Key Points: The recent sale of the Adelaide to Darwin railway project is a good example of commercial drivers and risk allocation on a PPP deal working as originally intended.
Our Major Projects Team recently advised the AustralAsia Railway Corporation on the $334 million sale of the Adelaide to Darwin railway project. The Corporation is the statutory corporation established by the Northern Territory and South Australian Governments to represent their interests in relation to the project.
The Build Own Operate Transfer (BOOT) project was sold by the receivers appointed by the senior project financiers to a wholly owned Australian subsidiary company of Genesee & Wyoming Inc (GWI). GWI is a New York Stock Exchange-listed corporation that operates railways in the US, Canada, Netherlands and Australia.
"The sale was more complex than most sales of PPP projects because GWI wanted to purchase the contractual rights and other assets of the existing special project vehicle, rather than the vehicle itself. GWI also wanted to make a number of substantive changes to the commercial terms of the original deal, which required careful negotiations to ensure that the Governments' risk profile was maintained" says Owen Hayford, who led our team.
The sale was further complicated by GWI's desire to replace the existing project finance structure with intercompany loans from other members of the GWI group, utilising funds raised through the existing global credit facilities of GWI.
John Shirbin says "This change had both positive and potentially negative impacts on the Government's risk profile. The corporate finance arrangements mean that the new project vehicle is more closely tied to the fortunes of GWI's global businesses. However, various measures have been put in place to mitigate and offset this risk. And on the positive side, with the new project vehicle being wholly owned by GWI, it can be expected that GWI will be singularly focused and committed to the ongoing success of the project."
The Governments have also secured commitments from the new owner to continue existing intermodal freight train services and pursue new business opportunities for freight rail services.
"The fact that this project went into receivership should not be seen as a failure of the PPP model", says Owen. The project went into receivership because it failed to generate the revenues which were forecast by the original equity investors. The consequent loss in project value was borne by these equity investors and subordinated debt financiers, in accordance with the agreed risk allocation.
"The project did not require a bail-out by the Governments, and the railway operated at all times during the receivership process. Rather than a failed PPP, the project should be seen as a good example of the commercial drivers and risk allocation on a PPP deal working as originally intended", Owen explained.
The project continues to generate substantial economic benefits for the Northern Territory and South Australia, justifying the original decision of the Commonwealth, NT and SA Governments to support the project as a PPP.