Risk-Sharing Mechanism for PPP Projects – the Case Study of the

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					                             Surveying and Built Environment Vol 19(1), 67-80 December 2008 ISSN 1816-9554

Risk-Sharing Mechanism for PPP
Projects – the Case Study of the
Sydney Cross City Tunnel
APC Chan, PTI Lam, DWM Chan and E Cheung*

The Cross City Tunnel in Sydney, Australia is a good example of how the improper
allocation of risks could affect the success of a Public Private Partnership (PPP)
project. It is not incorrect for risks to be passed on to the private sector, especially
when they are able to manage them. But maybe there should be a ‘partnership’ in
place when the private sector is unable to manage all the risks themselves. Some
critiques considered this project as an unsuccessful PPP as the Government has
had to cope with handling much public opinions dissatisfaction and criticisms for
their inaccurate traffic forecasts, leading to the investor making a financial loss.
This paper aims to derive a risk-sharing mechanism for projects similar to the
Cross City Tunnel, by reviewing the underlying causes leading to the ‘failure’ of
this project. In addition, the objectives are to ensure that appropriate risk allocation
is achieved in the best interests of all parties so as to make the project successful.
Unpredictable circumstances and inaccurate predictions of the Government could
make it difficult if not impossible for the private sector to handle the project. In
these situations the Government should step in, share the responsibilities and
overcome the problems encountered with the consortium. The Government should
be able to offer assistance in these circumstances in the form of finance, manpower,
governmental procedures, etc. depending on the need. In addition, this paper
advocates that such mechanism should be in place for similar projects in the future.
Benefits for both sector parties are anticipated when this mechanism is included in
the project contract. After all, a PPP is a ‘partnership’ and the parties should work
together to overcome obstacles for mutual benefit.

Public private partnership
Sydney Cross City Tunnel
Risk sharing mechanism

*Department of Building and Real Estate, The Hong Kong Polytechnic University, Hung Hom,
Kowloon, Hong Kong
E-mail :
      Risk-Sharing Mechanism for PPP Projects – the Case Study of the Sydney Cross City Tunnel

      INTRODUCTION                                                   describes that:

      The definition of a PPP has been                               ‘Privately financed projects involve
      reported by numerous researchers. Each                         p ro v i s i o n b y i n v e s t o r s o f e q u i t y
      definition varies slightly depending on                        capital and debt capital to fund what
      the author, jurisdiction and the time.                         might otherwise be wholly publicly
      As the Cross City Tunnel (CCT) in                              funded projects financed from NSW
      Sydney, Australia is a New South Wales                         Government borrowings and/or budget
      Government infrastructure project, it                          revenue’.
      is therefore logical to consider their
      definition of a PPP. According to the                          This further emphasizes the importance
      New South Wales Government the term                            of the financing of PPP projects.
      ‘public private partnership’ (PPP) is                          Passing on financial risks is appealing
      used to mean:                                                  to governments.

      ‘An arrangement for the provision of                           The PPP form of procurement is
      assets or services, often in combination                       recognized as an effective way of
      and usually for a substantial or complex                       delivering value-for-money public
      “package”, in which both private                               infrastructure or services. It seeks to
      sector supplier and public sector client                       combine the advantages of competitive
      share the significant risks in provision                       tendering and flexible negotiation,
      and/or operation’. (Infrastructure                             and to allocate risk on an agreed basis
      Implementation Group, 2005).                                   between the public sector and the
                                                                     private sector (Akintoye et al. 2005).
      In this definition the emphasis is on                          It is essential for the public client and
      both the public and private parties                            the private bidders to evaluate all of the
      sharing a large proportion of the risks                        potential risks throughout the whole
      in a PPP project. In reality it is not                         life of the project. Public and private
      always the case that an equal split of                         sector bodies must pay particular
      risks is experienced. Often the public                         attention to the procurement process
      sector takes up minimal risk and aims                          while negotiating contracts for a PPP
      to pass on as many risks as possible to                        to ensure a fair risk allocation between
      the private sector. This occurs more                           them. Systematic risk management
      commonly in developing countries or                            allows early detection of risks and
      jurisdictions where the Government                             encourages the PPP stakeholders
      has less experience in this alternative                        to identify, analyze, quantify and
      procurement method. This paper                                 respond to the risks, as well as take
      therefore aims to derive a risk-sharing                        measures to introduce risk mitigation
      mechanism for projects similar to the                          policies (Akbiyikli and Eaton 2004).
      CCT. In addition the objectives are to                         A fundamental principle (Grimsey and
      ensure that appropriate risk allocation is                     Lewis, 2002) is that risks associated
      achieved; and that the aims of all parties                     with the implementation and delivery of
SBE   are to make the project successful. The                        services should be allocated to the party
68    New South Wales Government further                             best able to manage the risk in a cost
                             Surveying and Built Environment Vol 19(1), 67-80 December 2008 ISSN 1816-9554

