The Victorian Government’s partner in the $1 billion Royal Children’s Hospital project was none other than Babcock & Brown, the financial engineer whose empire of leverage and exotic corporate structures now lies in a smoking ruin.
Desperate for cash to prop up its ailing empire in 2008, Babcock flicked on its stake in the hospital to an associate in the Atlantic tax haven of Guernsey for a quick $91 million in cash. Victoria could do little more than stand by in horror, hoping nobody would draw attention to it. Few did. It was a tumultuous time.
Now, keen to allay concerns that it may not have learnt the lessons of the financial crisis, the government message is that taxpayers had lost nothing from the Hospital debacle.
“The change in the financial structure of the Royal Children’s Hospital did not impact the funding or security available to the project,” a spokeswoman for the Department of Treasury and Finance told BusinessDay last week.
It was a misleading statement. Apart from the likelihood that funding costs on the deal were higher than they ought to have been, the department failed to mention, rather conveniently, that a $35 million payment was never forthcoming.
This underwritten and committed donation to the Royal Children’s Hospital was contracted as part of the state’s deal with the winning tender.
A year ago, it was written off. Suffer the children.
Strangely, the company which promised the donation, Babcock & Brown International, remains alive, which begs the questions why it has not been pursued for its debt and bankrupted.
There is a far greater question however which needs to be answered. Why does the state not properly monitor the financial position of its PPP (Public Private Partnership) owners and managers?
The Department of Treasury and Finance has transferred billions of dollars worth of public assets to private joint venture partners but won’t provide their financial details.
Yet the devil, as everybody knows, lurks in the details.
Last month, BusinessDay revealed the ultimate financial position of Australia’s most successful new participant in government privatisations, Plenary Group, was hidden by a secret trust structure.
Plenary, which has won 20 PPP (public private partnership) deals in a halcyon decade – hospitals, convention centres, army bases, high security buildings – is now being sued by the Tax Office.
The taxman has made an application to the Federal Court in Victoria to wind up one of its 100 per cent subsidiaries for failing to come good with $2.35 million in overdue BAS payments.
Despite this contretemps with the taxman, the high gearing of the Plenary PPP projects and, consequently, some edgy financial results, our political overlords still don’t deem it appropriate for taxpayers to be availed of the full details of their own counterparties.
The dead-bat response by the Department of Treasury and Finance (appended below) to questions over the past three weeks is no surprise.
In NSW, contracts for most of the billion-dollar toll-road deals are still under wraps. But at least the counterparties, firstly Macquarie Bank and now Transurban, are public entities who disclose their accounts.
The Department is happy to talk about generalities, but not specific cases. Protecting individual privacy is the Tax Office cover for darkness but the distinction here is that PPPs should not be confidential. These are public assets.
The financial status of a manager, equity sponsor and debt arranger of no less than five current Partnership Victoria projects – including the $1 billion VCCC hospital (now under construction but not due to be completed until 2015, hence the need for long-term financial viability) – ought to be in the public domain.
Does the state government have access to financial information on Plenary Group and its associated unit trusts? If it doesn’t, it should. And if it does, it should put it on the record.
Plenary itself is hardly to blame. As its principals say, it only discloses what it has to. Further, infrastructure projects are typically highly-geared, it says. And with regard to the tax dispute, any citizen or legal entity has the right to test its claims in the courts.
And they do. Plenary Group and its builder Grocon are now seeking further funding from the government for the Biosciences Research Centre, a $280 million PPP at La Trobe University.
The matter is in the Victorian Supreme Court as Plenary Research requests a 226-day extension on the completion date. Plenary Group owns 100 per cent.
In the case of another offshoot, Plenary Conventions, which owns the Melbourne Convention Centre, its most recent financial statements show it technically insolvent.
Plenary says a deficiency of assets over liabilities is not the best gauge of financial health. Cash-flow, they point out, is strong. Assets versus debt, however, is a fine indicator of leverage. (See more here.)
Surely authorities should ask that Plenary Group Pty Ltd and its Plenary Group Unit Trust – those that control Plenary Conventions – make full disclosure of their financial position at the end of 2011 and explain why a 100 per cent-owned subsidiary is not meeting its tax liabilities on a timely basis.
