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Risk-Sharing Mechanism for PPP
Projects – the Case Study of the
Sydney Cross City Tunnel
APC Chan, PTI Lam, DWM Chan and E Cheung*
ABSTRACT
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.
KEYWORDS
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 : bsesther@polyu.edu.hk
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INTRODUCTION
The defini t ion of a PPP has been
reported by numerous researchers. Each
definition varies slightly depending on
the author, jurisdiction and the time.
As the Cross City Tunnel (CCT) in
Sydney, Australia is a New South Wales
Government infrastructure project, it
is therefore logical to consider their
definition of a PPP. According to the
New South Wales Government the term
‘public private partnership’ (PPP) is
used to mean:
‘An arrangement for the provision of
assets or services, often in combination
and usually for a substantial or complex
“package”, in which both private
sector supplier and public sector client
share the significant risks in provision
and/or operation’. (Infrastructure
Implementation Group, 2005).
In this definition the emphasis is on
both the public and private parties
sharing a large proportion of the risks
in a PPP project. In reality it is not
always the case that an equal split of
risks is experienced. Often the public
sector takes up minimal risk and aims
to pass on as many risks as possible to
the private sector. This occurs more
commonly in developing countries or
jurisdictions where the Government
has less experience in this alternative
procurement method. This paper
therefore aims to derive a risk-sharing
mechanism for projects similar to the
CCT. In addition the objectives are to
ensure that appropriate risk allocation is
achieved; and that the aims of all parties
are to make the project successful. The
New South Wales Government further
describes that:
‘Privately financed projects involve
prov i s ion by inves tors o f equ i ty
capital and debt capital to fund what
might otherwise be wholly publicly
funded projects financed from NSW
Government borrowings and/or budget
revenue’.
This further emphasizes the importance
of the f inancing of PPP projects .
Passing on financial risks is appealing
to governments.
The PPP form of procurement i s
recognized as an effective way of
delivering value-for-money public
infrastructure or services. It seeks to
combine the advantages of competitive
tendering and flexible negotiation,
and to allocate risk on an agreed basis
between the public sector and the
private sector (Akintoye et al. 2005).
It is essential for the public client and
the private bidders to evaluate all of the
potential risks throughout the whole
life of the project. Public and private
sector bodies must pay particular
attention to the procurement process
while negotiating contracts for a PPP
to ensure a fair risk allocation between
them. Systematic risk management
allows early detection of risks and
encourages the PPP stakeholders
to identify, analyze, quantify and
respond to the risks, as well as take
measures to introduce risk mitigation
policies (Akbiyikli and Eaton 2004).
A fundamental principle (Grimsey and
Lewis, 2002) is that risks associated
with the implementation and delivery of
services should be allocated to the party
best able to manage the risk in a cost
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effective manner. A delicate balance
has to be sought amongst private
sector capacity, government regulatory
function and public satisfaction.
In general , the typical processes
for delivering PPP projects in New
South Wales include five major steps
(Figure 1): 1. project identification;
2 . p ro jec t approva l ; 3 . p lanning
assessment; 4. project delivery; and 5.
project implementation (Infrastructure
Implementation Group, 2005). Before
a project is even considered it will go
through a series of governmental in-
house procedures to decide whether
it is a public facility or service that is
needed. If it is decided to be necessary,
the project will have to be approved
via the Gateway review process and
to see which procurement option it
should adopt. Planning assessment via a
number of different line agencies would
be necessary. Finally the project will be
offered to the market, consortia will bid
for it and the Government will select
the most suitable candidate after a long
series of negotiations. The project will
typically be designed and constructed
over 3 to 5 years. It will then be put into
operation and maintained for a further
25 to 30 years as the concession period.
Thereafter, the project will normally be
returned to the Government, completely
ending its life as a PPP project.
Figure 1 Typical processes for delivering PPP projects in New South Wales,
Australia (Adapted from the Infrastructure Implementation Group, 2005)
Project identification and
early consideration
Project approval
Planning assessment
Project delivery
Project implementation
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BACKGROUND OF THE
SYDNEY CROSS CITY
TUNNEL (CCT) PROJECT
The primary objectives of the CCT
p r o j e c t w e r e t o r e d u c e t h r o u g h
traffic in Central Sydney and as a
result easing traffic congestion and
improving environmental amenity in
the central business district, and on
streets approaching the central business
district, and to improve the east to west
traffic flows (Roads Traffic Authority,
2003).
The CCT is a 2.1 km twin two-lane
motorway that runs east and west
underneath the busy central business
district of Sydney. It opted for a design-
build-operate (DBO) arrangement under
a 30-year concession agreement. The
project was part of a network of a new
transportation infrastructure plan of the
Roads and Traffic Authority of the New
South Wales Government. Its large
project sum of AUD680 million meant
that a PPP was an attractive option to
the New South Wales Government.
The initial concept of the tunnel was
mooted in 1998 (Cross City Tunnel Pty.
Ltd., 2007). After a series of complex
consultations, exhibitions, modification
and approvals the private sector was
finally asked for an expression of
interest on 15 September 2000 (Roads
Traffic Tunnel, 2003). In response,
a total of eight consortia expressed
interest by 23 October 2000. Three
consortia were shortlisted and asked
to submit detailed proposals for the
project on 8 June 2001. All the three
consortia submitted their proposals by
the closing date of 24 October 2001. It
was announced on 27 February 2002
that the Cross City Motorway Pty. Ltd.
was selected as the winning consortium.
The cons t ruc t ion for the pro jec t
commenced on 28 January 2003. It was
delivered ahead of schedule and took
only 31 months to construct (typical for
PPP projects). The tunnel was officially
opened for service to the public on
28 August 2005. Unsurprisingly the
project attracted the private sector
from within Australia and abroad. The
selected consortium included strong
financiers, Cheung Kong Infrastructure
of China, Bilfinger Berger of Germany
and RREEF Infrastructure of Australia.
They would bring in equity and recover
the cost of des ign, const ruct ion,
operation and maintenance via the
tolls collected. Therefore the project
company, Cross City Motorway Pty
Ltd, was allocated all the demand
risk for the project. Innovation was
introduced by the contractor. The tunnel
was the first motorway in Sydney
to have full electronic tolling. There
were high levels of expectations by all
the parties and the traffic forecast for
the tunnel was predicted to be 90,000
vehicles per day.