effective manner. A delicate balance              the project will have to be approved
has to be sought amongst private                  via the Gateway review process and
sector capacity, government regulatory            to see which procurement option it
function and public satisfaction.                 should adopt. Planning assessment via a
                                                  number of different line agencies would
In general, the typical proces s es               be necessary. Finally the project will be
for delivering PPP projects in New                offered to the market, consortia will bid
South Wales include five major steps              for it and the Government will select
(Figure 1): 1. project identification;            the most suitable candidate after a long
2. project approval; 3. planning                  series of negotiations. The project will
assessment; 4. project delivery; and 5.           typically be designed and constructed
project implementation (Infrastructure            over 3 to 5 years. It will then be put into
Implementation Group, 2005). Before               operation and maintained for a further
a project is even considered it will go           25 to 30 years as the concession period.
through a series of governmental in-              Thereafter, the project will normally be
house procedures to decide whether                returned to the Government, completely
it is a public facility or service that is        ending its life as a PPP project.
needed. If it is decided to be necessary,

                               Project identification and
                                  early consideration

                                     Project approval

                                  Planning assessment

                                     Project delivery

                                Project implementation

Figure 1 Typical processes for delivering PPP projects in New South Wales,
Australia (Adapted from the Infrastructure Implementation Group, 2005)
      Risk-Sharing Mechanism for PPP Projects – the Case Study of the Sydney Cross City Tunnel

      BACKGROUND OF THE                                              the closing date of 24 October 2001. It
      SYDNEY CROSS CITY                                              was announced on 27 February 2002
                                                                     that the Cross City Motorway Pty. Ltd.
      TUNNEL (CCT) PROJECT                                           was selected as the winning consortium.
      The primary objectives of the CCT
                                                                     The construction for the project
      project were to reduce through
                                                                     commenced on 28 January 2003. It was
      traffic in Central Sydney and as a
                                                                     delivered ahead of schedule and took
      result easing traffic congestion and
                                                                     only 31 months to construct (typical for
      improving environmental amenity in
                                                                     PPP projects). The tunnel was officially
      the central business district, and on
                                                                     opened for service to the public on
      streets approaching the central business
                                                                     28 August 2005. Unsurprisingly the
      district, and to improve the east to west
                                                                     project attracted the private sector
      traffic flows (Roads Traffic Authority,
                                                                     from within Australia and abroad. The
                                                                     selected consortium included strong
                                                                     financiers, Cheung Kong Infrastructure
      The CCT is a 2.1 km twin two-lane
                                                                     of China, Bilfinger Berger of Germany
      motorway that runs east and west
                                                                     and RREEF Infrastructure of Australia.
      underneath the busy central business
                                                                     They would bring in equity and recover
      district of Sydney. It opted for a design-
                                                                     the cost of design, construction,
      build-operate (DBO) arrangement under
                                                                     operation and maintenance via the
      a 30-year concession agreement. The
                                                                     tolls collected. Therefore the project
      project was part of a network of a new
                                                                     company, Cross City Motorway Pty
      transportation infrastructure plan of the
                                                                     Ltd, was allocated all the demand
      Roads and Traffic Authority of the New
                                                                     risk for the project. Innovation was
      South Wales Government. Its large
                                                                     introduced by the contractor. The tunnel
      project sum of AUD680 million meant
                                                                     was the first motorway in Sydney
      that a PPP was an attractive option to
                                                                     to have full electronic tolling. There
      the New South Wales Government.
                                                                     were high levels of expectations by all
                                                                     the parties and the traffic forecast for
      The initial concept of the tunnel was
                                                                     the tunnel was predicted to be 90,000
      mooted in 1998 (Cross City Tunnel Pty.
                                                                     vehicles per day.
      Ltd., 2007). After a series of complex
      consultations, exhibitions, modification
                                                                     A number of benefits were sourced
      and approvals the private sector was
                                                                     from materials published and released
      finally asked for an expression of
                                                                     from the project company Cross City
      interest on 15 September 2000 (Roads
                                                                     Motorway Pty Ltd (Cross City Tunnel,
      Traffic Tunnel, 2003). In response,
                                                                     2007) and the government agency
      a total of eight consortia expressed
                                                                     client the Roads and Traffic Authority
      interest by 23 October 2000. Three
                                                                     of New South Wales (Government
      consortia were shortlisted and asked
                                                                     Roads Traffic Authority, 2007). These
      to submit detailed proposals for the
                                                                     parties claimed that as a result of the
      project on 8 June 2001. All the three
SBE                                                                  Cross City Tunnel project the following
      consortia submitted their proposals by
70                                                                   benefits would be experienced:
                                   Surveying and Built Environment Vol 19(1), 67-80 December 2008 ISSN 1816-9554

