In the last year the Australian PPP market has seen some dramatic changes, with the BrisConnections debacle, the drying up of private finance and growing delays to major infrastructure projects across all states.

The Australian market for PPP/PFI and the activities of Infrastructure Australia show that well structured projects are proceeding albeit with more diligence and analysis than in recent years as the market as a whole takes a more conservative approach to the structure and funding of projects.

Nonetheless, recent media statements from state government leaders indicate that infrastructure spending is seen as a key driver to promote economic activity, employment and to steer Australia away from a deep recession. It is likely that many of these projects will be financed by more traditional means rather than PPPs, however several PPPs remain on the agenda.

Australian PPP Market Overview

There is still a lot going on in the Australian market, but projects have been heavily hit by the recession. Only two PPP projects have closed since July 2008 - the Victorian Schools PPP and the Royal North Shore Hospital PPP.  Another two are on the verge of closing - Queensland Schools PPP and Victorian Biosciences PPP.

In IJ's report last year on the Australian market there was talk of a bottleneck of projects gathering with the flood gates on the verge of bursting. This however never actually happened; the projects just stacked up. For instance, a recent deep drop in the price of exported coal has reduced the immediate need for many port facilities to be upgraded.

The availability of debt remains a problem and with a Federal Budget looming, there is also confusion at the state level as to how far the government will get involved to save a number of deals from going down the plughole or being delayed. As was widely anticipated, far more project submissions were lodged with the Federal Government than funds available.

There are opportunities and there is still a great need for the infrastructure to be done - in particular in the roads, rail and water sectors - but in this market it is widely felt that it will be the smaller deals that will get away.

A number of foreign banks have retreated from the Australian market, but some key players, such as RBS are still active and committed despite appetite drying up. However, something needs to change to attract senior debt.

Workshops have been carried out at state and federal levels looking at the different international solutions to the funding crisis and assessing a range of options. A number of possibilities are on the table, the UK Treasury PFI lending unit has been looked at, as well as a return to a widespread D&B roll out. In the UK the Treasury has set up its own lending arm to push through schemes, making investing in infrastructure a central part of its plan to spend its way out of recession.

Leighton O'Brien, partner at Allens Arthur Robinson says: "government, financiers and sponsors are, for once, all agreed - no one wants to see the PPP market stall, let alone fail. The PPP and toll road models had become fairly well settled. All participants are genuinely working together to find a way to restructure the model to get new projects started, particularly anything above Aus$300 million, which has been expected to struggle".

David Larocca, partner in Ernst & Young's Project Finance Advisory group said: "There is no doubt that the PPP model and procurement process needs some tweaking to deal with the current liquidity issues. The positive thing is that we are seeing governments actively engaged on the issue and looking for solutions that preserve the benefits of the PPP model."

One of the consequences of the global financial crisis and the failings of BrisConnections is that private consortia are now less willing to take on traffic risk in toll road projects - at least in the short term and under the current model which has been used for more than a decade and puts pressure on competing bidders to increase their traffic forecasts to win a bid.

It is believed that major road projects that will now use the availability model, such as the Peninsular Link project in Victoria.

Northern Link in Brisbane, Queensland was expected to undergo the RFP process in late 2008. It may now start as early as July 2009. There are no indications yet on whether the Queensland government will expect consortia to take full patronage risk or follow the Victorian availability model.

If the Peninsula Link project is a success, the use of the availability model could potentially kick-start a pipeline of other road deals that are needed across the country. In the past the greatest infrastructure need in Australia was in ports, in particular coal terminals, but now the focus is more towards roads.

In the past there have been spectacular miscalculations of traffic - the main examples being the widely publicised Sydney Cross City Tunnel and Melbourne's East Link. In the process many banks and "mum and dad" investors have lost their investments. Now there is a push towards PFI-type concessions.

Many of the projects in procurement are significant projects and exceed Aus$500 million in capital value. Commentators believe that in the current market a size below Aus$400-500 million is achievable by the private sector without government intervention. Above that level there is an expectation that the procuring agency will need to source some of the capital for the project or the project will need to have a new or different style of procurement to encourage the level of debt participation required in the Australian market.