A number of benefits were sourced
from materials published and released
from the project company Cross City
Motorway Pty Ltd (Cross City Tunnel,
2007) and the government agency
client the Roads and Traffic Authority
of New South Wales (Government
Roads Traffic Authority, 2007). These
parties claimed that as a result of the
Cross City Tunnel project the following
benefits would be experienced:
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• 34 traffic signals avoided (16 sets
westbound and 18 sets eastbound);
• Major reduction of traffic across the
central business district;
• I m p r o v e d q u a l i t y o f l i f e f o r
pedestrians and cyclists in the
central business district;
• Higher reliability of bus services in
the central business district;
• C u t t r i p s a c r o s s t h e c i t y t o
approximately 2 minutes, from up
to 20 minutes by avoiding traffic
lights;
• Improved access and movement
within the city for taxis, delivery
vehicles, cyclists and pedestrians;
• Make city streets safer and more
pleasant for pedestrians, residents
and business people by removing
in t rus ive th rough t r a ff i c and
providing more footpath space in
some streets;
• Reduced traffic noise levels; and
• Better air quality by taking cars off
surface streets.
Despite the benefits of the PPP which
have been highly publicized, some
may consider that there are also many
‘failures’ in the project. The next
section takes a closer look into these
‘failures’.
UNDERLYING CAUSES
LEADING TO ‘FAILURE’
C C T h a s b e e n p e r c e i v e d a s a n
unsuccessful project by the general
public and as a result the government’s
image has suffered ( Jean 2006) .
To illustrate some of the negative
p o r t r a y a l s o f t h e p r o j e c t , s o m e
headlines related to the project were
sought and are shown in the Appendix.
Among these seven headlines, three are
related to the toll. This shows that the
toll is probably one of the key factors
affecting the satisfaction level of the
general public towards the CCT, and
also one of the issues that is highly
sensitive among them.
The PPP has been given a bad name and
investors have been driven away from
New South Wales, at least temporarily
(AAP General News Wire 2006a). The
CCT encountered severe difficulties in
reaching the predicted traffic volume.
Motorists expressed their unhappiness
about the high toll levels (AAP General
News Wire 2006b) and the government
closing off the surface roads to direct
the traffic into the CCT (AAP General
News Wire 2006c). These problems
resulted from the inaccurate traffic
forecast and a f lawed concession
agreement. Currently, the CCT has
entered into receivership and the
concessionaire has written off their
equity (Project Finance, 2007).
In this project it has been unfortunate
that the public client and the private
consortium have argued openly in
public. Newspapers have reported them
criticizing each other for their faults
(Field 2006a). The Premier spoke out
publicly expressing his frustration
that motorists were able to use the toll
road without paying. He criticized the
operators for not enforcing the charge
and how it was unfair for the motorists
who did pay (AAP General News Wire
2006d; Field 2006b). On the other
hand the consortium also criticized
the Premier for failing to demonstrate
leadership (AAP General News Wire
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2006e). It can be seen how the media
has portrayed a tense battle between the
public and private sectors. This is an
image that nobody wants to create for
any project whether it is delivered by
a PPP or not. But being a PPP project
creates an even higher sensitivity, as
taxpayers will query whether they are
actually getting value for money from
the Government’s decision.
Following the unfortunate events
experienced, the private consortium
requested the Government to pay them
a toll subsidy and compensation for
the road changes. Unfortunately the
two parties were unable to come to a
satisfactory agreement (AAP General
News Wire 2006f). But in order for
the CCT case not to be repeated the
Government considered paying the
consortium compensation for the Lane
Cove Tunnel, which is also in Sydney,
if unfortunately traffic forecasts for
that are also predicted inaccurately
(Cratchley and Jean 2006a; 2006b).
This action from the government was
positive as it showed that they were
aware that there were problems in the
CCT project, and that they should share
the responsibilities by undertaking
more of the risks rather than passing
the pressure solely to the private
consortium.
I n 2 0 0 5 t h e N e w S o u t h Wa l e s
Government produced a report titled
‘Rev iew o f Fu tu re P rov i s ion o f
Motorways in NSW’ (Infrastructure
Implementation Group, 2005). The
report reviews recent road projects,
including the CCT, in order to improve
future similar projects. It is unfortunate
that more barriers are set up to protect
the Government, as a result of which
further risks are passed on to the private
sector. For example, in the document
they expressed their preference for
bidders with the ‘lowest’ toll. This line
of thinking is similar to selecting the
lowest cost bidder, which should not be
the only way to select the consortium.
Instead, value for money for the project
overall should be their main concern.
By focusing on the toll only, other
important features adding to value
may be neglected such as innovative
techniques and skills used in the project
to make it more efficient and as a result
creating value for money. The quality
of the work may also suffer.
In the report it was also mentioned
that in Victoria all the main variables
which would affect the commercial
outcome of the project for all parties
would be negotiated at the bidding
stage. But in New South Wales the toll
level or the possibility of a Government
contribution would not be open to
negot ia t ion . Therefore whether
value for money for the taxpayers is
achieved is questionable. The report
has indicated that the New South Wales
Government is clearly aware of their
faults, but whether they actually rectify
the situation remains to be seen.
To consolidate the findings reported
by the press discussed previously, the
underlying causes leading to the ‘failure’
of the CCT project include:
• Inaccurate traffic forecast;
• High toll levels;
• Government closing off the surface
roads to direct the traffic into the
CCT;
• Flawed concession agreement;
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• The public client and the private
consor t ium arguing openly in
public;
• N o t o l l s u b s i d y a n d / o r
compensation from the government;
• The toll level or the possibility of a
Government contribution was not
open to negotiation.
APPROPRIATE RISK
ALLOCATION
Grimsey and Lewis (2002) identified
nine main risks affecting all types of
infrastructure projects. These included
technical r isk, construct ion r isk,
operating risk, revenue risk, financial
risk, force majeure risk, regulatory/
political risk, environmental risk, and
project default. On the other hand Lam
et al. (2007) identified seven key risk
allocation criteria:
• Whether the party is able to foresee
the risk;
• Whether the party is able to assess
the possible magni tude of the
consequences of the risk;
• Whether the party is able to control
the chance of the risk occurring;
• Whether the party is able to manage
the risk in case it occurs;
• Whether the party is able to sustain
the consequences if the risk occurs;
• Whether the party will benefit from
bearing the risk; and
• Whether the premium charged by
the risk-receiving party is considered
reasonable and acceptable for the
owner.
