STUDY QUESTIONS:

1. At a cost of almost $2 billion, the City Link is one of the most expensive privately funded
infrastructure projects in the world. Where is the money coming from?

2. What are the key risks in the Melbourne City Link transaction? How were the risks allocated between:
the State, the equity investors in Transurban, the banking syndicate, the construction joint venture, and
the operations joint venture?

3. What are the various strategies you can use to manage project risks? For example, when is it
appropriate to prevent, hedge, insure, allocate, or bear particular risks?

4. Does the risk allocation follow the principal that risks should be allocated to the party best able to
manage them? What risks are not mentioned in the case that might be important from the perspective
of one or more project participants?

5. The banks are holding out for a government guarantee of returns and profits in certain situations. Is
this a reasonable request?

ANSWER

1. Transfield and Obayashi Corporation. They arrange debt and equity financing, enter into contracts
and own the project assets.

Given the magnitude of this project, Transfield knew that it needed a partner to develop the City Link. It
joined up with the Obayashi Corporation, one of the largest Japanese construction companies and an
expert in tunneling projects. The two construction firms co-sponsored Transurban, a single-purpose
entity that would bid for the project, arrange debt and equity financing, enter into contracts and own
the project assets. This structure would allow Transfield and Obayashi to pursue the City Link while
limiting the exposure of their balance sheets to the risks involved in this project. (pg 2 paragraph 2)

A$510 million of equity funding was required for the project and was to be raised in three pieces,
including the sponsors equity contribution, direct equity and underwritten components. First, the
sponsors (Transfield and Obayashi) would each contribute A$50 million to the project. Obayashis equity
contribution was deferred and would not be contributed until the end of the construction phase of the
project, although the commitment was supported by an irrevocable letter of credit posted at the
financial closing. Each sponsor would be reimbursed for all external costs and expenses incurred and
would be paid a success fee of A$10 million. Transroute, the French toll road operator involved in the
development and operation of the tolling system, also agreed to a A$5 million deferred equity
contribution. Transroute would be paid a success fee of almost A$3 million.