2.1 Is seeking upfront payments an unusual practice?
GOOD PRACTICE
In NSW, the practice of seeking upfront payments from proponents has been a common feature of recent privately financed road infrastructure projects.
The Eastern Distributor was an earlier example of privately financed infrastructure that used a form of upfront payment. Our Performance Audit report on it made some criticisms of the bidding process used. We note that the RTA has implemented a number of the recommendations in that report, including establishing internal financial modelling expertise, requiring proponents to fully disclose their financial models, and having a Treasury representative on the tender Review Panel.
The bidding model used in the three latest projects (see Exhibit 2.1) 'auctions' the concession to build and run the toll road. The upfront payment offered was the 'bid' at these auctions. Other factors being equal, the highest bidder will win the tender.
Exhibit 2.1: Upfront payments in recent road infrastructure projects | |||
Project | Cost of project* ($ million) | Year opened | Upfront payment ($ million) |
Cross City Tunnel | 680 | 2005 | 97 |
Westlink M7 | 1,540 | 2005 | 194 |
Lane Cove Tunnel | 1,142 | 2007 | 79 |
*Note costs include development, design, construction, fitout and commissioning only. Source: Audit Office research. | |||
The upfront payments for the Westlink M7 and the Lane Cove Tunnel projects have included a Development Fee to cover the RTA's estimated project development costs.
The upfront payment for the CCT project included an additional component, a 'Business Consideration Fee', that the RTA used for the first time in a privately financed project. This is a fee payable by the proponent to the RTA for the right to operate the business. It represents the amount each proponent was prepared to pay the RTA for the perceived value of the project.