Infrastructure Finance: The Sydney Cross City Tunnel
This approach refers to the project financing gained through an investment done by investors in exchange of shares in the project. This approach aims to share the profits with the investors according their equity. The investors would not only have right in profits but they would be able to have claims over the project’s assets as well.
The overall risk related to the project could be shared with the investors. Also by using this approach the efficiency of the project could be increased with the involvement of investors and their participation in the construction practices.
The major disadvantage related to this financing approach is that the shareholders would only get the part of profits after paying the overall debts.
This approach refers to the financing of the project through borrowing or taking loans at a promise of giving returns to the creditor’s as interests on the amount borrowed. These loans could further be classified as short term loans and long term loans. The assumed interest rate for short term loans is 6.8% and for long-term loans is 7.5%.
Because of the fact that the loans would be used in a transportation project which includes returns from the amount of traffic. It is supposed that this amount off traffic would be increasing with time so in order to pay the loans there would be more time required to pay interest on short term loans hence for short term loans interest rates is assumed to be at the maximum of 15%.
As compared to the equity financing there is no need to share control on the decision making of project in debt financing. Flexibility of interest rates based on the duration and several other factors could be obtained through this approach.
The debt holders would need to be paid first from the earnings out of the interest due to their claims on the assets of project otherwise. Flexible interest rates could led to the increase in cost of capital in the long run because of their significant increase.
The weighted average cost of capital WACC is the minimum rate of return required out of any projects to fulfil investor requirements. WACC method is used for the evaluation of projects. The formula to calculate WACC is
WACC = Weight of equity* Cost of equity + Weight of debt* Cost of debt
Here in this case the formula used to calculate WACC is
WACC = Weight of equity * Cost of equity + (Weight of public debt * Cost of public debt + Weight of short-term debt* Cost of short-term debt + Weight of long-term debt * Cost of long-term debt)* (1 – Tax rate)
Tax rate assumed is at 30%
By assuming the following capital structure
|Weight of Equity||Public Debt||Short Term Debt||Long Term Debt||Total|
The value of WACC is determined to be 0.0592 or 5.2%
Based on the analysis of the case following risks have been identified regarding the case:
- The major risk related to this project is regarding the uncertainties because of geological factors. These uncertainties could be like significant increase in the construction costs.
- The estimations made about the traffic could create various problem if the results are not as per the estimations like traffic generated more than the capacity could cause project failure.
- Another risks could include unfavorable behaviors from the public, environmental criticism because of the noisy construction process and so on.
Key Performance Indicators
Key performance indicators analysis is used in the project of Cross City Tunnel. Key performance indicators are divided into two categories one is operational and another is construction phase.
- Lack of overcrowding
- Effect of environment
- Increase number of accidents on road.
- Automobile failure services.
- According to the CCT project costing budget
- Scheduled construction work.
This analysis is done with the help of 05key variables that are Demand, Rate of Return, Inflation, construction costs and Operation costs. Calculate the difference between NPV and these all variables. As the demand increases the value of NPV varies as the demand level vary. As the inflation increases the value of NPV decreases because they both are inversely related with each other. As the rate of return increases the NPV for corporation projects decreases. As the construction and operation cost increase there is decrease in the value in NPV.
- Cheng Kong Infrastructure organization must attach extra comprehensive strategy on the financed plans of private sectors be develop to lead the government assistances. This will be measured as the committee’s second report.
- The information which relates to the increase in the toll prices make the variation in the contract should be apparent and openly available. The information must contain the original price of toll and also those components which make the variations in tool prices.
In Sidney other roads are also running efficiently with slight attention like M2, M3, M4, M7 but the Cross City Tunnel was surrounded by full debate. Since 2005 the Cross City Tunnel is operate slowly. The results of traffic are less than the original forecasting. The information exposed that only 30000 vehicles cross each day through the tunnel. Most of the people reflect the tunnel is not suitable for the short journey. In February 2006 media gossip was on the peak that the Cross City Tunnel was for sale and the New South Wales (NSW) is not a probable purchaser for the tunnel. With the financial problems, the Cross City Tunnel gain political interest. CKI and its partners for CCM Consortium may have to incur a significant loss in the coming financial quarter.