Saturday, 19 January 2019

NSW’s rail future back on track

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  • Artist impression of the new link

The New South Wales Government’s long-term transport plan has taken a giant step forward with the financial close of the North West Rail Link Operations, Trains and Systems PPP, the largest PPP ever awarded in NSW. Allens partner Phillip Cornwell and senior associate Scott McCoy, who worked on the transaction, reflect on the drivers to bring such a significant project together and, in turn, set the groundwork for a major transformation of Sydney’s public transport system.

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On September 15 2014, the New South Wales Government formally awarded the Northwest Rapid Transit consortium (NRT) the operations contract to deliver Australia’s largest public transport project, Sydney’s North West Rail Link (NWRL).

The A$3.7bn Operations, Trains and Systems contract is the largest PPP ever awarded in NSW and the final of three contracts in relation to the A$8.3bn NWRL project, intended to be the first stage of a new rapid transit network being built to cater for the city’s growth as part of Sydney’s Rail Future – the NSW Government’s plan to modernise Sydney’s trains.

Financial close was achieved a mere three days later, the culmination of a process that started years earlier and a testament to both the efficient process by which it was run and the high level of support enjoyed by the project.


With ageing rail infrastructure reaching maximum capacity limits and the greater Sydney population of 4.5m expected to swell to 6m by 2031, the NSW government developed Sydney’s Rail Future, a long-term plan to increase the capacity of Sydney’s rail network through investment in new services and through upgrading existing infrastructure.

The plan aims to modernise and transform Sydney’s rail network with the introduction of a new rapid transit network – a departure from the heavy-rail double-deck trains that currently provide all of Sydney’s suburban services – operating fully-automated single deck trains with metro-style frequencies.

The North West Rail Link was identified as the first stage of this new rapid transit network. Detailed planning for the North West Rail Link was completed by the end of 2012, and by 2013 tenders for all the major works associated with the NWRL had been called, with the works and future operations split into three major contracts:

* Tunnels and station civil works package, an A$1.15bn contract awarded to Thiess John Holland Dragados on June 24 2013 as a standard D&C contract, which involves building 15km twin tunnels, the longest railway tunnels ever to be built in Australia;

* Surface and viaduct civil works package, an A$340m contract awarded to the Impregilo-Salini joint venture on December 17 2013 as a standard D&C contract, which involves building a 4km elevated skytrain; and

* The A$3.7bn Operations, Trains and Systems (OTS) package.

The final of the three packages, the OTS package, was tendered as a PPP.

The project

The NRT consortium will design, build, finance, operate and maintain the 36km rapid transit train service. A typical availability-payment model will be used, with service payments from the state payable once operations commence following completion of construction, and the state taking patronage risk. Further income from limited commercial opportunities will also be possible. Fares will be set by the NSW Government, which will also be responsible for the electronic ticketing system.

A four-way unincorporated joint venture comprised of John Holland Group, Leighton Contractors, MTR Corporation and UGL Rail Services (the D&C JV) is responsible under a D&C contract with NRT for delivery of the greenfield infrastructure and associated rail systems, including:

* Construction of 23km of new rail network from Cudgegong Road to Epping in Sydney’s north-west, including installation of signalling and mechanical and electrical systems;

* Eight new railway stations and 4,000 associated car parking spaces;

* Platform screen doors running the full length of platforms;

* Construction of the rapid transit rail facility at Tallawong Road, to house and maintain Sydney’s new rapid transit fleet; and

* An operations control centre, also based at the Tallawong Road facility, to monitor the entire railway, ensuring safe and reliable running.

In addition, the D&C JV is responsible for:

* Upgrades to the 13km of existing rail network between Epping and Chatswood; and

* Upgrading five existing stations and converting them to rapid transit status, including computer-based train control, full-length platform screen doors, improved information displays and upgrades to fire and life safety systems.

French rail supplier Alstom has been subcontracted by the D&C JV to project-manage, design, supply, manufacture, test and commission the rolling stock and signalling system. This will include the supply of 22 six-car fully automated Metropolis train sets and the communications based train control signalling system. Trains will be driverless, the first in Australia.

