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Case Study – The Reliance Rail Rolling Stock Project, Australia

 

Reliance Rail was Australia’s largest PPP project when it was put to market in 2005-06 at Australian Dollar (AUD) 3.6 billion, with a capital requirement of AUD 2.35 billion. The contract required the design, construction, and maintenance of 78 urban train sets (626 carriages with 8 per train) for 30 years with options for further rolling stock purchases beyond that term. The contract was the first PPP for rail rolling stock procurement in Australia involving a long seven year manufacturing and construction period, complex risk allocation, and international procurement arrangements.

The new trains featured high levels of innovation and the contract extended to driver and crew training, and construction of a new maintenance facility to service rolling stock over the life of the contract. The trains were operated by the state-owned RailCorp organization as part of the NSW rail transport service, and the PPP paid by way of an availability payment involving availability, reliability, and disruption performance criteria.

The winning bidder for the project was a consortium of the engineering company Downer EDI (49 percent), ABN Amro and Babcock and Brown Public Partnerships (12.75 percent each), and AMP Capital Investors (25.5 percent). ABN Amro provided an underwriting of the AUD1.95 billion bond debt component and the bank debt was provided by Westpac, Mizuho, National Australia Bank, and Sumitomo Mitsui.

The Reliance Rail project was highly leveraged with equity accounting for around 6 percent of project capitalization. The debt finance and the interest rate swaps required for the fixed (pre-operational stage) and floating (operational stage) debt feature a monoline guarantee from FGIC and Syncora. The bonds were swapped into the Consumer Price Index (CPI) for inflation protection at a lower cost than otherwise available in the Australian market (Project Finance 2006-07).

A credit wrap was purchased in 2007 from two monoline insurers, Syncora Guarantee Inc. and FGIC UK Limited for the bond and bank finance to reduce the cost of capital to that available for AAA grade debt. Following the financial crises of 2007-08, both insurers incurred credit rating downgrades, and in 2010 Moody’s rated the guarantee of both companies at Ca (Standard and Poor’s CC) (Moody’s Investor Services 2010).

In 2012, Reliance Rail encountered credit reappraisal ahead of a drawing on its bank facility. The concern involved the consortium’s weak financial position, delivery delays, and an 18-month slippage in the delivery schedule. The project’s AUD 2.060 million senior debt was given a credit rating by Standard and Poor’s CCC+ in May 2013, and the AUD100 million junior debt was rated CCC- reflecting a weakened credit position and operational problems and delays.

Source: Project Finance: Transactional Evidence from Australia (2014). http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1064&context=pib

 

 

 

 

