government can maximise the proceeds (and the benefits to the community) without addressing the state of land transport surrounding Port Botany.

The Port relies heavily on road transport and the major road corridors, the M5 and M4, are heavily congested. Meanwhile, container movements by rail are in decline due to a lack of intermodal capacity and prioritisation of lines for passenger rail. Overall, the ability of the Port to move containers exceeds the ability of road and rail transport to clear and return containers and this differential is likely to be increased by the current expansion of the Port’s capacity.

This bottleneck could significantly dampen interest in the refinancing of the Port. While the Port provides an attractive revenue stream to investors, a lack of growth potential would need to be factored into the price offered by bidders.

The solution appears to be pushing back the refinancing process to 2013 and kicking off a number of infrastructure initiatives in the meantime. The NSW Government has recently put in a submission to Infrastructure Australia to seek funding for a comprehensive review of the land transport system including sequencing of necessary infrastructure and potential funding sources. It has also already commenced the Port Botany Landside Improvement Strategy and construction of the Southern Sydney Freight Line and the Einfield Intermodal Terminal.

The question is whether this will be enough, or at least enough by 2013, to provide bidders with comfort that landside issues are not going to act as a handbrake on the operation of the Port. The proposed review is not expected to define the problem and solution for 18 months. Until that time, which will be fairly close to the proposed refinancing process, it will be unclear whether the projects currently underway have significantly improved land transport productivity or have simply moved the bottleneck to another point in the road and rail networks. Given the complexity of the transport system, it may well be the latter meaning bidders will have to price in uncertainty about the potential throughput of the Port.

While this may seem a doom and gloom scenario, it could be part of the Government’s plan. Infrastructure Australia co-ordinator, Michael Deegan, has suggested refinancing the Port will bring much needed private sector investment to the surrounding road and rail networks. Giving the private sector a reason to invest in infrastructure sounds like clever policy from a Government that has inherited more infrastructure bottlenecks than available funds. However, such a strategy can’t be consistent with maximising the proceeds of the refinancing as bidders will have to price in their potential contribution to land transport infrastructure.