Infrastructure Finance: The Sydney Cross City Tunnel: Case Study
Introduction
This case is basically about the Cross City Tunnel in the city of Australia Sidney. The infrastructure project of the Cross City Tunnel of Sidney was taken by Cheng Kong Infrastructure Company (CKI). In the year 2000, New South Wales requested tenders for the project of Sidney CCT. Cheng Kong was particularly interested in this project because this company has lifelong experience in transportation projects. The Cross City Tunnel contain of two foremost tunnels. Both tunnels have double tracks one for entry and other for exit. Both of the tunnels automatically tooled. Tunnel users are supposed to purchase an automatically operated card or make a toll account having an electronically tag. According to this automatic operated tool account the charges of the toll depends on the size of vehicles. Cars, bikes and wagons have less charges compare to heavy loading vehicles.
A Brief Evaluation of the Organization
Cheng Kong Infrastructure Company was excited about this opportunity to invest in Australia on transportation Infrastructure. Australia is stable in environmental factors which sounds great investment opportunity for the CKI. Infrastructure project havea low risk of political and regulatory. This means these projects generate better profit and return which is a low level of risk. Winning this CCT project can be a big accomplishment for Cheng Kong Infrastructure Company. CKI is the most advanced and reputable infrastructure company in China and Hong Kong. The company has a diversified portfolio of Energy, transportation Infrastructure with business related to infrastructure. The company has a strong financial position. In the year 2000, the CKI has 78% of profit contribution. The objective of CKI was to gain this project from New South Wales.
Bidding Process
Initially,in the bidding process which was held in 2001, the 3 contractors were selected in which the name of CKI was on the top of 3. CKI submit the tender by following some factors like construction and design of the tunnel, maintenance, operation, safety plans,and traffic management.
Preparing the Proposal
The proposal was submitted by CKI with his business partner AG and made a Cross City Tunnel consortium for Cross City Tunnel in which all the things were mentioned for considering the whole project. By understanding the environmental and traffic factors the length of the tunnel must be increased by 300 meters and depth increase by 30 meters. The vehicles crossed from the tunnel on the daily basis are 17000 which also increases the cost of construction by US$138 million.
At the end of October 2001, all three parties submitted their proposals for the cross-city tunnel project. The CCM Consortium was the only proposal that cover all the factors with a business consideration charge. According to the data provided in CCM Consortium, the number of vehicles pass from the tunnel in 2006 are 86,300 whereas in 2016 the number of vehicles increases to 101,700.
On 27 February 2002, the minister of roads announce that the selected participant is the CCM consortium for the cross-city tunnel project.In this way, the organization meets its desired objectives, mission, and long-term goal. From 2002 TO 2005 the tunnel remains under construction. On the 28thof August 2005, the Cross City Tunnel opened in heart of Australia Sidney.
Strengths and Weaknesses of Organization
Strengths
- CKI is the most advanced and reputable infrastructure company in China and Hong Kong.
- CKI organization has a diversified portfolio of Energy, transportation Infrastructure with business related to infrastructure.
- The strong financial position.
- The strength organization gained through this CCT project is designing and building the tunnel in a very efficient manner
- Project completed almost 2 months ahead of timing.
- Innovation on the peak level at the marketplace.
- Higher reputation in the infrastructure industry.
- Strong brand recognition.
- Advanced human resource management.
The Cheng Kong Infrastructure has many strengths as listed above. The brand recognition, brand equity, market reputation, HR team, learning, and training methods.
Weaknesses
- Falling market share: higher rates of expenses like utilities from different sectors the organization must figure out the issues and focus on future growth.
- High rate of turnover in employees: the rate of turnover increases because employees do not satisfy the extrinsic motivation. The organization should increase the salaries and also offer other incentives to employees.
- Extra cost on building new supply chain and logistics network: adding the extra network can be very expensive and have maintaining issues of utilities.
Problem Statement
The major problem addressed in this case is that central Sidney is suffering from overcrowding of road traffic from which people of Sidney suffer a lot.Now the priority for the minister of the road is to expand the road for eliminating this salient issue faced by Sidney. So the different proposals and tenders were invited regarding the cross-city tunnel project from which the CCM Consortium was chosen for the Cross city tunnel. This is the infrastructure organization related to china and Hong Kong which do this project with his business partner to attain this goal effectively and efficiently. Through this project, the organization thinks that it should affect positively because this was a huge accomplishment for Cheng Kong Infrastructure holdings limited. The organization cover all the costs from the government which was spending on the Cross City Tunnel project. The CKI completed the project before the schedule which also increase the reputation of the organization in the marketplace. But after the operation of the tunnel, the coverage was very low the road users were not satisfied with this tunnel. The distance was too long as compared to the public roads. So the CCT was about to sell because this project was in loss for road minister as well as for infrastructure organization CKI and its partners for CCM Consortium may have to incur a significant loss in the coming financial quarter.
Situation Analysis
Financing Alternatives
From the case it could be said that all the projections and forecasts done for the project financing are based on two limitations. First limitation is regarding the overall erroneous estimations of the traffic and second limitation includes no costs to the government that lead to an increase in the overall construction cost. Based on these limitations different alternates for project financing were considered in order to gain maximum profits from the project. These alternatives were public financing, equity financing or debt financing.
Public Financing
This source of financing refers to the finance the project through public funding. By using this approach the total estimated costs would be brought down because of lower risk and return tradeoff. This approach could include financing through taxation or get invested from any public company by issuing bonds using interest rates at 4.25%. A maximum of 30% of project’s total equity was considered using this approach.
Advantages
The total estimated costs could be brought down because of lower risk and return tradeoff. Tis approach could encourage the private sector to invest in the project.
Disadvantages
The approach tends to an increase in public liability. Besides that, the other disadvantage from this approach is related to the level of commercial risk from public financing because of the project’s finance sourced through other approaches........
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