Australia: Light rail strategy for Sydney - public private partnerships in transport

The acquisition of Metro Transport Sydney by Transport for NSW heralds a new era for the administration and expansion of Sydney's light rail system.

On 23 March 2012, Transport for NSW acquired Metro Transport Sydney Pty Ltd (MTS), the company that owned and operated both the Sydney Light Rail and Sydney Monorail, for $19.8 million.

The acquisition was a first of its kind for Transport for NSW and now MTS and its subsidiary companies are under its control and form part of its portfolio. The Premier Barry O'Farrell and the Minister for Transport Gladys Berejiklian in March stated that it was "enabling the efficient delivery of future light rail extensions and clearing the way for the removal of the monorail to accommodate the new convention centre at Darling Harbour".

The acquisition has facilitated the award of a contract to John Holland for the construction of the Inner West Extension of the Sydney Light Rail, an extension of 5.6 kilometres of track from Lilyfield to Dulwich Hill in May 2012, and also the announcement of the monorail's closure on 30 June 2013 to make way for the Convention Centre Project.

Transport for NSW is expected to release a Light Rail Strategic Plan, targeted for the middle of this year. It is intended to examine Transport for NSW's greater ambitions for light rail in Sydney, including the feasibility of extensions through the CBD, to Sydney University and the University of NSW.

Although the acquisition of MTS was a unique move for Transport for NSW, on the other side of the globe, Transport for London has also been busy acquiring companies and restructuring financing arrangements on PPPs over the past few years.

In December 2008, Transport for London acquired two infrastructure companies known as Metronet after it spent a period in administration. Metronet had been responsible for two-thirds of the Tube modernisation works under PPP contracts.

Then in June 2010, Transport for London acquired the Tube Lines group of companies for £220.2 million. The 30 year PPP contract with Tube Lines was a performance based contract for the maintenance and renewal of the remainder of the Tube assets, including stations, tracks, tunnels, signalling and rolling stock on specified lines. The plans to buy the companies followed months of disputes between Tube Lines and Mayor Boris Johnson over the cost of future upgrade works. In a statement released by the City Hall, Mayor Johnson said that the completion of the deal "opens a new era for the Tube and one that will be free from the complexity and wrangling that hindered us in recent years."

Through this and the acquisition of Tube Lines, Transport for London now controls all of the maintenance and upgrade works for the Tube.

In November 2011, Transport for London also acquired the two companies responsible for the maintenance of the London City Airport and Woolwich Arsenal extensions of the Docklands Light Rail. Those extensions to the Docklands Light Rail had been funded under private finance initiative agreements. Transport for London named the "unique circumstances of the organisation's ability to raise finance and also current market conditions" as the reason by which, through Transport for London's investment, it could save up to £250 million by replacing the private sector financing costs with public sector borrowing.

Again, this transaction seems familiar to the NSW market. Late last year, the NSW Government announced that it was considering proposals for a financial restructure of Reliance Rail, the consortium engaged by the Government under a PPP contract for the delivery of 78 new Waratah trains for Sydney's CityRail network. In February this year the NSW Government agreed to invest $175 million in 2018 in return for 100 percent of the equity in Reliance Rail, conditional on the successful delivery of the 78 Waratah trains and Reliance Rail's ability to refinance its existing debt at that time.

As these recent examples show, there is often a need in long-term projects for flexibility to be responsive to changing circumstances, whether they be changes to policy objectives, the financial climate, technology or demand. Such flexibility will ensure that long-term projects can serve broader policy objectives as projects mature.

Including appropriate contractual mechanisms to address the need for such flexibility will provide greater certainty for both Government and the private sector in terms of outcome and also price when circumstances require the parties to renegotiate aspects of the project. Although at the stage project contracts are developed it might seem like looking into a crystal ball to predict possible future needs, drawing from past experiences, and also considering the nature of the project itself, it is obvious that certain circumstances are more likely to arise than others. Contractual mechanisms can then be developed to provide avenues for dealing with these types of scenarios. For example, mechanisms to enable clear methods for pricing extensions, processes for competitively bidding project augmentations and methods for private party / Government refinancing would provide greater certainty for Government and the private sector when facing such changing circumstances.

Time spent negotiating such mechanisms from the outset will be an investment in preserving flexibility for the future of a project.

Clayton Utz advised on both the Reliance Rail financial restructure and the acquisition of Metro Transport Sydney.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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