Australia: Public Private Partnerships - The Supported Debt Model

Last Updated: 29 September 2008
Article by David Lester

Key Point

  • The Supported Debt Model aims to achieve all the benefits of a traditional PPP, but with lower service payments

The Queensland Government, through the Department of Education, Training and the Arts (DETA), recently called for expressions of interest for the design, construction, operation and maintenance of seven new schools throughout South East Queensland (SEQ Schools Project).

The SEQ Schools Project is proposed to be procured as a Public Private Partnership (PPP) using the Supported Debt Model (SDM), the latest variant of the traditional 100 percent privately-financed PPP.

The SDM is designed to deliver greater value for money for Queensland by taking advantage of the Government's ability to source finance at a lower cost than the private sector.

It aims to achieve all the benefits of a traditional PPP, including private sector innovation, timely and on-budget delivery and appropriate management of risk, but with lower service payments than would otherwise be payable if the project was entirely funded by the private sector.

In this article we examine the model and consider any challenges to achieving a value for money outcome for the State.

What is the SDM?

The SDM has been developed based on the Credit Guarantee Finance model in the UK. For the SEQ Schools Project, it is proposed that the private sector will provide all financing for the project (both debt and equity) during the construction phase but only a portion (30 percent) of the funding required for the operations phase. Queensland Treasury Corporation (QTC) will provide the balance of the financing requirements (70 percent), by way of first ranking senior debt, upon completion of construction.

The QTC funding will be drawn down in tranches subject to the completion and certification of various stages of the project.

This model allows QTC to avoid construction risk and finance the "notionally risk free" portion of the project debt. The "notionally risk free" portion of the project debt is to be calculated by determining the minimum portion of project debt over the life of the project that could be recovered (based on the estimated termination payment payable to the contractor (ie. market value less State costs)) following contractor default and assuming the contractor had severely underperformed for a number of years before the contract was terminated.


Intercreditor issues

One of the most significant issues for this model is determining the intercreditor issues between QTC and the other senior debt providers.

Following the market sounding process, QTC has proposed a number of concessions regarding acceleration, enforcement, step-in and voting rights.

QTC may only accelerate the QTC debt in circumstances more limited than those normally conferred on a senior lender:

  • the private sector financiers have accelerated payment;
  • the security trustee has commenced enforcement action;
  • the project company fails to make any payment due and payable under the QTC facility and this failure continues for 10 days and is subsisting;
  • an insolvency event has occurred;
  • a change in control occurs which is not permitted; or
  • the private sector financiers have not accelerated payment within three months of a default occurring and this default is continuing.

The private sector financiers will be charged with making all enforcement decisions (including decisions relating to step-in rights), subject to consultation with QTC. QTC may only enforce the security in circumstances where:

  • an insolvency event has occurred;
  • a change in control occurs which is not permitted; or
  • the private sector financiers have not instructed the security trustee to enforce the securities within three months of being entitled to do so.

QTC will only be entitled to attend certain meetings called by the security trustee during enforcement and may express its views but will not be entitled to vote at these meetings.

Nevertheless, despite these proposed concessions, we would expect this issue will be the subject of significant negotiation between QTC, the private sector financiers and the project company.

Conflicts of interest

Another issue for this model is the potential conflict of interest as a result of the State acting both as procurer (through DETA) and lender (through QTC). The State has pledged to address this issue through open communication and implementation of the strict probity principles regarding PPPs.


While financial close on the SEQ Schools Project is proposed to occur in March 2009, the novelty and complexity of the model has the potential to adversely affect procurement times and bid costs.


To ensure a value for money outcome for the State, there must remain room for private sector innovation in the financial arrangements and reducing the role of the private sector financiers may limit the scope for that innovation.

Risk allocation

Although there may be less risks following construction of social infrastructure as opposed to economic infrastructure such as toll roads, no debt is ever truly risk free. As a result, it may be necessary to add a risk premium to QTC's debt which reflects the risks associated with providing the senior debt, allowing for a true value for money comparison to be made between 100 percent private finance and the SDM.

Credit Guarantee Finance

It will be interesting to see if the SDM follows the same path as Credit Guarantee Finance (CGF) in the UK. Although it was successfully piloted on two projects, CGF has barely rated a mention in the latest report from the UK Treasury on infrastructure procurement. Under CGF, the government lends the senior debt portion of the project finance to the project company in exchange for guarantees provided by credit-worthy financiers. The use of CGF, however, is limited because the government must manage and limit its exposure to each financier and to certain types of financiers.

It remains to be seen whether issues surrounding government borrowing will similarly limit the application of the SDM. The SDM is already limited to social infrastructure projects where revenues are more certain due to services payments. It is unlikely the State would take on the demand risk of economic infrastructure (eg. tolls from a toll road) to repay its debt.


The SDM, the latest variant to the traditional PPP, has the potential to deliver greater value for money for the State while maintaining the traditional benefits of PPPs such as a whole of life approach and timely, on-budget delivery. However, the challenges outlined above will need to be carefully managed in order to ensure the model achieves that potential. The SEQ Schools Project will provide an intriguing test case for the SDM and will no doubt be closely followed by the market.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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