The Victorian desalination project in Wonthaggi, South East Australia, stands out as perhaps the most impressive example of co-operation between a procuring authority and lenders to find an acceptable financing solution in the teeth of the most challenging market conditions.

However, it is also noteworthy for a number of other reasons, not least the speed of its procurement and the immense technical challenges involved in its design.

When built, the project will be one of the world's largest - and most energy efficient - reverse osmosis desalination plants supplying 150 gigalitres (GL) of water a year from 2011. The plant will have the potential to increase its output to 200 GL a year as needed [Projects Database].

While the economic climate inevitably has a bearing on the speed of future procurement - particularly on such a large scale - the scheme serves as a testament to what can be achieved in a short timeframe with an efficient procurement structure and pragmatic financing.

Background

After a decade which saw two major droughts, Melbourne's freshwater storage reserves fell from nearly full capacity in 1996 to just under a third in 2009.

A survey by the Central Region Sustainable Water Strategy found that within 10 years a 'perfect storm' of climate change, population growth and drought could result in shortfalls of drinking water of as much as 100 billion litres per year for Melbourne alone.

The project forms part of the Government's wider Water Plan, which includes the following initiatives:

• modernising irrigation systems
• regional roof water harvesting
• the water rebate scheme - whereby residents can claim money back for buying water saving products

It is this backdrop that helps to explain the extraordinary speed of the procurement with the contracting authority - the Victorian State Government - formally beginning procurement of the project just a year after announcing plans to build a desal plant.

Expressions of interest for the project were opened in June 2008, then closed a month later. Two consortia were competing for the project:

• AquaSure - Degrémont, Suex Environment, Macquarie Capital Group and Thiess
• BassWater - Veolia Water, John Holland and ABN AMRO Australia

AquaSure was announced as the preferred bidder on 30 July 2009. 

The contract with AquaSure allows the Government to order anywhere between 0 and 100 per cent of the plant's capacity, in set block increments, depending on climatic conditions.

Financial close for the project was reached on 2 September 2009 - with construction beginning during Q4.

The Project

When built the facility - located at on the Bass Coast near Wonthaggi southern Victoria - will produce up to 150 billion litres of water a year, with the possibility of future expansion to 200 billion litres.

The plant will consist of:

• 150 GL pa capacity desalination plant
• intake and outlet tunnels, 85km transfer pipeline,
• underground power transmission line and
• 63MW wind farm to power the plant

Financing

The transaction was successfully financed with 12 MLAs. The following banks collectively provided Aus$3.671 billion (US$3.15bn) in debt as MLAs on the project:

• BBVA - US$223 million
• HSBC - US$219 million
• National Bank of Australia - US$210 million (lead arranger)
• Westpac - US$210 million (lead arranger)
• Santander - US$210 million
• Intesa San Paolo - US$210 million
• Sumitomo Mitsui - $105 million
• Bank of Tokyo-Mitsubishi UFJ - US$84 million
• Dexia - US$84 million
• ICBC - US$84 million
• Macquarie - US$84 million
• Mizuho - $84 million

Debt finance was arranged in a single tranche with a seven-year tenor with the following pricing:

• Years 1-5 = 350bp
• Year 6 = 375bp
• Year 7 = 400bp

Equity totalling US$646 million was provided by seven institutions with the following breakdown:

• UniSuper - 26 per cent - US$168 million
• GDF Suez - 21 per cent - US$136 million
• Samsung - 21 per cent - US$136 million
• Itochu Group - 13 per cent - US$84 million
• Macquarie - 8 per cent - US$51 million
• HSBC - 6 per cent - US$39 million
• Theiss - 5 per cent - US$32 million

An export credit facility of US$252 million - included within the senior debt figures - was also created. The facility is supported by the following MLAs:  

• Australia and New Zealand Banking Group US$50 million
• BBVA - US$54 million
• HSBC - US$92 million
• Société Générale - US$54 million

The debt:equity ratio on the project was 84:16.

In November the MLAs successfully syndicated the debt. The syndication was 53 per cent (US$400 million) oversubscribed, bringing the total number of institutions involved to more than 30.

For the authority PwC provided financial advice while Corrs Chambers Westgarth offered legal counsel.

Future Developments

While the PPP market in Australia remains healthy the flow of deals reaching financial close has lessened since Victorian Desalination.

While the Peninsula Link road project [Projects Database] reached financial close successfully - others such as the Adelaide Prison Centre [Projects Database] and Sydney Metro [Projects Database] have either been suspended or scrapped altogether.

However, while these setbacks are disappointing they should not detract from the fact that Australia remains an attractive location for PPP.

The country has a sound regulatory environment, local expertise and a stable currency which are fundamental to calculating and managing risk on large scale project financed projects. Furthermore while deal flows have lessened they have not halted entirely with Ararat Prisons [Projects Database] to close during H1 and plans for a national broadband network [Projects Database] are proceeding apace.

Conclusion

Considering its size and complexity, Victorian Desalination reaching financial close within two years is nothing short of remarkable.

The project represents the largest public sector investment in water infrastructure in Australia's history and the state authorities should be commended for their support of the project.

The State Government went so far as to include refinancing support in the financing structure in the event of a market dislocation event - which undoubtedly helped to create certainty over future refinancing risk and allow the procurement to stay on schedule.

While the project itself cannot be taken as an accurate indicator of the Australian market in itself, it does reinforce the country's commitment to large-scale infrastructure projects in what remains a challenging time for the market.

The project at a glance