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Funding of PPP projects – where to from here? By Clare Corke, Senior Foreign Associate, Blake Dawson
By Clare Corke, Senior Foreign Associate Blake Dawson
With the collapse of the fi nancial 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, fi ngers 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 fi nancial markets’ collapse, but in the over-enthusiasm of sponsors relying on fl awed traffi c 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 fi nancial 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 fi nancing (like asset fi nancing or export credit fi nancing). 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 fi nancing is when current projects start refi nancing, 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 signifi cant swing back to bank debt, with the Peninsula 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 refi nancing 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 defi nitely an appealing proposition to banks and other fi nancial 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 diffi cult. 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 fi nancial 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 fi nanciers within a relatively short time after fi nancial 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.
Funding of PPP projects – where to from here?
CBUS: INVESTING IN OUR MEMBER’S FUTURE
The Federal Government’s 2009-10 budget announcement of a $22 billion spend on Australian infrastructure as part of its “Nation Building” program was welcome news for Cbus and its members, particularly as it is estimated that more than 15,000 jobs will be created each year.
Cbus is closely connected to infrastructure as Cbus is the industry superannuation fund for the building, construction and allied industries. With close to $14 billion in funds under management, more than 580,000 members and 66,000 participating employers, Cbus is one of Australia’s largest national super funds. Cbus is also a ‘public offer’ fund, which means that anyone, in any industry, can join.
In early February the Government released the Intergenerational Report 2010. This report calls for extensive nation building infrastructure in order for the country’s economy to cope with the impact of an aging population, population expansion and the impact of climate change. This is of great interest to Cbus – as any increase in infrastructure development leads to potential growth in our membership and funds under management.
We have a long history of investing back into the construction and building industry. With high positive cash flows Cbus can actively invest for the long term. We are not constrained by liquidity considerations as some retail funds may be. We invest in infrastructure because its long term nature suits our members’ long term superannuation profiles; it offers strong long term investment yields with potential for capital growth and it provides diversification and inflation protection benefits. Importantly, infrastructure helps to boost our economy and create jobs for our members. In turn, growth in our membership enables Cbus to invest more back into the construction and building industry, securing even more jobs.
Cbus currently invests around $1.6 billion in Australian and international infrastructure. Of this, around $890 million is invested in Australian infrastructure, in trust vehicles managed by our investment managers Industry Funds Management and Hastings Funds Management.
Through our managers’ investment vehicles we have significant holdings in Australian infrastructure across a range of sectors. In transport, this includes holdings in the Perth, Darwin, Melbourne and Brisbane airports; roads (Sydney’s M4 and M5) and the Port of Portland. Our social infrastructure includes Melbourne’s Southern Cross Station, the development of the Perth CBD Courts, an aged care facility and the first schools public private partnership in Australia – Axiom Education Holdings. One of our large utilities holdings is Electranet (South Australian electricity transmission). We have exposure to clean technology/energy through Pacific Hydro and Ecogen. Pacific Hydro is an Australian developer and operator of renewable energy generation in Australia and overseas. They are currently developing a large wind power project near Portland, Victoria. Ecogen operates gas fired power plants.
Cbus is serious about addressing the impacts of climate change. Cbus Property, our wholly owned property development and investment arm, concentrates on developing five and six-star energy-efficient buildings. Across our whole portfolio Cbus is addressing climate change, as a part of our approach to environment, social and governance issues (ESG). Among other steps, we have signed the United Nations’ Principles for Responsible Investments and David Atkin, Cbus’ CEO, is an international director on its Board. We have also appointed an environmental, social and corporate governance manager to our investment team to encourage our fund managers to act in accordance with these principles.
We recognise that superannuation represents a large proportion of the nation’s savings and plays an important role in infrastructure funding. However, investing in infrastructure must deliver more than jobs. Like all regulated funds, Cbus must ensure that the primary driver of all our investment decisions is delivering the best possible returns for our members.
Above all, it is our members’ future that drives us.
For further information visit www.cbussuper.com.au or call 1300 361 784.
PICTURED: A major milestone in the construction of Brisbane’s second Gateway Bridge was reached in October 2009 when the main river span was joined.
DIVERSE OPERATIONS UNDERPIN ABIGROUP’S ONGOING STRENGTH
Abigroup, one of Australia’s leading and most diverse national contractors, is playing a major role in building Australia’s infrastructure.
The company has successfully delivered some of the country’s largest and most important infrastructure projects and in 2010 is continuing its work with a number of key projects.
One of the biggest projects is the construction of Brisbane’s second Gateway Bridge as part of the Gateway Upgrade Project.
Work on the 1.63km bridge is progressing ahead of schedule and when it opens to traffic in mid 2010 the bridge will connect a new 7km section of Gateway Motorway north of Brisbane River with a 12km Gateway Motorway upgrade south of the river.
Abigroup is delivering the $1.88 billion project as part of a joint venture for Queensland Motorways.
Desalination plant
Abigroup, as part of the AdelaideAqua consortium, is currently working on the construction of one of the largest desalination plants in the world at Port Stanvac in South Australia.
The $1.14 billion Adelaide Desalination Plant will have a capacity of 100GL of desalinated water per year which will be sufficient to provide up to 50 per cent of Adelaide’s annual water requirements.
Work started in February 2009 and the first water from the plant is expected in December 2010.
New roads
Abigroup is involved in a number of road projects all over Australia.
In January 2010 the Victorian Government announced that the company, as part of the Southern Way consortium, had been appointed to design and construct the new $759 million Peninsula Link.
The project involves the construction of 27km of motorway between the EastLink toll road in Melbourne’s eastern suburbs and the Mornington Peninsula Freeway at Mt Martha.
This Public Private Partnership is the first road PPP in Australia which will be toll-free and based on an availability charge.
Schools
Abigroup is currently delivering schools packages in three states worth over $400 million under the Federal Government’s Building the Education Revolution program.
In NSW the company is the managing contractor for upgrades to 175 schools in the Sydney area, in Queensland Abigroup is upgrading 40 schools in the Greater Brisbane and Fitzroy-Central West regions and in Victoria the company is working on providing multi-purpose halls to 24 schools in the Melbourne, Latrobe Valley and Mornington Peninsula areas.
Also in Victoria, Abigroup, as part of the Axiom Education Victoria consortium, is delivering 11 schools in a PPP arrangement.
Engineering Projects
Abigroup, as part of the Bulk Water Alliance, is constructing one of Australia’s largest dams. The Enlarged Cotter Dam in the ACT will be 80 metres high, contain 400,000 cubic metres of Roller Compacted Concrete and will be Australia’s third largest concrete gravity dam.
The company is also working on a marine, civil and associated works project for the construction of the Australian Marine Complex Service and Supply Base at Cockburn Sound designed to support the growing number of oil and gas developments in Western Australia.
Telecommunications
Also in WA, Abigroup Telecommunications is working with vividwireless to construct Perth’s new WiMax wireless network.
The work includes installing rooftop antennas, cabling and the equipment that process data signals enabling customers to access the internet wirelessly. The project is scheduled to be completed in March 2010.