•   34 traffic signals avoided (16 sets                 sought and are shown in the Appendix.
    westbound and 18 sets eastbound);                   Among these seven headlines, three are
•   Major reduction of traffic across the               related to the toll. This shows that the
    central business district;                          toll is probably one of the key factors
•   Improved quality of life for                        affecting the satisfaction level of the
    pedestrians and cyclists in the                     general public towards the CCT, and
    central business district;                          also one of the issues that is highly
•   Higher reliability of bus services in               sensitive among them.
    the central business district;
•   Cut trips across the city to                        The PPP has been given a bad name and
    approximately 2 minutes, from up                    investors have been driven away from
    to 20 minutes by avoiding traffic                   New South Wales, at least temporarily
    lights;                                             (AAP General News Wire 2006a). The
•   Improved access and movement                        CCT encountered severe difficulties in
    within the city for taxis, delivery                 reaching the predicted traffic volume.
    vehicles, cyclists and pedestrians;                 Motorists expressed their unhappiness
•   Make city streets safer and more                    about the high toll levels (AAP General
    pleasant for pedestrians, residents                 News Wire 2006b) and the government
    and business people by removing                     closing off the surface roads to direct
    intrusive through traffic and                       the traffic into the CCT (AAP General
    providing more footpath space in                    News Wire 2006c). These problems
    some streets;                                       resulted from the inaccurate traffic
•   Reduced traffic noise levels; and                   forecast and a flawed concession
•   Better air quality by taking cars off               agreement. Currently, the CCT has
    surface streets.                                    entered into receivership and the
                                                        concessionaire has written off their
Despite the benefits of the PPP which                   equity (Project Finance, 2007).
have been highly publicized, some
may consider that there are also many                   In this project it has been unfortunate
‘failures’ in the project. The next                     that the public client and the private
section takes a closer look into these                  consortium have argued openly in
‘failures’.                                             public. Newspapers have reported them
                                                        criticizing each other for their faults
                                                        (Field 2006a). The Premier spoke out
UNDERLYING CAUSES                                       publicly expressing his frustration
LEADING TO ‘FAILURE’                                    that motorists were able to use the toll
                                                        road without paying. He criticized the
CCT has been perceived as an                            operators for not enforcing the charge
unsuccessful project by the general                     and how it was unfair for the motorists
public and as a result the government’s                 who did pay (AAP General News Wire
i m a g e h a s s u ff e r e d ( J e a n 2 0 0 6 ) .    2006d; Field 2006b). On the other
To illustrate some of the negative                      hand the consortium also criticized
portrayals of the project, some                         the Premier for failing to demonstrate
headlines related to the project were                                                                              SBE
                                                        leadership (AAP General News Wire                          71
      Risk-Sharing Mechanism for PPP Projects – the Case Study of the Sydney Cross City Tunnel

