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Question:
This report is created to understand how projects fail or succeed through the use of review of the same. The case of Cross City Tunnel Project which involved construction two cross -city tunnels is explored and reviewed. It was a privately financed tunnel project that included construction of a toll road under 2.1 km tunnels passing through Darling Harbour in the central business districts to Rushcutters Bay in Sydney, Australia. The project was started in January 2003 and the construction was finished before the schedule by 31st month. By 2005, the construction was open to public use.
The project was majorly funded by Private players from other countries like Bilfinger Berger from Germany, Cheung Kong Infrastructure from China, and RREEF Infrastructure from Australia. After the construction was finished, the costs that were incurred in designing, construction, operations and maintenance was planned to get recovery from Toll. Cross City Motorway Pty Ltd was made responsible for taking all the risks and collection of the money through tolls.
The tunnels were planned with an estimation of getting 90,000 vehicles traffic per day and as these vehicles passed through electronic toll ways, the money could be recovered. The actual traffic received after the tunnels were opened to public was only around 30,000 vehicles per day which lead to a loss of major amount and the expenses that were made could not be recovered leading to bankruptcy of Cross City Motorway Pty Ltd and the project failed. Later, the project was acquired by another private player for the duration till 2030 after which the structure is to be made completely public.
This report studies this tunnel project by exploring what objectives were decided before the project began, if the same were achieved, what benefits did the project got for the stakeholders, what critiques said and if the project could be considered a failure or success with reasons behind.
The objectives of the Cross City Tunnel Project were:
Specific deliverables of the project included:
Key stakeholders of the project included Client that was the Roads and Traffic Authority, Cross City motorways, Contractor Bilfinger Berger, and owner ABN Amro.
The Cross City Tunnel (CCT) was built to manage 3 times more traffic that it is managing now with 30,000 cars moving inside in a day. The road still faces problems of tangled traffic which has become a public concern. This was a result of frequent changes that caused closures on the roads making the toll go high (Fialho & Menon, 2016)[1].
The key challenges in forecasting the demand of traffic by the tunnel were due to the complicated city network, initial resistances from motorists and impacts of the elasticity of demand. These challenges made it difficult to have accurate forecast of traffic and the figure estimated majorly failed and was nowhere close to the actual traffic received by tunnels.
The project was a result of a Public Private Partnership in which the entire risk portfolio was transferred to the private partner which the partner could not handle and as a result the private sponsor of the project became bankrupt. Critiques say that transfer of risks completely to the private partner was itself a wrong move and over it the public dissatisfaction was seen over inaccurate forecasts of expected traffic. In cases of PPP, normal discourse should involve both the parties sharing responsibilities both for conduct and for risks which did not happen in the case and thus, removal of obstacles faced became a bigger challenge for a single organization dealing with it[2].
The tunnels were primarily constructed to give a public benefit that included:
The project was a major failure due to wrong traffic estimation. The amount of the traffic that was estimated by RTA actually exceeded the ceiling capacity of 53 vehicles per day[3].The original estimation was traffic was not met and thus, the project went on losses and after the project was constructed by consuming $900 million in expenses and incurring debts of $500. After the old owners were bankrupted, the tunnels were actually sold to new owners including ABN Amro which was an investment bank, , in around $700 million. Currently the structures are privately owned and by 2030, the ownership would be made public[4].
Public-Private Partnership projects have several benefits such as:
The public interests were first not evaluated well before the project was planned but in the later stages, recommendations were made to make an evaluation through public and also make the decision and summary of project prospects available to the public. All the contract variations were required to be updated and made public as they could affect the public to a great extent. Earlier the contract negotiations and project status was not publically communicated which gave rise to negative sentiments when the citizens were faced with high public toll and other forms of inconvenience from the project.
The Cross City Tunnel Project was majorly a failure despite the construction finished on time and within budget due to certain major reasons like:
Inaccurate forecasts of tunnel traffic: the initial traffic forecast figure was 90,000 vehicles per day but the actual traffic was only 30,000 per day which resulted into the loss of toll that was to be collected from remaining 60,000 vehicle owners if they travelled through the tunnel leading to losses for the sponsor company.
High Toll levels: The toll prices determined were found heavy and not affordable especially to motorists who resisted its use.
Surface Road Closures: Closure of surface roads for diverting traffic to Cross City Tunnel upset the residents of the city.