According to the terms and conditions
set out in the Project Deed of the
CCT, the private consortium accepted
more or less all the risks associated
with the project. The private sector is
often willing to take up large risks to
gamble for their desired returns. The
Government is also concerned about
the consortium's readiness to accept
risk (Ahadzi and Bowles 2004). But
it is a surprise that the Government
was willing to allow the private sector
to take up such a large proportion of
the risks. However in the arrangement
the social responsibility will always
be the public sector’s. Therefore the
Government should consider whether
the consortium is able to handle the
risk effectively. The risks that the
consortium agreed to take on board
in the Project Deed included (Roads
Traffic Authority, 2003):
• A l l r i sks a s soc ia t ed wi th the
financing, design, construction,
operation, maintenance and repair
costs of the project;
• The risks that traffic volumes or
project revenues may be less than
expected;
• Income tax risks; and
• The r i sks tha t the i r works o r
opera t iona l and ma in tenance
activities might be disrupted by the
lawful actions of other government
and local government authorities or
a court or tribunal.
Clifton and Duffield, 2006 undertook
a study where they looked into the risk
allocation structure for several recent
PPP projects in Australia. One of these
cases included the CCT (Table 2) and
realized that the risks for each party
were quite evenly spread. But further
study showed that the intensity of the
risks allocated to the private sector
was actually much greater compared to
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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
risks
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
allocation for public sector projects in
Hong Kong. From the literature they
identified a number of major risks
affecting public sector projects. In
their analysis they selected the Hong
Kong Disneyland as a case study. This
case study demonstrated which risks
would be most suitably allocated to
each party. The study concluded that
the public sector should be allocated
the site acquisition risks, inexperienced
private partner risk and legal and policy
risks. On the other hand, the private
party should be allocated the design
and construction risks, operation risks
and industrial action risks. Lastly, Shen
et al. (2006) advocated the importance
of there being some risks which both
parties should share. These include
development r isks , market r isks ,
financial risks and force majeure.
Although Shen et al.’s 2006 study
was conducted for a project in another
country and of a different nature; it
is believed that these shared risks as
mentioned could also apply to other
PPP projects such as the CCT. The CCT
suffered immensely due to the market
and financial risks. If these were shared
risks as suggested by Shen et al. (2006),
the intensity of the damage to the
consortium could have been minimized.
Traffic revenue risk has been identified
as one of the mos t c r i t i ca l r i sks
impacting the commercial success
of road projects delivered by a PPP
(Singh and Kalidindi 2006). In order
to overcome traffic revenue risk, the
annuity-based build-operate-transfer
(BOT) model has been presented as a
good solution. Unlike the traditional
BOT type road economic projects,
the concessionaire wil l be paid a
f ixed semi-annual annuity by the
governmental client. This approach
is similar to that used for the social
infrastructure PPP projects such as
hospitals and schools which are paid by
a regular fixed payment. Similarly the
annuity-based BOT model will require
the concessionaire to achieve certain
milestones and standards. The payment
wil l be used to cover the design,
construction, maintenance and operation
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of the road and its facilities. As a result
the concessionaire does not undertake
any of the traffic revenue risk. This
approach ensures that the governmental
client must also undertake their fair
share of risks. The risk allocation
framework shown in Table 2 shows
the appropriate risk allocation for each
party under the annuity-based BOT
model. Amongst the sixteen risks listed,
nine are undertaken by governmental
clients. In general the concessionaire
is responsible for the risks related
to the construction and operational
performance of the facility. Other
risks which are less predictable and
controllable are taken by governmental
clients. By adopting this approach the
business case may not be as attractive
to the private sector. The private sector
is often willing to take up more risks
in return for the possibility of financial
benefits. The private sector should not
be solely responsible for taking these
decisions. Instead the government
should also consider whether they
should allow the private sector to take
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
construction
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
to the annuity-based BOT model was
proposed, in that the patronage risk
stays with the government (Aziz 2007).
The shadow-toll design-build-finance-
operate (DBFO) system is similar
to the BOT system except shadow
tolls are used instead of real tolls.
The government will pay a toll per
vehicle per road kilometer instead of
the end users paying the toll. Another
option is the performance-based DBFO
system. For this payment mechanism
the se rv ices and the opera t iona l
performance of the contractor are
emphasized rather than the usage of the
facility.
From the experience of several road
projects including the CCT, the New
South Wales Government identified
some lessons learnt (Infrastructure
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Implementation Group, 2005):
• N e e d f o r c o n s u l t a t i o n a n d
communication over the life of
project procurement;
• Need for improved community
consultations and messages;
• Responsibility of Government client
over procurement life of project;
• Greater onus on the consortium to
accept full responsibility over the
whole life of the concession period.
The fourth lesson learnt indicates that
the Government feels that they have
accepted too much of the project risks.
Therefore they appear to be keen to
ensure that the consortium will take a
larger responsibility for risks in future.
RISK SHARING
MECHANISM
A PPP should be adopted primarily
based on value for money. Obviously
the package is accompanied by various
other advantages which are attractive
to the government such as private
financing and the transfer of risks. But
the decision to adopt a PPP should not
be solely based on these additional
advantages.
As discussed previously risks should
always be allocated to the party best
able to handle them. The party allocated
the risk should be the one most able
to prevent it from occurring. And
if the risk does occur the allocated
party should be the one most able to
minimize the consequences.
The inaccurate traffic forecast was the
main reason that led to the collapse of
the project company. As a result of this
fault other actions were taken by the
concessionaire to overcome the reduced
traffic flow. These actions led to further
complications which in turn ruined
the partnership agreement between the
public and private sectors.
In the case of the CCT the inappropriate
allocation of risks was believed to
be the root cause . In some cases
the Government may subsidize or
compensate the concessionaire if the
project revenue is less than expectation
or if the contract is terminated. But
often there is much argument as to
the amount which this subsidy or
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
occurring, an optimal risk-sharing
mechanism is presented. The risk-
sharing mechanism can be adopted
in projects of a high risk nature. The
CCT was a project of high risk due to
its scale and significance. In this risk-
sharing mechanism, projects which are
traditionally economic infrastructure
projects such as transportation projects
can adopt a regular fee payment from
the government instead of bearing the
revenue risk. This approach is similar
to social infrastructure projects. As
mentioned previously in this paper
other researchers have also reported
the possibility and feasibility of this
arrangement for economic infrastructure
projects.