      2006e). It can be seen how the media                           the Government, as a result of which
      has portrayed a tense battle between the                       further risks are passed on to the private
      public and private sectors. This is an                         sector. For example, in the document
      image that nobody wants to create for                          they expressed their preference for
      any project whether it is delivered by                         bidders with the ‘lowest’ toll. This line
      a PPP or not. But being a PPP project                          of thinking is similar to selecting the
      creates an even higher sensitivity, as                         lowest cost bidder, which should not be
      taxpayers will query whether they are                          the only way to select the consortium.
      actually getting value for money from                          Instead, value for money for the project
      the Government’s decision.                                     overall should be their main concern.
                                                                     By focusing on the toll only, other
      Following the unfortunate events                               important features adding to value
      experienced, the private consortium                            may be neglected such as innovative
      requested the Government to pay them                           techniques and skills used in the project
      a toll subsidy and compensation for                            to make it more efficient and as a result
      the road changes. Unfortunately the                            creating value for money. The quality
      two parties were unable to come to a                           of the work may also suffer.
      satisfactory agreement (AAP General
      News Wire 2006f). But in order for                             In the report it was also mentioned
      the CCT case not to be repeated the                            that in Victoria all the main variables
      Government considered paying the                               which would affect the commercial
      consortium compensation for the Lane                           outcome of the project for all parties
      Cove Tunnel, which is also in Sydney,                          would be negotiated at the bidding
      if unfortunately traffic forecasts for                         stage. But in New South Wales the toll
      that are also predicted inaccurately                           level or the possibility of a Government
      (Cratchley and Jean 2006a; 2006b).                             contribution would not be open to
      This action from the government was                            negotiation. Therefore whether
      positive as it showed that they were                           value for money for the taxpayers is
      aware that there were problems in the                          achieved is questionable. The report
      CCT project, and that they should share                        has indicated that the New South Wales
      the responsibilities by undertaking                            Government is clearly aware of their
      more of the risks rather than passing                          faults, but whether they actually rectify
      the pressure solely to the private                             the situation remains to be seen.
                                                                     To consolidate the findings reported
      I n 2 0 0 5 t h e N e w S o u t h Wa l e s                     by the press discussed previously, the
      Government produced a report titled                            underlying causes leading to the ‘failure’
      ‘Review of Future Provision of                                 of the CCT project include:
      Motorways in NSW’ (Infrastructure                              • Inaccurate traffic forecast;
      Implementation Group, 2005). The                               • High toll levels;
      report reviews recent road projects,                           • Government closing off the surface
      including the CCT, in order to improve                             roads to direct the traffic into the
SBE   future similar projects. It is unfortunate                         CCT;
72    that more barriers are set up to protect                       • Flawed concession agreement;
                                   Surveying and Built Environment Vol 19(1), 67-80 December 2008 ISSN 1816-9554

