Aus & NZ: PPPs hit a purple patch

08 February 2018 - 12:00 am UTC

Despite political backlashes to privatisations in Australia and New Zealand, the pipeline of PPP is looking rosier than it has in years, writes Shaun Drummond

The next few years were already looking bright for public private partnerships. Then, in the midst of the January holiday season in Australia, Victoria quietly flagged the AUD 16.5bn (USD 12.9bn) North East Link was to become the country’s biggest ever PPP.

The PPP aspect of the road is likely to at least equal the USD 7.51bn total value in the five PPP deals that reached financial close in 2017, according to Inframation Deals.

The move is all the more remarkable given political sensitivities surrounding PPPs and the fact that a left-leaning Labor government endorsing is it in an election year.

Despite procurement not formally beginning until after the November election, North-East Link Authority chief executive, Duncan Elliott, is on a tight timetable given the mammoth size of the project as he is still in the throes of market soundings to work out exactly what the PPP will cover. The 26km project will include 5km of tolled tunnels and adding to and upgrading the adjoining untolled Eastern Freeway.

The government will need an answer before the May budget when it will provide an update on the total cost of the project and how much it will contribute from state coffers. A call for expressions of interest is due by mid-year.

Interested parties had a couple of weeks until the end of January to register their interest and Elliott and adviser EY are about to kick off meetings with the industry, which includes global and local players. These will extend over February and March.

A key consideration is how much finance the private sector will be able to tip in given the size of the deal and the fact that there are numerous other large projects on the go around Australia. Some looking to take part in the project say it could mean more than AUD 2bn in equity for any consortium taking it on.

“The big question that we want to inform ourselves on – given a project of this size – is what is the best way to bring it to market and in what form?,” he says. “It was announced that the core would be an availability PPP. There is an upper limitation of size that the market would have difficulty with. So we need to know what the optimal size of the availability PPP [should be].”

Elliot says the entire project, which will reach financial close in 2020, may need to be broken up into different stages to ensure they have enough competition in the bidding. But this is all yet to be worked out.


Transport dominates

North East Link is one of numerous transport projects being delivered as PPPs or have a good possibility of doing so this year and next. Almost all of them are in New South Wales and Victoria. Despite each state having governments from opposite sides of politics, both have embraced PPPs.

Kate Evans, a partner at PwC based in Melbourne, finds it difficult to recall a time when there were more opportunities on offer for private investors in infrastructure across multiple states.

As well as a great need for new infrastructure to cope with rapid population growth, the activity has been kicked along by the federal government’s asset recycling incentives and most national and state governments establishing lists of priority projects. Under the National PPP Policy Framework established a decade ago, all state and territory governments agreed to consider any project with a capital cost above AUD 50m for a PPP.

“This is certainly one of the highest volume environments  we have experienced in Australia for many years,” she says. “That’s a reflection of an alignment in significant peaks in delivery load across multiple jurisdictions at the same time.”

That includes the biggest PPP in recent times – the AUD 6bn Metro Tunnel – and the Western Roads Upgrade. Both are located in Melbourne and reached financial close in December.

Although there are numerous projects still in the pipeline, she says the volume of deals coming to market between now and the end of the year may reduce in number, but be bigger in value than in previous years. “The pipeline is a little bit thinner for shorter term projects, with a lot riding on the outcome of [Victoria’s] budget process in the coming months,” she says. “There is a mixed shape to the market, with potentially a greater concentration into a smaller number of larger projects.”

The next biggest after Melbourne Metro and North-East Link for now is the the AUD 5.4bn Cross River Rail project in Queensland, where the government is about to call for bids. That will connect with the AUD 944m Brisbane Metro, a new 21km “high frequency” bus network through the city. Brisbane City Council is expected to make a decision in 2018 on whether it will also procure this as a PPP, or just rely on council, state and federal money.

The federal government is also overdue in releasing further details on the procurement timelines for the AUD 3.55bn PPP on a 126km section of the 1,700km Inland Rail project.

The Regional Rail project is the most advanced PPP in New South Wales. The project will replace the state’s entire fleet of aging regional and intercity trains, including 60 XPTs and 50 Explorer trains. The government shortlisted three consortia late last year – including Regional Futures, led by Downer, Bombardier Consortium and Momentum Trains, led by CAF. They are now in the midst of the RFP process, with consortia members next week visiting Dubbo in western NSW, which will be the site of a new train maintenance facility they will also have to build.

