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Risky business

Just before Christmas Melbourne, Australia, saw a major toll financed tunnel open to traffic.

But completion was several months late, and litigation over who is responsible is now flying left right and centre.

One of the main reasons is unforeseen ground conditions.

The tunnel is part of a much bigger road project - the Melbourne City Link - an innovative privately financed infrastructure project. The TransfieldObayashi construction joint venture set up to build it ran into unexpected problems with the local water table. As a result the tunnel's floor slab began to lift and the joint venture had to install 2,150 ground anchors along a 250m section and rock anchors along 2km of the 3km tunnel.

As with most privately financed projects, the contractor was working on a fixed price, lump sum basis, which meant that it was responsible for the cost overruns.

And as banks only finance private infrastructure if they are insulated from risk as much as possible, unforeseen ground condition risks were consequently loaded onto the contractor.

But it now appears that on City Link, the huge financial penalties faced by contractors under these terms are starting to hurt. Some close to the project even believe that Transfield, the Australian partner in the joint venture, could actually be wiped out.

The situation highlights the potential risks inherent in privately financed infrastructure projects - the sort of projects that our own Government has enthused about. Over the last few years private finance has come increasingly to the fore as a vital component in ensuring the nation gets the infrastructure it needs.

Indeed, the Treasury refuses to let most infrastructure projects get off the ground these days unless the public sector has at least had bash at levering private money into them.

Just how long this state of affairs lasts will depend on how well contractors, consultants and anyone else who invests in privately financed infrastructure manage risks such as those highlighted in Melbourne.

Already there are signs in the UK that mistakes have been made. Last week Laing revealed that it had burnt its fingers - this time on the privately financed National Physical Laboratory. A £40M provision has been set aside for losses mainly on this project. 'Exacting operating specifications have been more difficult to achieve than anticipated, ' it said.

Others are likely to follow, especially where there has been strong competition and work is technically complex, or relies on a long route being free of ground problems.

In this respect it is amazing that anyone is prepared to bid for the privately financed upgrade of London's Underground. Poorly kept records mean that even the Mayor's Transport for London department does not know the full extent of the risks that would have to be taken on to repair worn out Underground infrastructure.

One hopes London's new transport commissioner Bob Kiley will resolve this now that he is in charge of the public private partnership plan. But sadly for the construction industry, even if he does not, there will no doubt be contractors still ready and willing to forego proper risk assessment and do the work.

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