The past year has seen dynamic activity in the Australian transport market with a number of deals impressive in both their scale and geographical spread

Major projects reached close in each of the three largest state markets: the Brisbane RiverCity North-South tunnel in Queensland, the Reliance Rail rolling stock DBFO in New South Wales (NSW) and now the ConnectEast Mitcham-Frankston toll road in Victoria.

These three transactions alone - worth a total US$6.95 billion and calling for US$4.94 billion in debt financing - have helped meet the growing appetite of both domestic banks and European and Asian entrants for Aus dollar project debt.

The activity is also politically encouraging. The commitment of Australia's state governments to PPP and concession projects has been fair-weather at best, with the Victoria and NSW administrations distancing themselves from the troubled Spencer Street station and Cross City tunnel respectively.

The latter, which called in the receivers at the end of the year, has become a political football for a vocal lobby opposed to use of private finance in infrastructure.

However the naysayers have done little to stem dealflow and a successful first year in business for Sydney's M7 Orbital road (and subsequent refinancing) suggests a public-private consensus has restored investor confidence.

Thiess, John Holland and Macquarie's Melbourne ConnectEast toll road (which refinanced a US$1.64 debt package on 21 December on the back of 'red hot' market liquidity) seems set to follow the example of M7 rather than Cross City.

Background

Unlike other Australian cities, Melbourne had strong precedent for a privately run tolling. TransUrban's 22km CityLink project which links Melbourne Airport, the harbour and the industrial centres in the south east was one of Australia's first transport DBFOs to be awarded in 1995.

However, when CityLink opened to traffic in 2000 it did not solve the city's congestion problems - traffic from the swelling southeastern suburbs continued to lead to gridlock.

An independent report commissioned by the state government from Allen Consulting estimated that an extra road connecting the suburbs and city centre would contribute US$12 billion to the state economy.

In response the Labor government proposed the EastLink project, a 40km free-flowing toll road including twin 1.5km tunnels, running from the Eastern Freeway in the eastern suburbs of Melbourne to the Frankston freeway in Melbourne's southeast.

However political will showed signs of wavering as the Labor government of Victorian premier Steve Bracks first mooted the deal as a free shadow toll structure before changing the requirements to a high-tech toll where the consortium would bear commercial - or Patronage - risk.

Following a competitive tender, the ConnectEast consortium - composed of construction companies Thiess and John Holland (both are subsidiaries of Leighton Holdings) and Macquarie Bank (also acting as adviser) - was awarded preferred bidder status by the specially formed Southern & Eastern Integrated Transport Authority (SEITA) in October 2004.

The consortium committed to complete by November 2008 works including:

• over 40km of freeway standard road
• 1.5km of twin tunnels
• 16 grade separated interchanges 
• over 95 separate bridges 
• traffic control equipment and intelligent transport systems 
• tolling systems 
• road furniture, urban design elements and landscaping
• Two non-tolled public roads - the Ringwood Bypass and the Dandenong Southern Bypass.

At the start of 2007, construction is more than 50 per cent complete, with ConnectEast hoping to open the road to traffic several months ahead of schedule. After opening the road the concession will run for a further 35 years.

As a by-product of the political sensitivities raised by the road and also as a function of the high usage estimate of 350,000 vehicles a day, the tolls charge will be the lowest per km in Australia. Toll fares on the ConnectEast project will be capped at a maximum of Aus$4.67 (US$3.65) for non-commercial vehicles.

The road combines an electronic tag-and-beacon system with video surveillance and will be interoperable with other electronic tollroads in Australia, including Melbourne City Link.

Financing

In November 2004, ConnecEast raised project equity in a way typical to Macquarie projects through an ASX listing which would offer 82.5 per cent of the project company to private and institutional investors.

Of the US$823m raised in a heavily oversubscribed flotation, 75 per cent of ConnectEast was sold to institutions, 18.75 per cent to broker firm allocations and only 7.5 per cent to private investors.

Meanwhile the US$1.62 billion construction facility (the largest Australian project debt issue of 2004) was underwritten by MLAs Commonwealth Bank of Australia, United Overseas Bank, Bank of Scotland and Societe Generale.

On completion of construction, the debt facilities will convert into a three-tranche term loan, with tenors of six, eight and ten years (see pricing grid).

The project equity was boosted by US$225 million equity bridge provided by the four MLAs.

In mid 2006, with the Australian market awash with liquidity and encouraging progress made on construction of the EastLink, ConnectEast mandated seven MLAs for a refinancing.

The refi sees ABN Amro, BNP Paribas, HVB, Calyon and National Australia Bank enter the deal while Societe Generale and Bank of Scotland are out. Commonwealth Bank of Australia and United Overseas Bank retain their positions on the project.

The refinancing slashed margins by 40bp on the construction facility and 40-45bp on the 5-10 year debt tranches.

EastLink Mitcham-Frankston tollway pricing grid

Mark Siebert head of project finance at nabCapital, which joined the tranactions as an MLA, says: 'Clearly a factor in the reduced pricing was increased liquidity. A number of European and Asian banks have entered the Australian infrastructure market since ConnectEast closed in 2004, as evidenced by the successful syndication of the RiverCity Motorway project in Q4 2006.   

'However, this was not the only factor, he adds, 'Construction of the ConnectEast project is now well advanced, which is a clear positive.  In addition, the solid performance of the recently opened Westlink Western Sydney Orbital toll road is of comfort, given both projects share a number of common features.'

The refi echoes the repackaging of Transurban and Leighton's Westlink deal, which closed a US$974 million senior debt refinancing on 21 December 2005. Macquarie Bank again acted as financial adviser on that deal which saw margins cut from an average of 150bp to 78bp over BBSW.

Conclusion

They have been roundly criticised by developers, but arguably the unwillingness of Australian state governments to shoulder financial risk offers gilt edged opportunities to a hungry market.

If the EastLink proves as popular with motorists as it has with investors, then Macquarie and the other consortium members could benefit from considerable upside in a city where electronic tolling is already a proven success.

As the track record in Australia's PPP market grows, the relationship between government and the private sector is gradually improving.

As nabCapital's Mark Siebert says of Melbourne's recently renegotiated station PPP, 'the successful renegotiation of the  Spencer Street Station project was a positive step for the Australian PPP market in that it demonstrated that the public sector is able to achieve real risk transfer with these projects.'

Ironically then, after a storm of activity in 2006, 2007 may not prove as heated a year.

Several hospital PPPs, the second Defence Housing Project (Single LEAP II) and the US$2.5 billion Brisbane Airport Link will come to market but lag times of 12 to 18 months mean they may fail to trouble 2007 league tables.

In what one source describes as a 'red hot' debt market, this is not enough. State governments will have to match the quality of concessions with quantity, or risk watching as developers and financiers look elsewhere for volume.


The project at a glance