After the Magic Circle by-passed Melbourne, pessimists suggested that the market was destined for
obscurity – but local lawyers tell ALB’s Renu Prasad that they intend to remain optimistic.
Melbourne lawyers are damned with faint praise. While Magic Circle newcomers Allen & Overy and Clifford Chance have been courteously deferential to Melbournians and the strategic importance of this market, they have not established offices there. It is a mixed blessing for local lawyers.
“International firms are clearly targeting Sydney and Perth and Melbournians must be thinking about
what that means,” says Hall & Wilcox managing partner Tony Macvean. “On the one hand you wonder if Melbourne is decreasing in relevance, on the other hand it’s an opportunity – top tier firms have to direct their attention to those international firms, so potentially they’re going to take their eye off the game down here which means the market is opening up for us.”
It may be just parochialism in action, but some Sydney lawyers are already predicting the demise of Melbourne as a major centre. “Melbourne is the next Adelaide,” declared one top tier partner.
“Sure, they’ve got some blue chips and the banks down there, but I’ll bet that a lot of their legal work
is done in Sydney. Then you’ve got BHP which is officially headquartered in Melbourne – well how
much of their legal work is being done down there, and how much of it is being done in London by
Slaughter and May?”
The assumption is that Magic Circle firms have made a conscious decision to absent themselves from Melbourne, an inference which Mills Oakley CEO John Nerurker challenges. He believes that the choice of Sydney was tied to the fact that the parties involved in both Magic Circle mergers happened to be Sydney-based. In other words it was relationships, not geography, which was the determinative factor. “I
don’t think it says anything about the Melbourne market place whatsoever,” he comments. It is also true that some top tier firms are continuing to invest i Melbourne in a highly visible way – for example, Clayton Utz recently bsorbed local workplace relations firm Tindade, Farr & Pill. The firm is also looking to expand its corporate practice ad has already made lateral hires sch as ex-Holding Redlich partner Michael Linehan.
Melbourne lawyers concede that their market may not have the excitement of the resources boom or enjoy the cutting edge transactions to the same extent as Sydney, but they believe that there is still plenty of work to go around. “There is still plenty of business down here - lots of corporate work, panels, mid-market work and high net worth families are Melbourne based,” says Macvean. Most of these firms have
enjoyed steady revenue growth – Mills Oakley, for example, has had double digit growth for the past seven years and is on track for 22% growth in FY2011, while Hall & Wilcox is expecting 18% growth and Maddocks is expecting between 15 to 20% growth. Firms were still finalising their
revenue figures at time of writing.
Referral work
If Magic Circle firms are absent from Melbourne, it is likely that they are referring work to Melbourne firms – but to whom? None of the local firms interviewed by ALB was prepared to be quoted on the subject and indeed the question appears to be a sensitive one.
Allen & Overy’s Grant Fuzi said that his firm had cultivated relationships with local firms where necessary, but preferred not to disclose those firms. It is therefore perhaps understandable that local firms felt that it was inappropriate to discuss their Magic Circle relationships, if that was the wish of their de facto client.
This reticence extended not only to Allen & Overy and Clifford Chance, but also other international firms with whom Melbourne lawyers have built relationships. “These agreements are gentlemen’s agreements - it’s about being respectful and courteous,” said one partner. “Also, I would not want my firm’s arrangements publicised because that might preclude us from being approached to do work for other overseas firms – they might assume that the relationship is exclusive.”
It would be misleading to suggest that there is a hidden trail of lucrative work running from Melbourne to Sydney – both Allen & Overy and Clifford Chance are still in their infancy in Australia and perhaps
these relationships have not had time to evolve. Clifford Chance managing partner Mark Pistilli points out that his firm has barely had six months to organise its affairs.
In the longer term, Pistilli says that Clifford Chance will have a preferred list of firms, but that list will not
be exclusive. “We won’t align with anyone – we want the best expert that’s available and if you make that kind of undertaking, you may not always get the best,” he says. Pistilli says that no formal talks have taken place with Melbourne firms as to who will be a “preferred” provider and says this is more likely to evolve naturally.
In the meantime, Clifford Chance has adopted a mixed approach to Melbourne: it has undertaken some of the work in Sydney and Perth and has also referred one matter to Gadens and another to Hall & Wilcox. “They’ve handled it well, and no doubt it’s an opportunity for them to develop those relationships too,” Pistilli observed. He has also had approaches from around Australasia from local firms interested in representing the Clifford Chance brand in markets such as Melbourne and Adelaide and Auckland. However, the firm will not be pursuing these options at this point.
Stability
Lawyers report a sense of stability in Victoria which has been lacking in other jurisdictions. Brisbane has had flood waters lapping at its CBD; Sydney has struggled with a turbulent political environment but in Melbourne the story has been “business as usual”. It is true that there has been a change of government , but the platform of the new Coalition government was not regarded as being significantly
different from that of the previous ALP regime. Some changes in policy direction in areas such as PPPs have been mooted, but lawyers say that the political environment has not had the same distracting effect
that it has had north of the border.
