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DE L I V E R I N G P R OGR AMS TH R OU GH PU BLIC PR IVA TE PA R T NER SH IPS 27 which opened to traffic in 1987. Other notable P3 proj- Lessons learned from Australia's P3 experience dem- ects include the M4 Motorway (1992), the M2 Motorway onstrate that with the right projects, P3s are effective and (1997), and the Melbourne City Link (2000). P3 proj- deliver value. However, they are not a means of deliver- ects in New South Wales are managed by the Roads and ing infeasible projects. They require a long-term commit- Traffic Authority (state department of transportation), ment and the participation of private partners who are while those in Victoria are managed by special authori- vested in delivering successful transportation outcomes. ties including the Melbourne City Link Authority and the The potential for success of P3s can be enhanced by South East Integrated Transport Authority. guidelines to shape them. When public agencies sponsor Australia's P3 experience offers many examples of P3s, it is important to retain the services of specialists success. A study comparing 21 P3 projects with 33 tra- with experience in delivering successful P3 projects. As ditionally procured transport improvements indicated a a result of the positive experience with P3s in Australia net cost overrun of $58 million for the P3 projects ver- and elsewhere, interest in P3s among U.S. institutional sus $673 million for the traditional projects. Of the P3 investors is rising. projects in the sample, 3.4 percent were completed ahead of schedule, while 24.5 percent of the traditionally pro- cured projects opened behind schedule. The P3 projects Evolving Role of Equity in were also more transparent than traditionally procured Transportation Finance projects as measured by availability of public data for the study. Sasha Page of Infrastructure Management Group, Inc., Not all of Australia's P3 projects have proved to be stated that experience over the past 5 years demonstrates financially viable. Five recent projects have seen equity that trends in the equity markets are changing. Equity is severely affected or destroyed. In these cases, projects an important financing source, but it has become more were viewed more as financial transactions than as trans- conservative these days. Equity is important because it portation projects. This can occur when the focus is on cushions debt and lets private investors leverage more winning the project rather than delivering transportation money. Governments like equity because it indicates that outcomes. Interestingly, the five failed P3 projects were they are still in the game. all awarded to consortia that did not include a long-term In discussions of equity and P3s, it is important to operator on their team. Three of the failed projects gen- recognize that there are two types of investors. On one erated financing through initial public offerings, and the side are strategic investors who are looking for project remaining two raised debt through private investment opportunities. They include project developers, con- syndicates. Interestingly, a majority of toll roads in Aus- tractors, operating concessionaires, and equipment and tralia have failed to meet revenue forecasts during the material suppliers who are interested in securing con- first year of operations. tracts to provide one or more of their services. On the One recent failure was the Lane Cove Tunnel, which other are financial investors who are looking for a match is located on the Sydney Orbital Highway. This project for their long-term needs. These investors may include went into receivership in the first quarter of 2010. Twin private equity funds, publicly traded funds, banks and 2.3-mile tunnels were built in 2007 as a demand risk insurance companies, endowments and pension funds, toll road facility by a concession company made up of and even sovereign wealth funds. financiers and constructors at a total cost of AUD$1.6 Equity is repaid at the bottom of the annual cash billion, of which AUD$1.14 billion had been leveraged. waterfall and involves greater risks than debt. The cas- The facility was sold in May 2010 to Transurban for cade of payments for P3 projects begins with debt and AUD$630 million (US$560 million), resulting in an eventually involves repayment of equity. Sophisticated AUD$1 billion loss to debt and total loss of equity. This investors are prepared for the possible loss of equity. experience reflects poorly on state P3 practice and the Equity allows P3 developers to be rewarded for tak- ability to attract future private investment. ing on additional risks. Nonrecourse debt is another key Despite this setback, the widespread recognition in element. Equity can lose value, as has been seen with the Australia that P3s can deliver value led the National stock market in the recent past. The same is true of the Council of Government to establish the National Pub- value of infrastructure companies and owners like Con- licPrivate Partnership Policy and Guidelines in Novem- cesiones de Infraestructuras de Transporte, Transurban, ber 2008. All Australian state and territory government Fluor, and Macquarie. Typical earning levels for other agencies now apply the National Policy and Guidelines infrastructure sectors are 8 to 10 percent for brownfield to their P3 projects. The Australian P3 sector remains projects and 10 to 16 percent for greenfield projects. healthy, with more than 50 projects under contract, 11 The pool of equity providers has evolved over the in the market, and 15 potential P3 projects as of Decem- recent past. In 2005, there were five or six major pro- ber 2009. viders, but more recently a number of new funds and