When Sydney’s A$1.15bn Royal North Shore Hospital upgrade reached financial closure in October 2008, it was the last billion-dollar project to be closed prior to the onset of the global financial crisis. Almost a year later, the financial close of the A$3.7bn Victorian Desalination plant heralded the return of the mega-project.
Lawyers working in construction, project finance and infrastructure groups around the country are now gearing up for increased workflow as the plans for hospitals, roads, and railways are taken off the shelf, dusted off and put out to bid. “As a result of the GFC quite a lot of these projects were stalled, or deferred, for quite a few months,” says the head of Deacons’ infrastructure group Grant Ahearn.
Partner in Freehills’ projects group, David Templeman, says that confidence is returning to the market. “There was a period of time where everything kind of stopped and people were wondering what they were going to do – but there is a mood in the market now that there is a flow of available money and a flow of projects,” he says. “It will take a little while to get back to where it was, but there is confidence going forwards that infrastructure projects and project finance projects will happen.”
This confidence has led to some mega-projects coming back to market, and Mallesons Stephen Jaques partner Mark Upfold expects them to reach financial closure next year. “There are a number of very large projects spread throughout Queensland, NSW, South Australia and Victoria all coming to market and all expected to be bid and closed in the next 12 months,” he says, adding that though the market is still a bit sluggish, some decent-sized deals are coming through.
Those deals include Sydney’s A$4.5bn CBD Metro project, Victoria’s A$4.3bn regional rail project and the A$1.8bn Royal Adelaide Hospital project. According to industry sources, infrastructure spending is expected to exceed A$400bn over the next decade. However, the temporary hold-up in development of some of these projects means that funding is going to remain tight, as every deal will be seeking debt finance at the same time.
“I don’t think the funding problems are over but it’s now a bit easier to get debt funding,” says Ahearn. “A lot of these projects have banked up so it might be difficult getting funding for all of them in a relatively short amount of time.”
Those difficulties were evident even in the Victorian desalination plant deal, with the Victorian government agreeing to be an underwriter of last resort. The private sector was struggling to come up with debt funding at the requisite levels, Ahearn says, so the state government agreed to provide up to A$1.7bn against the construction cost of about A$3.5bn.
Mega-project funding
Funding for the mega-projects is inherently more complex and that leads to more work for legal teams working on the deals – even though the documentation process is effectively the same for a project of A$200m or one of A$3bn. “Interestingly, the documentation for a A$200m or a A$1.5bn PPP [public private partnership] is similar – they haven’t got round to having short-form documentation,” says Ahearn. “But the bigger ones inevitably have more complex issues so they do occupy more time and resources.”
Ahearn’s colleague and the head of Deacons’ major projects group Dan Marjanovic agrees. “There’s one fundamental difference between the mega-projects and those that sit in the medium space of A$100m to A$1bn – and that is the funding,” he says. “Funding for the larger ones is significantly more difficult to achieve these days and so the structuring is more complex.”
However, the struggle for funding major projects also presents an opportunity for law firms that don’t currently have a relationship with one of the parties forming the consortium bidding for any given project. These relationships are vital to winning infrastructure work, says Upfold.
“You need to have a relationship with the key players, the major builders, the major finance houses, and the major advisors who are critical in putting together a team before the lawyers are brought in as part of the overall consortium group to bid a project,” he says. “Firms like ours are always asked to put in proposals to do the legal work because of our track record in the sector, and because there are multiple bidders, we usually end up with at least one role.”
Things are changing in the infrastructure space, however, with many of the traditional lenders having balance sheet issues that prevent them from being as active in the market as they were prior to the global financial crisis. This opens up the door for alternative investors and banks that previously played a peripheral (if any) part in the funding of Australian mega-projects.
Marjanovic says that role is increasingly going to be taken over by the Chinese. “I think that we tend to overlook the fact that the Chinese banks are becoming increasingly relevant to the funding of infrastructure in Australia,” he says. “We’ve been talking about public infrastructure and PPPs but in terms of private infrastructure and project finance, particularly in the resources area, they are becoming increasingly important as a source for funds given the capital-constrained environment we’re facing.”
Deacons has been fortunate enough to pick up mandates with some of the Chinese banks in that space by having a presence in China and having relationships with banks there, Marjanovic says.
Since the funding crisis hit, banks have been unwilling to take on the risk associated with being a mandated lead arranger so the deals have been done on a club basis, rather than in a syndicate. The sheer size of some of the projects means that it will be inevitable that a mix of global banks will be involved, according to Templeman.
“Given the size of some of the projects that are going to hit the market and the amount of infrastructure that is going to be committed to in the next year or so, offshore banks (including European and Chinese banks) are likely to be a source of that finance,” he says. “You’d expect to see them be members of those clubs for smaller pieces of the debt.”
PPPs
As the private sector has pulled back its spending in the wake of the GFC, the government has been there to close that gap, with the most common way of participation through PPPs – although the shape that those partnerships take are constantly evolving. “The delivery of the project as to structure has changed as a consequence of the GFC,” says Clayton Utz head of projects Doug Jones. “The PPP projects obviously ran into various debt and equity issues so there are new models needing to be devised to proceed.”
One example of how the government has sought to bridge inadequacies in the PPP model is evident in Victoria’s billion-dollar Peninsula Link project in Melbourne. After a raft of unsuccessful toll roads around the country, the state government decided to offer the Peninsula Link on an ‘availability’ PPP model. This sees the private partner receiving revenue stream based on the road’s availability rather than its patronage.
The Queensland government has opted to avoid the PPP model altogether for its Northern Link project. “With the Northern Link project in Brisbane, the government is going to build and toll it itself rather than through a PPP structure,” Jones says. “It will then keep the option of subsequently selling the asset once it’s ramped up so there’s been a substantial change to the [PPP] model.”
Lawyers are being asked to come up with innovative funding structures for infrastructure projects. Those that are most able to come up with unique solutions are going to find the majority of the mega-project work going their way. “It does represent an opportunity for lawyers to be innovative and think outside the more traditional ways in which these projects have previously been delivered, in order to meet the needs of the market,” Jones says, adding that changes to delivery models must keep up with the changing market conditions.
“I think it is important to recognise that the changes to PPP delivery models need to be kept under review, in order to ensure that the changing market conditions as the GFC fades are reflected in the way in which these projects are designed,” he says.
The return of mega-projects is a boon to infrastructure practices across Australia. These are the deals that require cross-disciplinary legal teams solving the complex issues that come with the territory of working with up to 20 lenders, several developers and the government on a single deal. Although the financial close of the Victorian desalination plant marked a return to the days when billion-dollar projects were back on the table, it is questionable when, if ever, the market will go back to the halcyon days prior to the financial collapse.