•   The public client and the private                   more or less all the risks associated
    c o n s o r t i u m a rg u i n g o p e n l y i n    with the project. The private sector is
    public;                                             often willing to take up large risks to
•   No toll subsidy and / or                            gamble for their desired returns. The
    compensation from the government;                   Government is also concerned about
•   The toll level or the possibility of a              the consortium's readiness to accept
    Government contribution was not                     risk (Ahadzi and Bowles 2004). But
    open to negotiation.                                it is a surprise that the Government
                                                        was willing to allow the private sector
                                                        to take up such a large proportion of
APPROPRIATE RISK                                        the risks. However in the arrangement
ALLOCATION                                              the social responsibility will always
                                                        be the public sector’s. Therefore the
Grimsey and Lewis (2002) identified                     Government should consider whether
nine main risks affecting all types of                  the consortium is able to handle the
infrastructure projects. These included                 risk effectively. The risks that the
technical risk, construction risk,                      consortium agreed to take on board
operating risk, revenue risk, financial                 in the Project Deed included (Roads
risk, force majeure risk, regulatory/                   Traffic Authority, 2003):
political risk, environmental risk, and                 • All risks associated with the
project default. On the other hand Lam                      financing, design, construction,
et al. (2007) identified seven key risk                     operation, maintenance and repair
allocation criteria:                                        costs of the project;
• Whether the party is able to foresee                  • The risks that traffic volumes or
    the risk;                                               project revenues may be less than
• Whether the party is able to assess                       expected;
    the possible magnitude of the                       • Income tax risks; and
    consequences of the risk;                           • The risks that their works or
• Whether the party is able to control                      operational and maintenance
    the chance of the risk occurring;                       activities might be disrupted by the
• Whether the party is able to manage                       lawful actions of other government
    the risk in case it occurs;                             and local government authorities or
• Whether the party is able to sustain                      a court or tribunal.
    the consequences if the risk occurs;
• Whether the party will benefit from                   Clifton and Duffield, 2006 undertook
    bearing the risk; and                               a study where they looked into the risk
• Whether the premium charged by                        allocation structure for several recent
    the risk-receiving party is considered              PPP projects in Australia. One of these
    reasonable and acceptable for the                   cases included the CCT (Table 2) and
    owner.                                              realized that the risks for each party
                                                        were quite evenly spread. But further
According to the terms and conditions                   study showed that the intensity of the
set out in the Project Deed of the                      risks allocated to the private sector
CCT, the private consortium accepted                                                                               SBE
                                                        was actually much greater compared to                      73
      Risk-Sharing Mechanism for PPP Projects – the Case Study of the Sydney Cross City Tunnel

      those allocated to the Government, as
      shown in Table 1:

       Risk Allocated to Government                                      Risk Allocated to Consortium
       Native title risks                                                Design, construction and
                                                                         commissioning risks
       Force majeure                                                     Delay and completion risks
       Uninsurable risks                                                 Ground/geotechnical conditions
       Legislative and Government                                        Operation and maintenance/
       Policy                                                            facility management risks

      Table 1 Risk allocation structure for the CCT (Clifton and Duffield, 2006)

      Shen et al. (2006) studied the risk                            suffered immensely due to the market
      allocation for public sector projects in                       and financial risks. If these were shared
      Hong Kong. From the literature they                            risks as suggested by Shen et al. (2006),
      identified a number of major risks                             the intensity of the damage to the
      affecting public sector projects. In                           consortium could have been minimized.
      their analysis they selected the Hong
      Kong Disneyland as a case study. This                          Traffic revenue risk has been identified
      case study demonstrated which risks                            as one of the most critical risks
      would be most suitably allocated to                            impacting the commercial success
      each party. The study concluded that                           of road projects delivered by a PPP
      the public sector should be allocated                          (Singh and Kalidindi 2006). In order
      the site acquisition risks, inexperienced                      to overcome traffic revenue risk, the
      private partner risk and legal and policy                      annuity-based build-operate-transfer
      risks. On the other hand, the private                          (BOT) model has been presented as a
      party should be allocated the design                           good solution. Unlike the traditional
      and construction risks, operation risks                        BOT type road economic projects,
      and industrial action risks. Lastly, Shen                      the concessionaire will be paid a
      et al. (2006) advocated the importance                         fixed semi-annual annuity by the
      of there being some risks which both                           governmental client. This approach
      parties should share. These include                            is similar to that used for the social
      development risks, market risks,                               infrastructure PPP projects such as
      financial risks and force majeure.                             hospitals and schools which are paid by
      Although Shen et al.’s 2006 study                              a regular fixed payment. Similarly the
      was conducted for a project in another                         annuity-based BOT model will require
      country and of a different nature; it                          the concessionaire to achieve certain
      is believed that these shared risks as                         milestones and standards. The payment
SBE   mentioned could also apply to other                            will be used to cover the design,
74    PPP projects such as the CCT. The CCT                          construction, maintenance and operation
                             Surveying and Built Environment Vol 19(1), 67-80 December 2008 ISSN 1816-9554

