Freight heading south from Darwin will soon be able to travel by train. Financial close on Australia's largest PPP to date was signed in February and construction on the 1420km stretch of track is now underway. Negotiations have been long, involving three separate government bodies and incorporating roughly three hundred contracts. But it sets a precedent for future financings. ?I hope this has shown the Australian financing community that deals of this size can be done,? states Andrew Fletcher, senior vice president, infrastructure at Halliburton.

Initial proposals for the project were recorded in 1911 but it really got off the ground in 1996 when an official notice was released for expressions of interest to progress it as a PPP. In 1997, the Asia Pacific Transport Consortium (APTC) was named preferred bidder and in November 1999 officially awarded the mandate. APTC is special-purpose consortium comprised of Halliburton KBR, John Holland Group, Barclay Mowlem, McMahon Holdings, Australian Railroad Group, PGA and institutional investors.

The long concession of 50-years is said to be a necessary factor in making a deal of this size work. ?Government involvement was also crucial,? says one source. ?The deal would not have been possible without it.? The support came in two forms. An 831km portion of track connecting Tarcoola to Alice Springs was opened on the back of Commonwealth government funds in 1980 and handed over to APTC at financial close. In addition, public funds were pledged through AustralAsia Railway Corporation, a special-purpose vehicle set up by the Commonwealth government and Northern Territory and South Australian state governments.

A key strategic aim of the project is to stimulate development of a port hub at Darwin, thereby landbridging the trade route from Asia through to major cities in the south. The heightened risk that this untested concept poses was addressed through a highly-structured financing. Senior lenders have lent only against the domestic freight market exposure, taken as project base case-load. Landbridge traffic was considered on a marginal cost basis and mezzanine tiers take on a portion of this risk. Equity will see some returns from the domestic market but have significant upside potential from the development of a full landbridge market. Equity stakes and the government loan were upped in the deal's final hour ? said to be due to the ?immaturity? of the Australian debt market.

The final financing included A$239 million ($122 million) equity. Debt breaks down into a mezzanine tier one of A$86 million, mezzanine tier two of A$26 million, A$491 million senior debt, a A$50 million government loan and a A$428 government works contribution.

Lead arrangers ABN Amro, ANZ Investment, RBS and SG fully underwrote the senior facility and launched it to a successful syndication. This facility also includes a three-year equity bridge, fully supported by an irrevocable AA- bank letter of credit. That expires post-construction, leaving only the A$49 million non-recourse senior debt. This then breaks down into a A$150 million five-year bullet tranche (priced at 160bp), a A$261 million 12-year amortizing tranche and a A$80 million 12-year rolling stock tranche ? both starting at 165bp and rising to 190bp. Mezzanine two was placed to institutions at financial close, while mezzanine one was underwritten by Macquarie and RBS and then sold down later. Commercial lenders could take comfort from the fact that government funds are drawn down first.

The access regime provided further comfort. It is a unique system taking into account the project's considerable risks and is described by Andrew Fletcher as absolutely fundamental to the project. Under the regime, APTC has monopoly over the track but a pricing framework exists for access seekers. With this in place, lenders were willing to take on market risk. Domestic traffic flow was never considered to be a huge obstacle, with the only alternative being a road that according to market studies is more expensive. But it nevertheless sets an impressive precedent that a project of this size could attract commercial lenders without a government guarantee.

Other risks inherent to greenfield infrastructure deals are naturally exaggerated for a railway running the length of Australia. Although construction per se was not said to be a great problem, the conditions of the corridor did raise some concerns. In the end, all four contractors provided joint and several completion guarantees for fixed price project delivery.

?Land title was potentially a significant issue,? points out Jeremy Brasington, director at ANZ. ?The route crosses some aboriginal heritage sites associated with both heritage and title issues, and management of this to conclusion would have been extremely difficult without government involvement.? The North Territory and South Australia governments progressed a Local Aboriginal Industry Participation Initiative, which was signed into this deal. According to this, a percentage of the construction works must be contracted to local aboriginal groups.

Successful close of this benchmark project is all the more impressive when considered against Australia's history of privately financing railways. ?Two recent BOOT railway deals from Sydney city to the airport and from Brisbane city to the airport are in trouble and this makes people nervous,? says another source close to the arrangers. ?Banks willing to lend into the industry on the tenors we have seen on Adelaide to Darwin is unprecedented.?

And asked about lessons for the future, many deal sources point to the benchmark set in terms of the public and private sector working together. Three separate governments, a whole host of private sponsors and commercial lenders all agreed on terms, highlighting the possibility of opportunities for partnerships in the future.