The capital constraints apply more to the debt pool of funds rather than the equity pool and constraints are therefore bank driven as to the availability and cost of debt capital. Also, individual banks are commiting less to each project so beyond about Aus$500 million the number of banks required becomes an impediment.

2009 Budget and Infrastructure Australia

Many in the industry are waiting on the Federal Budget that is due on 12 May, when the government is expected to announce projects that are ready to go.

A greater call on government is expected in the budget, but there is still the desire among PF professionals and government to preserve the benefits of PPP in terms of providing value for money and efficiency.

State governments are actively looking for solutions, such as co-funding with the Treasury and revisiting the transaction process. Treasury in the various States and the Commonwealth are all looking at options around funding.

Many state governments are in a reasonable condition, having a AAA rating and the Federal Government entered office in late 2007 with zero debt and a budget surplus. This puts the Australian Government in a good position, enabling it to spend more on key infrastructure. However, early expectations are that the deficit could be in the order of Aus$50 billion (from a Aus$22 billion surplus) so the need to find finance is great. Further, several state and local governments have announced that they are also going it deficit with the key expense item being infrastructure.

How much funding the government will provide and whether it will be thinly spread will be revealed next week. What everyone expects is that the government will need to start spending money, despite the long lead time to get PPPs going.

The Infrastructure Australia (IA) priority projects list was due in February but has been delayed and is expected to be issued with the budget.

IA sent the priority list of 94 projects to government, outlining seven areas:

• broadband systems
• national energy grid
• port production
• rail freight
• water
• public transport in cities
• improving conditions for indigenous population

The final report from government will provide additional clarity, and guidance on which projects to focus on.

At the Commonwealth Government level, Infrastructure Australia had planned Aus$20 billion of investment into infrastructure, but recently announced that the Future Fund had access to only Aus$12.5 billion for infrastructure. Of this Aus$4.6 billion is already ear-marked for the National Broadband (NBN) project leaving only Aus$8 billion left for the state projects. Commentators agree that this is a challenging funding requirement but it is on the back of the prime minister's announcement in April that it will be a "nation building" project for Australia. 

The allocation of this fund and the identification of infrastructure projects is a work in progress with a number of road and transport projects initially being identified for development.

IA hasn't had the expected impact yet, as in part it has had to deal with the economic situation, which has led to projects being delayed.

Queensland

South East Queensland (SEQ) Schools PPP

Last month the Queensland state government achieved contractual close with the Aspire Schools consortium on the Aus$1.1 billion (US$784m) contract to develop seven new schools in the south-east of the state.

Aspire Schools includes:

• Commonwealth Bank of Australia (CBA)
• Leighton Contactors
• Broad Group
• Compass Group

The consortium is now working towards financial close with National Australia Bank (NAB) joining CBA and Leighton in providing finance for the DBFOM scheme [Projects Database].

The 30-year SEQ Schools project uses the Supported Debt Model (SDM), where the state provides for 70 per cent of the post-construction debt through the Queensland Treasury Corporation.

The SDM structure takes advantage of the government's ability to source debt at a lower rate than the private sector.

The market is waiting to see if Queensland will view this approach as a successful one. It does not solve the capital constraints, as debt still needs to be raised privately and creates structural complications and therefore risk. The SDM was not selected to deal with capital constraints - it was selected at the start of the process before the GFC to seek to provide value for money.

Ernst & Young is acting as financial and commercial adviser to the authority, Freehills is legal adviser, while Milliken Berson Madden is providing technical advice.

Northern Link Toll Road, Brisbane

Brisbane City Council's Aus$2.6 billion Northern Link Toll Road project has been delayed by around six to 12 months; however the tender process is due to restart in the second half of the year.

The Queensland scheme[Projects Database] started as a BOOT project but the downturn in the economy halted the procurement process after one of the two bids struggled to find finance. This compared to the situation when the Airport Link project (which was won by BrisConnections) came to market in 2007, when five consortia lodged an EOI.

The city council has announced that the scope will be reduced - the removal of exits and entries - to lower the expected cost from Aus$2.6 billion to Aus$1.7 billion. This will make it more manageable and expressions of interest will soon be sought for the revised deal.

