How low can it go?

The big news story in Brisbane today is that Rivercity Motorway is dropping the Clem7 toll from the already discounted price of $2.95 to $2:

Toll for Clem7 tunnel to drop to $2

Rivercity Motorway was hoping to charge $4.28 per car, and expecting 60,000 cars to use the tunnel daily.  Instead, only 22,500 cars a day use it, paying $2.95 per trip.  Clearly demand hasn’t been as great as expected, possibly because people are willing to endure a few extra minutes of inconvenience rather than pay $2.95 per trip (or around $30 per week if you travel through it twice each working day).

It’s possible that cutting the toll could lead to a significant increase in traffic numbers, but the increase would have to be very large to improve the long-term outlook for Rivercity Motorway.

To earn at least the current daily revenue (i.e., $66,375 = 22,500*2.95), the price drop would have to increase daily tunnel usage to around 33,200 cars or by 48%.  But, to earn what Rivercity Motorway expected the tunnel to earn each day (i.e., $256,800 = 60,000*4.28), usage would have to increase nearly 500% to 128,400 cars per day from the current 22,500.  Even for the tunnel to earn the revenue it would for 60,000 cars daily at the $2.95 toll (i.e., $177,000 = 60,000*2.95), usage would have to increase almost 300% to 88,500 cars per day.

The challenge of increasing tunnel usage by these large amounts clearly raises questions about the long-term viability of Rivercity Motorway, so it is no surprise its shares are trading at around 2 cents per share compared with around 30 cents earlier in the year.

Last month, Wilson HTM Analyst Nathan Lead (quoted in the Courier-Mail of 4 May) observed that, if traffic numbers don’t increase to around 75,000 to 85,000 cars daily, Rivercity Motorway is at risk of defaulting on its debts in the next two years.  So it could end up being placed in receivership, just as happened to the operator of the Lane Cove Tunnel in Sydney.  Let’s hope it doesn’t come to that, as we need viable public-private partnerships to help build the infrastructure needed to keep Brisbane and Queensland growing.

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