Project finance: Transactional evidence from Australia

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Vol: 1, Issue: 9

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Michael Regan
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The international project finance market is experiencing a period of significant change. The new Basel III capital adequacy rules will make it harder for banks to provide long-term project finance, and alternative sources of finance such as the shadow banking sector, fund managers, sovereign wealth funds, and institutional investors will take time to bridge the financing gap. In the meantime, it is difficult to source project finance for tenors beyond seven years, risk premiums are higher, and finance is difficult to source. Recent innovations in the form of the European Investment Bank’s Project Bond Initiative, and the ASEAN Infrastructure Fund and Bond Market Initiative can provide credit- enhancing support for qualifying projects in the medium term.In several respects, project finance in Australia has been working with similar constraints for many years particularly for the delivery of privately financed infrastructure projects and public private partnerships. Finance typically involves the issue of short-dated debt or bonds refinanced every six to seven years and for some projects, using revaluation and refinancing to lower average cost of capital and replace equity with debt without affecting debt service coverage and loan valuation ratios. This approach requires a stable interest rate environment and the probability that asset values will increase during the early stages of the project during which significant de-risking has taken place.The study uses a cross-sectional analysis of PPP financing in Australia with six case studies, the Eastlink Motorway and Southern Cross Railway Station projects in Melbourne, the Airport Link and Clem 7 toll roads in Brisbane, and the Desalination Plant in Eastern Victoria, and the Reliance Rail project in New South Wales.The Victorian projects were commissioned under the Partnerships Victoria PPP policy framework between 2004 and 2009, which includes the global financial crises (GFC) of 2007-08 and following years. The Reliance Rail project was commissioned under the New South Wales Privately Financed Projects policy, and the two Brisbane toll road projects were contracted under Queensland PPP policy in 2008 and 2006 respectively.The object of the analysis is to identify common characteristics in the way long-term PPP projects are financed in Australia, differences to practices in overseas markets, and lessons learnt that may inform future PPP policy and private finance.