Case Study: Cross River Rail marks construction shift

06 September 2019 - 12:00 am UTC

CIMIC and SPV financial adviser Macquarie Capital held celebratory drinks in Sydney’s inner city suburb of Darlinghurst on 30 August to mark their win of the AUD 4.5bn (USD 3.06bn) Cross River Rail PPP in Brisbane getting underway, a full six months since the deal was awarded to a CIMIC-led Pulse consortium.


Delaying the get-together allowed for the deal to reach financial close on 1 July as well as a 25 August signing of the project’s second major contract – the Rail, Integration and Systems Alliance, which was also won by a CIMIC-led consortium.


The time taken to finalise the contracts pales by comparison to how long it has taken to actually get the project going in the first place.


Two previous plans for a new public transport tunnel – including one involving buses and trains – going back to 2010 under Brisbane and the Brisbane River had already been scrapped by previous governments.


The present Labor government launched this third plan in April 2016.


It took until August the following year for the government to announce how it would procure the project, including a Tunnels, Stations and Development PPP covering much of the value of the 10.2km project, including building 5.9km of tunnels under the city and the Brisbane River and four new stations.


EOIs were due by November that year, the month the government won a second term in the state elections. A shortlist of three was announced by February 2018.


Construction woes 


The Pulse consortium comprises CIMIC Group, and its subsidiaries including builder CPB Contractors, its financier Pacific Partnerships and operations and maintenance contractor UGL, along with Dutch equity investor DIF and construction companies BAM and Ghella.


Investor Equity shareholding Equity amount (AUD m)
CIMIC 49% 102.56m
BAM 15% 31.40m
DIF 25% 54.42m
Ghella 10% 20.93m
TOTAL   209.31m 



But a few eyebrows were raised when CIMIC’s CPB Contractors and UGL – along with AECOM and Jacobs, HASSEL, RCS Australia, Acmena, Martinus Rail and Wired Overhead Solutions – also won the Rail, Integration and Systems Alliance contract.


That contract will upgrade seven existing stations, install rail infrastructure in the new tunnel and integrate the project into the existing network.


One adviser said it was not uncommon for the CIMIC group companies – when they were known as Leighton Holdings – to compete against each other, but it was now rare for a single group to win two main contracts on a major project. 


On this occasion it made for a tricky dance to get both contracts signed.


“It is quite hard to sign the deal because half of the directors were on the alliance [contract] side,” the adviser said. “You had to sub divide your board all the way down so that you can ring fence decision making. You literally don’t have the right people to [sign off on the deal].”


Pulse was up against Qonnect Finance, including Capella Capital, John Holland, Lendlease and QIC Global Infrastructure; and CentriQ Partnerships, including Plenary, Acciona, GS Engineering & Construction, Salini Impregilo and Spotless Group.


Just three months after the shortlist was announced, Acciona said it was suing the NSW government for AUD 1.1bn in losses it had incurred on the then AUD 2.1bn (AUD 2.8bn now so far after cost blowouts) Sydney Light rail project.


Going with the CentriQ group, which had a contractor in the midst of a high-profile court battle, was seen as risky for the Queensland government. 


For Qonnect, the handicap was Lendlease. During the tender Lendlease announced a shock AUD 350m writedown in its engineering and services division and flagged it was considering selling it.


CEO Steve McCann said it would stay in consortia already formed to bid on PPPs but would pull its engineering arm out of any new ones. Capella Capital itself has continued to bid for PPPs, but the market suspected Qonnect would not have put in an enthusiastic bid for Cross River Rail.


Another trend that became clear in Cross River Rail was the construction companies’ push to take equity in the project. CIMIC has 49% of the AUD 209m, DIF 25%, BAM 15% and Ghella 10%. Construction companies are keen to not only avoid going broke, but use their newfound market power to push for better returns. 


Alliance jitters


Meanwhile, on the eve of a winner being announced for both the PPP and Alliance contracts, Laing O’Rourke – a builder in one of the two shortlisted consortia for the Rail systems alliance contract –  was banned from operating in Queensland by state regulator the Building and Construction Commission.


It said Laing O’Rourke had not met the minimum financial requirements of new laws that came into effect on 1 January. It did not eventually involve the builder losing its license but was considered a bad look to award contracts to it. That said, it is not known whether Laing O’Rourke’s problems were the reason its consortium lost.


Advisers and bankers Inframation spoke to consider CIMIC an obvious favourite given their track record, but raise questions about its capacity to take on more. 