of the road and its facilities. As a result       performance of the facility. Other
the concessionaire does not undertake             risks which are less predictable and
any of the traffic revenue risk. This             controllable are taken by governmental
approach ensures that the governmental            clients. By adopting this approach the
client must also undertake their fair             business case may not be as attractive
share of risks. The risk allocation               to the private sector. The private sector
framework shown in Table 2 shows                  is often willing to take up more risks
the appropriate risk allocation for each          in return for the possibility of financial
party under the annuity-based BOT                 benefits. The private sector should not
model. Amongst the sixteen risks listed,          be solely responsible for taking these
nine are undertaken by governmental               decisions. Instead the government
clients. In general the concessionaire            should also consider whether they
is responsible for the risks related              should allow the private sector to take
to the construction and operational               up large risk.

 Risk Allocated to Government                          Risk Allocated to Consortium
 Pre-investment                                        Delay in financial closure
 Resettlement and rehabilitation                       Time and cost overrun during
 Permit/approval                                       Time and cost overrun during
                                                       operation and maintenance
 Delay in land acquisition                             Non-political force majeure
 Delay in payment of annuity                           Performance standards
 Change of scope                                       Lane availability
 Traffic revenue risk                                  Interest rate risk
 Change in law
 Political risk

Table 2. Risk allocation framework for the annuity-based BOT model (Singh
and Kalidindi 2006)

Another payment mechanism similar                 option is the performance-based DBFO
to the annuity-based BOT model was                system. For this payment mechanism
proposed, in that the patronage risk              the services and the operational
stays with the government (Aziz 2007).            performance of the contractor are
The shadow-toll design-build-finance-             emphasized rather than the usage of the
operate (DBFO) system is similar                  facility.
to the BOT system except shadow
tolls are used instead of real tolls.             From the experience of several road
The government will pay a toll per                projects including the CCT, the New
vehicle per road kilometer instead of             South Wales Government identified                          SBE
the end users paying the toll. Another            some lessons learnt (Infrastructure                        75
      Risk-Sharing Mechanism for PPP Projects – the Case Study of the Sydney Cross City Tunnel

      Implementation Group, 2005):                                   the project company. As a result of this
      • Need for consultation and                                    fault other actions were taken by the
         communication over the life of                              concessionaire to overcome the reduced
         project procurement;                                        traffic flow. These actions led to further
      • Need for improved community                                  complications which in turn ruined
         consultations and messages;                                 the partnership agreement between the
      • Responsibility of Government client                          public and private sectors.
         over procurement life of project;
      • Greater onus on the consortium to                            In the case of the CCT the inappropriate
         accept full responsibility over the                         allocation of risks was believed to
         whole life of the concession period.                        be the root cause. In some cases
                                                                     the Government may subsidize or
      The fourth lesson learnt indicates that                        compensate the concessionaire if the
      the Government feels that they have                            project revenue is less than expectation
      accepted too much of the project risks.                        or if the contract is terminated. But
      Therefore they appear to be keen to                            often there is much argument as to
      ensure that the consortium will take a                         the amount which this subsidy or
      larger responsibility for risks in future.                     compensation should be.

