Toll roads are now an integral part of the Sydney road network, the first privately funded and operated toll roads (the M5 and the M4) having opened in 1992. In February 2002, the CrossCity Motorway Consortium (CCM), was announced as the preferred bidder for the US$461 million Sydney Cross City Tunnel project. Project sponsors were Baulderstone Hornibrook, Bilfinger Berger AG and Deutsche Bank AG. The equity-debt ratio is 30:70.

As part of a policy initiative to further improve traffic flows east - west across the city of Sydney, the New South Wales (NSW) State Government put the Cross City Tunnel out to competitive tender on a BOOT basis. This project will be the sixth privately owned and operated toll road development in Sydney, and will be followed by two further toll road projects. Construction commenced in January 2003, and the tunnel is due to open to the public in 2005.

Project Objectives

The project is a key infrastructure project for the New South Wales government. The government objectives for the project included:

• to reduce traffic passing through city surface streets;
• to improve cross city travel times for motorists; and
• to improve the city’s environmental quality and conditions, including by reducing exhaust from vehicles on surface streets.
• In line with the above objectives, it is estimated that the Cross City Tunnel will reduce cross city travel times from up to 20 minutes to two minutes, bypassing up to 18 sets of traffic lights and taking up to approximately 90,000 vehicles off city surface roads.

Project description

The Cross City Tunnel will be a twin lane, two kilometre tunnel running east west under the city of Sydney. It will be bi-directional and, unlike most tunnel projects, the tunnel is actually comprised of two completely separate tunnels (one for east-west travelling vehicles and one for west-east travelling vehicles) which do not follow the same path. It will be tolled both ways.

The project also includes the connection of the tunnel to the Eastern Distributor toll road which is 20 minutes from Sydney to its major international airport. Consistent with government policy on projects of this nature, CCM is also obliged to install traffic calming measures on specified local surface roads to limit the use of these local surface roads to local traffic rather than through travel.

Traffic revenues

This BOOT project has a 33-year concession term (including a staged construction period of approximately 42 months in total). During the operational phase of the concession, CCM has the right to levy and collect tolls from the users of the tunnel. The maximum toll amounts have been pre-agreed with the government in the project documentation. The Australian government adopted a “differential tolling” model consistent with other Sydney toll roads (i.e. heavy vehicles will be charged a higher toll than normal passenger vehicles). Similar to other Australian toll roads, the private sector takes full patronage risk, rather than entering into shadow-tolling type arrangements.

Unique features

A unique feature of this project is the use of a full free flow electronic tolling system using electronic tags (similar to the system used for the Melbourne CityLink tollway). These pocket-sized tags are affixed to the windshield of a vehicle and scanned as the vehicle passes under a gantry (without having to slow down), following which the toll is deducted from the electronic tag-holders’ nominated account.

There will be no toll booths for manual toll collection (unlike other existing Sydney toll roads where motorists currently have a choice between electronic and manual systems). A separate, although still electronic, payment regime will be available for casual users who do not own electronic tags.

The players

• The project was put out to tender by the transport authority arm of the NSW government, the Roads and Traffic Authority (RTA). The Australian government awarded the project to CCM on the basis of a non-conforming bid, which centred on a different, and improved, tunnel design. CCM’s bid relocated the tunnel portals at the eastern end and increased both the depth and the length of the tunnel to achieve an increase in the tunnel speed limit and resultant patronage.  RTA was involved in the negotiation of all aspects of the project documents.
• Bilfinger Berger BOT GmbH, Cheung Kong Infrastructure and DB Capital Partners (on behalf of its funds and clients, including Development Australia Fund) are each equity investors. A JV between BH and Bilfinger Berger AG will design and construct the project and BH will also operate the tunnel after opening. Gerhard Becher, managing director of sponsor Bilfinger Berger said of the deal: “It is a very interesting project and it will be beneficial to the city of Sydney and hopefully the developers and investors.”
• CCM had to negotiate and enter into contracts with other third party infrastructure owners and authorities whose assets may be affected by the project. For example, the cross city tunnel runs very close to, and directly underneath, one of Sydney’s busiest underground railway stations (Town Hall station) and various electricity substations and assets will require relocation.

Financing

Deutsche Bank AG and Westpac Banking Corporation, as joint lead arrangers and underwriters, underwrote the senior debt facilities.

Gerhard Becher, Managing Director of Bilfinger Berger, commented on the syndication: “The loan is quite widely syndicated among Australian, some German and international banks and at the time of the syndication there was great interest to participate in the syndication. The equity debt ratio of the project was roughly 30:70.”

The senior debt facilities were comprised of a mixture of facilities, including:

• a direct pay letter of credit backed facility to bridge fund the deferred equity contribution of an equity participant, together with a complex, structured equity arrangement for the deferred contribution of part of the offshore equity;
• a bullet project facility to fund construction costs, structured with a view to being refinanced on construction having been completed and the ramp-up period having passed; and
• a performance bond facility to enable the provision of the performance bonds required to be provided by CCM to RTA under the concession deed.

The project reached financial close in December 2002, and was the first to do so out of the latest series of new toll roads. Syndication was successfully completed, over-subscribed, in February 2003.

Mallesons Stephen Jaques was legal adviser to the JLAs and Allens Arthur Robinson advised CCM.

Risks and environmental Issues

The project faced a major environmental risk as the location of exhaust stacks and air pollution have been two of the more controversial aspects of tunneling projects in Sydney of late, particularly in the M5 East tunnel project in Sydney. Following public exhibition of the Cross City Tunnel project during the initial planning phase, RTA received 196 representations from the community, many of which related to air pollution issues.

The final tunnel design included a two kilometre vent duct to be excavated under the two main traffic tunnels and a single 60 metre high ventilation stack at the western end of the tunnel (previously designed to be only 40 metres high).

Another issue was planning approval. Prior to selecting the preferred bidder, RTA had developed a design for the tunnel and had obtained planning approval in October 2001.

New planning approval had to be obtained for the revised project prior to financial close. This involved undertaking additional studies for the project. The conditions of the planning approval recognise the importance of maintaining air quality, and impose a number of air quality conditions in relation to the in-tunnel, in-stack and stack dispersion quality.

The NSW government has not to date required the installation of particulate filtration systems in Sydney tunnel projects. It will be interesting to see how the government responds in the medium term to what appears to be growing community interest in exhaust emissions from tunnels.

Future of toll roads

Two further toll road projects were put out to competitive tender by the NSW government after the Cross City Tunnel, ensuring the continued involvement of the private sector in Sydney’s ever-growing toll road network. The Western Sydney Orbital project is a 40 kilometre road - Australia’s biggest urban road project - and is a vital part of Sydney’s orbital road network. This project reached financial close in February 2003 and is expected to open at the end of 2006.

The Lane Cove Tunnel project - a 3.4 kilometre tunnel project linking the city to the north-west of Sydney - is currently in bid phase, with a preferred bidder expected to be announced later in 2003. In addition, the state of Victoria has commenced work on its second major toll road project, with the government calling for tenders for the proposed  US$1.2 billion Mitcham-Frankston Freeway project.IJ

Scott Gardiner is a partner of law firm Mallesons Stephen Jaques where he specialises in infrastructure and project finance transactions. Natasha Morris, who assisted with this article, is a solicitor with Mallesons Stephen Jaques