There are signs, however, that new construction competitors are setting up shop in Australia to chase the big deals on offer.


Recent PPPs like North East Link and Inland Rail have attracted more than two viable bid consortia, despite the projects’ large size. Several sources say that up to two Chinese-led consortia were trying to form to bid on the North Link motorway, although only the three named this week made it in the end, one of which includes a Chinese construction firm.


But losses on big fixed-price contracts is a global problem and is likely to continue to dog large PPP tenders for some time. The latest is US contractor, Fluor, which reported a big slump in profit at its 2Q result in early August, as reported, largely due to cost blowouts in fixed-price government infrastructure projects.


It was looking to make its first bids on PPP deals in Australia on the North East Link and Inland Rail deals, but pulled back.


Political issues


The Queensland Labor government has long berated the federal Liberal-National coalition for not helping fund its signature project.


The federal government insisted the project business case had to be given the tick by Infrastructure Australia (IA) before it would commit, despite giving billions to the Western Australian government for its MetroNet rail project when it was not even on the IA priority list at the time. 


IA in the end rejected the Cross River Rail business case, saying the costs would outweigh the benefits and the Queensland government was forced to fund it fully itself. 


Deputy Premier Jackie Trad has ministerial responsibility for Cross River Rail.


She was also facing a possible corruption investigation by the state Crime and Corruption Commission (CCC) over allegations she and her husband failed to declare they had bought a house near one of the project’s planned new stations in March before the winning bid was announced.


However, on 6 September, the CCC said it would not investigate the allegation as it only deals with matters that could lead to a criminal conviction. “No evidence or information was identified that supported a reasonable suspicion of corrupt conduct,” it said, adding that the matter is one for parliament to decide whether there has been any breach of ministerial guidelines. 


But it found Cabinet procedures for dealing with potential conflicts of interest were inadequate and made recommendations to reduce the risk of corruption occurring.


Meanwhile, members of one of the country’s biggest construction unions, the CFMEU, marched to state parliament on 22 August demanding Trad resign and the Cross River Rail Delivery Authority be scrapped.


Cheap debt, high gearing


It perhaps isn’t surprising, but the Pulse consortium’s win on Cross River Rail may have simply come down to price.


All bidders would have benefited from a host of international banks hitting Australian shores in recent years to chase the big projects on offer, but several bank and adviser sources said the Pulse consortium was able to borrow for the project on low margins. 


One possible sign of this is that Cross River Rail did not include any Australian banks. European and Asian banks – some of which are new to this market – are willing to take low margins to get a toehold here, say some bank observers that have been established in Australia for longer.


One source at a large local bank lamented they missed the final cut for the winning bid group when they weren’t prepared to lend at the low margin.


Another banker at an Asian bank that also missed out agreed the margin was “aggressive to win the bid”.


​​​​​​The 11 banks that did make it to provide the AUD 4.38bn of debt are outlined in the table below. The debt was split across four tranches of 4.8, 6.6, 6.6 and 7.1 years, including a capex, two term loans and revolving credit facilities.



Cross River Rail debt lenders 
Banco Bilbao Vizcaya Argentaria (BBVA)
Credit Agricole CIB
Intesa Sanpaolo
KfW IPEX-Bank GmbH (KfW)
Societe Generale
Standard Chartered
Sumitomo Mitsui Banking Corporation (SMBC)
Sumitomo Mitsui Trust Bank (SMTB)



Total equity was AUD 209.3m, so debt was at 95%. 


PPPs are highly geared, particularly now with record low interest rates, but 95% appears to mark a new high, according to several advisers and bankers. Most PPPs in Australia in the past couple of years have been 90% debt.


However, perhaps the most comparable project – Melbourne’s AUD 3.6bn Metro Tunnel rail PPP – had a debt-to-equity ratio of 93:7.


The lack of Australian banks likely also reflects CIMIC – which is majority owned by German parent Hochtief and ultimately Spain’s ACS – bringing in its offshore relationship banks, said a source at one of the banks in the group. 


“The local banks know the market better and will pick up on important things we can miss,” he says. “If they are not there you worry what’s wrong with the deal.”


Just before financial close, a couple of the individual banks were reducing their exposure by selling down some of their debt. Sources said these included the French banks, SocGen and Credit Agricole.


CIMIC and the Cross River Rail Delivery Authority were asked to comment for this article but didn’t respond.


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