Over the past 20 years, the public private partnership (PPP) model has successfully delivered projects throughout Australia and the world, traditionally procuring 100% debt and equity finance from the private sector.

But private debt and equity finance is not the only way to go. Many governments, both overseas and locally, have been closely scrutinising the cost of private finance for large government infrastructure projects and wondering if there is some way of utilising government funds to assist in these projects while retaining the benefits and, in particular, the rigour of a PPP procurement with the private sector.

Recently, Australia successfully closed its first PPP using Queensland's answer to the UK Credit Guarantee Finance model – the supported debt model (SDM). It was used for the South East Queensland (SEQ) Schools project and varies from the traditional PPP model because it is partly debt financed from the public sector.

The SEQ Schools project involves the construction of a number of schools in South-East Queensland – one of Australia's fastest growing regions by head of population. The construction phase of the project is being wholly debt-funded by the private sector. 70% of that debt, however, will eventually be taken out by the Queensland Treasury Corporation (QTC) at various milestone dates during the course of the project (linked to the completion of construction of the schools). The remaining debt will be taken by subordinated private sector lenders.

One of the key drivers for the project (and one of the elements of the price the equity sponsors were prepared to commit to in their financial modelling from the outset) was to provide the private sector access to technically cheaper public sector funding during the longer term operational phase of the project.

Because it is the first of its kind, the SDM model encountered some teething problems that had to be resolved by intensive negotiations and lateral thinking.

One of the issues was to determine in what circumstances the public sector would be obliged to take-out the construction debt. Ultimately, the approach taken was designed to provide certainty of take-out from the private sector's perspective, while still affording the public sector adequate protection as the senior financier.

Through negotiation, the parties agreed a position that ensured that the overall project would not unravel at the first sign of a problem (such as a potential event of default) and which provided incentives to the construction financiers to actively work out any problems during the construction phase to preserve the value in the QTC take-out.

Another hurdle was to strike the right balance in relation to the extent of the State of Queensland's passivity in enforcement due to its dual role as concessionaire as well as senior term financier.

As concessionaire, the State has various termination rights in relation to the project as a whole under the project documentation and, in the ordinary course, the senior term financier would have standard default and step-in rights in relation to its borrower under the financing documentation – with each of the State or the senior term financier's respective rights heavily impacting on the other if they were to be exercised. The parties therefore spent considerable time working to ensure the sponsors and the private sector financiers were afforded the right level of breathing room to manage the project and deal with defaults to protect the concession.

This was particularly critical in relation to the operating term phase of the debt, where the State's dual role becomes more acute. The process required balancing the circumstances when the State, as senior debt provider, had to stand on the sidelines and when it could accelerate or take enforcement steps. To protect the concession, a position was finally agreed where, in certain circumstances, the State would cede control of the enforcement processes to the private sector financiers to avoid a conflict under the dual 'state' interests in the project.

Refinancing and prepayment presented another significant commercial issue. In the prevailing market conditions, private sector debt was not available for a 20 to 30 year term on any reasonable value for money basis and, accordingly, shorter term debt (which would need to be refinanced at five to 10 year intervals) was procured.

The sponsors and QTC were however keen to ensure that the QTC debt remained for the duration of the project – they did not want to see it prepaid unless circumstances arose, such as a partial termination, which made prepayment unavoidable. Given the lower cost economics of QTC's debt, one can imagine the difficulties that the private sector equity participants would have in refinancing QTC's debt through private sector financiers at some point in the future.

Accordingly, a position was ultimately achieved that requires QTC debt to remain in the project (except in specific termination circumstances) whilst the private sector debt is permitted (and required) to be refinanced several times over the life of the project.

Break costs payable to QTC in the event of a prepayment or cancellation of its facility also became an issue that required some lateral thinking. QTC's funds are not deployed in the same manner as those of a traditional bank, so accurate break fees could not be easily calculated based on a standard bank break-costs methodology.

Additionally, QTC's base interest rate is not calculated in the normal bank manner based on a BBSY (or a similar base rate) plus a set margin. Rather, the base rate is calculated according to a fixed rate determined by setting a zero net present value when all future drawdown amounts and remaining mandatory repayments are discounted (using certain discount factors and involving the calculation of a zero coupon yield curve based on the QTC yield curve). A margin is then applied to that rate.

To address QTC's entitlement to compensation in the event of prepayment, both parties had to be comfortable that the formula agreed was a fair representation of the State's cost of funding, a position which was ultimately achieved through some rigorous negotiation.

Negotiating the world's first SDM Project was a challenging and rewarding process. The model broke new ground in the Australian PPP market for participation in a PPP by a government treasury.

In doing so, many innovative solutions were developed to complex scenarios that result when public and private funding is combined together in the financing and procurement of public infrastructure. These solutions and the effort that the public and private participants put into working through the process to achieve a successful financial close offer many valuable lessons for future projects that may again contemplate the injection of public funds into the more traditional PPP model.

They have also been instrumental in enabling the procurement of a highly successful, state of the art, package of seven new schools into the local community in South East Queensland. These schools are critical to the development of the region and would not have been possible without the dedication and commitment of the individuals from both the government and the Aspire Schools consortium involved in the project.