Opening Statement Peter Walsh, Chief Executive, Transport Infrastructure Ireland Joint Committee on Transport and Communications 29th November 2022
The Reported Increase in Motorway Toll Charges from January 2023
Chairman, Members of the Committee, I thank you for your invitation to attend today. I am joined by my colleagues Cathal Masterson, Director of Commercial Operations and Pat Maher, Director of Network Management. I understand that the Committee wishes to discuss the Reported Increase in Motorway Toll Charges from January 2023.
To assist in this discussion, I will:
- Provide some Legislative and Contractual context;
- Explain why toll charges are rising;
- Explain what toll revenue is used for;
- Outline the consequences of deferring toll charge increases and;
- Describe TII’s engagement with DoT in relation to Tolls.
1. Legislative and Contractual Context
The National Roads Authority, operating as TII since 2015, was established under the 1993 Roads Act. It is the general duty of the Authority to secure the provision of a safe and efficient network of national roads having regard to the needs of all users.
Under Part 5 of the Roads Act, TII is assigned powers and obligations in relation to the making of toll schemes.
Under Regulation 15 of the Road Regulations 1994 monies accruing to the Authority under the Act shall be applied for the purposes of its functions under the Act or otherwise in relation to the construction and maintenance of national roads.
There are ten toll roads situated on the national road network. Of those, two are public tolls (M50 eFlow and Dublin Tunnel) as the toll revenues are collected directly for TII as a public authority. These public toll revenues are invested by TII in the operation and maintenance of the national road network.
The other eight toll roads are public private partnership (PPP) toll roads.
The creation of PPP toll road contracts was a Government policy initiative. In 1999 the Government decided to adopt a PPP approach to fund public capital projects. In the National Development Plan 2000-2006, the Government set a minimum indicative target of €1.27 billion, for private sector investment into national road projects. The use of PPP contracts was identified as an essential component in contributing to the financing and delivery of the national road improvements. The NDP stipulated that funding structures, including road user tolls, where appropriate, were to be examined.
The Government established the Central Public Private Partnership Unit in the Department of Finance at the beginning of 1999, to lead, drive and co-ordinate the process and in mid-1999 the Government established a Cabinet Committee on Infrastructural Development, including Public Private Partnership. The Cabinet Committee focussed initially on transport, notably the core inter-urban road network.
In response to these policy decisions TII established a PPP Unit and developed a bundle of eight Toll Concession PPP contracts which, following competitive tendering, were entered into during the period 2003 to 2007. In total €1.75 billion of private finance was raised by the PPP companies and used to fund the construction, operation and maintenance of these PPP road projects.
TII’s eight PPP Toll Concession contracts have contract durations of 30 years for six of them, 35 years for one and 45 years for the remaining one.
During those years the PPP Co must construct, operate and maintain the road. At the end of the period the road must be handed back with a minimum residual life. The minimum residual life varies for different elements of the asset but for example, for pavements it is 10 years. The payments relating to these services are strictly controlled by the contract conditions. Revenue from index linked tolls is a core element of these contracts.
2. Why Toll Charges are Rising
After a decade of little or no inflation we are now in a period of high inflation. I reported to this Committee, on 6th April this year, on the impact that high inflation rates are having on construction contracts. Toll charges are set relative to inflation.
The byelaws for toll roads provide for toll charges to be reviewed annually. The method for calculating toll charges is set out in the byelaws for each toll road. The Maximum Toll is calculated by indexing the Base Tolls (which are set out in the relevant byelaw) by the consumer price index (CPI) applicable in August of the preceding year. The calculated amount is then rounded up or down. The actual toll charges cannot be more than the Maximum Toll levels.
In relation to the eight PPP Toll Concession contracts, the PPP companies submit their toll charge calculations annually to TII as part of their Annual Toll Plans as provided for in the PPP contracts. This normally occurs in September or October. TII then reviews these submissions and the associated calculations and, in accordance with the contract conditions, where the calculations are in accordance with the byelaws, TII cannot unreasonably withhold or delay approval of the proposed revised tolls.
TII does not have the right to prevent the PPP Company from raising the toll charges where their submissions are in accordance with the byelaws.
In relation to the M50 eFlow Toll, it is a matter for the TII Board to determine the Toll Charges subject to not exceeding the Maximum Tolls.