“I’ve spoken to property developers in Sydney towards the end of the last regime – not only did they have the business problems of access to credit, but they had the political overlay to deal with too,” recalls Herbert Geer managing partner Bill Fazio. “They were asking what was happening with planning and infrastructure and all that stuff and expecting a change in government. So there was a bit of a hold
back effect.”
This situation is unlikely to be quickly resolved post election as the new NSW government has a clear
mandate to make sweeping reforms. Fazio contrasts this to the situation in Victoria: “Even though we had a government change here I don’t think we’ve changed enormously in terms of what the government is hoping to achieve,” he says. “Overall, the business climate has been just a little bit kinder to people in Victoria.”
Lawyers report that mid-market M&A is starting to pick up. “The succession of large family owned businesses has been contemplated for some time, but now we’re starting to see that happen,” says
Tony Macvean. “Large family businesses are either transferring control to the next generation or they’re selling out by way of trade sale or to private equity.”
At Mills Oakley, the Melbourne M&A team has seen fee growth “in the mid 20s”, according to Nerurker. “That is symptomatic of a higher degree of activity,” he says. “Businesses have to do deals. A whole generation of baby boomers are getting set to retire over the next ten years, they’re divesting
themselves of their businesses. People can’t put their lives and plans on ice forever – you can wait a year or two for the economy to warm up, but after that if people want to sell, they want to sell. And likewise for buyers.”
The activity is not confined to family businesses. Macvean nominates superannuation funds and financial planning as two other particularly active areas for M&A, while Maddocks CEO David Rennick says that some of the activity has a distressed feel to it. “However, there is far more positive activity,” he observes.
PPPs – the great Victorian tradition Victoria has long been one of the leaders in the Australian PPP space and the state has continued its tradition of innovation. Last year, when conspicuous PPP motorway failures such as Brisbane’s CLEM7 and Sydney’s Lane Cove and Cross-City Tunnels had soured private sector enthusiasm for such projects, lawyers devised a new availability model PPP concept which redistributed patronage risk. Victoria’s Peninsula Link motorway, facilitated by Clayton
Utz (government advisors), Freehills (advising the lenders) and Mallesons (advising Southern Way Consortium), is regarded as an important step in the evolution of the PPP concept, particularly in relation to motorway projects. The motorway is now under construction.
Peninsula Link was an example of the enthusiasm with which the previous Victorian state government embraced the PPP concept. Another notable PPP was the Victorian desalination plant, facilitated by Clayton Utz (AquaSure consortium), AAR (Thiess), Corrs (Victorian government) and Mallesons
(senior financiers). But times are changing. A new Liberal government took office in November last year and there is a new culture of scepticism surrounding the mega-projects which were heralded with so much fanfare during the GFC.
This is a political narrative which mirrors that of Canberra: while the previous Victorian government was
anxious to boost the economy with a series of “shovel ready” projects during the GFC, the debate has now moved to fiscal responsibility. Like its Commonwealth counterpart, the Victorian Coalition has been
critical of alleged wasteful conduct by the ALP. “They are very focused on strong fiscal management - all
Liberals want to own that ground,” says Fazio. “That will be an inhibitor to the really big projects in the short term that aren’t 100% demanded by the population.”
The situation is aggravated by the fact that some of the flagship Victorian PPPs have run into trouble.
The desalination plant has been beset with delays and industrial disputes and contractor Leighton Holdings has revised its budgeted profit for the project downwards by nearly A$300m. Meanwhile, the Peninsula Link project has been criticised in a recent report by state Auditor-General Des Pearson, who questioned the appropriateness of the PPP model in this particular instance, finding that the tender process may have been skewed towards the PPP process to the detriment of the public sector
alternative. The new government, which has been particularly critical of the previous government’s handling of PPPs, has asked the Public Accounts and Estimates Committee to conduct an enquiry into how the process can be improved.
It is difficult to say how much of this debate represents a genuine challenge to the viability of the PPP model and how much is a criticism of the execution in these particular instances or this particular political context. While a complete departure from the PPP concept is unlikely, lawyers are watching the political landscape with great interest “There is a sense of nervousness as to which way the state will go,” says Mallesons partner Jeff Clark. “Everyone is looking for a clear statement of policy and understanding of what their focus is going to be and the priorities for the next couple of years.”
Lawyers are generally confident that there will be no wholesale departure from the PPP model. “I don’t believe it’s dead,” says Freehills partner Josh Sgro. “They might be looking at different ways these assets might work, for example slightly different models where you have government setting up
its own project company. There might be variations on a theme, but there will still be a lot of scope for private sector finance and involvement, otherwise the projects just won’t be delivered.” David Rennick is of the same view: “They are always looking at revising the model and trying to get it right,” he says. “The bottom line is that government at all three levels does not have the money to fund the infrastructure that is planned and required. The private sector has to get involved - call it PPPs, whatever you like - the reality is that infrastructure is going to have to be delivered using the private sector.”
