A regional Australian perspective on infrastructure developments

April 2021  | SPECIAL REPORT: INFRASTRUCTURE & PROJECT FINANCE

Financier Worldwide Magazine

April 2021 Issue

According to one of Australia’s leading banks, activity on Australian infrastructure projects worth A$100m or more will rise by an expected A$21bn, year on year, in 2021/22 alone. By 2022/23, the pipeline is forecast to rise to nearly A$93bn for the year. These numbers are indicative that Australia is in an infrastructure-led recovery, but these numbers do not tell the whole story.

COVID-19

The infrastructure sector in Australia has been impacted more than most by COVID-19, but not in the way that the pandemic has impacted this sector in other jurisdictions. The construction industry in Australia was not shut down because of COVID-19 and therefore projects have, overall, progressed at pre-COVID-19 rates. Delay has, however, impacted several projects which have undergone strategic review of their suitability in a post-COVID-19 world.

The size, shape and nature of new infrastructure planning is also likely to shift to address changing social and economic circumstances and Australian federal and state governments are using infrastructure development to stimulate a weakened fiscal environment, albeit a platform of strong infrastructure growth has been the bedrock of New South Wales (NSW) and Victoria state government policy for some time. Some types of infrastructure have experienced increased levels of demand, such as waste management and waste to energy projects associated with increased residential waste due to growth in online shopping and digital infrastructure, whereas city-centric infrastructure is likely to undergo strategic review with governments increasing their focus on regional infrastructure as more people seek to take advantage of enhanced work from home (WFH) flexibility. Other asset classes previously seen as attractive by investors may experience reduced levels of demand, such as airports, student housing and so on.

Inevitably, the impact of any changed habits and behaviours, including in relation to transportation, waste generation and power consumption, will take some time for state and federal governments to fully analyse, but traditional long-term infrastructure planning in Australia is likely to undergo disruptive change.

Sustainability and ESG

The drive for sustainable infrastructure development is a broadly global phenomenon and Australia is no exception, although some original grander aspirations have been replaced by a more pragmatic approach to carbon offset. However, the COVID-19 pandemic is likely to generate a positive and renewed interest in the development of sustainable infrastructure in Australia.

Environmental, social and corporate governance (ESG) policies, such as indigenous employment and obligations to upskill apprentices and trainees, are now mandatorily imposed by government entities procuring infrastructure in Australia, and ESG has become a feature of investment decisions by large Australian corporates. All ASX200 companies now provide detailed ESG reporting, for example. Current ESG requirements are not merely aspirational but non-compliance often attracts significant financial penalties. While the ‘Equator Principles’ have been adopted by the big four domestic banks in Australia, these are now seen as minimum requirements and it is likely that projects which fail to satisfy more robust ESG requirements will become more difficult to finance – a number of Australian financial institutions have also signed the UN’s Principles for Responsible Investment.

The domestic ESG financing market in Australia is also developing numerous products which reward the green credentials of financed assets. These include green loans, green bonds and sustainability-linked loans. The greater use of these green products is widely anticipated for new project financed deals and in the refinancing of older projects.

Procurement models

There remains appetite across Australia for large scale public-private partnerships (PPPs), particularly in NSW and Victoria, and bidding activity is expected to remain strong throughout 2021. PPP is not, however, the predominant procurement model in Australia.

In the delivery of major infrastructure asset classes, especially road and rail, we are seeing projects broken down into a number of smaller packages and PPP procurement only being used for packages where the risk allocation and transfer principles appropriately reflect the PPP model. For example, only one package of five in the North East Link project in Victoria will utilise PPP procurement. Likewise, the colossal Sydney Metro project has been disaggregated into multiple packages and PPP has been identified as the procurement model for only a minority of those packages.

The non-PPP packages on projects like North East Link and Sydney Metro adopt some more traditional procurement models – including early works contracting, direct procurement – design and construct (D&C), construct-only – and forms of alliancing, and hybrids of direct procurement and alliancing – whereby a greater share of risk can sit with the procuring entity.

A move away from wholesale PPP procurement has been primarily due to a number of high-profile cost overruns and cancellations of PPP projects in 2020, including high-profile cost overruns on the Melbourne Metro PPP blamed on unknown geological conditions and the cancellation of two PPPs for Strategic Roads Upgrade after final bids had been submitted.

The Strategic Roads Upgrade projects are now being procured using the Program Alliance model which has been used successfully on the Level Crossing Removal Projects in Victoria. The Program Alliance model adopts good faith collaboration to facilitate risk allocation as the relevant risk arises, rather than based on a pre-agreed risk allocation profile at contract execution.

In relation to the projects that are procured as PPPs, there has been some softening of the risk allocation in PPPs in favour of the private sector – in particular a movement away from lump-sum pricing toward models such as the ‘incentivised target cost risk’ in the revamped North East Link PPP. For those who believe that the PPP market in Australia had become unnecessarily adversarial, this represents a helpful shift in risk allocation.

Two other projects, the Western Harbour Tunnel and the Circular Quay Renewal programme in NSW, are notable for distinctiveness in procurement – the procurement models for these projects are designed to be iterative and collaborative through the procurement process and into the life of the project. On Circular Quay, Transport for NSW (TfNSW) expects to appoint a preferred design and delivery partner following receipt of early design ideas and before its final investment decision is made. On the Western Harbour Tunnel, the NSW government is similarly seeking to appoint a ‘development partner’. In appearance at least, this is a departure from the ‘take it or leave it’ methodology common to most PPP projects.

 

Joanne Emerson Taqi is a partner and John Broadhead is a senior associate at Norton Rose Fulbright. Ms Taqi can be contacted on +61 2 9330 8943 or by email: joanne.r.emersontaqi@nortonrosefulbright.com. Mr Broadhead can be contacted on +61 3 8686 6483 or by email: john.broadhead@nortonrosefulbright.com.

© Financier Worldwide

BY

Joanne Emerson Taqi and John Broadhead

Norton Rose Fulbright

©2001-2024 Financier Worldwide Ltd. All rights reserved. Any statements expressed on this website are understood to be general opinions and should not be relied upon as legal, financial or any other form of professional advice. Opinions expressed do not necessarily represent the views of the authors’ current or previous employers, or clients. The publisher, authors and authors' firms are not responsible for any loss third parties may suffer in connection with information or materials presented on this website, or use of any such information or materials by any third parties.