Under this mechanism, the consortium
of high-risk economic infrastructure
projects will be paid via a regular fee
payment. In this way the payment will
be based on project performance rather
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than usage. As in social infrastructure
projects certain risks are still taken
by the concessionaire, such as those
associated with the design, construction,
operation and maintenance. But the
other risks should be dealt with by the
Government including revenue risk.
Although the economic package for
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
sector. By protecting the private sector
the government will also benefit, since
as always the ultimate responsibility
lies with them. The government may
be able to pass on most of the financial
risks but they cannot avoid the social
responsibility. Hence this proposed
mechanism is believed to benefit all
parties involved.
The detai ls of the proposed r isk-
a l loca t ion mechan i sm wi l l va ry
depending on the project itself. But
it is likely that the payment will be a
regular fee paid to the concessionaire
based on performance and activity
milestones. Under the agreed payment
the concessionaire wil l del iver a
service to the public according to
standards as agreed to in the contract.
If the concessionaire under-performs
then they wi l l be penal ized by a
deduction of their fees. In this way
the concessionaire is monitored by
the project’s performance rather than
usage of the facility. In the CCT project
the concessionaire had to bear the
revenue risk, hence their main priority
was to generate revenue. They used
toll prices and redirecting traffic to
bring in revenue which just caused
public frustration. Although the local
government could have prevented these
actions, they did not step in. If the
consortium had not needed to worry
about the revenue, the public would
have been more satisfied. As a result
the public perception of the facility, the
project company and the Government
would have been very different!
CONCLUSIONS
The CCT was designed as part of a
large infrastructure network plan for
New South Wales, Australia. Due to its
complexity and size, a PPP appeared to
be an attractive delivery method. Under
the PPP procurement the financing
would be provided by the private sector.
Also expertise and innovation which
would otherwise be unavailable within
the Government could be sought. As
a result the Government managed to
pass on many of the project risks to the
private sector. Obviously for a project
of this size there would be abundant
financial opportunities for the private
sector, hence they were very willing
to take up the associated risks for the
chance to be involved. The situation
could have been a win-win case but
unfortunately this was not actually what
happened.
Media reports have reflected the CCT
as an unsuccessful PPP project. For
the consortium this may have been the
case. For the Government, although
they have received some negative
critiques, at the end of the day they
have still constructed a world-class
infrastructure facility. For the general
public, the scandal may have been more
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amusing than having a serious effect. It
is not easy and probably impossible to
distinguish whether any case is either
solely successful or a failure. Instead
it is believed that lessons can be learnt
from each case.
This paper has looked into a highly-
profiled case and tried to recommend
solutions to overcome the potential
obstacles. As a result a more suitable
risk-sharing mechanism for projects
similar to the CCT has been presented
to achieve win-win service outcomes.
ACKNOWLEDGEMENT
The content of this paper is based on the
initial findings of an ongoing research
study which aims to develop a best
practice framework for implementing a
PPP in Hong Kong. The work described
in this paper was fully supported by
a grant from the Research Grants
Council of the Hong Kong Special
Administrative Region, China (RGC
Project No. PolyU 5114/05E).
REFERENCES
AAP General News Wire (2006a), War
of Words Erupts again Between Lemma
and Tunnel Boss, AAP General News
Wire, 4 August 2006.
AAP General News Wire (2006b),
Cross City not viable, higher prices not
the answer, AAP General News Wire,
26 August 2006.
AAP General News Wire (2006c, Lane
Cove Tunnel Road Changes May Be As
Bad As Cross City, AAP General News
Wire, 21 August 2006.
AAP General News Wire (2006d),
Motorists have right to be angry over
toll inequities, AAP General News Wire,
20 September 2006.
AAP General News Wire (2006e),
Cross City Boss says Lemma Fails to
Show Leadership, AAP General News
Wire, 4 August 2006.
AAP General News Wire (2006f),
Tunnel Operators Seek Millions in
Compensat ion for Changes, AAP
General News Wire, 26 August 2006.
Ahadzi M and Bowles G (2004) ,
'Publ ic-Pr ivate Par tnerships and
Contract Negotiations: An Empirical
Study', Construction Management and
Economics, 22 :9, 967-978.
Akbiyikli R and Eaton D (2004), 'Risk
Management in PFI Procurement: A
holistic Approach'. Paper presented
a t t h e P ro c e e d i n g s o f t h e 2 0 t h
Annual Association of Researchers in
Construction Management (ARCOM)
Conference, Heriot-Watt University,
Edinburgh, UK.
A z i z A M A ( 2 0 0 7 ) , ' A S u r v e y
of the Payment Mechan i sms fo r
Transportation DBFO Projects in
Bri t i sh Columbia ' , Construct ion
Management and Economics, 25:5,
529-543.
Clifton C and Duffield CF (2006),
'Improved PFI/PPP Service Outcomes
through the Integration of Alliance
Principles', International Journal of
Project Management, 24:7, 573-586.
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Cratchley D and Jean P (2006a), Govt
May Compensate Lane Cove Tunnel
Operators, AAP General News Wire, 28
August 2006.
Cratchley D and Jean P (2006b), State
Government May Compensate Lane
Cove Tunnel Owners, AAP General
News Wire, 28 August 2006.
Cross City Tunnel Pty. Ltd. (2007),
http://www.crosscity.com.au, Retrieved
30 May 2007.
Field K (2006a), Childish Act Shows
NSW Not Open For Business, AAP
General News Wire, 10 October 2006.
Field K (2006b), Sydney's Cross City
Tunnel Operators to Pursue Toll Cheats,
AAP General News Wire, 20 September
2006.
Grimsey D and Lewis M (2002) ,
'Evaluating the Risks of Public Private
Partnerships for Infrastructure Projects',
Internat ional Journal o f Project
Management, 20:2, 107-118.
Infrastructure Implementation Group
(2005), Review of Future Provision of
Motorways in NSW, New South Wales
Government.
Jean P (2006), Cronulla Riot, Tunnel
Were My Toughest Days: Lemma, AAP
General News Wire, 3 August 2006.
Lam KC, Wang D, Lee PTK and Tsang
YT (2007), 'Modelling Risk Allocation
Decision in Construction Contracts',
Internat ional Journal o f Project
Management, 25:5, 485-493.
