International Construction Law Review
THE EFFECTS OF THE CREDIT CRUNCH: AN AUSTRALIAN PERSPECTIVE*
PROFESSOR DOUG JONES
AM, RFD, BA, LLM, FCI Arb, FIAMA Partner, Clayton Utz, Sydney, Australia
1. INTRODUCTION
The financial landscape has shifted considerably in recent times, with far-reaching effects extending, not least, to the Australian privately financed public-private partnership (PPP) market. This, in turn, has important implications for the construction industry as the PPP model is a widely used method of major public infrastructure delivery in Australia. As the PPP model is a widely used method for the delivery of major public infrastructure in Australia, this has important implications for the construction industry. The “credit crunch”, characterised by a sharp decrease in the availability of finance paired with a sharp increase in the cost of finance, has had a major impact on the traditional structure of the PPP model. With syndication and long-term debt no longer an option, parties are being forced to develop innovative solutions in order to enable projects to proceed and meet value for money outcomes.1
This paper will first, by way of background, discuss the credit crunch and its interaction with PPPs. It will then proceed to explore potential solutions aimed at adapting the PPP model in order to mitigate the effects of the credit crunch. These solutions focus on the need to reduce the risk associated with investing in PPPs and consider alternative sources of finance.
2. PPPs IN AUSTRALIA
As a discrete policy stream, the advocacy of PPPs originally emerged out of the continued budgetary constraints faced by the various governments and
* A paper delivered to the International Bar Association’s 7th Biennial Conference on Project Finance, Washington, April 2009. The author gratefully acknowledges the assistance provided in the preparation of this paper by Brad Vann, Partner, and Sue Haining, Consultant, of Clayton Utz, Melbourne, and Jennifer Ingram, Legal Assistant, of Clayton Utz, Sydney.
1 London’s Olympic Village provides an excellent illustration of the potential impact of the credit crunch on PPPs. When it was envisaged in 2007, the private sector was expected to bear the entire cost of the project. However, the severity of the credit crunch has left the private sector unable to fund even a small part of the development. While the private sector still proposed a deal, the government considered that more public money would be saved in the long term if the project were fully publicly funded. Importantly, the funding situation is to remain flexible and the involvement of private funding will be reassessed closer to completion.
The International Construction Law Review [2009
398