Two recent high profile PPP failures in New South Wales have reflected the importance of political costs evident upon the failure of a PPP. The Cross City Tunnel (CCT) was a transport infrastructure project connecting the western side of the Sydney CBD to Sydney's eastern suburbs by means of a 2.1km tunnel. In 2003 the New South Wales Labor government announced it was awarding Cross City Motorways the contract to build own and operate a tunnel that was to connect he western fringes of the Sydney CBD and east-west road arteries leading into the city to the eastern side of the city. In April 2005 the Cross-City Tunnel opened for operation at a building costs of $AU 680 million - by late 2006 the venture had debts of $AU 500 million dollars and was insolvent. In 2007 the venture was sold for $AU 700 million to a consortium making it now completely privately owned and privately operated. The tunnel will revert to public ownership in 2030. The Cross City Tunnel was the first road PPP to go into receivership in Australia. The paper presented by Peter Phibbs at the State of Australian Cities conference 2007 provides a detailed insight into the Cross City Tunnel PPP based on primary contractual documents tabled in New South Wales Parliament and Auditor General Reports (Phibbs, 2007).
The second similar failure in New South Wales in recent years is the collapse of the Lane Cove Tunnel (LCT) PPP which was estimated to have cost $AU 1.1 billion to construct. The tunnel is 3.6km long and was one of the final parts of the Sydney Orbital - a freeway network system that encircles the greater Sydney metropolitan area. The tunnel was opened in 2007 and the company that designed, built and was set to operate the tunnel until 2037 (Connector Motorways) went into receivership in January 2010. In both the context of the CCT and the LCT, political considerations have dominated the circumstances surrounding the collapse of each respective PPP. Although the political fallout from the LCT is yet to be felt, if the political furore that surrounded the CCT PPP collapse is any indication, the New South Wales government will most likely face a difficult time winning next years election (a prospect that was unlikely anyway). The collapse of the CCT project resulted in a New South Wales parliamentary investigation by a joint select committee. The completed parliamentary report gives unique insights into the world of transport related PPPs in New South Wales (Report, 2006). At the heart of many of the recommendations of the report were considerations of political importance to public sector officials similarly operating in the field of transport orientated PPPs.
Some of the most glaring omissions and mistakes committed by the New South Wales government in the context of the CCT include: A lack of public transparency, a disregard for commercial warnings related to project viability and an ill managed public relation operation. With respect to the transparency shortcoming, the NSW government, as part of its contractual arrangements with the CCT consortium, agreed to commit to CBD road closures upon the opening of the CCT to 'direct' traffic into the tunnel. There was an immediate public backlash against this undertaking and it was not until the government capitulated to political pressure that these contractual terms were publicised upon tabling in parliament. The traffic arrangements were difficult for the public to understand and this created some popular discomfort. The real sting for the public, however, was the lack of transparency which many members of the public understood to be arrogance on the part of the government and plainly insulting. Quite cynically people have come to unfortunately expect a lack of transparency or accountability from the private sector, but the brazenness of the NSW governments actions created significant disaffection amongst the voting public.
The parliamentary report completed in relation to the problems with the CCT was completed in 2006 and publicised the drastic miscalculation or over estimation of traffic volumes underpinning the figures upon which the viability of the entire project was premised. Several commentators have noted this point, but have yet to point out the inconsistency of the government approving proposals for a project in which it has a vested political interest. Indeed, in the context of the LCT, it is widely believed that the NSW government delayed the opening of the tunnel such that it would coincide with the 2007 state election and provide maximum political capital (at the cost of $25 million to the taxpayers). When a government vests its political capital in the success or popularity of a PPP to this extent, the costs associated with its demise are considerably greater.
The CCT episode was particularly important in a political sense to the NSW government in that 2007 was an election year. If not for the lack of a viable alternative government, the CCT debacle and the media interest it generated may have cost the Labor party office. The breakdown of the CCT project even degenerated into a personal conflict between the Premier of NSW at the time, Morris Iemma, and the head of the CCT consortium chief, Graeme Mulligam, with both parties exchanging insults in a public display of public private disunity (Noble, 2006). The political situation faced by the NSW Labor government, as noted above, was made worse when it became public knowledge that in order to attract private investors, the government agreed to certain CBD road closures to 'direct' cars into the tunnel. Furthermore, the toll that was to be levied on motorists by the toll ways operators was also relatively high ranging from $1.87 - $6.75 (depending on which way a motorist is travelling, the type of vehicle, the particular exit taken and whether the motorist is registered for an e-tag (an electronic toll device attached to the windscreen of a vehicle)). Whilst the transport minister at the time requested from the private operators that the toll be reduced to lessen the political pressure that was building on the government, it was conceded that there was no legal way in which to force such a reduction short of command economy style price controls. After it became public knowledge that the government had agreed to the road closures that subsequently caused traffic chaos in Sydney, the NSW government preferred to breach its contractual arrangements with the CCT consortium rather than pay the higher non-economic cost of a severe public backlash. The toll operators, however, voluntarily agreed to toll-free period to attract road users and eventually reduced the toll to stimulate interest and demand. Ultimately both efforts failed in turning the project into a long-term profit making enterprise.
The final parliamentary report into the CCT confirms the fact that the initial viability of the CCT project was based on exorbitant estimates of traffic volumes that were approximately 50% greater than the traffic volumes that were realised. An early viability study into the project also made it clear that upon a realistic estimate of traffic volumes the CCT project would only be commercially profitable if it included car parks and a shopping complex underground (Phibbs, 2007). The politics surrounding the LCT project failure in early 2010 were not as immediate as the fallout from the CCT episode - perhaps demonstrating that the same NSW government has learnt from its political mistakes. That is not to say the LCT opening and initial operations were flawless, far from it in fact. When first opened, the LCT operators also demanded road closures from the government in order to direct traffic onto the toll way. Such actions again created some resentment, although the resentment quickly turned to anger when it was realised that the NSW government was collecting massive fines from motorists who were early adopters of the toll way and did not realise there was a 10km/h speed reduction at the start of the 3.1km tunnel and were caught on a strategically placed speeding camera. The fines resulted in an economic windfall for the government but a political near catastrophe. When news of the disproportionate number of fines appeared in the media, the government was pressured into refunding the fines and changing the speed limit at the entrance of the tunnel to match the roadways leading into the tunnel at 80km/h. Whilst it is true that the city of Sydney now has two new useful, if not vital, pieces of infrastructure and that the private sector has born most of the cost, this has not translated into praise or political benefit for the government. Indeed the opposite is true. The dissolution of the CCT and the LCT PPPs has in fact inflicted significant political costs on the government despite ostensibly the tunnels being built on time and at minimal direct costs to the taxpayer. It appears that one of the most significant costs to a government in the context of PPPs (and in particular in relation to their dissolution) is the political cost. Although this cost is unpredictable it is manageable. Managing political benefits and costs requires an astute political strategy that balances fiscal considerations with reputational threats and opportunities. Whilst the private sector may have to make important decisions as to how much economic capital it will invest in a PPP, governments need to be weary of how much political capital they themselves invest.