The difficult conditions presently being experienced in overseas and domestic debt markets are not expected to continue indefinitely. Anecdotal response from industry suggests that equity and debt finance will continue to be available for PPP projects in the sub-$300 million capitalisation sector of the market. However, as noted, lending criteria will be tougher and projects with lower delivery and operational risk profiles are more likely to raise capital than those with projects carrying greater risk burdens. This is a view supported by the capital market survey (Appendix 3). In this latter category are projects requiring high levels of innovative design or technology, patronage risk and greenfield land transport projects.
A significant part of the problem for PPPs in Australia is the wide use of IPOs and medium-term corporate finance as opposed to long-term project finance more common in Europe and the United States (Regan 2007b). The IPO may not be an option in the foreseeable future and medium-term corporate debt may be difficult to source. However, financiers and credit rating agencies report that larger projects with lower overall credit risk will continue to attract long term project finance. Project finance creates a problem for the Australian PPP financing model for several reasons including the early stage refinancing to capture shift in the risk and return profile of the project, the preference for early stage contractor withdrawal, and an inability to extract the preferred risk and incentive framework favoured by local firms.
Adverse market conditions also present opportunities and Australia's capital market has proven adroit in developing innovative financial solutions designed specifically to facilitate investment in this asset class. The stapled security, deferred equity contribution and composite group structure are examples of this. Superannuation fund managers and institutional investors are attracted to this asset class because of its investment characteristics which include:
● High capital intensity and EBITDA margins
● Low variable costs and high yield in maturity
● Indexed long-term cash flows
● long-term investment horizon that is well matched to the tenor of fund liabilities.
This group of investors have a reduced appetite for delivery and forecasting risks associated with land transportation projects. However, as projects shed early-stage risks and revenue streams mature, these projects are more attractive to fund managers. Further innovation in structuring PPP projects for listed and unlisted investments may well target the quarantining of early stage project risks with a view to attracting earlier participation by fund managers.
Further innovation in the PPP model is also a possible response to present market conditions. PPPs are a hybrid procurement form that has proved remarkably resilient since its first use in Australia with the Sydney Harbour Tunnel in the 1980s. Continued refinement of the model to meet changed circumstances including the withdrawal of franchisees, the apportionment of windfall gains, extension of the model to complex social infrastructure services including specialised applications in corrective services, the health sector (Royal Children's Hospital, Royal Women's Hospital) and education (schools projects in NSW, Victoria and Queensland).