Vendor Management

My previous post discussed the importance of maintaining your reputation as a credible purchasing organisation. I would also rank highly the importance of maintaining your reputation as a credible contracting organisation, but I would, apparently, be wrong.

The State Government of New South Wales (Australia's most populous state) is currently embroiled in a dispute with its partner in a toll road running underneath Sydney. Last year's opening of the PPP project, called the Cross-City Tunnel, started a running bun fight between the operator of the tunnel and the State government that has consumed hundreds of hours of senior executive and senior politician time and resulted in untold column-inches of press coverage.

The constant coverage has whipped up the fury of Sydney motorists who are refusing to use the Cross-City tunnel and choose instead to run a maze of back streets to avoid it. The source of the discontent is not particularly relevant. Suffice to say, it started as a simple distributive justice issue that should have been easily resolvable – people who travelled a short distance in the tunnel were required to pay nearly as much as those who travelled its full length. But the issues have now, hydra-like, multiplied and neither side can back down without face-egg.

The tunnel operator's position is that they are losing a shedload of cash and need to maintain their contracted unit cost increases. The State Government's position is that, despite the wording of the contract, they want the operator to reduce the unit cost and allow for the re-opening of side streets closed to drive traffic through the tunnel.

This week, after three months of negotiations, both sides have walked away from the table.

Two days ago, the State government handed down its budget. Somehow, despite the warm Australian economic climate, the State government of NSW is in deficit.

And yesterday, this gem appeared in the press. Despite all of the problems with the Cross-City tunnel, the State government intends to rely primarily on PPP projects to build infrastructure over the coming years and doesn't see it's behaviour in the Cross-City tunnel dispute impacting the success of future projects.

Will the private sector come to party and tender for this work? Of course they will. But, after watching the Cross-City tunnel fiasco, I wonder what risk premium PPP bidders will put on their offers.