The current pipeline for social infrastructure PPP deals in Australia, including schools and hospitals, is solid but not brilliant, particularly when compared to the Federal Government's stimulus spending. Deal flow is largely dependent on different factors in each state. With the prospect of four elections in one year – the largest number of elections since 1996 – divining signs of progress will be difficult. But the backdrop is much improved.

Roger Black, head of infrastructure delivery services at Deloitte, says that during the crisis conditions in Australia's social infrastructure market were grim. But in even in the midst of the crisis some deals, including the A$1.1 billion ($1 billion) South East Queensland Schools, still got closed. "What we saw – even ten months ago when things were really tight – is there were still transactions being done," he said. "But by all accounts appetite has grown a lot since then. There seems to be a strong appetite – a strengthening appetite – for private debt."

Industry players say that because optimism has returned to capital markets, investors see value for money in social infrastructure. "The market, in terms of appetite for a good deal, has bounced back," said Mario D'Elia, Melbourne-based partner at PricewaterhouseCoopers' advisory practice. "That's not an issue. If you have a good deal people will tender for it."

"One of the frustrations that everybody has with the Australian market is the pipeline is patchy," says Black. "The states also don't necessarily have a good reputation for sticking to timetables. In some states where there is a pipeline they don't necessarily embrace the concept [of public private partnerships] with a great deal of enthusiasm."

Building enthusiasm from 350bp

The A$3.5 billion Victorian Desalination Plant PPP, which was awarded to the AquaSure consortium, is now seen as the high water mark in social infrastructure deals. To get the deal away, the Victorian government provided the syndication of the project's debt with a backstop. "It was a real turnaround," says David Lester, partner at Clayton Utz's Brisbane bank and financial services and major projects team. "It was a very important marker in the market, I think, that they were able to get that debt sold down. It was perhaps an indication the debt market's loosening up again."

The margins on Victorian Desalination were generous – 350bp over the swap rate. Geoff Daley, head of infrastructure advisory at RBS Australia, says that is likely to have been the peak in pricing, with margins having fallen since then. He notes that margins on the Peninsula Link freeway project are lower than the Desalination project. RBS formed part of the winning Southern Way grouping. "With more competition in the market, the price is coming down," Daley said. "More and more banks out there are looking for places to invest."

John O'Rourke, a principal at Plenary Group, says that the trend is positive for funding, pricing and availability for projects. "I think the value for money proposition has returned," he said. "There's more competitive tension coming back into the bond market. Deals closed through 2009 were very much reliant on short-dated bank debt. The number one positive expected trend is that debt availability will be better, which therefore leads to more competitive tension in pricing."

RBS's Daley says that while appetite is there, the issue for PPPs across the debt market is in relation to lending periods. "You won't find a bank that will lend you money for 25 years," he says. "There used to be capital market investors to do that. You can't really find that at the moment. It means that in 5-7-10 years you're going to have to refinance it. What are interest rates going to be then?"

During the worst of the crisis Australia's infrastructure market was rocked by the troubles at satellite funds run by Macquarie and Babcock & Brown, which tainted investor perceptions of infrastructure. "The market has moved on," Delia says. "Everybody is a chameleon. They keep changing and they'll adapt to whatever is involved". O'Rourke says that the satellite issue created uncertainty and overhang, and cautiousness with investors, but believes that appetite is now there as long as fund structures are put together well.

"Commercial development markets are still very difficult," O'Rourke adds. "Funding constraints for property is going to remain tough in 2010. Therefore there is capacity (among construction companies) to take on PPP volume and risk. It's a good time for governments at this point in the cycle to pick up that slack in the commercial development market. The appetite for PPPs amongst construction companies is strong."

Demand and supply

But O'Rourke asks whether there are enough social infrastructure deals in the pipeline to sustain sponsor interest. "That's always been an issue in Australia," he says. "The number of projects. Whilst there's a steady pipeline and projects are larger, we'd still like to see more coming to market." O'Rourke says the pipeline is actually fatter than it's historically been. "This market has never been a big market. For us there are 4-5 projects per annum that were worthy of pursuit around Australian states. I think that's increased a little. Projects are of a larger scale than they have been in the past. It means there's more opportunity in bigger projects. But it brings with it more risk in a bid sense."