Case Study – Chapman’s Peak Drive, South Africa South Africa’s Western Cape Provincial Government (the province) entered into a Concession Agreement with a consortium of private sector companies named Entilini (Pty) Ltd (the concessionaire) in May 2003 for the design, build, and operation of Chapman’s Peak Drive. This contract was the culmination of work undertaken over the previous three years by the provincial Department of Transport and Public Works in terms of Treasury Regulation 16 governing such PPPs. A Viability Gap Funding (VGF) capital grant of approximately 50 percent was approved as part of the concession. The road was successfully completed on time and to a high quality in very difficult mountain-side conditions. Chapman’s Peak is a very high-risk road perched on the side of a mountain in Cape Town. It is an important economic and tourist route linking the north and south of the city on the west side of Table Mountain. A key contractual provision was that the concessionaire takes the first risk in relation to traffic. Once a debt-service coverage ratio of 1.00 is reached, the public sector agency provides support up to a maximum of 50 percent of the debt service in that period. The support is in the form of a temporary, interest-bearing advance to the concessionaire, which is repayable once cash flows improve above a debt-service cover ratio (DSCR) of 1.0 over a period of time to be agreed with lenders. The support can continue for a maximum period of 18 months, after which the support terminates and, failing additional shareholder or sponsor support for the project, the concessionaire will be in default under the loan agreements. A concessionaire-default termination will then occur with the support amount advanced deducted from the termination payment made. Because of a single outstanding environmental approval for the toll plazas, the concessionaire was unable to complete the toll plazas. For five years, the concessionaire claimed payment to the extent that revenue was below forecast because such circumstances were classified as a “designated event” under the Concession Agreement. Between 2005 and 2008. The situation was exacerbated by a road closure due to what the concessionaire cited as dangerous road conditions. Given the lack of revenue incentive to keep the road open, this was contested by the province and a public outcry raised political tempers. The Minister of Transport in the province appointed a joint task team of treasury and transport department officials assisted by financial, legal, and technical advisors to investigate the matter. The task team’s terms of reference may be summarized as the following. • Establishing what happened to give rise to the current circumstances. • Establishing whether there was any financial impropriety in any of the events. • Establishing why things went wrong. • Providing options and recommendations as to what the province should do in response to the circumstances. The task team carried out a detailed financial and non-financial systems analysis to identify any fraudulent or financially inappropriate behavior by the concessionaire and the adequacy of the systems. Compliance with technical and operational specifications was also analyzed. The task team analyzed the following: • The key, high impact causes of project distress. • The cost of termination of the concession under any of its provisions. • The cost-benefit analysis of the project. • The likely future financial outcomes for the project. • Future scenarios regarding traffic volumes and revenues. The task team concluded that based on affordability (cost), risk transfer and Value for Money it would be best to do the following: • Amend the Concession Agreement to provide more comprehensive definitions of the closure event and damage events, and prevent the concessionaire from unilaterally closing the road. • Provide revenue support to restore the concessionaire to its base case return on equity. This would be done on the basis of an interest-bearing loan with repayments commencing when the base case Return on Equity (RoE) was exceeded. This was then effected by means of an amendment of the Concession Agreement. Source: Nazir Alli and William Dachs (2015), "Consideration of Risk Transfer and the Impact of External Events in Road Concessions in South Africa" - Chapman’ s Peak Drive Case Study, ICPPP2015 at the University of Texas.

Jarvis Case study, U.K. (step –in) Until the beginning of 2004, Jarvis was a successful group of companies in the United Kingdom (UK), winning PPP contracts across a range of sectors (for example, rail, emergency service centers, and schools) with a strategy of aggressive bidding. Jarvis was involved in 27 educational Private Finance Initiative (PFI) projects with a whole life value of £3 million. Typically, Jarvis undertook the role of a contractor and operator in these contracts and invested equity alongside a financial investor. As the result of a rail crash in 2002, in which Jarvis was later found to be negligent, authorities across the UK began to disregard Jarvis as a private partner for their projects, even when the group was offering the best price. From 2003, concerns were being raised about the quality of work done by Jarvis in the PFI business. In 2004, the Brighton and Hove Council branded Jarvis’s work on four schools as “unacceptable”. This resulted in a deteriorating financial position, which in turn led Jarvis to breach its main banking covenants in 2004. Despite some major restructuring, Jarvis’ partners (for example, sub-contractors) stopped work or demanded payment in advance for their work. This led to substantial delays in some of the PPP projects under construction in which Jarvis was involved. As authorities were eager to see the construction of their projects completed, notably school projects as the start of the school year was approaching, they encouraged lenders to utilize their step-in rights to rescue the projects. Overall, 14 projects under construction were successfully restructured through a range of measures. From the banks’ point of view, the projects were refinanced through a rescheduling and increase in senior debt within the projects. Although authorities had to suffer delays to the delivery of the assets, they incurred no financial loss and the projects are now operating normally. Jarvis was eventually declared insolvent in 2010. Source: Public Centre Research Centre, PriceWaterhouseCoopers LLP, http://www.infrastructureaustralia.gov.au/publications/files/The_Value_of_PFI.pdf European PPP Expertise Centre Allen and Overy LLP (2012) http://www.allenovery.com/SiteCollectionDocuments/Termination_Report.pdf

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