The Big One
The A$1.32 billion Adelaide to Darwin rail project was first
considered by State and Commonwealth Governments as early as 1911.
After many inter-Government reviews and reports by expert panels,
the Northern Territory and South Australian Governments decided to
call for private sector expressions of interest in 1996 to develop
this challenging project in ?partnership? with public sector.
After extensive and detailed EOI, bidding and short listing phases the Northern Territory and South Australian Governments, via their project vehicle, AustralAsia Railway Corporation, selected the Asia Pacific Transport Consortium (APTC) as the preferred bidder in November 1999. Sixteen months later, on 20 April 2001 this complex and challenging project achieved financial close and became a landmark partnership between the private and public sectors.
The Project
The project entails completion of the rail link from Alice Springs to Darwin (approx. 1420 kms) and development of an integrated rail and port operation linking the southern State capitals of Sydney, Melbourne and Adelaide to Darwin, over immense distances of 4746 kms, 3793 kms and 2975 kms respectively. The Commonwealth Government, via its rail track agency, ARTC, contributed the existing rail line from Tarcoola to Alice Springs (which was opened in 1980 and covers 831 kms), to the Consortium for the Concession period.
The project has a concession term of 50 years post completion of the new railway and will operate under an open access rail regime, for an initial period of 30 years, developed with the Consortium and sponsored/legislated by the Northern Territory and South Australian Governments.
Project Participants
The projects complexity was reflective of the number of participants involved.
The Government as the project vendor was co-ordinated through a special purpose vehicle owned by the Northern Territory and South Australian Governments. As a co-founder of the project the Commonwealth Government was also involved in the overall funding package and approving the Rail Access regime under National Competition Policy (NCC) guidelines.
Asia Pacific Transport Consortium was formed in 1997 and is represented by eight partners ? contractors (Kellogg Brown & Root, John Holland Group, Barclay Mowlem, McMahon Holdings), transport operators (Australian Railroad Group and PGA) and Institutional investors.
The projects financial and commercial advisor was Macquarie Bank, which arranged the debt and equity financing, negotiated the financial terms of the Concession Deed and the financial contribution with Governments.
The lead underwriting group for the senior debt package was ABN-Amro, ANZ, RBS (Australia) and SG Australia.
Macquarie Bank and RBS (Australia) co-underwrote the tier 1 mezzanine debt facility.
The project also involved successfully negotiating contractual arrangements with third party operators, users and service providers.
Freight Market/Financing Strategy
The rationale for the project was to complete the domestic rail link to the north of Australia and to provide the impetus for the development of a Port hub in Darwin to facilitate the landbridging of freight through Darwin as Australia's closest export/import point to its major trade partners.
The fundamental rationale for this project is that it provides for an efficient, economical and safe transport corridor for the domestic freight market linking the Northern Territory to the rest of Australia. Facilitation of landbridge traffic through the Port of Darwin will add to the traffic development throughout the rail corridor and in particular at the main rail/transport hubs.
APTC's approach to the landbridge market is to consider this traffic on a marginal cost basis. Utilising the ?domestic? freight traffic trains as the projects base load and adding on incremental landbridge wagons and/or double stacking will allow the Consortium to competitively price this niche market freight relative to existing well developed export/ import infrastructure in the Southern states.
Strategic alliances with shippers will see the landbridge potential for Darwin develop over the initial five years of project operations.
The freight market was studied extensively by the APTC's advisors, the Governments and the debt providers. Overall there is a high level of consistency provided by all the traffic studies in relation to the domestic freight market and the potential for the development of the landbridge market is substantial.
The project financing strategy approach was to layer the risk profile for the various layers of debt, mezzanine, equity and government contribution. The senior lenders would only bank the domestic freight market exposure, whilst the mezzanine tiers are fully supported by the domestic and in the case of tier 2 mezzanine debt, limited landbridge freight volumes. Equity will achieve acceptable returns from the domestic market with the strong upside potential to come from the development of the full landbridge market.