Metro Trains Sydney, an incorporated joint venture comprising Hong Kong’s MTR Corporation, John Holland and UGL Rail Services, will operate and maintain the rapid transit network on completion for the 15-year concession period.

Diagram 1

Services are expected to start in the first half of 2019, with the new rapid transit trains running every four minutes during peak hour (15 trains an hour). Key operational performance requirements include an on-time running rate of 98% and availability of 98.5%. Although the North West Rail Link will initially use six-carriage trains, more carriages and trains can be added as demand increases, with the platforms designed to be long enough for eight-carriage trains.

The key players

The Northwest Rapid Transit consortium comprises MTR Corporation, John Holland, Leighton Contractors, UGL Rail Services and Plenary Group, which acted as financial sponsor and capital arranger.

Equity financing will come from three of NRT’s consortium members, MTR Corporation (20%), Leighton Contractors (10%) and Plenary Group (10%), and will also include equity investments from Palisade Investment Partners (20%), Partners Group (20%) and Marubeni Corporation (20%).

Debt was provided by three of Australia’s major banks in ANZ, NAB and Westpac, as well as international banks Standard Chartered, BTMU, ING, HSBC, Mizuho and OCBC.

NRT was advised by Ashurst Australia, while the bank group was advised by a team from Allens. Clayton Utz advised the NSW Government.

The bid and financing process

Expressions of interest for the NWRL were called by the NSW government in December 2012, kicking off an extensive five-month process. The NRT Consortium was included in the shortlist of two bidders when it was announced on April 30 2013, with bids due by December 5 2013. The competing bidder was TransForm, a consortium comprising Serco Australia, Bombardier Transportation Australia, SNC-Lavalin Capital, McConnell Dowell Constructors (Australia), John Laing Investments and Macquarie Capital Group.

Following a six-week BAFO process, the Northwest Rapid Transit consortium was announced as the preferred bidder on June 24 2014. Some consolation for TransForm was the announcement by the NSW Government that it would contribute to the bid costs of the unsuccessful shortlisted OTS consortium submitting a conforming proposal.

The contribution was capped at the lower of one-third of bid costs and US$10m, intended to reflect the size and complexity of pulling together a proposal for the NWRL contract, in exchange for the NSW Government acquiring the intellectual property in the unsuccessful proposal.

Welcomed by the market, this approach is now being more widely adopted, with the Victorian government also having revised its PPP requirements, announcing in May 2014 that it would trial repayment of partial bid costs to encourage competition and attract high-quality bids, with the unsuccessful bidder on Melbourne’s East West Link PPP the first recipient.

The New Zealand government has also adopted this strategy, agreeing to reimburse costs on its first road PPP, the NZ$1bn Transmission Gully project.

An intense 12 week period followed the announcement of NRT as preferred bidder to bring the NRWL project to contractual and financial close. As is often the case, a number of issues were outstanding even at the conclusion of the BAFO stage, and during this time all parties worked tirelessly but constructively to resolve them.

Of critical importance to the NSW government was ensuring that the documentation was sufficiently flexible to allow it to implement its long-term Sydney’s Rail Future plan. In particular, the NSW government was focused on its ability to connect the north-west rail link to the existing Bankstown line, requiring the building of a second rail crossing of Sydney Harbour and converting the Bankstown Line to the same rapid transit line system as the north-west rail link.

This extended to the modification regime more generally, with the state limiting consent rights from financiers in relation to state-funded modifications. In a number of specific instances, the state was granted optionality, to be exercised in its complete discretion, to direct NRT to implement certain pre-agreed modifications to the scope of works, with these pre-agreed options priced prior to contractual close.

Whilst recognising the importance of flexibility to the state, this had to be balanced against the need for certainty required by the banking group and its focus on ensuring that adequate measures were in place to protect them from any adverse change to the risk profile of the project as a result.

