The nature of financing PPPs in NSW has changed dramatically since the construction of the SHT. Early economic infrastructure PPPs were primarily driven by contractors and tended to lack the type of consortium structures seen today - that is, there was not necessarily an investment bank directly involved, or other third parties contributing equity.
Due to contractors having limited balance sheet capacity, equity did not feature prominently in a project's capital structure,17 with initial projects being mostly financed with bank debt.18 This situation has changed remarkably over the last decade, with PPP financing structures potentially evolving further as a result of the Global Financial Crisis.
While the SHT was totally debt funded, the financiers, being risk adverse, were not willing to take patronage risk, which ultimately had to be underwritten by Government. The development of the toll road model has seen financiers willing to take patronage risk, as illustrated by the Cross City Tunnel project.
In recent years, the financing of PPP projects has become complex. This can be partly explained by the skills a consortium acquires with the Australian investment bank driven model, and also reflects the development of new financial instruments in the market.
An example includes the move away from traditional bank debt, to raising finance in debt capital markets. Financing packages have incorporated credit wrapped CPI indexed annuity bonds, providing an extremely competitive cost of funds. The ability of the private consortium to hedge out its interest rate exposure through an appropriate swap derivative, gives the Government MSP certainty. This type of debt has been used in projects such as the Rail Rollingstock, Orange Hospital and Lane Cove Tunnel projects.
Credit wrapping bonds, through a monoline insurer, has enabled BBB projects to issue AAA bonds in the capital market, allowing long term finance to be raised at a lower cost than would be available from other sources. The onset of the Global Financial Crisis and the demise of the monoline insurers, means that credit wrapped capital market bond issues are no longer a source of PPP debt finance.
The downgrading of the monoline insurers has had no effect on existing NSW PPP projects, as the insurance contract is between the monoline insurer, the project company (issuing entity) and the bond investors. The insurance policy will only be called if the project company defaults on its interest payments to bond investors. The downgrade of the monoline insurers, however, has impacted on the credit rating of the underling bonds that have been issued off the back of recent PPPs. For example, Rail Rollingstock bonds have been re-rated by Standard & Poor's to BBB+.
Since the onset of the Global Financial Crisis, there has been:
■ illiquid bond markets
■ no securitisation
■ unprecedented increases in credit margins
■ a thin domestic banking market as a result of foreign capital flight
■ the need for the domestic banking market to fill the "debt gap"
■ banks now taking a more risk adverse approach to funding - seeking to limit their exposure to individual projects
■ combining to make it increasingly difficult to obtain debt finance for PPPs in the current market.
Current market conditions may yield further innovation in PPP financing structures, which may incorporate various forms of Government support and a move back to bank debt. In developing alternative financing models, the NSW Government will be cognisant of the following:
■ the primary consideration is that any future asset acquisition and financing arrangements are to be managed in terms of efficient service delivery, rather than to generate rates of return for private sector investors
■ the challenge is to design mechanisms to encourage long term investment in public assets that can provide the required services that are value for money.
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17 Graham, D. 1997, Transport Infrastructure - public or private? Transport Engineering Australia, vol. 3 no.1. page 11.
18 ibid. page 11.