But why is the pipeline not larger? The Federal Government's stimulus spending is one issue. It has pumped a lot of cash into schools and the housing sector. A lot of those projects would have been PPPs. The stimulus spending has taken focus away from PPP projects, creating an element of dislocation. Delia also notes that there is also natural pause: "They did a whole lot rapidly over the last few years, so there's a bit of catching up and taking a deep breath." He says there has recently been a strong focus on transport and one-off type projects like desalination plants. "It's a bit of a hotch potch," he adds. "There's one here and one there."

Existing projects include the new Royal Adelaide Hospital in South Australia, which has a total capital of around A$2 billion with a fairly large debt component. The A$1 billion Parkville Comprehensive Cancer Hospital in Victoria has been confirmed as a PPP and is being shortlisted in February. Beyond that it is mooted that there are two to three significant project opportunities in Victoria in the healthcare arena, as well as another schools project and another one or two hospitals and a prison. Bendigo hospital is also coming up as a potential candidate, while Box Hill Hospital has been given the go ahead for funding for a major development, but the procurement model is yet to be decided on.

In Queensland there is the possibility of Sunshine Coast Hospital being delivered as a PPP, but the state is focused on privatisation issues. Western Australia is the big hope. The WA state government has said it will be seeking expressions of interest on at least four PPPs this year in health, education, correctional services and utilities.

New South Wales has virtually no social infrastructure activity in schools and hospitals. The ruling NSW Labor government has experienced a series of leadership changes and observers say it is unlikely to survive an election in 2011. Industry players say the political environment in NSW makes for a lack of the strong leadership necessary for PPPs. "It's wait and see in terms of social infrastructure [in NSW]," O'Rourke says. "We're not seeing real opportunity in the short term in 2010 for hospitals and schools projects."

Australia is facing four elections, including a Federal election and state elections in South Australia, Tasmania and Victoria, this year. "There are quite a few elections coming up in the next nine months," Delia said. "As part of that there's always a release of announcements of things held back. I temper what I said [about a skinny pipeline] by saying there might be a lot of announcements on business cases, investigations, or maybe commitments coming out of the election process."

"When promises of new things are flushed out they're typically 3-5-7 years before they come to fruition," says O'Rourke. "I don't think that's going to be particularly influenced by the state of elections." Deloitte's Black agrees. "They'll announce a project but the delivery mechanism is only decided during the business case."

The desire and appetite for social infrastructure PPPs is also now there among market participants. Daley says there is enough to satisfy them. "I'm surprised people describe the pipeline as skinny," he said. "The pipeline is actually reasonably solid. I suppose that if you get some you always want more."

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Debt on life support

The bounce back in the social infrastructure market could also halt the spread of the supported debt model (SDM), which was used by the Queensland Government for the South East Queensland Schools Project in 2009. The project, to build six new primary schools and one new high school in fast-growing areas, was awarded to the Aspire School Consortium, which includes Leighton Contractors and the Commonwealth Bank.

Most industry players say the SDM is unlikely to become widely used as a method of funding PPPs. Under the SDM the private sector provides all financing during construction, but just 30% for the operations phase. The Queensland Treasury Corporation provides 70% of financing when construction is finished.

"I can't see it becoming a mainstay or a feature of PPP projects around Australia," says one industry source who did not wish to be named. "Whenever a state does something a bit new or a bit different, other states will look at it. But it has complications. The government is effectively bankrolling the operations of the project. There are various intercreditor issues, various documentation issues. I'm not seeing any evidence of people actively pursuing that around the country in other jurisdictions."

David Lester at Clayton Utz says the complications with SDM deals means it is hard to tell whether they will become popular way of funding PPPs. "I think they did have some real issues convincing the market this was an appropriate way to deal with value propositions," he says.

Lester notes that for the SEQ Schools Project, the SDM model wasn't initially aimed at addressing the liquidity issues that happened last year during the GFC. "That project had been in train for some time before it closed in April last year. Having said that, it does create some benefit in that there is less financing required from the private sector, which was certainly an issue over the last 12 months and continues to be an issue. There's merit to looking at that model in this current environment."