                                                                     To p r e v e n t s i m i l a r c a s e s f r o m
      RISK SHARING                                                   occurring, an optimal risk-sharing
      MECHANISM                                                      mechanism is presented. The risk-
                                                                     sharing mechanism can be adopted
      A PPP should be adopted primarily                              in projects of a high risk nature. The
      based on value for money. Obviously                            CCT was a project of high risk due to
      the package is accompanied by various                          its scale and significance. In this risk-
      other advantages which are attractive                          sharing mechanism, projects which are
      to the government such as private                              traditionally economic infrastructure
      financing and the transfer of risks. But                       projects such as transportation projects
      the decision to adopt a PPP should not                         can adopt a regular fee payment from
      be solely based on these additional                            the government instead of bearing the
      advantages.                                                    revenue risk. This approach is similar
                                                                     to social infrastructure projects. As
      As discussed previously risks should                           mentioned previously in this paper
      always be allocated to the party best                          other researchers have also reported
      able to handle them. The party allocated                       the possibility and feasibility of this
      the risk should be the one most able                           arrangement for economic infrastructure
      to prevent it from occurring. And                              projects.
      if the risk does occur the allocated
      party should be the one most able to                           Under this mechanism, the consortium
      minimize the consequences.                                     of high-risk economic infrastructure
                                                                     projects will be paid via a regular fee
      The inaccurate traffic forecast was the                        payment. In this way the payment will
SBE   main reason that led to the collapse of
76                                                                   be based on project performance rather
                            Surveying and Built Environment Vol 19(1), 67-80 December 2008 ISSN 1816-9554

than usage. As in social infrastructure          public frustration. Although the local
projects certain risks are still taken           government could have prevented these
by the concessionaire, such as those             actions, they did not step in. If the
associated with the design, construction,        consortium had not needed to worry
operation and maintenance. But the               about the revenue, the public would
other risks should be dealt with by the          have been more satisfied. As a result
Government including revenue risk.               the public perception of the facility, the
                                                 project company and the Government
Although the economic package for                would have been very different!
projects paid by a regular fee may not
be as attractive to the private sector,
this type of mechanism for high-risk
projects can help to protect the private
                                                 The CCT was designed as part of a
sector. By protecting the private sector
                                                 large infrastructure network plan for
the government will also benefit, since
                                                 New South Wales, Australia. Due to its
as always the ultimate responsibility
                                                 complexity and size, a PPP appeared to
lies with them. The government may
                                                 be an attractive delivery method. Under
be able to pass on most of the financial
                                                 the PPP procurement the financing
risks but they cannot avoid the social
                                                 would be provided by the private sector.
responsibility. Hence this proposed
                                                 Also expertise and innovation which
mechanism is believed to benefit all
                                                 would otherwise be unavailable within
parties involved.
                                                 the Government could be sought. As
                                                 a result the Government managed to
The details of the proposed risk-
                                                 pass on many of the project risks to the
allocation mechanism will vary
                                                 private sector. Obviously for a project
depending on the project itself. But
                                                 of this size there would be abundant
it is likely that the payment will be a
                                                 financial opportunities for the private
regular fee paid to the concessionaire
                                                 sector, hence they were very willing
based on performance and activity
                                                 to take up the associated risks for the
milestones. Under the agreed payment
                                                 chance to be involved. The situation
the concessionaire will deliver a
                                                 could have been a win-win case but
service to the public according to
                                                 unfortunately this was not actually what
standards as agreed to in the contract.
If the concessionaire under-performs
then they will be penalized by a
                                                 Media reports have reflected the CCT
deduction of their fees. In this way
                                                 as an unsuccessful PPP project. For
the concessionaire is monitored by
                                                 the consortium this may have been the
the project’s performance rather than
                                                 case. For the Government, although
usage of the facility. In the CCT project
                                                 they have received some negative
the concessionaire had to bear the
                                                 critiques, at the end of the day they
revenue risk, hence their main priority
                                                 have still constructed a world-class
was to generate revenue. They used
                                                 infrastructure facility. For the general
toll prices and redirecting traffic to
                                                 public, the scandal may have been more                     SBE
bring in revenue which just caused                                                                          77
      Risk-Sharing Mechanism for PPP Projects – the Case Study of the Sydney Cross City Tunnel

      amusing than having a serious effect. It                       Wire, 21 August 2006.
      is not easy and probably impossible to
      distinguish whether any case is either                         AAP General News Wire (2006d),
      solely successful or a failure. Instead                        Motorists have right to be angry over
      it is believed that lessons can be learnt                      toll inequities, AAP General News Wire,
      from each case.                                                20 September 2006.