TII’s practice has generally been to set the Applicable Tolls at the Maximum Toll levels in accordance with the byelaws, as the revenues collected contribute to the operation and maintenance of the national road network.
In relation to Dublin Tunnel Toll, it is also a matter for the TII Board to determine the Toll Charges, subject to not exceeding the Maximum Tolls. The toll arrangements for Dublin Tunnel were established firstly, for the purpose of demand management (i.e. ensure that the non-HGV traffic would not interfere with the ability of the Dublin Port Tunnel to meet its primary objective of providing a high quality access route for HGVs to Dublin Port) and secondly, to generate revenues to support the operation and maintenance of the asset. Therefore, the Board of TII in determining the tolls rates consider both the levels of traffic and congestion at the tunnel and financial issues in determining the appropriate charges. At their October meeting the TII Board accepted the TII management recommendation, that the 2022 toll rates are sufficient to prevent downstream congestion and should remain unchanged for 2023.
3. What Toll Revenue is Used For
TII receives approximately €200m annually from the two public tolls and revenue share from the PPP Toll Concessions. This revenue is used to fund the asset renewal, operation and maintenance of the national road network. The 5,300km of national road network is essential to the economic and social life of the country. The network has an asset value of €31 billion (as assessed in 2019). The asset renewal, operation and maintenance of the network requires approximately €600m annually. The Department of Transport provides the balancing €400m from general taxation. This represents 2% of asset value and is barely adequate to maintain asset value.
The toll revenue of the eight PPP concessions is used to repay the loans raised to fund the construction, and to fund the PPP’s operation and maintenance of the 300km of motorway and dual carriageway. The senior debt, outstanding at 31 December 2021 was approximately €730m. The PPP Companies employ approximately 250 people on the eight PPP Toll schemes.
4. The Consequences of Deferring Toll Charge Increases
TII does not have the right to unilaterally change the basis on which PPP toll rates are revised therefore any proposed change would have to be the subject of negotiation.
From TII’s experience, PPP companies would not enter into detailed discussions without first engaging legal and financial advisers (which their lenders would likely insist on). Negotiations of this kind could take many months if not years to successfully conclude.
Any proposed change to the terms of the PPP Toll Concession contracts that would ‘freeze’ toll rates would change the public / private risk transfer (as it could be said to impact on traffic demand). This change in risk would first need to be assessed by NDFA, CSO and possibly Eurostat.
TII’s PPP Toll Concession contracts are currently treated as ‘off balance sheet’. For a PPP concession to be recorded off government balance sheet, the majority of the risks and rewards have to be borne by the private partner.
If the proposed changes impact the demand risk that is currently being carried by the private sector, this may have an impact on statistical treatment.
In the event that a freezing of toll charges is agreed, the contractual entitlement to the index linking of toll charges would still exist. If inflation continues to rise, this will result in rebalancing of, and consequentially, larger increases to, toll charges in January 2024.
In addition, any freezing of toll charges would also reduce the amount of money that TII receives under the revenue share mechanism of the PPP contracts.
In relation to the public (M50 eFlow) charges, freezing the charges at 2022 levels would result in a forecast reduction in revenue of approximately €13m. That reduction would have to be made up from general taxation as the costs of asset renewal, operation and maintenance of the national road network is subject to the cost increases caused by inflation.
5. TII’s Engagement with Department Of Transport (DoT) In Relation to Tolls
TII and DoT are in regular communications on a wide range of issues. On the specific matter of Toll Charge increases, indications that there would be increases, as a consequence of high inflation rates, were communicated in late July. Details of how a range of possible inflation rates would affect toll charges were sought by DoT and provided by TII on 1st September.
The August Consumer Price Index (CPI) of 8.6% for the 12 months to August 2022, was published on 12 September. This CPI is the contractually relevant inflation rate for toll charges. This allowed the PPP Toll concession companies to complete their toll charge calculations as part of their Annual Toll Plans. The forecast of the funding that TII would receive from Tolls during 2023 was communicated to DoT at the end of September. Following the 25 October meeting of the TII Board, at which 2023 Toll Charges were set, an information note detailing the 2023 toll charges was provided to DoT on 7 November.
That concludes my opening statement. My colleagues and I will endeavour to answer any questions that members of the committee may have.
Please see the Appendix below for more information