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
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
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.
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