      This paper has looked into a highly-                           AAP General News Wire (2006e),
      profiled case and tried to recommend                           Cross City Boss says Lemma Fails to
      solutions to overcome the potential                            Show Leadership, AAP General News
      obstacles. As a result a more suitable                         Wire, 4 August 2006.
      risk-sharing mechanism for projects
      similar to the CCT has been presented                          AAP General News Wire (2006f),
      to achieve win-win service outcomes.                           Tunnel Operators Seek Millions in
                                                                     C ompens at i on for Changes , AAP
                                                                     General News Wire, 26 August 2006.
                                                                     Ahadzi M and Bowles G (2004),
      The content of this paper is based on the
                                                                     'Public-Private Partnerships and
      initial findings of an ongoing research
                                                                     Contract Negotiations: An Empirical
      study which aims to develop a best
                                                                     Study', Construction Management and
      practice framework for implementing a
                                                                     Economics, 22 :9, 967-978.
      PPP in Hong Kong. The work described
      in this paper was fully supported by
                                                                     Akbiyikli R and Eaton D (2004), 'Risk
      a grant from the Research Grants
                                                                     Management in PFI Procurement: A
      Council of the Hong Kong Special
                                                                     holistic Approach'. Paper presented
      Administrative Region, China (RGC
                                                                     a t t h e P ro c e e d i n g s o f t h e 2 0 t h
      Project No. PolyU 5114/05E).
                                                                     Annual Association of Researchers in
                                                                     Construction Management (ARCOM)
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                                                                     Edinburgh, UK.
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      AAP General News Wire (2006b),                                 Management and Economics, 25:5,
      Cross City not viable, higher prices not                       529-543.
      the answer, AAP General News Wire,
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                                                                     'Improved PFI/PPP Service Outcomes
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SBE   Cove Tunnel Road Changes May Be As                             Principles', International Journal of
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Cratchley D and Jean P (2006a), Govt                       Li B, Akintoye A, Edwards PJ and
May Compensate Lane Cove Tunnel                            Hardcastle C (2005), 'The Allocation of
Operators, AAP General News Wire, 28                       Risk in PPP/PFI Construction Projects
August 2006.                                               in the UK', International Journal of
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Cove Tunnel Owners, AAP General                            limit', Project Finance, April 2007.
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                                                           R o a d s Tr a ff i c A u t h o r i t y.
Cross City Tunnel Pty. Ltd. (2007),                        ( 2 0 0 7 ) , h t t p : / / w w w. r t a . n s w. g o v., Retrieved                     au/constructionmaintenance/
30 May 2007.                                               majorconstructionprojectssydney/
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                                                           Examples of Newspaper Headlines
Lam KC, Wang D, Lee PTK and Tsang
                                                           relating to the CCT when it opened
YT (2007), 'Modelling Risk Allocation
                                                           (Infrastructure Implementation Group,
Decision in Construction Contracts',
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Management, 25:5, 485-493.
       Development of a Conceptual Framework for the Study of Building Maintenance Operation Processes in the Context of
       Facility Management

     Appendix Examples of Newspaper Headlines relating to the CCT when it opened
     (Infrastructure Implementation Group, 2005)

           Tunnel cuts William St to one lane to trap drivers
       The Daily Telegraph, 6 October 2005

       ‘Cheap’ tunnel buyback mooted
       Australian Financial Review, 17 November 2005

         $105m TOLL
                                                               Motorists pay
                                                               hidden charge
                                                                to cross city

       The Daily Telegraph, 6 October 2005

         Three weeks toll-free
                                                                                           Taken for
                                                                                           a ride
         but roads still colgged                                                           Tunnel at the crossroads

       The Daily Telegraph, 14 October 2005-12-02                          Sydney Morning Herald, 13 October 2005

         Changes to                                                                                            to feel
         contract led
         to high tolls
SBE    The Daily Telegraph, 17 November 2005                         Sydney Morning Herald, 28 November 2005

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