Reliance Rail, Australia's largest PPP financing to date, and one of the largest globally in 2006, has closed A$2.35 billion ($1.85 billion) in debt facilities. The A$3.6 billion project features an upset victory by the sponsors, a panoply of wrapped debt facilities and a complex procurement contract. The project is the first for a rolling stock procurement, and other national and local governments are likely to copy it.

Reliance Rail's sponsors and equity investors are Downer EDI (49%), ABN Amro Australia and Babcock & Brown Public Partnerships (each with 12.75%), and AMP Capital Investors (25.5%). Babcock & Brown and ABN Amro were joint financial advisers to the sponsors, and ABN Amro underwrote the A$1.95 billion bond debt component.

Lead arrangers of the A$400 million bank facility are Westpac, National Australia Bank, Mizuho Corporate Bank, Sumitomo Mitsui Finance Australia and Citibank. However, both bonds and bank debt, as well as the swaps required for the financing, feature a monoline guarantee from Financial Guarantee Insurance Corp. (FGIC), and XL Capital Assurance. The bonds are swapped into CPI, because the Australian bond market is not able to offer inflation protection at a sufficiently attractive price.

The sponsors hold a 37-year concession to design, build, finance and maintain a fleet of rail cars for RailCorp, which provides rail service around Sydney and in the Australian state of New South Wales. RailCorp's owner is the state, and the contract is part of the RailCorp Rolling Stock PPP Project.

The contract covers 624 new rail cars, enough to outfit 78 eight-car train sets, and Reliance must make 72 of them available each day. The new double-decker trains will replace 40% of the rolling stock on the Sydney City Rail Network. Much of the network's existing fleet is nearing the end of its useful life, and lacks modern amenities such as air conditioning.

Under the contract these cars will be delivered between 2010 and 2014, and work on construction of the cars will begin in 2007. The builder of the cars will be a joint venture of Downer EDI and Hitachi, and while China's Changhun Railway Vehicle will undertake some initial manufacture, the fleet will be assembled at Downer's Australian plant, in accordance with the state's desire for 20% local content.

Maintenance of the fleet will take place at a new facility that John Holland is building at a cost of roughly A$200 million. The maintenance contract runs for 30 years. Hitachi's role involves adapting the technology that it has implemented on the Japanese bullet train, and is implementing on the Channel Tunnel Rail Link.

RailCorp issued a request for expressions of interest on 31 August 2004, setting a deadline of 13 October that year. The government invited proposals separately for single-decker and double-decker trains. The single-deck project for 208 cars, attracted a higher number of bidders – four to the double-deck project's two – on 10 October 2005.

But RailCorp abandoned plans for the single-decker element, and on 4 May increased the number of double-decker trains, citing high growth in passenger numbers. It issued a request for detailed proposals to Reliance Rail and Star Transit, made up of United Group and Mitsubishi Electric, on 31 May, and received submissions in August.

NSW chose Reliance Rail over Star Transit on 10 November, saying that Reliance "offered better value for money and had presented the superior train". But Reliance was initially cast as the underdog to Star, and few of the equity analysts following Downer had factored the contract into their earnings projections.

The complexity of the contract, and the technological challenges of the bid, have meant that while financial equity is – just – the majority, the lead contractor holds the largest stake in the consortium. But Babcock & Brown and ABN Amro's victory shows that the ABN Amro approach of combined debt and equity has survived the departure of its key personnel to B&B and Plenary, even if the contract's size has forced some modifications.

Using a combined bank and bond solution maximises pricing benefit and avoids some of the interest costs attached to a 100% bond solution for a project that will take seven years to reach completion. Spreading the wrap across all types of debt – bank and bond – cuts down on intercreditor issues and exploits high levels of demand at banks for wrapped assets.

The contract involves a much higher transfer of operational risk to the private sector than is typical for rolling stock deals. The concession holder is paid according to availability, reliability, and the absence of disruption. There is limited transfer of the risk from track conditions passed to Reliance as well. However, the operation of the trains, collection of fares, and maintenance of track stations and signaling all remain with RailCorp.

The deal has echoes of the London Underground PPP, if only because the Tube included a rolling stock element. More relevant to Reliance was the experience of the Millennium Train, which Downer also built for RailCorp (that time as a conventional procurement). The Millennium Train suffered well-publicised problems operating on Sydney's aging and centralised commuter rail network.

Sydney residents have expressed surprise that the builder of the Millennium Train had a second chance at a RailCorp contract, the benefits to lender due diligence are clear. Roughly 70% of the content of the new trains are based on the earlier model, and thus relatively proven, and the builder is much more familiar with making the new trains compatible with the existing network than its rivals.

Reliance Rail
Status: Closed 8 December 2006
Size: A$3.6 billion
Location: Sydney, New South Wales, Australia
Description: DBFM contract for 78 trainsets for Sydney's commuter rail network
Sponsors: Downer EDI (49%), ABN Amro Australia and Babcock & Brown Public Partnerships (each with 12.75%), and AMP Capital Investors (25.5%)
Debt: A$2.35 billion
Bond underwriter: ABN Amro
Bank arrangers: Westpac, National Australia Bank, Mizuho, Sumitomo Mitsui, Citibank
Financial advisers to the sponsors: ABN Amro, Babcock & Brown
Monoline insurers: FGIC, XL
Financial adviser to government: PwC
Legal adviser to government: Clayton Utz
Legal adviser to Reliance Rail: Blake Dawson Waldron
Legal adviser to lenders: Malleson Stephen Jaques
Independent engineers: GHD, Interfleet