The parties worked hard to resolve and document these issues by the target date for contractual close, set months in advance. This was a herculean effort given the size and complexity of the project, the rail safety and accreditation requirements, and interface requirements with other stakeholders, including local councils, Sydney Trains, the government’s electronic ticketing system, and the civil works contractors responsible for the TSC and SVC works. The NRT Consortium, advised by Plenary Group, was widely lauded as running a highly efficient bid and closing process.

Just as impressive was the project reaching financial close just days later, the result of the various advisory teams, including consortium and banks’ counsel, ensuring that the project was efficiently and effectively managed, with key documentation and CP work-streams running in parallel with negotiations from the announcement of preferred bidder. The result was a rare smooth financial closing, delivered in what one banker described as a “zen atmosphere”. If only all transactions closed in such manner.


The project’s total private capital is over A$1.8bn, including a 7.5-year senior debt facility of approximately A$1.55bn. The financing was developed using a securitised licence structure, an additional layer of documentation but with which parties are now familiar, its use well established by precedent transactions.

Equity was contributed by way of deferred equity, subject to appropriate equity support being provided for uncalled equity amounts. Consistent with precedent transactions, equity contributions are able to be accelerated following certain events, including an event of default under the financing documents.

The remainder of the financing is to be provided by the NSW Government by way of a “State Construction Contribution” (SCC). Sized at 50% of the total delivery phase project costs (including financing fees and interest during construction) as at financial close, the SCC will consist of monthly construction payments during the delivery phase. This will only be available for utilisation, however, upon certain conditions having first been satisfied, including a minimum contribution of equity having been provided and the construction of the project having advanced to a certain level.

Although the debt tenor of 7.5 years is consistent with recent Australia market terms for debt of this nature, it is still significantly shorter than the concession period, leaving the project open to refinancing risk. This is an issue in financing PPPs in Australian generally, a product of the dominance in Australian project finance of bank lending and the lack of a long-dated project bond market.

The Basel III rules and their conservative implementation by the Australian banking regulator, APRA, are not calculated to encourage banks in Australia to lend long-term. Arguably the PPP bidding process incentivises bidders to bid the lowest cost of debt, even though any refinancing gains are shared with the public sector. Bidding short-term bank debt and taking refinancing risk is the norm.

This risk is partially mitigated in the NWRL transaction by the state proposing the now well-accepted conditional debt pay down (CDPD) structure. Under this simpler variant of the “supported debt model” the state agrees to make a lump-sum contribution equal to 50% of the senior debt between two and four years post-construction, ie, when the project has been de-risked. The state’s obligation to pay is subject to certain conditions having first been satisfied and the payment being allocated in its entirety to prepay outstanding senior debt.

The debt facilities were hedged using interest rate swaps until the second anniversary of the scheduled date for completion of construction, the expected date of the CDPD payment if all goes well. After this date, the state has agreed to bear the floating interest rate risk (net of margin), implemented by way of a floating-rate mechanism in the availability charge.


The North West Rail Link was a transaction with a number of firsts – the first dedicated single-deck train fleet with metro-style frequencies in Australia, the first driverless passenger line, the first rail line to be built and operated by the private sector from the outset, the first stage on the NSW Government’s long-term rail plan, and the biggest PPP in NSW history.

It has laid the groundwork for a major transformation of Sydney’s public transport system. As flagged in Rebuilding NSW: State Infrastructure Strategy 2014, the State Government has allocated a further A$7bn for Sydney Rapid Transit, which will extend the North West Rail Link to deliver a new rapid transit rail line under Sydney Harbour, through the CBD and to Bankstown in Sydney’s West. The new plan will see construction on the second harbour rail crossing accelerated, with funding expected to flow from 2016–17, construction commencing in 2017 and completion by 2024.

While it may not have been the first time that a project reached financial close only a few days after contractual close, the speedy close was a testament to the dedication, effort and co-operation of all participants in the project – government, contractors or financiers, and their advisers – and evidence of the efficient process applied to bring the deal to a successful close. Let’s hope that all future deals should be so lucky

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