Ernst & Young is acting as financial adviser to the authority, Connell Wagner is providing traffic advice, Clayton Utz is legal adviser, while Sinclair Knight Merz and Aurecon are the engineering and environmental advisers.

Sunshine Coast Hospital PPP

The Queensland state government is still procrastinating over the scope and size of the Sunshine Coast Hospital PPP project in Kawana, south east Queensland.

The government is thinking about what they want the scheme [Projects Database] to include in terms of scale and whether to link the deal with the development of a business or recreation site.

The project is being considered as a PPP and is currently at the pre-procurement stage, but expressions of interest are expected in the coming months depending on the market.

Deloitte is acting as financial adviser on this project, while Freehills is providing legal advice.

Gold Coast Rapid Transport System PPP

The Gold Coast Rapid Transport System scheme [Projects Database] is at a similar stage to Sunshine Hospital in that expressions of interest will be sought in the second half of the year.

The project includes the development of a public transit system connecting the Gold Coast Railway with major population centres and destinations on the Gold Coast.

The Queensland Government and the Gold Coast City Council are working together to build the light rail rapid transit system between Helensvale and Coolangatta.

Port of Brisbane Motorway (POBM) Upgrade PPP

The Department of Main Roads is currently undertaking a business case for the POBM Upgrade in accordance with the Queensland Government value for money framework. This includes consideration for the potential delivery of the project via PPP.

The scheme is at the preliminary stage and could come to market in the second half of 2009.

This project is designed to provide a four-lane motorway-standard connection from the Gateway Motorway, which connects all interstate and intrastate markets, to the Port of Brisbane at Fisherman's Islands.

Airport Link PPP

The current experience of the Airport Link project being delivered by the BrisConnections consortium that closed in July last year - does not give the public (and much of the PF market) a good feeling about toll roads.

After a public float of the company the share price fell rapidly from Aus$1 to 0.1 cent (1/1000th of the original value) in a matter of months. Unfortunately some investors launched in the market at 0.1 cent not realising the units were stapled in that two further Aus$1 instalments were due in April 2009 and early 2010. That is a person could have invested Aus$1,000 and then be sent a note saying that they owe Aus$2 million.  

In March 2009 Macquarie Bank stepped in to buy around 8 per cent of the stock such that between it and two other major shareholders they would have more than 25 per cent of the stock and could block the wind-up vote. Last month Thiess - the construction contractor on the project - purchased Australian Style Investments' proxy votes (not the shares) for Aus$4.5 million.

As a consequence, all the resolutions at the general meeting were voted down and ASI remains liable for the first call on its 77 million shares. ASI has transferred most its shares, although the transeree was identified in recent court hearing as being unable to pay the call. It is understood Macquarie also purchased units from small investors allievating from the debt burden.

While the construction of the project continues, it seems to be a very unfortunate sharemarket process that has not done the cause for PPP any favours.

New South Wales

Many potential projects in New South Wales (NSW) are contingent on the Federal Budget and the IA priority list announcement.

The NSW market is not currently great and the state has been slow in getting projects moving through, but it is thought that the smaller deals will get through.

CBD (Central Business District) Metro, Sydney

The Aus$5.3 billion plus CBD (Central Business District) Metro project in Sydney is the main PPP project in the pipeline in NSW. The EOI for the D&B package was advertised on 30 March (closed 17 April) and the EOI for the IMO (operation and maintenance) package was advertised on 20 April, which is due to close on 15 May.

The project consists of D&B packages for the permanent route infrastructure, and potential PPPs for rolling stock, stations and systems, included in the IMO package.

The government was going to fund the Aus$5.3 billion first stage of the programme, but now there is pressure on the private sector bidders for the the IMO package to commit equity and a "reasonable portion of debt' for the project.

The second phase of the programme is expected to be worth Aus$8.2 billion, extending to the western suburbs, which is subject to receiving federal funding - the funding has not yet been announced.

Clayton Utz is acting as legal adviser to the authority.

The future of PPP projects in NSW is expected to include road projects and extensions to the Metro programme.

