The Australian state of Victoria is sitting on a cash pile of A$11 billion ($8.4 billion) following the sale of the Port of Melbourne in September and plans to use the proceeds to partner with the private sector on infrastructure projects.
Already the government has announced the building of a Metro railway tunnel under Melbourne’s central business district, the procurement of 65 high capacity trains, the removal of 11 dangerous level rail crossings, and an extension of the Western Distributor road. All are being done under public-private partnerships (PPPs) and are together worth A$19.7 billion.
The pipeline for 2017 is full and includes a A$10 billion North-East Link road project, a A$300 million upgrade to Southern Cross railway station and availability contracts on at least three packages of arterial roads worth about A$1.5 billion each.
All up the government has increased infrastructure investment from an average of A$5.2 billion per year during the previous seven years, to around A$7.4 billion per year for 2016 and 2017. The investment offers a range of opportunities to investors and, for the state, a chance to build its reputation after pulling out of a high-profile PPP deal.
Selling old assets to fund new projects is a popular model in Australia. Victoria’s neighbouring state of New South Wales reaped a whopping A$33 billion in the past three years from privatising its port and electricity assets, and plans to spend A$73 billion on new infrastructure between now and 2020.
Investors openly praise Mike Baird, the outgoing premier of NSW and a former HSBC banker, for his financial savvy and for running a fair process. His successor, Gladys Berejiklian, who held the roles of transport minister and treasurer under Baird, is expected to be similarly accommodating to private interests.
Victoria’s track record, on the other hand, is less than enviable. When Premier Daniel Andrews came to office in 2014 he surprised the market by following through with an election promise to cancel a A$5.3 billion PPP contract with Lend Lease to build an 18 kilometre tollway. Andrews claimed the cost of the East-West Link would exceed the benefits by a large margin and it had been approved without thorough analysis, despite being on the government’s agenda for more than 10 years.
“The previous government tried to keep information about the economics of the project out of the public domain knowing that the road was only going to return 45 cents of benefit on every dollar invested,” said Tim Pallas, treasurer of Victoria, in an exclusive interview with FinanceAsia.
The decision to renege on a seemingly watertight contract sent shockwaves through the investment community and cost the state as much as A$1.1 billion in compensation to discharge its agreements with the Lend Lease consortium.
Brendan Lyon, head of policy think tank Infrastructure Partnerships Australia, said Victoria did the right thing. “We needed to show the world Australia is not like Argentina in the 1980s; however the incident has reminded us that good reputations are hard won and easily lost,” Lyon said.
“Investors want to be sure that governments are committed to offering a regular flow of projects to the market and following an honest process,” he said.
Pallas is confident lessons have been learned and sends a message to investors that Victoria is a good place to do business. In the past two years his office has established two independent authorities to oversee the delivery of new projects – Infrastructure Victoria and the Office of Projects Victoria.
Infrastructure Victoria released its first major report in December, formulating a 30-year strategy and making 137 recommendations to government.
“We are being guided by a coherent rational approach to projects and have been pushing for a nationally consistent approach to cost analysis,” said Pallas.
The government has also updated its guidelines governing PPPs. “We amended the rules to make it easier to do business and reduce the time and cost to tender,” said Pallas. “We’ve introduced new standard documents covering expressions of interest, requests for tender and base contracts.”
Lyon at Infrastructure Partnerships wants to believe there is a wider evolution under way, changing the whole structure of procurement models and promoting innovation – which he says has been missing for the past two decades.
“There is an increasing call for a more disciplined approach to debt and more accountability attached to equity,” he said. “Until recently most infrastructure projects were approved without a real understanding of the costs and benefits.”
The industry is also pushing the government to think creatively about finance options. Arnon Musiker, head of public, project and infrastructure finance at ratings agency Moody’s, said highly-rated awarding authorities should consider using their ability to raise-lower cost finance to reduce overall project costs.
“This could include providing a financing package that is available to all bidders, or dividing a project into parts with the government retaining the more risky components,” said Musiker.
Pallas says Victoria is already using its capital to complete early-works on projects and “get the ball rolling”. In December it contracted engineering company John Holland to complete A$325 million of excavation works on the Metro Tunnel in preparation for the awarding of a PPP for the rest of the project. Three consortia have been shortlisted for the A$6 billion PPP and the winner is set to be announced in the third quarter of this year.
More than 50% of the state’s capital spend is going towards transport projects, said Pallas. “Victoria’s population is growing faster than any of the other states and this places pressure on our transport networks and social infrastructure,” he said.
One of the more novel opportunities on offer is a series of outer suburban arterial road networks that are being parcelled together. Private investors will be asked to upgrade and maintain the roads under 20-year contracts in return for an availability payment from the government.
So far three parcels have been identified and the first – the Western package worth $1.8 billion – goes to RFP in the next few months. Two more packages – in Melbourne’s North and Southeast – are likely to follow by the end of the year.
The scheme draws inspiration from the rapid bridge replacement project in Pennsylvania in the United States where a PPP is being used to replace 558 aging bridges across the state. The consortium of Plenary Walsh Keystone Partners has been contracted to finance, design, construct and maintain the bridges over a 28-year term.
Lyon considers Victoria’s arterial road scheme to be a game-changer for Australian infrastructure. “It shifts the focus to a performance-based framework and takes the job of maintenance away from the state,” he said. “It will fundamentally change the way we fund our road networks into the future.”
Infrastructure lawyer Paul Kenny also likes the scheme, noting its similarity to the privatisation of public utilities like electricity distribution networks. Though he expects it will take the private sector some time to understand the assets.
“Bidders will have to make an assessment of the capital costs of the upgrades and the ongoing maintenance costs based on information made available by the state,” said Kenny, who is a partner and public sector lead at law firm Allens. He adds a caution about ensuring the contracts safeguard against policy changes during the course of the 20-year partnerships.
“Governments have a reputation of coming up with new ideas and may ask for further works or improvements on the roads down the track. The contracts must have a robust set of provisions to cover this.”