Cost Estimation Plans for Sydney Harbour Tunnel - Coursework Example

This paper is about cost estimation plans for Sydney harbour Tunnel. After giving a brief introduction of the tunnel, various approaches andperspectives for cost estimations of huge infrastructure projects are given. The tunnel proved to b less than a success and there were a number of hindering factors which are responsible for the failure of the project which is also considered as an important Public Private Partnership (PPP). A basic cost-benefit analysis is given and the conclusion is made while keeping the current situation in view. 1.0 Introduction Sydney harbour Tunnel (SHT) was opened in 1992 and currently is being operated by a private company which is to complete a thirty-year allowance period to the travelers. According to the agreement, these operations will be transferred to government. Approach road to this tunnel is shared with that of Sydney Harbour Bridge. The SHT is 2.3 kilo meters long with only 1 kilometer of the tunnel being under the Sydney Harbour. There are total 4 sections in the tunnel; two on the North of the Sydney Harbour and the other two on its Southern side. The two land tunnels on the North side have a length of 1 kilometer each and those on the Southern side have a length of half kilometer each. The four units are joined by means of eight solid concrete blocks. There are two carriage ways in SHT, each having two traffic lanes. The purpose for building the Sydney Harbour Tunnel was to reduce the traffic load on Sydney Harbour Bridge and to provide an easy and safe access to the other part of the city. This tunnel is one of the largest tunnels in Australia and therefore, has much importance. The project for construction of the SHT can be considered as one of its own nature as there are certain outcomes observed which have raised questions about the project. One such important issue is the fact that the project Sydney Harbour Tunnel was a PPP in which the private partner bore higher portion of risk as compared to that of public partner, or to be more precise, in this case government of Australia. In the next section of this essay we will focus on the various assumptions made during the cost estimation of the STH plan. Various approaches towards the cost estimation of mega infrastructural projects and their application to the Sydney Harbour Tunnel Project will follow the assumptions. A cost-benefit analysis of the project is given and conclusion is drawn on the basis of all the discussion. To start the discussion about cot estimation of STH, let us first discuss some of the major assumptions made during the financial planning stages of the project. Given are some of the basic facts and figures about Sydney Harbour Tunnel: 2.0 Looking into The Finances and Economics of Sydney Harbour Tunnel Sydney Harbour Tunnel was built on the principle of 'BOT,' i.e., Build, Operate and Transfer. There were a number of financial advisors involved in economic and financial analysis of the project. A combination of analysis techniques were used by these consultants and a unified statement as a result of the analyses was given by the Auditor General NSW in 1994.It was stated that the project was viable and beneficial on financial, economic and environmental basis. The tunnel was reported to be justified on the basis of factors like travel time, air quality, economics of the project and the quality of travel with special reference to air quality. However, it was mentioned in the later parts of the report that technical deficiencies and constraints may affect some of the outcomes o the project. These assumptions are addressed in the very next section of the essay with their detailed analysis and how it influenced the overall functioning of the tunnel from the start up to the date. The estimated cost for the construction of the tunnel was reported to be 3.8 million Australian Dollars. These funds were generated from three different sources. The first tool used was the issuance of inflation-index bonds of maturity 30 years to raise a capital of AU $ 486. The second measure adopted was a loan of AU $ 40 millions from the joint venture of public and private company where the private partners were more prone to risks. NSW government also provided an interest free loan of AU $ 223 millions. 3.0 Assumptions Made While Financial Planning of Sydney Harbour Tunnel According to Phibbs (2007), there were three major areas which were misaddressed while making assumptions about the cost of the project. The three most prominent areas of interest include volume of traffic to flow through the tunnel, cash inflows, road closures and their impact and effect of toll size on the choice of route by the travelers. Let us start the discussion with the estimates about the traffic volume. 