The significant aspect of the project financing is that there are no committed freight off take contracts to support the project cashflows. The nature of the corridor, the length of the linehaul requirements and the efficiency of rail over these distances and the Rail Access regime provide an acceptable market risk framework for the project lenders.
Project Structure
The complexity of the structure was necessary to ensure project financial efficiency for the founding sponsors and to ensure the Governments contribution to the project/assets could be efficiently managed under the various Concession Deed requirements.
The main project vehicle roles are :
? Asia Pacific Transport Pty Ltd ? management company for Joint Venturers
? Freight Link Pty Ltd ? Rail operating activities
? Asia Pacific Transport Finance Pty Ltd ? borrowing vehicle
? Asia Pacific Contracting Pty Ltd ? construction contracting vehicle
The complexity of the project, the numerous participants and structure of the project financing entities resulted in over 260 project documents.
Financing Structure
The project financing structure remained largely as originally bid by the Consortium in March 1999. Summary of the main financial components are :
A$million
Equity 239m
Mezzanine tier 1 86m
Mezzanine tier 2 26m
Senior debt 491m
Government loan 50m
Government works contribution 428m
Total project cost 1320m
The Government works funding programme and Government loan are drawn first under the financing strategy. Mezzanine and senior debt facilities are drawn approximately 18 months after financial close. The senior debt facility for the construction of the project contains an equity bridge which is fully supported by irrevocable AA- Bank Letters of Credit.
Government works and APTC works are undertaken concurrently, with Government works ownership passing to Government at completion of the works programme.
Construction risk is supported by Joint and Several completion guarantees from the contractors parent companies for fixed time, fixed price project delivery.
Having regard to the linear construction risk of the project liquidated damages were provided for 6% of the construction contract value. Additionally, the project sponsors used insurance bonding to provide additional security support for the Government funding programme, particularly over the first 24 months of construction.
To provide additional operational support for the senior and tier 1 mezzanine lenders equity also provides a further A$66 million of contingent equity to support the project during the first 3 years of traffic ramp-up and also to provide cover for maintenance and operational costs of the existing railway during the 3 year construction phase. Contingent equity is released after construction completion through the ramp-up period after satisfying a complex range of coverage tests.
Intercreditor negotiations were complex having regard to the myriad of finance layers involved in the project.
Equity lock-in arrangements are restrictive, however, they are reflective of the nature of the operational and construction risks carried by all project participants.
No Australian project financing can escape the issue of potential taxation consequences. This can be exacerbated if Governments are involved in some financial capacity. Notwithstanding the extensive involvement of Governments in this project and the headline attention the media did provide, the project successfully obtained a private binding ruling from the Australian Taxation Office on all major financing and structural aspects. Including the manner in which the various levels of Government financial support were to be provided.
Project Construction Features
The main construction design features are:
? 1420 kms single track standard gauge with passing loops;
? 144,000 tonnes of steel ? enough to build three Sydney Harbour bridges;
? 2 million concrete sleepers ? if placed end to end would reach from Darwin to Singapore;
? 15 million cubic metres of earthworks ? approximately 8% of the soil moved to build the Panama Canal, the largest earthworks project in history;
? 120 bridges with a total combined length of 8 km;
? carry axle loads of 23 tonnes; and
? maximum operating speed 115 km per hour.
The new railway will be constructed on multiple fronts which will aim to minimise disruption by the tropical wet season (November through February) and optimise project logistics. The main construction targets include track laying at the rate of 2 km per day and a daily sleeper production rate of 4,000 from two plants located along the corridor.
Construction is scheduled for completion within 36 months from financial close.
Project Concession Deed
As with most project financing the project Concession Deed receives considerable attention by all sides of the project, equity, lenders, vendors, third party interests. Many of the risks with this project could be described as standard type issues dealing with construction risk, force majeure, insurance, maintenance standards etc.
However, this project involved additional consideration which resulted in a complex risk allocation for issues such as:
? native title, heritage and sacred sites;
? corridor leases;
? access and competition;
? change in law;
? pre existing contamination;
? MAE protection; and
? Early termination payment regime.
