Australian infrastructure: Greenfield gambit

It is one of starkest and most recent examples of what happens when public-private partnerships (PPPs) - where private sector interests help finance a project and hold it for a set period before it reverts to government ownership - go wrong. Several other tunnel and toll road PPPs in Australia have suffered a similar fate: the traffic forecasts used to underpin financing for a project are overoptimistic and so the economics just don't work.

These experiences have made institutional investors highly sensitive to project risk in Australian greenfield infrastructure, to the point that some are reluctant to get involved at all.

The NorthConnex tunnel project, however, has managed to overcome these concerns. It is a nine-kilometer, twin-tunnel project that will connect the northern suburbs with the Sydney Orbital Network of roads that circles the city. A total of A$2.9 billion ($2.3 billion) is required to make it happen.

Last week, Canada Pension Plan Investment Board (CPPIB), Queensland Investment Corporation (QIC) and Transurban Group closed on the financing. The New South Wales and federal governments are putting in A$800 million, Transurban is contributing A$1.05 billion, and the two pension funds will cover the rest.

The greenfield project risk has been minimized by packaging an existing brownfield asset into the deal. CPPIB, QIC and Transurban already own the Westlink M7 toll road and they proposed that this be combined with NorthConnex under North West Roads Group. This involved convincing the government to extend the M7 concession so it ends at the same time as the NorthConnex deal, in 2048.

North West Roads can rely on toll revenue from the M7 while the new tunnel is under construction and the investors can rest easy that their downside is covered should the traffic volumes fail to meet expectations.

The arrangement is a convenient one - the three investors happened to own M7, which is part of the Sydney Orbital Network that NorthConnex will feed - and the chances of it being replicated on other projects are surely slim, even though Transurban owns much of Australia's toll road system.

However, the deal is an example of the innovative approaches being employed to provide the next generation of infrastructure. It is thought likely that the New South Wales government will find a way to thread some brownfield assets into the A$10 billion WestConnex highway, making it more palatable to investors.

Australia's superannuation funds are often described as logical owners of the country's infrastructure projects. There is ample demand to participate in brownfield privatizations - although valuations are a concern - and this hybrid model could get them more involved on the greenfield side as well.

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• Topics
• Australasia
• Infrastructure
• Australia
• CPPIB
• QIC
• Infrastructure