We’ve seen the odd toll road failure in this country. But nothing quite so spectacular as RiverCity Motorway (ASX Code RCY).

Once a road has been built, the tolling infrastructure is in place, and cars are driving on the road, toll roads produce cash. Typical margins are between 60% and 85% — that is, only 15%-40% of revenue goes towards operating expenses. The remainder is available to service debt and, if there’s enough to go around, provide equity with a return as well.

They don’t fail because there is no cash. They fail because there is not enough cash to service the large amount of debt typically used to finance construction. At least that’s what I thought.

RiverCity, the owner of Brisbane’s Clem Jones Tunnel, is in the truly extraordinary situation of not generating enough toll revenue to cover its operating expenses. Using current traffic numbers of about 30,000 per day (one third of the forecast) and the current average toll of $2.06 (half of the toll on which the forecasts were based), the annual revenue of $22.5 million will fall $11 million short of the operating costs. Forget about the $95 million in annual interest it is supposed to be paying, RiverCity can’t even meet its daily bills.

On the latest numbers, it has the ignominious distinction of being the first ever toll road to be worth more if they shut the gates than it is as an operating toll road (an aquarium under the Brisbane River perhaps?).

That is not going to happen. Traffic will grow enough to justify a value. But the banks are going to lose most of the $1.3 billion they lent to the company.

Let’s be really optimistic and assume the traffic can grow 50% from here and they can put the tolls back up to an average of $3 during the next two years. That would produce about $15 million of cash after paying operating costs. Now assume that when the banks go to sell it, someone is prepared to pay 15 times this cashflow on the assumption of substantial future growth (yes, yes, I’m stretching the friendship but Transurban has paid stupider prices, 20 times is not out of the question). That would equate to a sale price of $225 million.

This piece of infrastructure cost $2.8 billion to build. Equity investors contributed $1 billion, Brisbane City Council kicked in $500 million  and the banks lent $1.3 billion. At a stretch, it’s worth $300 million, about 10% of the construction cost. Equity investors have been completely wiped out (the current share price is 1.2 cents, which is clearly 1.2 cents too high) and the lenders are staring at a $1 billion hole in their loan books.

The appallingly low traffic numbers have been known for a while, so the banks will already have provided for most, if not all, of these losses. Don’t expect any headline-grabbing announcements. But they, along with everyone else involved in this sorry state of affairs, are undoubtedly nursing their wounds. It will go down as the greatest private infrastructure failure of all time.

*This first appeared on the Intelligent Investor site.