A difficulty arises with multiple criteria for the PPP bid process. This is demonstrated with Sydney's Cross-City Tunnel (CCT) which invited bids on the basis of length of tenure, an up-front payment and user charges.16 Multiple bid evaluation criteria can create problems for government and generate consumer resistance. Up-front payments to the state contribute to higher user charges and consumers eventually reimburse any up-front payment to government over the life of the project. The Audit Office of NSW reviewed the CCT project which proceeded as a PPP on a no cost to government approach. The up-front fee was designed to meet all of the costs of the project incurred by the state so far. The surplus was unallocated. The Audit Office found that an up-front fee needs strong justification if the cost is to be met by tunnel users.
A further matter raised in the CCT review was variations in the cost of the project requested by the state. These were paid for by raising tolls and changing the toll escalation factor. The review found that the basis for changing the tolls was reasonable but the result was to significantly increase medium-term toll revenue (Auditor General NSW 2006).
The strategy for the CCT project aimed at reducing surface traffic volumes, easing road congestion and improving amenity within the Sydney CBD with partial road closures. However, poor communication with stakeholders and a bid framework that used a “no cost to government” approach led to the perception that partial road closures were designed to benefit the tunnel operators. Two recent state inquiries found that this was not the case. Nevertheless, this was the perception and the outcome is a bad one for Sydney - a tolled tunnel competing with free urban roads and only minor alleviation of the CBD congestion problem. However, the CCT project should not be viewed as a total failure although this is the result for the project's equity investors. It is not the case for the project's secured lenders or the New South Wales Government. The state has secured the private investment that it needed for a strategic east-west by-pass for the city and it has not been required to provide additional capital nor ongoing revenue support for the project.
The CCT tunnel also demonstrated demand price elasticity for this group of assets. Patronage increased significantly during toll-free periods suggesting that demand is quite sensitive to pricing in the presence of substitutes. Transurban City Link tollway in Melbourne has met traffic forecasts and options within the contract have proved sufficiently robust to meet the cost of financing the recent Calder Interchange upgrade suggesting that long-term contracts can retain flexibility to meet changes in future operating requirements. Flexibility was also achieved with the re-franchising of Victoria's public transport PPPs with the withdrawal of National Express in 2002. The Victorian Government maintained uninterrupted service delivery and conducted bilateral negotiations with other franchisees for the transfer of the services preserving value for money outcomes in the process (VAGO 2005). Service continuity was also maintained with other failed PPP transactions including the Sydney Airport rail link and La Trobe Hospital.
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16 The bid documentation recommended a franchise term and a recommended toll which left the amount of any up-front payment to the discretion of the bidder (Auditor General NSW 2006).