3.1 Traffic Volume Forecasts While designing a mega project like STH, the forecasts about the users who will avail the facility and will be a source to generate revenues are one of the basic prerequisites. In case of STH this step was taken with over estimation of the traffic volume which had to travel from the North to the South part of the city or otherwise was very low as compared to that estimated by the project planners at the time of forecasting demand of the tunnel. This fact leads to a number of reasons which caused the estimated revenue from the STH to be very low as compared to the estimated one. Flyvberg et al (2006) also confirmed this. A decrease in the number of travelers meant a decrease in the number of toll payers which were considered as a source of revenue generation. Another factor while making cost estimations of Sydney Harbour Tunnel was the ignorance of the substitutes available to the travelers. Although construction of STH reduced load on the Sydney Harbour Bridge, the tunnel attracted only a very small proportion of the existing traveler base which was already small for creation of such a mega project. Given is a comparison of actual traffic which used the tunnel to the estimated one: International rating agency, Standard and Poor's also confirmed the over estimation of the traffic volume for the tunnel and reported that total traffic forecast was 20-30 % escalated of the actual traffic volume. 3.2 Estimated Cash Inflows Coming to the second factor in cost estimation plan of Sydney Harbour Tunnel is the estimated cash inflows. As the total volume of the traffic through the tunnel was reduced, the estimated cash inflows also suffered considerable decline. On the other hand, to maintain such a large under harbour tunnel, considerable costs were to incur to keep it running. Predictive and repetitive repair mechanisms were used which needed budget for their functioning too. Following graph shows the traffic flow through STH as compared to the other toll roads in Sydney. It gives a clear idea that although the traffic volume is not negligible, it is lower than other major roads in Sydney and therefore generates smaller cash inflows when compared to other projects with same cost: Source: Independent Public Inquiry: Long Term Public Transport Plan for Sydney. Final Report 2006. 3.3 Costs-Benefit Ratio Third factor is of the utmost importance. While a cost-benefit analysis was made for the Sydney Harbour Tunnel project, the cost-benefit ratio came out to be exceptionally positive as compared to the other similar infrastructural projects. If a single element of benefits achieved from the underground parking of cars was taken out, the cost-benefit ratio declined considerably. To be more precise, the cost to benefit ratio came to be 0.88 for Sydney Harbour Tunnel project which was very low as compared to other projects which were aimed to introduce some additional public transport in the main city. In short, at the time of making cost estimation plan for SHT, the present value of benefits outweighed the present value of costs and project seemed to be not only viable but also a attractive investment. Probably, this may be entitled to the use of traditional cost-benefit analysis techniques but it made private partners of the project to bear higher risks. The cost estimations about the toll size and effect of road closures on the performance of STH were the other two factors which were estimated inappropriately. Following graph will elaborate this fact: 3.4 Toll Size and Its Effect Toll size for the travelers of STH was higher as compared to other similar channels. An increment in the fee charged which was planned to be raised after certain time period, lead to further decline in the number of travelers as well a the revenues they were to participate. According to former chief executive of Road and Tunnel Authority Australia, the toll amount is quite high as compared to other similar channels where the travelers travel for equal time duration of an average of 15 to 20 minutes (RTA, 2006). Currently the toll fee of STH is $ 3.56 and is in high contrast with the proposed amount of $ 2 at the time when the project was being planned financially in 1988. This toll fee is the highest among all the toll roads of Sydney. There are a number of reasons for this high toll price. One of the most widely discussed reasons is the desire from government officials who want to operate this tunnel at no cost to the state. Similarly, in order to justify the decreased traffic volume and the resulting lower revenues are also contributing towards raising the toll fee. All the construction and maintenance work which is performed by the CCM was translated in terms of increase in toll. Another similar event which resulted in another 0.15% of increase in toll is the continuous roadwork being performed at Sydney Harbour Tunnel. The Auditor General report about the effect of these two events as they affected the changes in toll fee was reported to be significant in reducing the overall revenue generated from SHT. It can be represented in the form of following graph which shows increase in the toll and resulting decrease in traffic volume and revenues: This graph was published in NSW Auditor General's report of the year 2006 and is a strong evidence of the fact that road toll prices have a high elasticity. If one notes the difference, to be more precise, the increase in the volume of traffic when the toll was removed in 2005 and then in the next year, 2006, when the fee was reduced to half, the fact that toll fees are a major factor in reducing the revenue generated from the Sydney Harbour Tunnel and reducing the traffic volume. 