Despite the cautious approach, some projects are proceeding. Examples are the A$1bn Victorian Comprehensive Cancer Centre in Parkville, which at the time of writing was awaiting an announcement as to the winning consortium. Many firms including Clayton Utz, Gilbert + Tobin, AAR and Freehills have assisted in the bidding process while Minter Ellison is the government advisor.
Contracts have also been let on the A$390m Ararat Prison project, the first Victorian social infrastructure project to be procured in accordance with the National PPP Guidelines approved by COAG in 2008. Minter Ellison is again the government advisor. The A$528m New Bendigo Hospital is also in the
development stage. These projects are now regarded as a certainty to proceed, although there have been notable delays by the government which had prompted speculation to the contrary earlier this year.
The general feeling is that the pipeline of projects is not as strong as it was 18 months ago and lawyers
are eyeing the possibility of a new generation of projects such as a new container terminal at the Port
of Hastings and expansion of the underground railway network. Again, firm announcements have not been forthcoming to the extent that lawyers perhaps might have hoped. “They’ve got a range of options,” observes Josh Sgro. “We know they’re looking at them - it’s just a question of when they come to market.” The government has introduced legislation to establish an independent Port of Hastings
Development Authority in anticipation of future development of the port.
Energy
Victoria, with its vast reserves of brown coal, will be particularly affected by the introduction of a carbon price. While coal-fired power stations are commonly found across Australia, Victoria is noteworthy for its heavy use of brown coal, which emits more carbon than other types of coal. The state’s energy producers therefore have a particular interest in the outcome of the carbon price policy debate. “This is something that is hanging over the heads of the existing electricity generators and their current financings and their prospects of investing in future generation capacity,” says Jeff Clark.
Brown coal has become a highly contested issue. Energy company HRL recently won an approval to construct a new brown coal plant in the Latrobe Valley, but only at half of the capacity it had sought and not without significant community opposition and the prospect of legal action by environment groups.
The viability of the project now hangs in the balance, a situation aggravated by the uncertainty over carbon pricing. It’s a problem replicated across the state as energy generators ponder their
investment decisions.
“There are a number of power stations which have debt which is coming up for renewal in the next 12 months and that’s proving very problematic,” says Clark. “Lenders aren’t going to be comfortable allowing an energy generator to operate as per normal in circumstances where there is significant
uncertainty which may impact on the feasibility of the whole company.
Generally what they’re requiring is that any surplus cash flow is either locked up or applied to debt
retirement and they are not allowing it to be paid to the shareholders in the generating company. Any debt extensions are going to be relatively short term because people aren’t prepared to commit for any length of time. No one is going to invest in any new technology or any new power stations while there is uncertainty as to what the final scheme will be.”
But there is more to the Victorian energy story than brown coal. The state is regarded as a leader in wind
farm technology and is set to be home to the largest wind farm in the southern hemisphere, the AGL
Energy/ Meridian Energy project at Macarthur which was facilitated by AAR (Meridian), Freehills (AGL) and Norton Rose (AGL).
The Macarthur wind farm received approval in 2006 and since then there has been a steady flow of new
wind farm approvals by Victorian authorities. These have ranged in size from as few as 14 turbines through to Origin’s 157 turbine project at Stockyard Hill, west of Ballarat. Five Victorian wind farm projects received approval last year.
The fact that a project has been approved does not necessarily mean that construction will commence
immediately. The legal work stemming from a wind farm ranges from environmental approvals, financing, construction contracts and off-take agreements and much of the work to date has been at the earlier stages of this process. “It is fair to say in Victoria that, because of the nature of the market,
we’ve been doing more of the permitting process to date,” says Freehills partner Tim Power. “What I expect to happen once the market improves for building wind farms is that things will bereversed - we will probably end up doing more work in terms of commercialising projects when clients get ready to
actually go out and build.”
The reason why many projects have paused at the approval stage is that the market for wind energy is
regarded as sub-optimal at present. “The business case for building a wind farm depends on electricity
prices of course, but it also depends on whether you got an off-taker for the electricity, which some wind farm operators are finding challenging at the moment,” says Power. “It also depends on price for Renewable Energy Certificates (RECs). At the moment the REC price is quite depressed. So until there is better alignment with some of those things, which isn’t expected to happen for a year or so, we won’t see too many more wind farms being built.Hopefully over the next 12 to 18 months these projects will start to come into the bankable stage and will
be ready to go.”
Some commentators believe the REC price may not recover to economic levels until 2014 – still some time in the future, but not so far ahead that operators have the luxury of an extended period of inactivity. “You got to make investment decisions well beforehand so you can hit the market when those REC prices are good,” observes Power. As with other large projects, midsize firms will expect to play a part
once development begins in earnest.
Herbert Geer, for example, has already been involved in the Macarthur project, advising electricity regulator AEMO on the negotiation of off-take arrangements. “These project usually have a few layers,” says Fazio. “So you’ll have someone acting for the equity side of things – and we were on the off-take
agreement side to interconnect with the network for the electricity regulator.”