It is worthy to briefly touch on some of these :
Corridor Security
The rail corridor land issues were particularly complex involving two jurisdictions and numerous packages of land. The land is managed by several Land Councils and Governments and is subject to numerous rights (easements) to cater for power utilities, roads and private access arrangements.
It was difficult to determine a clear title for the entire corridor which resulted in complex warranty and reliance regime arrangements.
Access Regime
The Northern Territory and South Australian Governments developed a joint legislated Access Regime ? the first to be certified under the Australian national competition laws.
The regime establishes pricing frameworks for contestable and non contestable freight and provides a clear mechanism for access seekers to negotiate access with APTC. The access rules are unique and have been developed having regard to the significant risk profile accepted by the Consortium for such a substantial greenfield project.
The regime is complex and proved difficult to structure and negotiate with the Governments and then in turn with the National Competition Council. Communicating these complex arrangements to the lenders and equity took considerable time and necessitated various features to be addressed under the lenders loan covenants.
Material Adverse Effect Protection
As with other areas of the Concession Deed this area proved equally complex to resolve.
Due to the involvement of three Governments it was necessary to negotiate various levels of remedies for MAE's for the respective Governments. Various MAE's lead to a range of solutions depending on the MAE itself. Some limited MAE's provide for financial remedies while others provide for extensions of Concession term or assistance with negotiating outcomes with a particular level of Government.
Conclusion
This is a landmark project by any definition and created many firsts for the mature Australian project finance market. It took 90 years from concept to delivery, involved multiple levels of Government and many private sector participants. It is a greenfield open access integrated rail/port freight project that provides open market risk for the lenders under a unique and complex Rail Access regime.
As with projects of this nature this project had several near death experiences during the 16 months it took to successfully close. The commitment of all tiers of Government for this project was fundamental for its delivery. The Consortium's founders contributed huge resources to get this project to and across the line in a true example of public-private partnership.
Notwithstanding the market and media sceptics this project has successfully closed and has entered its next phase successfully involving considerable local industry involvement bringing a range of benefits to the communities and Governments and laying the foundation for a successful long term nation building project.
After extensive and detailed EOI, bidding and short listing phases the Northern Territory and South Australian Governments, via their project vehicle, AustralAsia Railway Corporation, selected the Asia Pacific Transport Consortium (APTC) as the preferred bidder in November 1999. Sixteen months later, on 20 April 2001 this complex and challenging project achieved financial close and became a landmark partnership between the private and public sectors.
The Project
The project entails completion of the rail link from Alice Springs to Darwin (approx. 1420 kms) and development of an integrated rail and port operation linking the southern State capitals of Sydney, Melbourne and Adelaide to Darwin, over immense distances of 4746 kms, 3793 kms and 2975 kms respectively. The Commonwealth Government, via its rail track agency, ARTC, contributed the existing rail line from Tarcoola to Alice Springs (which was opened in 1980 and covers 831 kms), to the Consortium for the Concession period.
The project has a concession term of 50 years post completion of the new railway and will operate under an open access rail regime, for an initial period of 30 years, developed with the Consortium and sponsored/legislated by the Northern Territory and South Australian Governments.
Project Participants
The projects complexity was reflective of the number of participants involved.
The Government as the project vendor was co-ordinated through a special purpose vehicle owned by the Northern Territory and South Australian Governments. As a co-founder of the project the Commonwealth Government was also involved in the overall funding package and approving the Rail Access regime under National Competition Policy (NCC) guidelines.
Asia Pacific Transport Consortium was formed in 1997 and is represented by eight partners ? contractors (Kellogg Brown & Root, John Holland Group, Barclay Mowlem, McMahon Holdings), transport operators (Australian Railroad Group and PGA) and Institutional investors.
The projects financial and commercial advisor was Macquarie Bank, which arranged the debt and equity financing, negotiated the financial terms of the Concession Deed and the financial contribution with Governments.
The lead underwriting group for the senior debt package was ABN-Amro, ANZ, RBS (Australia) and SG Australia.