Potential projects are:

• M4 East road
• port and airport to the south of the CBD

Despite the financial close of the Aus$1.05 billion Royal North Shore Hospital PPP [Projects Database] in October last year, there is a state election due in early 2011 and it is unlikely that any road deals will come to market before then.

There are still hospital projects in the pipeline but no news on when they will kick off.

Victoria

Victorian Budget

Victorian Budget on Tuesday (5 May) - set a reliance on local funding, with the examples of Boxhill Hospital and Peter MacCallum Hospital.

The Victorian government will spend Aus$8 billion in the next year on major projects in an attempt to reduce the impact of the global economic crisis, and will fast-track its capital works agenda - bringing forward big-spending measures on transport, schools and hospitals.

The investment will cover a range of infrastructure developments including water and sewerage projects, schools, transport projects and hospitals.
The first stage of the state government's Aus$38 billion Victorian Transport Plan - worth Aus$3 billion over the next four years - will get underway and includes spending on railway stations, rail lines and roads.

Projects that will start this year include:

• 20 new X'Trapolis trains - Aus$650 million
• new stations in some of Melbourne's growth areas - more than Aus$152 million
• improving the reliability of rail services - Aus$132.1 million

All of Australia's governments need to get on with delivering major infrastructure, in spite of short-term economic turmoil.

Victorian Desalination PPP

A project dominating the state of Victoria's PPP market is the Aus$3 billion Victorian Desalination Plant in Melbourne - a watershed deal that could face a significant funding shortfall.

The scheme [Projects Database] is currently at the bid evaluation stage with two bidders, and a preferred bidder is expected to be named in the next couple of months.

Bids were due in at the end of March, but the debt situation has delayed the progress of the project. The bidders and government are now looking to close the funding gap.

The two teams are:

• AquaSure - Degrémont, SUEZ Environnement, Macquarie Capital Group and Thiess - advised by Clayton Utz
• BassWater - Veolia Water, John Holland and ABN Amro Australia (RBS)

The DBFOM plant will provide 150 billion litres of water a year and be operational by the end of 2011 with the potential to increase to 200 billion litres in the future.

Ararat Prison

The new DBFM prison in Victoria will be developed under a PPP arrangement in Ararat. It will be a 350-bed medium-security protection prison adjacent to the existing Ararat prison.

The Victorian Department of Justice has already invited expressions of interest for qualified consortia to undertake a role in this project that is expected to be worth up to Aus$300 million.

Peninsula Link Road

Expressions of Interest were received this week (5 May) for the Aus$800 million to Aus$1 billion Peninsula Link Road in Victoria. The state government allocated Aus$354.3 million over four years for the project.

The five consortia vying for the 25km project are:

• ConnectSouth - Fulton Hogan and John Holland
• Peninsula Gateway Consortium - with Leighton Contractors
• Urban Connect - Acciona and BMD Constructions
• Southernway - Abigroup
• Connect 11 Partnership - Thiess and McConnell Dowell

The scheme will be an availability charge based project rather than a toll road after the market response to the recent Queensland toll roads. The Peninsula Link will be a shadow-toll like deal, as the private sector will not take any patronage risk, following recent concern around risk.

The EOIs will now be evaluated and a shortlist of two or three consortia will continue through the bidding process. In mid-June shortlisted bidders are expected to receive a request for proposal (RFP) with detailed documentation expected.

Clayton Utz is acting as legal adviser to the authority.

Victoria Biosciences Hospital

The Aus$230 million Victoria Biosciences project includes the development of an advanced medical facility that is expected to reach financial close in the near future.

A Plenary Research consortium is the frontrunner for the deal, and includes Plenary Group, Grocon Constructors, Kane Construction and Honeywell Services.

Clayton Utz is acting as legal adviser to the authority.

Other projects in the state that could be potential PPPs are:

• Peter Mac Comprehensive Cancer Centre, Victoria - expected to reach the EOI stage in the next half
• Melbourne East - West Link toll road

South Australia

South Australian Schools

The South Australian (SA) Schools PPP is currently at the preferred bidder stage with a Commonwealth Bank of Australia-led consortium.

