Thank you for providing me with a copy of the final draft of the Performance Audit - The Cross City Tunnel Project and inviting me to comment on the report.
A number of the recommendations you make are generally consistent with the Premier's Department recent Review of Future Provision of Motorways in NSW and the Joint Select Committee's Inquiry into the Cross-City Tunnel. As such Treasury is already in the process of implementing changes to address some of your recommendations.
In particular, your recommendation that Treasury publicly disclose contract amendments is being implemented by revising Ministerial Memorandum 2000-11 Disclosure on Information on Government Contracts with the Private Sector.
Also, Treasury is currently updating and revising the Working With Government Guidelines for Privately Financed Projects to address a number of your recommendations. In particular, the revised version will emphasise the importance that any user charges and/or taxpayer contributions for projects should be value for money and Budget Committee approval will be required prior to amending any contract.
I would also like to take the opportunity to clarify and elaborate on a few areas that you mentioned in your report.
Firstly, I would like to clarify your suggestion that the Government required the project to be delivered at no net cost to government (p2). There is not a general principle that required privately financed projects to be delivered at no net cost to government. The need for a Government funding contribution in addition to any user charges associated with a project is determined on a case by case basis, taking into account the Budget situation and the Government's expenditure priorities.
The Government's approval to proceed with the Cross-City Tunnel project was not conditional on there being 'no cost to Government'. As your report points out, the Treasurer wrote to the Minister for Roads on 14 March 2002 stating that where additional funds were needed for the project they should come from the RTA's existing forward capital program.
Secondly, your report infers that the CrossCity Motorway Consortium (CCM) won the tender on the basis of contributing the highest up-front payment (p26). Whilst the up-front was one of the main financial points of comparison in the competition, there were other important non-financial evaluation criteria. CCM's winning bid was assessed to be a technically superior bid because there would be reduced traffic disruption during construction and the design enabled an increase in the speed limit to 80 kilometres per hour.
Thirdly, your report states that the high patronage estimates of CCM's winning bid should have received greater scrutiny (p29). The patronage estimates of all bids were interrogated in detail. In addition, the financial models of all bidders were stress tested to determine the impact of much lower than forecast revenue projections and CCM's bid performed well on these tests.
The traffic forecasts of CCM's winning bid were only about 6 per cent higher in 2006 than the Public Sector Comparator (a tunnel with a 60 kilometre per hour speed limit) and 9 per cent higher in 2016. Given the challenges in accurately forecasting toll-road patronage particularly in the early ramp-up stages, it would have been difficult to conclude that these estimates were unreasonable. These challenges are evident from a Standard and Poor's publication which found that traffic forecasts for various toll-roads around the world were underestimated on average by around 30% during the ramp-up phase (refer Global Project Financing Yearbook, October 2005). Whilst traffic flows are difficult to predict in the ramp-up phase, traffic on most of Sydney's toll-roads have, after the first couple of years, been consistent with or exceeded initial forecasts.
It is also interesting to note that in contrast to the Cross-City Tunnel experience, Transurban, part owner of the Westlink M7, have made statements that their traffic forecasts "have proved extremely accurate" (refer Transurban Investor Briefing, February 2006).
Finally, I would like to thank you and your staff for the co-operative approach taken during the course of the audit and the opportunity to comment on the report.
(signed)
J Pierce
Secretary
Dated: 23 May 2006