Macquarie Bank and RBS (Australia) co-underwrote the tier 1 mezzanine debt facility.
The project also involved successfully negotiating contractual arrangements with third party operators, users and service providers.
Freight Market/Financing Strategy
The rationale for the project was to complete the domestic rail link to the north of Australia and to provide the impetus for the development of a Port hub in Darwin to facilitate the landbridging of freight through Darwin as Australia's closest export/import point to its major trade partners.
The fundamental rationale for this project is that it provides for an efficient, economical and safe transport corridor for the domestic freight market linking the Northern Territory to the rest of Australia. Facilitation of landbridge traffic through the Port of Darwin will add to the traffic development throughout the rail corridor and in particular at the main rail/transport hubs.
APTC's approach to the landbridge market is to consider this traffic on a marginal cost basis. Utilising the ?domestic? freight traffic trains as the projects base load and adding on incremental landbridge wagons and/or double stacking will allow the Consortium to competitively price this niche market freight relative to existing well developed export/ import infrastructure in the Southern states.
Strategic alliances with shippers will see the landbridge potential for Darwin develop over the initial five years of project operations.
The freight market was studied extensively by the APTC's advisors, the Governments and the debt providers. Overall there is a high level of consistency provided by all the traffic studies in relation to the domestic freight market and the potential for the development of the landbridge market is substantial.
The project financing strategy approach was to layer the risk profile for the various layers of debt, mezzanine, equity and government contribution. The senior lenders would only bank the domestic freight market exposure, whilst the mezzanine tiers are fully supported by the domestic and in the case of tier 2 mezzanine debt, limited landbridge freight volumes. Equity will achieve acceptable returns from the domestic market with the strong upside potential to come from the development of the full landbridge market.
The significant aspect of the project financing is that there are no committed freight off take contracts to support the project cashflows. The nature of the corridor, the length of the linehaul requirements and the efficiency of rail over these distances and the Rail Access regime provide an acceptable market risk framework for the project lenders.
Project Structure
The complexity of the structure was necessary to ensure project financial efficiency for the founding sponsors and to ensure the Governments contribution to the project/assets could be efficiently managed under the various Concession Deed requirements.
The main project vehicle roles are :
? Asia Pacific Transport Pty Ltd ? management company for Joint Venturers
? Freight Link Pty Ltd ? Rail operating activities
? Asia Pacific Transport Finance Pty Ltd ? borrowing vehicle
? Asia Pacific Contracting Pty Ltd ? construction contracting vehicle
The complexity of the project, the numerous participants and structure of the project financing entities resulted in over 260 project documents.
Financing Structure
The project financing structure remained largely as originally bid by the Consortium in March 1999. Summary of the main financial components are :
A$million
Equity 239m
Mezzanine tier 1 86m
Mezzanine tier 2 26m
Senior debt 491m
Government loan 50m
Government works contribution 428m
Total project cost 1320m
The Government works funding programme and Government loan are drawn first under the financing strategy. Mezzanine and senior debt facilities are drawn approximately 18 months after financial close. The senior debt facility for the construction of the project contains an equity bridge which is fully supported by irrevocable AA- Bank Letters of Credit.
Government works and APTC works are undertaken concurrently, with Government works ownership passing to Government at completion of the works programme.
Construction risk is supported by Joint and Several completion guarantees from the contractors parent companies for fixed time, fixed price project delivery.
Having regard to the linear construction risk of the project liquidated damages were provided for 6% of the construction contract value. Additionally, the project sponsors used insurance bonding to provide additional security support for the Government funding programme, particularly over the first 24 months of construction.
To provide additional operational support for the senior and tier 1 mezzanine lenders equity also provides a further A$66 million of contingent equity to support the project during the first 3 years of traffic ramp-up and also to provide cover for maintenance and operational costs of the existing railway during the 3 year construction phase. Contingent equity is released after construction completion through the ramp-up period after satisfying a complex range of coverage tests.
Intercreditor negotiations were complex having regard to the myriad of finance layers involved in the project.
