Sixteen months after opening Sydney's Cross City Tunnel is in bankruptcy. With traffic of 30k/day - about a third of the 89k projected at financing - the concessionaire Cross City Motorway Pty (CCM) had insufficient cash to make interest payment due to creditors at the end of the year.

CCM's creditors - a syndicate of 16 Australian and international banks with loans to CCM of $420m (A$560m) Dec 27 appointed KordaMentha, bankruptcy and turnaround specialists as bankruptcy receivers and managers for the creditors. They are taking control with the apparent cooperation of CCM staff.

Receiver says tunnel operations continue

Martin Madden of the receivers said in a statement posted on the Cross City Tunnel website: "It will be business as usual. Our job is to ensure its continued smooth operations, including its ongoing maintenance, to ensure continuity of employment and ensure the business is adequately funded in the long term."

Government says no bail-outs, no changes to toll rate controls or term

The New South Wales state government negotiated the concession in 2002 for the construction of the 2.1km (6,890ft) toll tunnel which runs through and to the east of Sydney's central business district. In addition to having investors put up all the money for the project the state got a $60m (A$79m) upfront concession fee though the government said this more or less covered its planning, permitting and administrative expenses on the project.

Government roads minister and spokesman Eric Roozendaal said taxpayers have nothing to fear since there will be no government bail-out of the project or any subsidies. He said that toll rate controls and the term of the concession (35 years) will not be altered. The state government is confident the tunnel will continue to be operated safely and maintained.

CCM is in litigation with the state government over about a dozen surface road openings in apparent breach of the toll concession, but this was not a factor in the bankruptcy which was due to highly erroneous traffic and revenue forecasts - by the British firm Hyder Consulting.

Since the receivers took over tunnel operations and toll collection have continued as usual though traffic is light because of the holidays.

Hong Kong and German investors lose most

Equity investment in the project - some $165m (A$220m) - is almost certainly completely lost. The equity is held 50% by Cheung Kong Infrastructure (CKI) a Hong Kong and Chinese tollroad investor, 30% by DB Capital Partners a subsidiary of Deutsche Bank, and 20% by Bilfinger Berger, the German-based international construction company, which led construction of the project for CCM. The loan portion of the financing - $420m - was organized by the Australian Westpac bank and by Deutsche Bank, mainly from other local and international banks and pension funds.

CKI says it has already made "substantial" write-offs of its investment in CCM.

Tolls of $23m/yr

Toll revenues are currently running about $23m/yr on 30k veh/day compared to a Hyder Consulting projection of Dec 2006 traffic of 89k veh/day. A state commissioned study by Masson Wilson Twiney, Australian traffic forecasters had projected 53k veh/day. Hyder have never explained how they got the numbers so disastrously wrong.

As others have explained it Hyder aggregated all the east-west routes in a wide band and assigned a proportion to the tunnel. The breadth of the potential corridor appears to have been way too wide and traffic in the extremities continues to travel on established surface streets.

An executive of one of the established tollroad companies in Sydney told me in 2003 that his company had estimated the maximum tunnel traffic at 40k veh/day and possible early year traffic at 25k. He said that CCM's projections were "madness" because the pool of potential users was pretty much confined to William Street, the signalized surface arterial above the tunnel route, and not routes to the south which had been wrongly dragged in. William Street itself carried only about 70k veh/day at its maximum before the tunnel, we've heard.

The tunnel is unlikely to benefit from much growth in traffic since the area it serves is mature and there is no hinterland for further growth (just the Pacific Ocean). CCT serves a high income area of the inner eastern suburbs which were heavily built out as far back as the 1920s. Development since has been mostly displacement of lowrise buildings by highrises. The Hyder projections however were for strong growth of traffic in the tunnel, apparently some artifact of induced demand: 2006 88.8k, 2016 99.9k, 2034 197k.

The projections were fanciful not only on the demand side but on tunnel capacity. Highway engineering manuals put the capacity of 2x2 lanes in the range 50k to 70k veh/day with normal distribution of traffic across the day and night. Over 70k veh/day can only be achieved in 4 lanes by aggressive management of variable prices to prevent overloading and sustain free flow. 197k veh/day on 4 lanes is unheard of. (Texans would build 10 lanes for that kind of traffic, the rest of us 8 lanes.)

State premier called CCM CEO a "fuckwit"

One of the more comical incidents in the short history of the Cross City Motorway company was when the state premier Morris Iemma was heard on an open microphone at a lunch event telling his colleague that the company CEO Graham Mulligan was a "fuckwit" - just crude Australian slang for an idiot. He wasn't the only one!

Much nonsense on the design

Pundits and politicians have had a great time ridiculing the project since its traffic and revenue difficulties emerged on Day 1. Some newspapers have campaigned for reopening of surface streets. Some of the same ones who panned the project on opening had hailed the street closures as enlightened thinking when advanced in the planning process - giving "streets back to the people" etc.

