THE privately financed Waratah train project will be forced into full state ownership, with taxpayers kicking in $175 million to guarantee the delivery of 70 remaining trains for Sydney's overstretched rail system.
The $3.6 billion public-private partnership was "within hours of going under", Treasury sources told The Sun-Herald yesterday. Just six of the 78 Chinese-made trains have been delivered and the project is 18 months behind schedule.
But unlike the spectacular financial collapses of the Cross City Tunnel and the Lane Cove Tunnel - which did not burn taxpayers - the state government decided it could not stand by and let the Waratah project sink.
"It would have cost hundreds of millions of dollars and commuters would have been waiting another five years for the trains they need," a senior government source said.
The O'Farrell government will announce the bailout by Wednesday this week, insisting Labor left behind "the riskiest financial deal ever negotiated by a state government".
"This stands alone under the Christmas tree. There's nothing like this deal. It's as aggressively financed and as risky as you would ever see."
Winning the contract from Labor in 2006, Reliance Rail, headed by the infrastructure services firm Downer EDI, took on debts of $2.4 billion at cheap interest rates before the global financial crisis. Just a fraction of the debt mountain - $137 million - was put up as equity by investors.
Under the deal to be announced, the government will become the only shareholder when it tips in $175 million in 2018. The equity investors, Downer, AMP and the Royal Bank of Scotland, will lose their shareholding but debt holders should be spared.
The government's commitment is designed to keep Reliance operating until 2018 and force four banks, including Westpac and National Australia Bank, to extend further loans of $357 million next month. The banks have not ruled out a last-minute legal challenge before the lending deadline next month but the government is confident the finance will be secured.
Sources said the Treasurer, Mike Baird, was expected to sell the negotiated deal as "an investment" for taxpayers because there would be an immediate return on the money from 2018 through a 30-year train maintenance contract Reliance has already signed with RailCorp.
The best case for the government is that a private sector investor steps in to take over Reliance before 2018, allowing the government to walk away before committing any money.
Attracting a white knight would be unlikely without renewed confidence in the project. Reliance's debt has sunk from a AAA credit rating to the status of "junk".
The delivery of trains from China will play a crucial role in any renewed optimism. The 78 Waratahs, which will make up half of the CityRail fleet, are expected to be on the tracks by some time in 2014.
The six trains so far in service were beset by technical problems during testing by RailCorp and, as a consequence, have been confined to the Airport and East Hills line and South line, where multiple tracks reduce the impact of any breakdown.
A spokeswoman for Mr Baird declined to comment while a Reliance Rail spokesman said: "We can't comment until a deal has been finalised and signed."
The $5 billion, seven-kilometre underground line between Rozelle and Central was supposed to bring Sydney's rail network into the 21st century. Taxpayers lost more than $350 million when it was canned in February 2010.
Cross City Tunnel
The most controversial public private partnership in the
state's history cost $1 billion to build, opening in 2005. The 2.1-kilometre tunnel was greeted with outrage once the public realised surface roads would
be closed to "funnel" drivers
into it. With traffic about a third what had been forecast, the consortium behind it collapsed.
Lane Cove Tunnel
The $1.1 billion tunnel may as well have been called Cross City II. The government had to delay surface road changes to quell outraged motorists. Again the financing was based on wildly optimistic patronage forecasts. The owner, Connector Motorways, went into receivership in January 2010.
Widely known as the ghost train for to its lack of passengers, it opened in 2000. The state has so far paid $800 million more than budgeted, mainly to compensate private interests.