CCM offered the RTA $100.1 million as an upfront payment for the CCT project. The offer comprised a Development Fee of $54 million for the RTA's initial estimate of its project development costs, and a Business Consideration Fee of $46.1 million. The actual payment reduced to just under $97 million on finalisation of the contract, mainly due to movements in interest rates.
The Business Consideration Fee was the price a proponent was willing to pay for the right to build and operate the tunnel. It was distinct from the estimated development costs. There were no government directions on its use.
The bidding model developed by Treasury allowed the bidders to compete on a number of variables. They could bid on the upfront payment, the concession period or the toll. CCM offered the highest upfront payment, and this became a decisive criterion in the assessment of bids.
The advantage of making the upfront payment a point of competition is that it makes it easier to compare bids. Difficulty in comparing bids has been the subject of past criticism. However, allowing the upfront payment to be a point of competition also presented significant risks, particularly the risk of higher tolls. If motorists perceive the level of tolls as unreasonable, they may avoid using the tunnel. Therefore, we consider that the Budget Committee of Cabinet should have reviewed and assessed the implications of this approach.
All of CCM's bids predicted a higher number of cars using the tunnel than the RTA and the rival bidders. CCM's projections for 2006 ranged from 12 per cent to 50 per cent higher than other bidders. This should have concerned the evaluation panel sufficiently to cause greater scrutiny of the projections. Actual patronage to date has been under a third of the CCM estimates.
After receiving the $97 million upfront payment in December 2002, the RTA used part of it to recover its project development costs, and committed another part to future CCT project costs. By April 2005, the RTA had not spent or committed about $9.0 million of the upfront payment, earmarked for the finalisation of outstanding project costs. The RTA used only $3.1 million of the unspent portion of the upfront payment on the subsequent cost increases, which largely flowed from the Planning Minister's Project Conditions of Approval.
To recover subsequent cost increases, preserve the upfront payment, and avoid using funds from its capital expenditure budget, the RTA negotiated two deals with CCM. The first deal resulted in a change to the way the toll escalates. This was incorporated in the original contract. The second deal resulted in a 15 cents toll increase. This was incorporated in the First Amendment Deed.
CCM delivered the project to the RTA on time. The RTA delivered the project at 'no net cost to government' because it passed on all increased costs to motorists by way of toll increases. This was because it interpreted 'no net cost to government' to mean no net cost to the RTA budget. The RTA did not adequately consider using its capital expenditure budget to meet cost increases.