Late last month, Plenary lodged a copy of its 2011 accounts for the company which provides accommodation and ancillary services to the Australian Defence Force under a 30-year PPP.
Plenary Living LEAP No 1 Pty Ltd – a federal government project – reported a profit of nearly $4 million.
As with Plenary Conventions, this PPP contractor is highly leveraged. Some $300 million of assets are funded by just over $20 million of equity – and that’s after taking a dividend which was greater than post-tax profits.
Debt and subordinated debt totals $261 million. The statements note that Plenary founders John O’Rourke and Paul Oppenheim resigned as directors during the year, replaced by representatives of new majority shareholders, Pinnacle RE Services Ltd and Canada’s largest pension fund CDPQ.
The company’s financial position appears satisfactory in the circumstances, given its two financially-strong shareholders. And this is indeed the case with many of Plenary’s entities. Each special purpose vehicle is quarantined from the other, not only legally, but financially too, thanks to non-recourse debt.
The government contracts – not with the parent – but with the SPV and Plenary have sold down shareholdings in a number of its ventures to quality equity investors such as those mentioned above.
Nonetheless, these complex structures still house public assets – they need to be fully accountable – and their leverage and accounting tends to be aggressive.
Take Plenary Living for instance.
The bulk of the company’s profits of $3.95 million was due to an unexplained reduction in the discount rate (from 10 per cent to 9.15 per cent). This is used to discount financial receivables over the next 27 years.
Financial receivables, which total $283 million represent the majority of the company’s assets of $300 million. These are funded by a high-risk mixture of $278 million of liabilities (including $261 million of debt, of which $ 18 million is externally-funded subordinated debt) and $22 million of conventional equity.
The term loan-secured debt is once again supplied by Deutsche Bank, while Bank of Tokyo Mitsubishi supplies the subordinated debt, so Plenary Group’s equity participation is seemingly minimal at just over 10 per cent. And its funders, it should be said, are as blue chip as they come.
Its stake in Plenary Research, the Biosciences PPP in dispute with the government, does not appear to have been sold down though.
Its ownership of the VCCC hospital project is not so clear and its equity position on this one presumably much higher.
Who would know? Hopefully, the government. And the government should be putting the bona fides of all its financial partners firmly in the public domain. Not just Plenary Group.
These PPP rights to operate public assets typically last for 20 to 30 years. A lot will happen in that time. Governments will surely be gone, and so will most of the bankers by then.
Response to questions by department of treasury and finance:
BusinessDay put questions to the Secretary Grant Hehir. Mr Hehir declined to respond. The following are comments from a spokesperson and do not answer the questions which were asked:
The structure of the PPP contract protects the State, and therefore the tax payer, in a number of ways:
– Protection against private sector solvency risk is achieved by the structure of the self-contained Special Purpose Vehicle (SPV), which is created to solely finance and deliver the project, it is not affected by the performance of other assets or health of the parent company. If the parent incurs financial difficulties then the SPV, and thus the project, is independent and protected.
– As part of the bid process the State carries out a thorough assessment of the ability of each consortium member to fulfil its intended obligations under the contract. This includes full due diligence on the financial health and capacity of all consortium members and their parent companies.
– Only vehicles that pass stringent tests in relation to their ability to deliver the services and bear the associated costs and risk will be considered suitable contracting parties.
– Contract execution is dependent on the Government being satisfied that the required funding is in place with appropriate arrangements from the financiers to enable the SPV to fund construction and related activities.
– Any breach of contract or failure to achieve the specified contractual service standards will result in the State abating services payment to SPV, under the principles of no service no fee.
Once the SPV has been formed and finance put in place the health of the project is determined solely by that of the SPV. The contract is disclosed online via www.partnerships.vic.gov.au and company disclosure is subject to ASIC requirements.
Full, transparent and regular provision of all relevant SPV financial performance data is part of the arrangements for all of Victorian PPPs. This information is provided to Government in accordance with the disclosure provisions in the contract and is closely monitored by the relevant department.
A selling down of an interest in an SPV is not an unusual occurrence, and generally comes about for investment purposes, and is subject to change in control provisions.