By Clare Corke, Senior Foreign Associate Blake Dawson
With the collapse of the financial markets in 2007, many opponents of PPPs in Australia took the opportunity to question the future viability of PPPs and whether there would ever be an appetite for banks to fund these kinds of transactions again. In particular, fingers were pointed at projects that had experienced problems, such as Sydney’s Lane Cove Tunnel and Brisbane Airport Link, as reasons why the PPP model was in serious trouble – if not dead. Strangely, however, the problems that beset both Lane Cove Tunnel and Brisbane Airport Link were rooted not in the financial markets’ collapse, but in the over-enthusiasm of sponsors relying on flawed traffic forecasts (in the case of Lane Cove Tunnel) and inexperienced retail investors (in the case of Brisbane Airport Link). However, in both instances, the funding model used in these projects will probably not be seen in the same guise for many years. Drilling deeper into the funding issue, for a number of years prior to the financial markets collapse, Australia’s PPP funding model relied heavily on bonds being sold into the market, with little reliance being placed on bank debt or other forms of debt financing (like asset financing or export credit financing). Even though today it is recognised that the bond market will recover over time, it is unlikely that it will bounce back fast enough or vigorously enough to provide debt funding for PPP projects of over $1 billion in the immediate future. It is more likely that it will re-emerge gradually through the taking up initially of a minority of the funding tranches. It is also likely that the placing of debt with unsophisticated investors will be actively discouraged by the government agency procuring the infrastructure; senior debt providers; rating agencies; or regulators like ASIC. Perhaps the place to start looking at bond financing is when current projects start refinancing, as by that stage the project will be fully constructed, the operators will have proven themselves and the project should be on a steady path for the remaining operating term. In the meantime, the latest projects in Victoria indicate that there has been a significant swing back to bank debt, with the Peninsula
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Link (a 25-kilometre road link between EastLink in Carrum Downs and the Mornington Peninsula Freeway in Mount Martha) being completely bank-debt funded, and the Victorian Desalination Plant being bank-debt funded, subject to government support initiatives like an underwriting of the syndication of the debt facilities by the state, and refinancing support. Market perception appears to be that bank underwriting without government support is available for projects not in excess of $1 billion. For larger projects in excess of $1 billion, it is positive to note that the State underwritten portion of the syndication of the Victorian Desalination Plant debt was placed within two months of a three-month syndication process, and the State’s support is no longer required. State underwriting or some other form of government support is definitely an appealing proposition to banks and other financial institutions, particularly in a climate where lenders are nervous to underwrite amounts in excess of $300 million, and the management of large bank syndicates during the negotiation phase of a project is difficult. Time will tell whether the consortia bidding for the New Royal Adelaide Hospital (with a capital component of $2 billion), and Stage 1 of the Sydney Metro (with a capital component of $3 billion) will be able to fully fund their bids without the assistance of government support. Market capacity would become even more acutely felt if the $1.7 billion Gold Coast Rapid Transit rail project and the $1 billion Parkville Consolidated Cancer Centre in Victoria also reach financial close at a similar time. With the bond market remaining in the doldrums, it is suspected that state funding will remain in demand for the rest of this year, although it is likely that in each instance the funding shortfall on bid submission will be taken up by the unsuccessful bidder’s financiers within a relatively short time after financial close. This bodes well for PPPs in general and sends a clear message to the markets that there is an appetite for PPP debt. Hopefully the state and federal governments in Australia agree.