Equity lock-in arrangements are restrictive, however, they are reflective of the nature of the operational and construction risks carried by all project participants.
No Australian project financing can escape the issue of potential taxation consequences. This can be exacerbated if Governments are involved in some financial capacity. Notwithstanding the extensive involvement of Governments in this project and the headline attention the media did provide, the project successfully obtained a private binding ruling from the Australian Taxation Office on all major financing and structural aspects. Including the manner in which the various levels of Government financial support were to be provided.
Project Construction Features
The main construction design features are:
? 1420 kms single track standard gauge with passing loops;
? 144,000 tonnes of steel ? enough to build three Sydney Harbour bridges;
? 2 million concrete sleepers ? if placed end to end would reach from Darwin to Singapore;
? 15 million cubic metres of earthworks ? approximately 8% of the soil moved to build the Panama Canal, the largest earthworks project in history;
? 120 bridges with a total combined length of 8 km;
? carry axle loads of 23 tonnes; and
? maximum operating speed 115 km per hour.
The new railway will be constructed on multiple fronts which will aim to minimise disruption by the tropical wet season (November through February) and optimise project logistics. The main construction targets include track laying at the rate of 2 km per day and a daily sleeper production rate of 4,000 from two plants located along the corridor.
Construction is scheduled for completion within 36 months from financial close.
Project Concession Deed
As with most project financing the project Concession Deed receives considerable attention by all sides of the project, equity, lenders, vendors, third party interests. Many of the risks with this project could be described as standard type issues dealing with construction risk, force majeure, insurance, maintenance standards etc.
However, this project involved additional consideration which resulted in a complex risk allocation for issues such as:
? native title, heritage and sacred sites;
? corridor leases;
? access and competition;
? change in law;
? pre existing contamination;
? MAE protection; and
? Early termination payment regime.
It is worthy to briefly touch on some of these :
Corridor Security
The rail corridor land issues were particularly complex involving two jurisdictions and numerous packages of land. The land is managed by several Land Councils and Governments and is subject to numerous rights (easements) to cater for power utilities, roads and private access arrangements.
It was difficult to determine a clear title for the entire corridor which resulted in complex warranty and reliance regime arrangements.
Access Regime
The Northern Territory and South Australian Governments developed a joint legislated Access Regime ? the first to be certified under the Australian national competition laws.
The regime establishes pricing frameworks for contestable and non contestable freight and provides a clear mechanism for access seekers to negotiate access with APTC. The access rules are unique and have been developed having regard to the significant risk profile accepted by the Consortium for such a substantial greenfield project.
The regime is complex and proved difficult to structure and negotiate with the Governments and then in turn with the National Competition Council. Communicating these complex arrangements to the lenders and equity took considerable time and necessitated various features to be addressed under the lenders loan covenants.
Material Adverse Effect Protection
As with other areas of the Concession Deed this area proved equally complex to resolve.
Due to the involvement of three Governments it was necessary to negotiate various levels of remedies for MAE's for the respective Governments. Various MAE's lead to a range of solutions depending on the MAE itself. Some limited MAE's provide for financial remedies while others provide for extensions of Concession term or assistance with negotiating outcomes with a particular level of Government.
Conclusion
This is a landmark project by any definition and created many firsts for the mature Australian project finance market. It took 90 years from concept to delivery, involved multiple levels of Government and many private sector participants. It is a greenfield open access integrated rail/port freight project that provides open market risk for the lenders under a unique and complex Rail Access regime.
As with projects of this nature this project had several near death experiences during the 16 months it took to successfully close. The commitment of all tiers of Government for this project was fundamental for its delivery. The Consortium's founders contributed huge resources to get this project to and across the line in a true example of public-private partnership.
Notwithstanding the market and media sceptics this project has successfully closed and has entered its next phase successfully involving considerable local industry involvement bringing a range of benefits to the communities and Governments and laying the foundation for a successful long term nation building project.
Request a Demo
Interested in IJGlobal? Request a demo to discuss a trial with a member of our team. Talk to the team to explore the value of our asset and transaction databases, our market-leading news, league tables and much more.