Flaw in the concession agreement: There were several flaws in the concession agreement between the private consortium and the government as there was no clarity on government participation on managing operations and risks
Public-Private Argument: There was an open argument in public that happened between public client and the private sponsors consortium:
No Government contribution: No subsidy or compensation was provided by the government for the project nor was the government body open for sharing toll levels or any other forms of monetary risks [5].
Inefficient Risk Allocation: As per Grimsey and Lewis (2002), any construction project comes with 9 major types of risks that include technical, construction, operational, revenue, financial, political, force majeure, environmental and project defaults. As per Lam (2007), these risks could be well managed if the party managing risks is able to foresee the risk, assess their potential impacts, control the probability of their occurrence, sustain the consequences, get benefits are bearing the risk, and charge a considerable ad affordable premium against risks. In the case of cross city tunnel project, the risks that were identified and were agreed included risks associated with financing, designing, construction, operations, maintenance, and repairs, risks associated with traffic volumes, income tax risks, and risks due to governmental or political interventions. The risks that government agreed to take on them included native title risks, force majeure, uninsurable risks, and legislative policies related risks.
Some lessons could be learnt from the analysis of this project that could bring improvements and that included:
Based on these lessons, certain modifications were proposed later with the new sponsor acquiring the project. A new model of risk management called annuity-based build-operate-transfer (BOT) was then proposed in which risks allocations were modified. There were sixteen risks that were identified out of which 9 were to be allocated to the government. The operational performance risks were to be taken by Private consortium of sponsors. The distribution of risk components then was proposed as per following framework:
Figure 1: New Risk allocation framework
A Joint Select Committee was established in the year 2005 to look into the matter and come up with recommendations for resolving risks and coming up with an improvement plan. The committee produced 3 major reports that included some 17 recommendations for improving the condition of the project and these included[6]:
Based on this recommendations, a performance audit was conducted on the tunnel project in the year 2006 after which the contracts defined for the project earlier were amended with considerations of user-pay principles, transparency of contract variations, community consultation, patronage projections and so on.
Upon consultation with community, Bourke St was upgraded by making changes in the arrangements such as modifications in the traffic capacity for vehicles turning right from William St. towards the Bourke St. , tree plantation, urban amenity improvements, increase local access and so on. After 2005, changes were made in the construction in two phases and these changes included reduction in number of lanes, addition of six toll free options and so on. There were nine changes made on entry and exit of tunnels, 10 changes were targeted to restriction of road space for general traffic running on the central corridor of the city, and two changes were made on the direct access provided to public on Cahill expressway and in the Domain Tunnel through local roads. C and D category changes were reversed. The changes made were majorly targeted to achieve the initial goals of the project that included enhancement in the quality of environment in the city, provide easily assessable and reliable travel options to public. The modifications and the resulting project was funded by a new sponsor, ABN Amro that repaid the debts on project and the sale price also included returns made to equity investors of the project. The resulting changes in the funding structure were 47% stake of ABN AMRO in Diversified Infrastructure, Global Infrastructure Fund of 47% provided by ABN Amro and 6% stake given to Leighton Contractors[7].
This report was developed to understand how projects succeed or fail by considering the case of The Cross City Tunnel (CCT). It was found that the project that involved construction and maintenance of two tunnels was a major failure as the traffic estimation done initially by the developers proved out to be wrong leading to debts of $500 million and the structures were then sold to ABN Amro at $700 million. The committee was formed to investigate the causes of failure of the project and the investigative report came up with 17 recommendations. Upon considerations of these recommendations and the community participations , some 22 changes were actually considered on the project that included changes made on entry and exit of tunnels, road space for general traffic running and direct access provided to public. Major causes of earlier failure were found to be flawed concession agreements, wrong traffic forecasts, lack of government participation in risk management and so on. From the case, it can be concluded that if the considerations of risks are not made appropriately considering the whole life cycle of the project then it can cause major failures in a project.
Chan, A & P Lam, "Risk-Sharing Mechanism for PPP Projects – the Case Study of the Sydney Cross City Tunnel.". in Surveying and Built Environment, , 2008, 67-80.
Fialho, J & N Menon, Cross City Tunnel. in , Portugal, MIT, 2016.
Phillips, G, Analysis of Sydney Public-Private Partnership Road Tunnel. in , 1st ed., Sydney University, 2015.
Phillips, G, Public-Private Partnerships and Sydney Road Tunnels. in , 1st ed., , 2007,
Project Implementation Status Report of Central Sector Projects. in , 1st ed., New Delhi, Ministry of Statistics and Programme Implementation, 2008.
Sydney Cross-City Tunnel. in , 1st ed., Bartlett School of Planning., 2014.
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