Li B, Akintoye A, Edwards PJ and
Hardcastle C (2005), 'The Allocation of
Risk in PPP/PFI Construction Projects
in the UK', International Journal of
Project Management, 23:1, 25-35.
Project Finance (2007), 'Skies not the
limit', Project Finance, April 2007.
R o a d s T r a f f i c A u t h o r i t y .
(2007) , ht tp: / /www.rta .nsw.gov.
a u / c o n s t r u c t i o n m a i n t e n a n c e /
majorconstructionprojectssydney/
crosscitytunnel/index.html, Roads
Traffic Authority of New South Wales
Government, Retrieved 30 May 2007.
Roads Traffic Authority (2003), Cross
City Tunnel: Summary of contracts,
Roads and Traffic Authority of New
South Wales Government.
Shen LY, Platten A and Deng XP (2006),
'Role of Public Private Partnerships to
Manage Risks in Public Sector Projects
in Hong Kong', International Journal
of Project Management, 24:7, 587-594.
Singh LB and Kalidindi SN (2006),
'Traffic Revenue Risk Management
Through Annuity Model of PPP Road
Projects in India', International Journal
of Project Management, 24:7, 605-613.
APPENDIX
Examples of Newspaper Headlines
relating to the CCT when it opened
(Infrastructure Implementation Group,
2005)
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Facility Management Surveying and Built Environment Vol 19(1), 81-101 December 2008 ISSN 1816-9554
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
$105m TOLL
OUTRAGE
CROSS
CITY
GROVEL
The Daily Telegraph, 6 October 2005
Australian Financial Review, 17 November 2005
The Daily Telegraph, 6 October 2005
The Daily Telegraph, 14 October 2005-12-02 Sydney Morning Herald, 13 October 2005
The Daily Telegraph, 17 November 2005
Changes to
contract led
to high tolls
Sydney Morning Herald, 28 November 2005
Three weeks toll-free
but roads still colgged
‘Cheap’ tunnel buyback mooted
Taken for
a ride
Drivers
to feel
squeeze
Tunnel at the crossroads
Motorists pay
hidden charge
to cross city
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Risk-Sharing Mechanism for PPP
Projects – the Case Study of the
Sydney Cross City Tunnel
APC Chan, PTI Lam, DWM Chan and E Cheung*
ABSTRACT
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.
KEYWORDS
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 : bsesther@polyu.edu.hk
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INTRODUCTION
The defini t ion of a PPP has been
reported by numerous researchers. Each
definition varies slightly depending on
the author, jurisdiction and the time.
As the Cross City Tunnel (CCT) in
Sydney, Australia is a New South Wales
Government infrastructure project, it
is therefore logical to consider their
definition of a PPP. According to the
New South Wales Government the term
‘public private partnership’ (PPP) is
used to mean:
‘An arrangement for the provision of
assets or services, often in combination
and usually for a substantial or complex
“package”, in which both private
sector supplier and public sector client
share the significant risks in provision
and/or operation’. (Infrastructure
Implementation Group, 2005).
In this definition the emphasis is on
both the public and private parties
sharing a large proportion of the risks
in a PPP project. In reality it is not
always the case that an equal split of
risks is experienced. Often the public
sector takes up minimal risk and aims
to pass on as many risks as possible to
the private sector. This occurs more
commonly in developing countries or
jurisdictions where the Government
has less experience in this alternative
procurement method. This paper
therefore aims to derive a risk-sharing
mechanism for projects similar to the
CCT. In addition the objectives are to
ensure that appropriate risk allocation is
achieved; and that the aims of all parties
are to make the project successful. The
New South Wales Government further
describes that:
‘Privately financed projects involve
prov i s ion by inves tors o f equ i ty
capital and debt capital to fund what
might otherwise be wholly publicly
funded projects financed from NSW
Government borrowings and/or budget
revenue’.
This further emphasizes the importance
of the f inancing of PPP projects .
Passing on financial risks is appealing
to governments.
The PPP form of procurement i s
recognized as an effective way of
delivering value-for-money public
infrastructure or services. It seeks to
combine the advantages of competitive
tendering and flexible negotiation,
and to allocate risk on an agreed basis
between the public sector and the
private sector (Akintoye et al. 2005).
It is essential for the public client and
the private bidders to evaluate all of the
potential risks throughout the whole
life of the project. Public and private
sector bodies must pay particular
attention to the procurement process
while negotiating contracts for a PPP
to ensure a fair risk allocation between
them. Systematic risk management
allows early detection of risks and
encourages the PPP stakeholders
to identify, analyze, quantify and
respond to the risks, as well as take
measures to introduce risk mitigation
policies (Akbiyikli and Eaton 2004).
A fundamental principle (Grimsey and
Lewis, 2002) is that risks associated
with the implementation and delivery of
services should be allocated to the party
best able to manage the risk in a cost
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effective manner. A delicate balance
has to be sought amongst private
sector capacity, government regulatory
function and public satisfaction.
In general , the typical processes
for delivering PPP projects in New
South Wales include five major steps
(Figure 1): 1. project identification;
2 . p ro jec t approva l ; 3 . p lanning
assessment; 4. project delivery; and 5.
project implementation (Infrastructure
Implementation Group, 2005). Before
a project is even considered it will go
through a series of governmental in-
house procedures to decide whether
it is a public facility or service that is
needed. If it is decided to be necessary,
the project will have to be approved
via the Gateway review process and
to see which procurement option it
should adopt. Planning assessment via a
number of different line agencies would
be necessary. Finally the project will be
offered to the market, consortia will bid
for it and the Government will select
the most suitable candidate after a long
series of negotiations. The project will
typically be designed and constructed
over 3 to 5 years. It will then be put into
operation and maintained for a further
25 to 30 years as the concession period.
Thereafter, the project will normally be
returned to the Government, completely
ending its life as a PPP project.
Figure 1 Typical processes for delivering PPP projects in New South Wales,
Australia (Adapted from the Infrastructure Implementation Group, 2005)
Project identification and
early consideration
Project approval
Planning assessment
Project delivery
Project implementation
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BACKGROUND OF THE
SYDNEY CROSS CITY
TUNNEL (CCT) PROJECT
The primary objectives of the CCT
p r o j e c t w e r e t o r e d u c e t h r o u g h
traffic in Central Sydney and as a
result easing traffic congestion and
improving environmental amenity in
the central business district, and on
streets approaching the central business
district, and to improve the east to west
traffic flows (Roads Traffic Authority,
2003).