3.5 Road Closures In order to make people use the STH as a channel of transport, there were made changes in the structure and function of more or less 7 on-the-surface roads. The aim of these actions was to reduce the on-the-surface traffic load s well as to make people to make better use of the mega project. It was estimated that by road contractions and closures, people will prefer to use the STH instead of any other mode of transport. However, this was not the case when actual results were observed. First of all there was a general resentment in public regarding the road closures. It was planned with closing the roads; the toll fee will also be adjusted in order to attract traffic towards the use of the tunnel. As a part of he plan, in the year 2006, 13 roads were closed but on the side of toll fee, the toll fee was lifted in the year 2005 and in the year 2006,it was restore to half of its original. Moreover, changes in political set up of the country lead the project to suffer more losses and the Sydney Harbour Tunnel faced more financial pressures then existed before these changes. In the next section of the essay, the focus of debate will be the use of various cost estimation techniques as were used by the planners. 4.0 Analysis of Current Situation Currently, there is much debate on the parameters on which any grant or financial decision has to be made particularly when it is related to mega infrastructural projects. The traditional models of cost estimation which were used in the cost estimation of the Sydney Harbour Tunnel project are thought to be abandoned. There has been wide research and debate of using more advanced project cost estimation techniques in order to make better forecast about the success and projected cost and benefits of the project. In addition to the use of better cost estimation tools and techniques, the external environmental factors should also be taken into account while panning nay mega project of public use. Number of substitutes available, costs to be incurred on repair and maintenance, toll fees and as they are affected by changes in government policy and the user base which is to be benefited from one such project are the parameters which all were miscalculated at the time of project launch. Some researchers have argued on the fact that such huge spending should be made public as much as possible to have a consensus before commencement of ay such huge project. ABN Amro bank is named as a new buyer of the Sydney Harbour Tunnel project at the price of 695 million dollars. There is still much controversy on this issue. There has been immense criticism on the NSW government for this project and the private partners of the project are said to be 'going into receivership.' Baker and Jhones (2006) also reported same opinion. To avoid any such situation in coming future, all the factors which lead such a huge project down should be estimated and considered carefully to make better decision about huge infrastructure projects. 5.0 Conclusion In the light of all the above discussion about the cost estimation of Sydney Harbour Tunnel, can be inferred that the project could be a success had it had undergone a more careful cost-benefit analysis and was launched with more vigilant strategy. Following are few suggestions regarding any huge investment in infrastructural project: Huge investments, in projects which do not have promising gains and need a high degree of compromise while making cost-benefit analysis, should be analyzed with more care and vigilance. While making cost estimations, an equal amount of emphasis should be paid to the benefits achieved. While designing a project o public use, the use of non-financial information should also be made and given due weight. Revenue risks from projects of huge investments should b carefully monitored and mitigated in order to sustain gains and minimize losses. In case of STH cost estimations, a number of factors were either ignored or were considered to be more in favor of the project when the actual situation was more or less opposite. This fact lead to one after the other cost estimation mistakes and the results were observed and criticized by all. Although, financial information about any huge project is not made public anywhere, disclosing some of the information can help in decision making by timely consideration of public opinion. References: Baker J and John Danny (2006) "Tunnel collapses in debt" Sydney Morning Herald, December 28, p1. Enersol Consulting Engineers (1989) 'Sydney Harbour Tunnel Inquiry, Vols. I & II' Sydney: North Sydney Municipal Council. Flyvbjerg, Bent, Mette Skamris Holm, and Sren L. Buhl. (2006) Inaccuracy in Traffic Forecasts. Transport Reviews 26.1, 1-24. NSW Auditor-General (2006) "Performance Report- Cross City Tunnel", Sydney, NSW. NSW Parliament Joint Select Committee on the Cross City Tunnel (2006a), "Cross City Tunnel First Report", February 2006. Muhammad, I. and Low, N. (2006), Mega Projects in Transport and Development: Case Studies in Australia. Sydney Harbour Tunnel, Australasian Centre for the Governance and Management of Urban Transport GAMUT), the University of Melbourne, Victoria 3010, Australia. Read More