THE MELBOURNE CITY LINK

The Melbourne City Link

The Melbourne City Link

Introduction

The A$1.8 billion ($1.2 billion) Melbourne City Link (MCL), currently under construction, is Australia's largest-ever privately funded public infrastructure project. The project sponsor is Transurban, a single-project company listed on the Australian stock exchange in 1996 and one of a handful of single-project companies publicly listed. Transurban has entered into a thirty-four-year concession with the state government of Victoria to build, own, and operate Victoria's first private toll road. At the end of this time, the project is to be transferred back to public control at no cost to the state.

Discussion

Distribution of Risk

The government's philosophy in the MCL deal was to gain the best outcome for the community by allocating each risk to the party best able to deal with it. This provides incentives to use best management practices to reduce the probability of the risk materializing or "crystallizing,'' or to manage it effectively if it does crystallize.

Where no party is clearly best able to manage the risk, a transparent and fair system for risk allocation or risk-sharing must be found. This mechanism must be flexible over the life of the project and be able to cope with risks not yet envisaged (Wagner 1997, pp. 334-354). Often, significant resources are used in negotiating these risk-sharing arrangements. It is therefore useful to learn from the agreements reached in past projects.

Traffic and Financial Models

In order to develop a risk-sharing mechanism, the parties to the MCL used a technique for measuring the effects of a risk materializing compared with the situation had the risk event not occurred. To achieve this, they developed two models. The base case financial model contains all of the assumptions and information used by Transurban in developing its business case, the proposed debt repayment schedule, and the predicted equity return. The base case traffic model is a computer-based model of the Melbourne transport system that has been used to generate the predicted traffic flows on the basis of a certain layout of the urban road network, public transport characteristics, and tolling regimes (Sears 2008, pp. 400-408).

Material Adverse Effect Regime

The material adverse effect (MAE) regime developed for the MCL is a tool that helps allocate and share risks. It also provides a mechanism for determining the size and nature of any settlement (Rumane 2010, pp. 360-464). The regime is designed to provide flexibility over the life of the project and has scope to allow for unforeseen risk events. Before an event can be considered under the MAE regime, it must be identified. Only specified risk events for which the state has assumed at least a partial liability are covered (Pierce 2004, pp. 190-286). These events are listed in this article. There are four stages in the MCL MAE regime. The first stage is the occurrence of an event that causes a risk to crystallize. It is then incumbent on Transurban to identify the situation and demonstrate that an MAE has occurred.

In the second stage, the parties agree that the event is ...