The CCT is a 2.1 km twin two-lane
motorway that runs east and west
underneath the busy central business
district of Sydney. It opted for a design-
build-operate (DBO) arrangement under
a 30-year concession agreement. The
project was part of a network of a new
transportation infrastructure plan of the
Roads and Traffic Authority of the New
South Wales Government. Its large
project sum of AUD680 million meant
that a PPP was an attractive option to
the New South Wales Government.
The initial concept of the tunnel was
mooted in 1998 (Cross City Tunnel Pty.
Ltd., 2007). After a series of complex
consultations, exhibitions, modification
and approvals the private sector was
finally asked for an expression of
interest on 15 September 2000 (Roads
Traffic Tunnel, 2003). In response,
a total of eight consortia expressed
interest by 23 October 2000. Three
consortia were shortlisted and asked
to submit detailed proposals for the
project on 8 June 2001. All the three
consortia submitted their proposals by
the closing date of 24 October 2001. It
was announced on 27 February 2002
that the Cross City Motorway Pty. Ltd.
was selected as the winning consortium.
The cons t ruc t ion for the pro jec t
commenced on 28 January 2003. It was
delivered ahead of schedule and took
only 31 months to construct (typical for
PPP projects). The tunnel was officially
opened for service to the public on
28 August 2005. Unsurprisingly the
project attracted the private sector
from within Australia and abroad. The
selected consortium included strong
financiers, Cheung Kong Infrastructure
of China, Bilfinger Berger of Germany
and RREEF Infrastructure of Australia.
They would bring in equity and recover
the cost of des ign, const ruct ion,
operation and maintenance via the
tolls collected. Therefore the project
company, Cross City Motorway Pty
Ltd, was allocated all the demand
risk for the project. Innovation was
introduced by the contractor. The tunnel
was the first motorway in Sydney
to have full electronic tolling. There
were high levels of expectations by all
the parties and the traffic forecast for
the tunnel was predicted to be 90,000
vehicles per day.
A number of benefits were sourced
from materials published and released
from the project company Cross City
Motorway Pty Ltd (Cross City Tunnel,
2007) and the government agency
client the Roads and Traffic Authority
of New South Wales (Government
Roads Traffic Authority, 2007). These
parties claimed that as a result of the
Cross City Tunnel project the following
benefits would be experienced:
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• 34 traffic signals avoided (16 sets
westbound and 18 sets eastbound);
• Major reduction of traffic across the
central business district;
• I m p r o v e d q u a l i t y o f l i f e f o r
pedestrians and cyclists in the
central business district;
• Higher reliability of bus services in
the central business district;
• C u t t r i p s a c r o s s t h e c i t y t o
approximately 2 minutes, from up
to 20 minutes by avoiding traffic
lights;
• Improved access and movement
within the city for taxis, delivery
vehicles, cyclists and pedestrians;
• Make city streets safer and more
pleasant for pedestrians, residents
and business people by removing
in t rus ive th rough t r a ff i c and
providing more footpath space in
some streets;
• Reduced traffic noise levels; and
• Better air quality by taking cars off
surface streets.
Despite the benefits of the PPP which
have been highly publicized, some
may consider that there are also many
‘failures’ in the project. The next
section takes a closer look into these
‘failures’.
UNDERLYING CAUSES
LEADING TO ‘FAILURE’
C C T h a s b e e n p e r c e i v e d a s a n
unsuccessful project by the general
public and as a result the government’s
image has suffered ( Jean 2006) .
To illustrate some of the negative
p o r t r a y a l s o f t h e p r o j e c t , s o m e
headlines related to the project were
sought and are shown in the Appendix.
Among these seven headlines, three are
related to the toll. This shows that the
toll is probably one of the key factors
affecting the satisfaction level of the
general public towards the CCT, and
also one of the issues that is highly
sensitive among them.
The PPP has been given a bad name and
investors have been driven away from
New South Wales, at least temporarily
(AAP General News Wire 2006a). The
CCT encountered severe difficulties in
reaching the predicted traffic volume.
Motorists expressed their unhappiness
about the high toll levels (AAP General
News Wire 2006b) and the government
closing off the surface roads to direct
the traffic into the CCT (AAP General
News Wire 2006c). These problems
resulted from the inaccurate traffic
forecast and a f lawed concession
agreement. Currently, the CCT has
entered into receivership and the
concessionaire has written off their
equity (Project Finance, 2007).
In this project it has been unfortunate
that the public client and the private
consortium have argued openly in
public. Newspapers have reported them
criticizing each other for their faults
(Field 2006a). The Premier spoke out
publicly expressing his frustration
that motorists were able to use the toll
road without paying. He criticized the
operators for not enforcing the charge
and how it was unfair for the motorists
who did pay (AAP General News Wire
2006d; Field 2006b). On the other
hand the consortium also criticized
the Premier for failing to demonstrate
leadership (AAP General News Wire
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2006e). It can be seen how the media
has portrayed a tense battle between the
public and private sectors. This is an
image that nobody wants to create for
any project whether it is delivered by
a PPP or not. But being a PPP project
creates an even higher sensitivity, as
taxpayers will query whether they are
actually getting value for money from
the Government’s decision.
Following the unfortunate events
experienced, the private consortium
requested the Government to pay them
a toll subsidy and compensation for
the road changes. Unfortunately the
two parties were unable to come to a
satisfactory agreement (AAP General
News Wire 2006f). But in order for
the CCT case not to be repeated the
Government considered paying the
consortium compensation for the Lane
Cove Tunnel, which is also in Sydney,
if unfortunately traffic forecasts for
that are also predicted inaccurately
(Cratchley and Jean 2006a; 2006b).
This action from the government was
positive as it showed that they were
aware that there were problems in the
CCT project, and that they should share
the responsibilities by undertaking
more of the risks rather than passing
the pressure solely to the private
consortium.
I n 2 0 0 5 t h e N e w S o u t h Wa l e s
Government produced a report titled
‘Rev iew o f Fu tu re P rov i s ion o f
Motorways in NSW’ (Infrastructure
Implementation Group, 2005). The
report reviews recent road projects,
including the CCT, in order to improve
future similar projects. It is unfortunate
that more barriers are set up to protect
the Government, as a result of which
further risks are passed on to the private
sector. For example, in the document
they expressed their preference for
bidders with the ‘lowest’ toll. This line
of thinking is similar to selecting the
lowest cost bidder, which should not be
the only way to select the consortium.