Engineering masterpiece, well built

The tunnel - three separate tubes, one of two lanes each direction plus a large longitudinal ventilation tube - are a masterpiece of engineering design and were built without serious cost problems, mishaps or faults in 31 months, some five months ahead of schedule. About midway the tubes go between rail subway lines below and an existing north-south underground toll tunnelway (the Eastern Distributor) above. And they have have underground connection ramps to that other toll tunnelway.

The CCT tubes were built with rather basic roadheader machines - a long grinder on an arm - and 'boomers' which do rockbolting and shotcrete.

One criticism of the tunnel plan is that while it works well for traffic wanting to go under the central city between eastern and western suburbs it serves poorly downtown office workers with corporate basement parking who live in the inner eastern suburbs. There are no direct ramps into the central city streets such as Elizabeth Street which might have attracted more use by highly paid people in the city's office towers.

The state essentially designed the facility before the project went to concessioning though CCM extended its eastern portal further east compared to the initial government plan.

For motorists traveling the length of the tunnel and going beyond the CBD it bypasses 16 traffic signals westbound and 18 signals eastbound for 2 or 3 minute trips compared to 10 to 20 minutes on surface William Street.

Full open road tolling systems have worked well - a combination of transponder and video tolling of occasional users. Technically the tunnel has performed well. It has no breakdown lanes, just a pair of 3.3m (11ft) lanes with 4.4m (14ft5in) overthead clearance and heavy safety surveillance and variable signage. The tunnel is safe.

Different toll rates tried

CCM tried several toll rates - full tolls of $2.60 (A$3.50) for cars with transponders (double for other vehicles and a higher toll for video tolling pass), then zero tolls , then full tolls, then half-tolls, then full tolls again.

- At full tolls the tunnel started at end Aug 2005 at 20k veh/day

- After two months of full tolls at end Oct 2005 traffic had grown to 23k

- The month of Nov 2005 was declared by the company "toll free" in order to get more motorists to try it. Traffic with no toll was 50k to 51k.

- On reimposition of full tolls traffic was around 26k to 27k from Dec 2005 through Feb 2006

- Half price tolls were tried from Mar 2006 for several months and produced 32k to 36k daily traffic

- With reimposition of full tolls in the second half of 2006 traffic was around 30k again and clearly the revenue maximizer of the three tried.

Cross City Motorway is private and there was no public prospectus or public financial reporting but local newspapers say interest due for 2006 was $24m. Operating costs have to be in the range $15m to $20m so present toll revenues leave perhaps $3m to $8m for debt service.

Clearly the receivers hope to be able to slough off a major chunk of capital through write-off of the equity plus deferral of interest on a proportion of the debt in order to reduce capital service costs drastically. Operating costs, already quite low cannot probably be squeezed much.

Receiver hopes to turn around the business and eventually pay off creditors

The receiver's chief representative Martin Madden says in a statement:

"We see this as the chance for a fresh start for the tunnel. We believe, with some changes, it can and will succeed.

"We intend to work closely with the current management team, the RTA and the State Government to secure a long term sustainable business.

"We don't intend to make significant changes immediately, but we will look at all the options to ensure sustainable growth in the business.

"It is Year Two of a 35-year project and we believe that the tunnel can ultimately be successful as an important piece of Sydney's traffic management infrastructure. We believe the banks' position can be protected."

First in ten to go bad

This is the first of ten major tollroad concessions in Sydney and Melbourne to go very wrong and cause a default. Two or three others were below forecast in their early years but none as disastrously below as the CCT. Those previous laggards have subsequently come good.

Cheung Kong Infastructure still has hype on website

The Hong Kong based CKI is an investor in infrastructure with money in gas, electric powerplants, tollroads, and water in mainland China, Hong Kong, UK, Australia, Philippines and Canada. Profits last year were $750m (HK6b) on assets of $5.6b (HK44.6b) and market capitalization of $6.9b (HK55b).

CKI have an unfortunate bit of hype about CCT still on their website under the name of H L Kam, their group managing director:

"The Cross City Tunnel in Sydney, which heralds CKI's first transportation project outside China, commenced operation in August 2005. Over the course of the next 30 years, the Group expects to reap steadily growing cash returns from this investment." (http://www.cki.com.hk/english/about_CKI/businessReview/index.htm)

They have a 40% stake in the Lane Cove Tunnel, which is also a dicey project, not so much because of traffic which it seems likely to get, but because of its high project cost and capacity constraints.

CKI's major toll properties are in China:

- Guangzhou East-South-West Ring Road

- Panyu Beidou Bridge, also in Guangdong province

- Jiangsha Highway and the Chaolian Bridge in Jiangmen

- Changsha Bridge (50%)

- National Highway 107, Zhumadian section

- Eastern Harbour Crossing, Hong Kong (50%)

see www.cki.com.hk

TOLLROADSnews 2007-01-02