The successful Pinnacle consortium includes:

• Commonwealth Bank of Australia (CBA)
• Hansen Yuncken
• HJB Investments
• Spotless

The Pinnacle team will develop six new 'superschools' in the Adelaide area, replacing 20 existing schools and pre-schools.

Financial close of the DBFM scheme [Projects Database] will follow soon.

KPMG is acting as financial adviser to the authority, Corrs Chambers Westgarth and Clayton Utz are acting as legal advisers, while Connell Wagner is technical adviser.

South Australian Prisons

The South Australian Prisons PPP project is fast approaching the best and final offer (BAFO) submission deadline at the end of May with the following three consortia in the running:

• Secure Australian Facilities Environment (SAFE) - Westpac (equity and debt), Thiess (construction), Resolve FM (facilities management), Eurest (catering), GSL (services) and Sielox (security)
• Secure Partnerships South Australia (SPSA) - Brookfield Multiplex Infrastructure (co-equity)
  Commonnwealth Bank of Australia (co-equity), Brookfield Multiplex Constructions (construction - new Men's and Women's Prison, (NMWP)), Hansen Yuncken (construction - Secure Youth Training Centre (SYTC), Pre-Release Centre (PRC), and Forensic Mental Health Centre (FMHC)) and Transfield Services (major services contractor)
• Torrens Corrections Partnership (TCP) - ABN Amro (equity and debt), Bilfinger Berger (equity), Baulderstone Hornibrook (construction), Sarah Group (construction), United Group (facilities management), Serco (services) and Webb (security)

The five new facilities include:

• 760 bed Men's Prison at Mobilong, replacing the existing 341 cells at Yatala
• 150 bed Women's Prison at Mobilong, replacing the existing 92 cells at Northfield
• 80 bed Pre-Release Centre at Cavan, replacing the existing 60 bed men's facility adjacent to Yatala
• 40 bed Forensic Mental Health Centre at Mobilong, replacing the existing facilities at Oakden and Glenside
• 90 bed Youth Detention Centre at Cavan replacing the existing 80 beds at Magill and Cavan

The estimated value of the project is Aus$550 million.

Turner & Townsend is acting as lead adviser to the authority, Ernst & Young is providing financial advice, while Clayton Utz is acting as legal adviser.

Royal Adelaide Hospital PPP (formerly Marjorie Jackson-Nelson)

The Royal Adelaide Hospital (Marjorie Jackson-Nelson) project is considering the PPP route, and the procurement process is expected to get underway soon.

A call for expressions of interest for the Aus$1.7 billion scheme is expected in the coming months.

Clayton Utz is acting as legal adviser to the authority.

Conclusion

The way forward for PPPs in Australia and in particular the toll road market seems to lie with the availability model. However, with traffic risk now being handled by government rather than the private sector, the public purse could be severely strained if the traffic volumes fall below desired levels.

The outlook for the Australian PPP market is by no means guaranteed, but compared to international PPP markets where finance has dried up, it is fair to say that Australia is fairing well. With the federal and state governments pushing infrastructure projects the outlook for publicly funded infrastructure looks steady for the time being.

Mark Upfold, partner at Mallesons Stephen Jaques said: "Whilst one could not describe the PPP/Infrastructure market as "optimistic" over the short term, it is fair to say that the sector is facing challenges; however it is responding to those challenges and we expect to see projects currently in the bid cycle complete that cycle in the short term, for new projects to be come to market and be closed over the medium term and for large scale resources and transportation projects to continue their development although it is expected that this may be a slower pace than otherwise would have occurred. Indeed it is rare to see a project or potential project be "abandoned" due to the market cycle, rather projects are being deferred but often will continue to carry out feasiblity and environmental reviews."

David Templeman, a projects partner also at Freehills agrees, noting “the challenges in the market have generated a strong level of communication between the private sector and government to identify how best to fund the projects coming to the market, both in the short and longer term. It is hoped that this communication will allow some of the projects which have been delayed to proceed in the short term. Many market participants do not believe that the fundamentals of PPP procurement need to be radically changed. The main issues to address include funding projects in the shorter term and some specific risk issues such as patronage risk on toll road projects.”