Instead, value for money for the project
overall should be their main concern.
By focusing on the toll only, other
important features adding to value
may be neglected such as innovative
techniques and skills used in the project
to make it more efficient and as a result
creating value for money. The quality
of the work may also suffer.
In the report it was also mentioned
that in Victoria all the main variables
which would affect the commercial
outcome of the project for all parties
would be negotiated at the bidding
stage. But in New South Wales the toll
level or the possibility of a Government
contribution would not be open to
negot ia t ion . Therefore whether
value for money for the taxpayers is
achieved is questionable. The report
has indicated that the New South Wales
Government is clearly aware of their
faults, but whether they actually rectify
the situation remains to be seen.
To consolidate the findings reported
by the press discussed previously, the
underlying causes leading to the ‘failure’
of the CCT project include:
• Inaccurate traffic forecast;
• High toll levels;
• Government closing off the surface
roads to direct the traffic into the
CCT;
• Flawed concession agreement;
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• The public client and the private
consor t ium arguing openly in
public;
• N o t o l l s u b s i d y a n d / o r
compensation from the government;
• The toll level or the possibility of a
Government contribution was not
open to negotiation.
APPROPRIATE RISK
ALLOCATION
Grimsey and Lewis (2002) identified
nine main risks affecting all types of
infrastructure projects. These included
technical r isk, construct ion r isk,
operating risk, revenue risk, financial
risk, force majeure risk, regulatory/
political risk, environmental risk, and
project default. On the other hand Lam
et al. (2007) identified seven key risk
allocation criteria:
• Whether the party is able to foresee
the risk;
• Whether the party is able to assess
the possible magni tude of the
consequences of the risk;
• Whether the party is able to control
the chance of the risk occurring;
• Whether the party is able to manage
the risk in case it occurs;
• Whether the party is able to sustain
the consequences if the risk occurs;
• Whether the party will benefit from
bearing the risk; and
• Whether the premium charged by
the risk-receiving party is considered
reasonable and acceptable for the
owner.
According to the terms and conditions
set out in the Project Deed of the
CCT, the private consortium accepted
more or less all the risks associated
with the project. The private sector is
often willing to take up large risks to
gamble for their desired returns. The
Government is also concerned about
the consortium's readiness to accept
risk (Ahadzi and Bowles 2004). But
it is a surprise that the Government
was willing to allow the private sector
to take up such a large proportion of
the risks. However in the arrangement
the social responsibility will always
be the public sector’s. Therefore the
Government should consider whether
the consortium is able to handle the
risk effectively. The risks that the
consortium agreed to take on board
in the Project Deed included (Roads
Traffic Authority, 2003):
• A l l r i sks a s soc ia t ed wi th the
financing, design, construction,
operation, maintenance and repair
costs of the project;
• The risks that traffic volumes or
project revenues may be less than
expected;
• Income tax risks; and
• The r i sks tha t the i r works o r
opera t iona l and ma in tenance
activities might be disrupted by the
lawful actions of other government
and local government authorities or
a court or tribunal.
Clifton and Duffield, 2006 undertook
a study where they looked into the risk
allocation structure for several recent
PPP projects in Australia. One of these
cases included the CCT (Table 2) and
realized that the risks for each party
were quite evenly spread. But further
study showed that the intensity of the
risks allocated to the private sector
was actually much greater compared to
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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
risks
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
allocation for public sector projects in
Hong Kong. From the literature they
identified a number of major risks
affecting public sector projects. In
their analysis they selected the Hong
Kong Disneyland as a case study. This
case study demonstrated which risks
would be most suitably allocated to
each party. The study concluded that
the public sector should be allocated
the site acquisition risks, inexperienced
private partner risk and legal and policy
risks. On the other hand, the private
party should be allocated the design
and construction risks, operation risks
and industrial action risks. Lastly, Shen
et al. (2006) advocated the importance
of there being some risks which both
parties should share. These include
development r isks , market r isks ,
financial risks and force majeure.
Although Shen et al.’s 2006 study
was conducted for a project in another
country and of a different nature; it
is believed that these shared risks as
mentioned could also apply to other
PPP projects such as the CCT. The CCT
suffered immensely due to the market
and financial risks. If these were shared
risks as suggested by Shen et al. (2006),
the intensity of the damage to the
consortium could have been minimized.
Traffic revenue risk has been identified
as one of the mos t c r i t i ca l r i sks
impacting the commercial success
of road projects delivered by a PPP
(Singh and Kalidindi 2006). In order
to overcome traffic revenue risk, the
annuity-based build-operate-transfer
(BOT) model has been presented as a
good solution. Unlike the traditional
BOT type road economic projects,
the concessionaire wil l be paid a
f ixed semi-annual annuity by the
governmental client. This approach
is similar to that used for the social
infrastructure PPP projects such as
hospitals and schools which are paid by
a regular fixed payment. Similarly the
annuity-based BOT model will require
the concessionaire to achieve certain
milestones and standards. The payment
wil l be used to cover the design,
construction, maintenance and operation
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of the road and its facilities. As a result
the concessionaire does not undertake
any of the traffic revenue risk. This
approach ensures that the governmental
client must also undertake their fair
share of risks. The risk allocation
framework shown in Table 2 shows
the appropriate risk allocation for each
party under the annuity-based BOT
model. Amongst the sixteen risks listed,
nine are undertaken by governmental
clients. In general the concessionaire
is responsible for the risks related
to the construction and operational
performance of the facility. Other
risks which are less predictable and
controllable are taken by governmental
clients. By adopting this approach the
business case may not be as attractive
to the private sector. The private sector
is often willing to take up more risks
in return for the possibility of financial
benefits. The private sector should not
be solely responsible for taking these
decisions. Instead the government
should also consider whether they
should allow the private sector to take
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
construction
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
to the annuity-based BOT model was
proposed, in that the patronage risk
stays with the government (Aziz 2007).
The shadow-toll design-build-finance-
operate (DBFO) system is similar
to the BOT system except shadow
tolls are used instead of real tolls.
The government will pay a toll per
vehicle per road kilometer instead of
the end users paying the toll. Another
option is the performance-based DBFO
system. For this payment mechanism
the se rv ices and the opera t iona l
performance of the contractor are
emphasized rather than the usage of the
facility.
