Home' Infrastructure Australia : Infrastructure Australia 2010 Contents 22 INFRASTRUCTURE AUSTRALIA APRIL 2010
the base case, with a break-even case (where the tra c revenue
would just be able to service the debt) using even lower gures,
say 40,000 cars per day. In this theoretical example at 40,000 cars
per day or above, the project would survive nancially, but equity
might not get a return, or at least not for a long time. Below 40,000
cars per day, the project survival would be in question
and much below that level, it would default under the
terms of the nancing arrangements as we have seen
in some recent cases where even the conservative as-
sumptions of the lenders have proven too optimistic.
As in any eld of endeavour, while deceitful con-
duct can never be totally ruled out, the overwhelm-
ing evidence is that the professionals in this business are highly
quali ed, comply with strict professional standards and take
their professional obligations, including in relation to integrity
and corporate governance, extremely seriously.
ese professionals try their very best to seek the right an-
swers, but the pressures of the tendering process are enormous
and the stakes are high. A $3 billion design and construct contract
is a very desirable prize for a construction company and the costs
of losing a bid are signi cant, in the tens of millions of dollars.
It became quite apparent early on that the more cars (ignoring
trucks here for simplicity) were projected to use a toll road, the
better the prospect of winning a tender. e more cars, the greater
the projected revenue, the higher the debt that could be borrowed
and the lower the equity required and the better the returns.
e greater the revenue, the more can be spent, including on
paying a "concession fee" of millions of dollars up front to the
government in the case of the Cross City Tunnel. is "conces-
sion fee" amounted to circa $100 million to the Roads and Tra c
Authority. e Cross City Tunnel is perhaps a good example of
the process getting out of control as extensive tra c management
measures were implemented to force the tra c into the tunnel,
resulting in a spectacular public relations failure, later followed
by the Project Financing failure.
So the tendering process is an issue, but there are also impor-
tant structural weaknesses in the model:
• A major weakness in infrastructure projects is that the in-
terests of the parties are not aligned as these have essentially
different objectives. The construction companies have no
long-term commitment to the project, as once it is built
(and operating) their prime objective is to move on to the
next project. The operator provides a service for a fee, and
from a commercial perspective the authorities take a "hands
off " approach.
• Another weakness of the model is that it departs from one
of the most fundamental commercial principles of risk al-
location which is that risk should be allocated to the party
best able to mitigate it. In the case of the failures in Sydney,
the RTA would have been the party best able to understand
and mitigate this traffic risk.
e result is that "debt" and "equity" providers are le facing a
tra c risk they have no real ability to mitigate.
e shortcomings of the Project Finance model have wide-
ranging rami cations for the implementation of large scale
infrastructure projects. As long as tra c or patronage is a key
input to the model s success, big projects such as the Very Fast
Train project will not be nanceable using this model. History
has shown that many great engineering undertakings have been
met not by people pursuing a pro t motive, but by enlightened
visionaries trying to address a challenge, such as in the case of
the Snowy River Scheme.
A better model for infrastructure nancing appears to be the
PPP model which is typically used for social infrastructure such
as hospitals and schools. However, it too has limitations. e time
has come to look at variations on the current PPP model as there
are many possible variants that could provide for better outcomes.
Even a hybrid model could be conceived, but such variants may
require modi cations to accounting standards, the introduc-
tion of new instruments (eg infrastructure bonds or similar),
modi cations to the tax treatment for investments and so forth.
We can only hope that the current debate will lead to a more
purposeful model that will give this country a sound methodol-
ogy to underpin its badly needed, and sometimes critical, future
Jean-Roch Dubourdieu has a bachelor of engineering
(industrial) from UNSW, an MBA from the AGSM
and a diploma of applied nance from FINSIA. He is
currently the head for infrastructure, energy and resources for
an international bank based in Sydney. He is also a member
of a task force of tertiary nancial education provider
Kaplan Professional, supervising the development and
delivery of the project nance subject for its Master
of Applied Finance course.
It became quite apparent early on that the more
cars were projected to use a toll road, the better
the prospect of winning a tender.
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