Roland Cartright - Commonwealth Bank of Australia - Financial Models for PPP Projects


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Roland Cartright delivered the presentation at 2014 National PPP Summit.

The National PPP Summit is the leading annual event for industry stakeholders to gather and discuss the issues across the national and global PPP markets. The 2014 agenda reviewed current and emerging financing models as well as showcasing best practice strategies for the procurement process, risk transfer and whole-of-life project management.

For more information about the event, please visit:

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Roland Cartright - Commonwealth Bank of Australia - Financial Models for PPP Projects

  1. 1. Financial Models for PPP Projects Roland Cartwright, Director, Project Finance, Infrastructure Commonwealth Bank of Australia 14th National PPP Summit 04 June 2014
  2. 2. 1 Recent Privatisation Successes Strong demand for brownfield assets Port of Newcastle > 98 year lease sold by NSW for $1.75bn in April 2014 Queensland Motorways > Brisbane road networks sold by QIC for $7.05bn in April 2014 Port of Botany & Port Kembla > Sydney ports sold by NSW for $5.07bn in May 2013 “27% stake in Port of Brisbane sold at EV / EBITDA multiple of 28x ” Nov 2013 “QIC begins trade sale of $6b QML assets” Nov 2013 “Port of Newcastle privatisation kicks off” Nov 2013 NSW seeking to sell poles & wires for $37bn Jun 2014 Port of Newcastle sold for $1.75bn Apr 2014 Queensland Motorways sold for $7.05bn Apr 2014 Port of Melbourne to be sold by either party post November election Mar 2014 Information drawn from various public data sources and websites
  3. 3. 2 Positive Investor Sentiment Institutional investors have a keen interest in infrastructure Top 5 Investor Themes 1 2 3 4 5 Investors are seeking defensive investments Infrastructure offers stable cash flows, a strong yield that has a low correlation with other asset classes and the opportunity for liability matching There is a low risk of loss of capital and in a situation of distress an expectation of high recovery rates Construction risks can be assessed and are accepted in PPP financings but patronage risks are challenging Availability PPPs are used to attract investment into social infrastructure financing where the scope for direct user charges is often limited
  4. 4. 3 Types of PPPs and Funding vs Financing The two classes of PPPs have different funding sources There are two main types of PPPs used in Australia > Economic ■ Funding comes from user charges, such as toll roads or ground rentals paid to a terminal operator or car parking charges collected at airport > Social ■ Funding come from a service or availability payment from the government and is typically used to fund schools, hospitals, prisons and other “social” infrastructure
  5. 5. 4 Traffic Forecasting Risk Project failure due to misjudged demand has undermined a number of projects Troubled projects include: 1 2 3 Road Project failures have been most prominent 4 5 Lane Cove Tunnel: a 3.6km twin tunnel built for A$1.1bn that opened in March 2007 but was sold out of receivership in May 2010 for A$630m, with loss to debt and equity. BrisConnections: a 6.7km twin tunnel built for construction cost of A$4.8bn that opened in July 2012. It went into receivership in February 2013 and debt holders are expected to realise less than 40 cents in the dollar. ConnectEast: a 39km surface toll road in Melbourne built for a construction cost of A$2.5bn. Investors who purchased shares for $1 each in 2004 received just 55 cents for their securities when the road was sold in 2011. Adelaide to Darwin Railway: a 3,000km north-south rail link from Darwin to Adelaide constructed at a cost of A$1.2bn. It has failed to generate a profit since opening in January 2004 and went into bankruptcy despite Government funding. Cross City Tunnel: a 2.1km tunnel built at a cost of over A$1bn that opened in August 2005. It failed and was sold for A$700m in June 2007 before failing a second time when its debt was purchased at only A$475m in March 2014. Information drawn from various public data sources and websites
  6. 6. 5 Responses to a changing PPP landscape Private Sector Parties Governments  Absence of private financing for Greenfields toll roads – The last project that sought private acceptance of the greenfield patronage risk was Legacy Way in 2010. This approach was abandoned when only one bidder was able to obtain the necessary finance.  Transfer of focus to economic infrastructure and existing toll roads with stabilised traffic – Infrastructure investors continue to seek long-term yield assets and have paid between 25x and 30x EBITDA for economic infrastructure – Investment focus has shifted to assets such as capital city landlords ports, and privatisation by long-term lease of assets such as desalination plants and the divestment of the Queensland Motorways  Reduced risk appetite from builders – Construction risks have caused losses on PPP projects with build costs no longer covered by inflated revenue forecasts. Builders have responded by refusing to accept some construction related risks, with these risks remaining with the Government procuring a project.  Roads procured as availability PPPs – Governments have retained the traffic risk and have tendered road projects as availability based PPPs, examples include: • Penlink • EastWest Link • Transmission Gully (New Zealand)  New Funding Models Explored – NSW Government is trialling new models for road financing: • M7/NorthConnex • WestConnex • Privatisation to recycle assets  Operator led and service rich PPPs – Governments are increasingly seeking to transfer the “core” services along with the asset construction and management to the PPP. Examples include: • Ravenhall Custodial Prison • Northern Beaches Hospital