From the experience of several road
projects including the CCT, the New
South Wales Government identified
some lessons learnt (Infrastructure
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Implementation Group, 2005):
• N e e d f o r c o n s u l t a t i o n a n d
communication over the life of
project procurement;
• Need for improved community
consultations and messages;
• Responsibility of Government client
over procurement life of project;
• Greater onus on the consortium to
accept full responsibility over the
whole life of the concession period.
The fourth lesson learnt indicates that
the Government feels that they have
accepted too much of the project risks.
Therefore they appear to be keen to
ensure that the consortium will take a
larger responsibility for risks in future.
RISK SHARING
MECHANISM
A PPP should be adopted primarily
based on value for money. Obviously
the package is accompanied by various
other advantages which are attractive
to the government such as private
financing and the transfer of risks. But
the decision to adopt a PPP should not
be solely based on these additional
advantages.
As discussed previously risks should
always be allocated to the party best
able to handle them. The party allocated
the risk should be the one most able
to prevent it from occurring. And
if the risk does occur the allocated
party should be the one most able to
minimize the consequences.
The inaccurate traffic forecast was the
main reason that led to the collapse of
the project company. As a result of this
fault other actions were taken by the
concessionaire to overcome the reduced
traffic flow. These actions led to further
complications which in turn ruined
the partnership agreement between the
public and private sectors.
In the case of the CCT the inappropriate
allocation of risks was believed to
be the root cause . In some cases
the Government may subsidize or
compensate the concessionaire if the
project revenue is less than expectation
or if the contract is terminated. But
often there is much argument as to
the amount which this subsidy or
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
occurring, an optimal risk-sharing
mechanism is presented. The risk-
sharing mechanism can be adopted
in projects of a high risk nature. The
CCT was a project of high risk due to
its scale and significance. In this risk-
sharing mechanism, projects which are
traditionally economic infrastructure
projects such as transportation projects
can adopt a regular fee payment from
the government instead of bearing the
revenue risk. This approach is similar
to social infrastructure projects. As
mentioned previously in this paper
other researchers have also reported
the possibility and feasibility of this
arrangement for economic infrastructure
projects.
Under this mechanism, the consortium
of high-risk economic infrastructure
projects will be paid via a regular fee
payment. In this way the payment will
be based on project performance rather
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than usage. As in social infrastructure
projects certain risks are still taken
by the concessionaire, such as those
associated with the design, construction,
operation and maintenance. But the
other risks should be dealt with by the
Government including revenue risk.
Although the economic package for
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
sector. By protecting the private sector
the government will also benefit, since
as always the ultimate responsibility
lies with them. The government may
be able to pass on most of the financial
risks but they cannot avoid the social
responsibility. Hence this proposed
mechanism is believed to benefit all
parties involved.
The detai ls of the proposed r isk-
a l loca t ion mechan i sm wi l l va ry
depending on the project itself. But
it is likely that the payment will be a
regular fee paid to the concessionaire
based on performance and activity
milestones. Under the agreed payment
the concessionaire wil l del iver a
service to the public according to
standards as agreed to in the contract.
If the concessionaire under-performs
then they wi l l be penal ized by a
deduction of their fees. In this way
the concessionaire is monitored by
the project’s performance rather than
usage of the facility. In the CCT project
the concessionaire had to bear the
revenue risk, hence their main priority
was to generate revenue. They used
toll prices and redirecting traffic to
bring in revenue which just caused
public frustration. Although the local
government could have prevented these
actions, they did not step in. If the
consortium had not needed to worry
about the revenue, the public would
have been more satisfied. As a result
the public perception of the facility, the
project company and the Government
would have been very different!
CONCLUSIONS
The CCT was designed as part of a
large infrastructure network plan for
New South Wales, Australia. Due to its
complexity and size, a PPP appeared to
be an attractive delivery method. Under
the PPP procurement the financing
would be provided by the private sector.
Also expertise and innovation which
would otherwise be unavailable within
the Government could be sought. As
a result the Government managed to
pass on many of the project risks to the
private sector. Obviously for a project
of this size there would be abundant
financial opportunities for the private
sector, hence they were very willing
to take up the associated risks for the
chance to be involved. The situation
could have been a win-win case but
unfortunately this was not actually what
happened.
Media reports have reflected the CCT
as an unsuccessful PPP project. For
the consortium this may have been the
case. For the Government, although
they have received some negative
critiques, at the end of the day they
have still constructed a world-class
infrastructure facility. For the general
public, the scandal may have been more
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Risk-Sharing Mechanism for PPP Projects – the Case Study of the Sydney Cross City Tunnel Surveying and Built Environment Vol 19(1), 67-80 December 2008 ISSN 1816-9554
amusing than having a serious effect. It
is not easy and probably impossible to
distinguish whether any case is either
solely successful or a failure. Instead
it is believed that lessons can be learnt
from each case.
This paper has looked into a highly-
profiled case and tried to recommend
solutions to overcome the potential
obstacles. As a result a more suitable
risk-sharing mechanism for projects
similar to the CCT has been presented
to achieve win-win service outcomes.
ACKNOWLEDGEMENT
The content of this paper is based on the
initial findings of an ongoing research
study which aims to develop a best
practice framework for implementing a
PPP in Hong Kong. The work described
in this paper was fully supported by
a grant from the Research Grants
Council of the Hong Kong Special
Administrative Region, China (RGC
Project No. PolyU 5114/05E).
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APPENDIX
Examples of Newspaper Headlines
relating to the CCT when it opened
(Infrastructure Implementation Group,
2005)
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Facility Management Surveying and Built Environment Vol 19(1), 81-101 December 2008 ISSN 1816-9554
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
$105m TOLL
OUTRAGE
CROSS
CITY
GROVEL
The Daily Telegraph, 6 October 2005
Australian Financial Review, 17 November 2005
The Daily Telegraph, 6 October 2005
The Daily Telegraph, 14 October 2005-12-02 Sydney Morning Herald, 13 October 2005
The Daily Telegraph, 17 November 2005
Changes to
contract led
to high tolls
Sydney Morning Herald, 28 November 2005
Three weeks toll-free
but roads still colgged
‘Cheap’ tunnel buyback mooted
Taken for
a ride
Drivers
to feel
squeeze
Tunnel at the crossroads
Motorists pay
hidden charge
to cross city
