05 May 2011

PPPs: the Australian GFC experience

by Brad Vann

Recent projects indicate that the climate is improving and investor confidence in the infrastructure market is growing

Although Australia did not experience a recession, it has still experienced the same difficulties as the rest of the global finance sector, as liquidity left the wholesale financial markets, and the confidence levels of investors (of both debt and equity) fell.

The impact of the GFC has been felt in Australia in much the same way as elsewhere:

  • the bond markets have closed;
  • club bank arrangements have replaced syndications;
  • infrastructure projects have been at risk of funding shortfalls;
  • banks have been prepared to give only short commitment periods;
  • the cost of wholesale debt rose, and credit committees became more risk averse with a consequential rise in the cost of project financing;
  • markets, both equity and finance, have become more risk-averse. This has included an aversion to taking market/patronage risk on infrastructure projects;
  • banks have been prepared to finance infrastructure with only short funding periods, thus requiring scheduled refinancing for each project; and
  • market disruption risk has become a reality.

In addition, the trend of banks to become more focused on lending into their own domestic markets has particularly been felt in Australia, where foreign banks have in the past played a significant role in funding our PPPs.

As funding for infrastructure projects became more scarce and more expensive, the value to governments of the PPP model for delivering infrastructure came under scrutiny and there have been strong opinions expressed on the need to return to traditional government-funded delivery methods.

Australia does not have an infrastructure bank to perform the role that the European Investment Bank and the European Bank for Reconstruction and Development have performed in the UK and Europe by increasing significantly their funding support of PPPs over the past three years. Nor traditionally has there been any export credit agency activity in Australian PPPs.

There have also been demands for the Federal Government to establish an infrastructure bank, and to re-introduce tax preferred infrastructure bonds.

Despite this, we have seen a number of projects reach financial close in 2009/2010 where the private sector participants and the relevant State Governments have worked together to achieve an acceptable risk allocation for both sides within the existing PPP structure. In particular, the States have been prepared to give increased support to the private sector to overcome the impact of the GFC. The following projects are examples of this.

The South East Queensland Schools Project: the supported debt model (government as lender)

Under this model, the private sector funds the riskier construction phase of a PPP project, and the government takes out an agreed proportion (60-70 percent) of the private sector debt on completion of construction, becoming the main senior debt funder in the less risky operational phase of a social infrastructure project.

The Victorian Desalination Project (government as debt supporter)

This project required $3.671 billion in debt and reached financial close at the height of the GFC, and in record time.

Government funding support was provided by a guarantee of syndication. The government agreed to be the lender of last resort for any debt that could not be syndicated after financial close. The syndication was oversubscribed, so the guarantee was never called on.

Government funding support extended to a sharing with the private sector of additional financing costs for certain market disruption events, and a sharing of the risk of losses on a scheduled refinancing (the debt finance was for only seven of the 30 year project term).

The Government also gave some support for increased costs if long-term hedging was required for the project.

Peninsula Link (government removes market/patronage risk)

The recent failure of several high-profile toll road projects in Australia to meet patronage expectations has increased concerns in the market over optimism bias in traffic forecasting by consortium bidders. This, coupled with the impact of the GFC on debt markets, has resulted in both debt and equity being loath now to finance infrastructure assets which have demand risk attached.

The Peninsula Link Project used an availability model for the first time in Australia for a road PPP, without tolling. Government payments, once the freeway is operational, are used to repay the private sector funding and provide equity returns.

Hence, the private sector does not bear patronage risk. Its incentive for good performance is the abatement of the government payment stream for non-availability of the freeway in the agreed condition at all times.

Conclusion

A positive to emerge from the GFC is its stimulation of creative problem-solving, as we have had to examine new funding models and financing options. For example, how can we attract our superannuation funds to greater investment in infrastructure and what options are available to governments to refinance their investment in infrastructure (if for particularly large projects governments might be required to co-fund with the private sector)? And although we cannot say that the effect of the GFC has passed, recent projects indicate that the climate is improving and investor confidence in the infrastructure market is growing.


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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.