THE SYDNEY CROSS CITY TUNNEL
OPIM-5668 Project Risk and Cost Management
Feb 18th, 2011
Sourabhdeep Singh Khanna
In 2000, Cheung Kong Infrastructure Holdings Limited (CKI) was faced with a great opportunity to invest in a transportation project in Australia. The group was particularly interested in investing in Australia due to the country’s stable regulatory environment and economic growth. This project presented a good chance for the firm to continue with its globalization strategy and achieve its global ambitions in transportation infrastructure project investment.
In September 2000, the Australian’s Roads and Traffic Authority (RTA) invited tenders for the construction, financing and 30-year operation of the Sydney Cross City Tunnel (CCT). The primary objectives of the CCT project were to 1) relieve traffic congestion in central Sydney, 2) improve the reliability of public transport and, 3) provide a safer environment and improved amenities to vehicles, cyclists and pedestrians. The CCT project comprised two stages: The first one encompassed two east-west tunnels that would run between the eastern side of the Darling Harbour and Kings Cross. Stage Two would take advantage of the opportunities afforded by reduced traffic congestion such as improvements to surface roads, including new bus and bicycle lanes and other improvements to pedestrian facilities.
CKI together with its major business partner, Bilfmger Berger Aktiengesellschaft (AG), decided to form the CrossCity Motorway Consortium (the CCM consortium) and submitted its final proposal to the RTA in October 2001. Although Transportation investments generate significant risks, CKl was confident that the project risks could be mitigated through careful planning and negotiation with the Australian government authorities.
In the hope to reap maximum returns, CM consortium’s proposal included the following changes to the original project plan: 1) Increase the length of the tunnel by 300 meters and, 2) the depth at the eastern tunnel by 30 meters. The changes would add US$135.7 million to the project cost, but would increase the tunnel's daily capacity by an extra 17,000 vehicles which in turn would allow the consortium to earn additional revenue of AU$10.98 million per year. The total projected construction cost would therefore become AU$680 million.
The CCM consortium project team determined that the return on investment would come from the revenues generated from tolls charged during the term of the concession. In determining the pricing strategy, the CCM consortium took into account the following considerations:
1. Differential pricing scheme: Toll charges would depend on the size of the vehicle and the route that that it took. Passenger vehicles such as motorbikes, sedans, station wagons, taxis and vehicles towing trailers would pay less money than Heavy vehicles 2. Toll escalation scheme: Tolls could be increased as follows: 4% per annum until the Q2 of 2012 and then 3% per annum until Q2 of 2018. From mid-20I8, the maximum increases would be in line with inflation. 3. Both tunnels would be electronically tolled. Users needed to buy an electronic pass or hold a toll account and have a valid electronic tag Vehicles without electronic tolling transponders might pay higher toll charges 4. Buses providing public transportation were not required to pay tolls.
The CCM consortium with the advise of Hyder consulting, estimated that the CCT would be used by over 90,000 vehicles per day by 2006 and over 100,000 vehicles per day by 2016. On 27 February 2002, CCM won the contract and started the construction of the Sydney Cross City Tunnel.
Statement of the Problem
The CCT opened for traffic on 28 August 2005, but the results were not good at all. A report presented by the CCM in February 2006 revealed that...
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