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Navigating the Challenges of PPP Financing: Insights from the Australian Infrastructure Landscape

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This report discusses the evolution and challenges of Public-Private Partnerships (PPPs) financing in Australia, highlighting the shift from pre-GFC monoline-wrapped bonds to the present funding landscape characterized by reduced market capacity and increased risk aversion. It explores the importance of private debt for effective risk transfer, competition maximization strategies, the implications of government guarantees, and the need for refined risk management mechanisms. The analysis draws on case studies, including the New Royal Children's Hospital and the SE Queensland schools project, to illustrate critical lessons learned in PPP financing.

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Navigating the Challenges of PPP Financing: Insights from the Australian Infrastructure Landscape

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  1. INFRASTRUCTURE & PROJECTS GROUP Guarantees and Government Financing for PPPsPPP Days 201022 March, 2010 ADVISORY

  2. Australian PPP debt pre-GFC • Monoline-wrapped bonds the norm • Market capacity over A$10 billion • Single underwriter • Strong competition • Long tenor debt, close to project term (25+ years) • High gearing • Spreads/margins of c. 0.70% • Strong appetite for usage risk New Royal Children’s Hospital, Melbourne

  3. What are the problems now? • Most monolines closed • Capital markets effectively shut • Bank market: • Capacity has contracted • No underwriting • Loan tenors of 5 – 7 years • Other terms more conservative • Short commitment periods (90 day max) • Margins c. 3.00% • No market appetite for usage risk

  4. PPP fundamentals remain strong • Value for Money to Governments • Attractive to contractors, operators and financiers • Stable, high quality, long-term revenues • Well defined, sensible risk allocation • Underlying credit rating is low investment-grade Schools PPP project, Victoria

  5. Why do we need private debt? • Without private finance, risk transfer is ineffective • Limited availability of equity finance • Lenders bring rigour and discipline • equity investors are often over-optimistic • due diligence investigations do change bids • lenders’ control mechanisms do prevent problems

  6. How to access capacity most efficiently? • Maximise competition • only require [25%] of debt at bid stage • funding competition for winner • Government underwriting /syndication guarantee • allows access to full market capacity • Government senior debt to cover any funding gap • doesn’t affect basic risk allocation • can be refinanced when market capacity allows but • requires experienced staff • conflict of interest Desalination project, Victoria

  7. Other solutions have problems • Government financial guarantees • substantially reduce risk transfer • Capital grants • distort risk allocation unlessrelatively small • Supported Debt model • has complex inter-creditor issues • doesn’t really address market capacity SE Queensland Schools

  8. Government may need to share refi risk • Refinancing risk is a direct result of the GFC • Risk is essentially one of debt margin • PPP Co bearing it may not be VFM • Government bears this risk already on its own debt • Risk is similar to insurance risk after 9/11 However • PPP Co should be incentivised to manage its finances • Risk upside must not lead to super-profits for PPP Co

  9. Possible refinancing risk sharing mechanism + -

  10. Government can accept uncommitted debt • Many countries do not require committed debt in bids • How to mitigate risk of changing terms • lenders commit to terms for as long as possible • lenders commit to rest of bid • any changes to finance terms must be fully transparent • reconfirm finance terms before final evaluation • move rapidly to financial close

  11. Governments need to mitigate usage risk • “User pays” PPPs are attractive • they limit budget impact • Government could guarantee minimum usage • lenders likely to base debt amount onguaranteed level • equity could have a large upsideunless capped or shared • Government could remove usage risk • make payments based on availability and performance • fund these payments from user revenue Hills M2 Motorway, NSW

  12. Presenter’s contact details David Asteraki Director, IPG, KPMG +61 2 9295 3858 / +61 450 958 348 dasteraki@kpmg.com.au www.kpmg.com.au

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