According to Brendan Lyon, the chief executive of Infrastructure Partnerships Australia, other transport projects potentially lending themselves to a PPP in NSW include the AUD 4.5bn Western Harbour Tunnel, which will connect to the WestConnex motorway scheme.

The government there is currently consulting with the private sector on funding options for this and is due to announce how it will fund the project in mid 2018.

Infrastructure Australia’s chief executive, Philip Davies, has also highlighted numerous projects on IA’s Infrastructure Priority List coming up in Australia’s eastern states that could readily call for private investment.

These include the “operational components” of Sydney Metro City and Southwest – to run under Sydney Harbour, the city and out to the south west of the city – which could be valued at up to AUD 10bn. Further ahead, Sydney Metro West, to run from the city centre to Parramatta in the west, could be another AUD 10bn PPP transaction, he said.

The state government has said it will make a decision on how to procure the operation of the line this year. Many in the market expect that it will simply extend the concession of the existing PPP owners on the Northwest Metro because the southern line will need to link up with this.

Davies also names the AUD 5bn Western Sydney Airport, even though this is being financed by the federal government, as potentially having potential for PPP, as well as a AUD 480m third runway at Perth Airport.


Social shift

Like others in the industry, Evans says the balance will begin to shift towards more social infrastructure by the end of the year.

Two more PPPs for arterial roads following the Western Roads Upgrades are planned. But most now believe these won’t happen until after the Victorian election in November. 

Industry observers say a large part of the reason for the shift is political. NSW also has an election coming up in early 2019 and new schools, housing and hospitals are likely to be bigger vote winners than another big motorway.

As well as the second phase of NSW’s Social and Affordable Housing Fund, for which the government is now calling for EOIs, Evans says we may see some school PPP projects in both NSW and Victoria.

South Australia is working on PPPs for two schools in Adelaide’s suburbs, although spokespeople for the government still cannot give any details on procurement timing eight months after they were announced in the state budget in June 2017.

Industry sources say the Victorian government is also considering PPPs for another hospital in Melbourne’s western suburbs, as well as for doubling in size of the maximum security Barwon Prison.

Social housing has also been on the agenda in Victoria for some time, with an AUD 1bn equity and an AUD 1bn debt fund established in 2017 to help finance new homes. It is unclear, however when that program actually call for private investors.

But any hint of privatising essential services like health, schools and housing can also be vote-losers.

New Zealand’s new Labor government has virtually banned PPPs or privatisations in social infrastructure, although some projects at a late stage of development under the previous government may still go ahead and private money in transport projects has not been ruled out.

Massey University’s Wellington campus has a student accommodation project out to tender with a bid deadline of 26 February. It has not yet decided how the project will be procured.

NSW tried to make five regional hospitals into PPPs in 2017 but quietly returned all to state funding after a political backlash.


Unsolicited or market led proposals

Fund managers and advisers have also pointed to the rising use of unsolicited or market led proposals (MLPs).

Evans says many of these will not get past the first assessment stage, but as big public privatisations tail off, investors are using this option more.

Transurban has been one of the most prolific users of this system.

MLPs usually require the proponent to have some “unique” advantage for it to get past the first stage. It helps that Transurban is the dominant toll road operator and can argue new toll roads it proposes will connect to its roads, ease congestion on them and it can trade with its existing road concessions, including offering to take the burden of financing a road off the state in return for an extension to its tolls on an older road.

Transurban’s proposed West Gate Tunnel and NorthConnex in Sydney are examples of these.

Another that is still being considered in NSW is Macquarie’s plan to develop the new Sydney Metro Martin Place station, including its new global headquarters in the design.

In Queensland, Transurban-led changes to the Logan Motorway and a cruise ship terminal being built at Port of Brisbane – owned by a consortium including IFM and QIC – were the state’s first MLPs to be approved.

Another potential market-led proposal in Victoria is the Melbourne Airport Rail Link, although this is expected to be several years away.

Along with the high volume of PPPs now coming to market, many point out NSW and Victoria in particular are becoming more “sophisticated”. This involves not just getting the private sector to provide new hardware but entire services, with contracted delivery targets.

“State and territory governments have developed an appetite for outcomes focused contracts,” Davies told the Canada Council for PPP conference in November. “These type of contracts are appealing as they can deliver a considerable cost saving to the state through the service delivery component.”

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