03 Dec 2009

The PPP market - the last 12 months in review

by David Lester

Amidst a tumultuous and challenging time for financing infrastructure projects, we are seeing new and innovative models of delivery, which may assist market recovery with appropriate government support.

At the risk of stating the blindingly obvious, the last 12 months has been a tumultuous and challenging time for financing infrastructure projects. Just how challenging is reflected in the huge reduction in the dollar value of project finance transactions worldwide for the half year ending 30 June 2009. It totalled just US$80 billion which is half of the equivalent period in the previous year.[1]

PPPs have particularly been affected by the broader financial crisis. The graphs below show quite dramatically the impact the GFC has had on the market's ability to get PPP projects closed during the worst of the crisis.

Projects list

The collapse of Lehman Bros on 14 September 2009 has widely been accepted as the tipping point for the GFC ie. the point at which the global interbank lending market dried up as banks stopped trusting each other. The impact on the Australian PPP market can be seen by the dearth of projects that were able to reach financial close in the first six months of 2009.

By overlaying the performance of the All Ordinaries and the Dow Jones indices you can see that this period corresponded with the free fall of the equity markets to their low point in March 2009.

At the height of the crisis banks were unable to fund themselves at the wholesale money market reference rates and there were suggestions that those rates had become unrepresentative. Foreign banks that had previously been very active in the Australian market began retreating back to their domestic markets. The syndication market closed and banks were only prepared to lend what they were willing to hold. The credit wrapped bond market had effectively been shut since the end of 2007 which placed even greater reliance on bank debt for infrastructure projects. This constraint on liquidity meant:

  • less debt available for any given project and the need for a club of banks for all but the smallest of projects;
  • a higher price of debt, making it harder for privately financed deals to beat the public sector comparator;
  • a shorter term for debt leading to refinancing risk and hedging issues; and
  • greater conditionality relating to the debt during the procurement phase (eg. market disruption and market flex provisions have again became the norm rather than the exception).

This constraint on liquidity in the debt markets led to the deferral or cancellation of a number of PPP projects (eg. the Sunshine Coast hospital PPP and the South Australian prisons PPP). In January 2009, the Brisbane City Council suspended its EOI process in relation to delivery of Northern Link as a PPP.

Having said that, since May 2009 there has been a flurry of activity in the Australian PPP market.

The Victorian biosciences project was the first PPP to close in Australia in 2009, and while it was not a huge project it did show that PPP projects were still able to be closed and gave an indication of the terms upon which the banks were willing to lend.

The Queensland Schools PPP closed at the end of May 2009. This project was of great interest to the market given the innovative Supported Debt Model it used.

The South Australian schools PPP closed in July.

In September 2009, the Victorian Government and AquaSure reached financial close in relation to the desalination plant project. This project was hugely significant for the Australian market given the size of the project ($3.5 billion) and the amount of debt that had to be raised. The recent announcement of the successful syndication of $1.8 bn of the debt is a further indication that the credit crisis is easing.

The pipeline

While the delivery of these projects is a testament to the resilience of the PPP model (and no doubt the political imperative driving the relevant procuring agencies), there remain significant challenges for the delivery of the infrastructure pipeline.

This has necessarily led to a re-examination of the PPP model and, in some cases the use of other delivery models.

On Peninsula Link, the Victorian Government is utilising an availability style design, build, finance and maintain (DBFM) delivery model which has the effect of eliminating traffic risk and increasing revenue certainty for the private sector. Bids were lodged for this project on 20 October 2009.

In Queensland, the Brisbane City Council is proposing to use public funds for the design, construction, operation and maintenance (DCMO) of Northern Link. The Council has received seven expressions of interest and is hoping to shortlist later this year.

Other procuring agencies have sought to break projects into publicly funded and privately funded pieces (eg. Sydney Metro and the Gold Coast Rapid Transit project).

Other innovations like the use of a debt funding competition and the injection of government support (via direct grants, senior or mezzanine debt, equity or via a guarantee) to fill funding gaps will no doubt be a feature of PPP projects in the short to medium term. Tweaks to the risk allocation, particularly in relation to patronage risk, refinancing risk and market disruption, will also no doubt continue.


It has been a challenging period for financing infrastructure projects in the last 12 months, however, we are seeing some green shoots of recovery. Innovation in delivery in order to meet the changing market conditions will remain critical to the successful delivery of the infrastructure pipeline in the foreseeable future.

[1] "Global Infrastructure Finance Review - H12009" - Infrastructure Journal, August 2009. Back to article

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.