  7. 7. 6 Is a PPP the right model? PPPs can add value where PPPs should not be used when  The infrastructure and services are likely to be required for the full concession term  Changes in service delivery or demand that would lead to modification requests are limited and/or sufficiently defined that they can be reasonably priced by the concession holder  The private sector is able and willing to price risks at a lower cost than it would cost Government to retain that risk  There is scope for private innovation  There is value in the project and contract discipline, on the borrower and also the Government parties, that is provided having external private financing involved in due diligence and also managing the project through construction and operation  The project is of sufficient size (i.e. > A$100m) to cover the establishment costs  The infrastructure, the technology or the service requirement is constantly changing (e.g. telecommunications)  The project outcomes are not sufficiently certain to enable the private parties to develop and price a solution  The project involves risks that the private parties are unable or unwilling to commercially price (greenfield toll road patronage risk currently falls in this category)  For policy or security reasons the Government desires a high degree of control over the project (such as defence projects)  The project involves public interest issues best managed by traditional procurement approaches PPPs account for < 10% of projects procured by Australian Governments & don’t have universal application Source: Clayton Utz: “Improving the Outcomes of Public Private Partnerships” (2013)
  8. 8. 7 Important Information Important information: This presentation, provided by Commonwealth Bank of Australia ABN 48 123 123 124 („Commonwealth Bank‟), is confidential and is provided to you on the basis that you will not disclose its contents to any person other than your directors, employees, agents and professional advisors without our consent. The information provided in this document is the copyright of Commonwealth Bank. This obligation will not apply if the information is available to the public generally (except as a result of a previous breach of this confidentiality obligation) or you are required to disclose it by law. Commonwealth Bank believes that the information herein is correct and any opinions, conclusions or recommendations contained in this document are reasonably held or made as at the time of its compilation but makes no warranty as to the accuracy and reliability of the completeness of that information. The Commonwealth Bank accepts no responsibility for any loss or damage which may be suffered by any person, directly or indirectly, as a result of the material contained in this document. The contents of this document should not be relied upon as a substitute for appropriate/ professional advice or as a basis for formulating business or other decisions. The information contained in this presentation is made available only for persons who are wholesale clients as defined in the Corporations Act 2001. This document is not intended to represent an offer of finance or to issue any financial products, and is based on Commonwealth Bank‟s current understanding of the facts. Further due diligence of the specific circumstances is required to confirm any outcomes are achievable. Any subsequent financing proposal would be subject to Commonwealth Bank‟s formal review and credit approval process, market conditions at the relevant time and documentation. All legal, accounting or taxation outcomes described or alluded to in this presentation are provided without any liability whatsoever to Commonwealth Bank, whether for negligence or otherwise, and are not intended to constitute legal, accounting or taxation advice. The information provided is therefore indicative of what the expected outcomes of the transaction might be, based on assumed facts as contemplated by the Discussion Paper, and should not be relied upon. On this basis, no representation or warranty, expressed or implied, is made as to the accuracy, completeness or thoroughness of content of such information. As actual outcomes will depend on each client‟s specific facts and circumstances, it is with respect to such unique facts and circumstances that we strongly advise the recipient to seek its own legal, accounting and taxation advice.