PPPs the key to NZ's future infrastructure

The future of New Zealand's major infrastructure projects lie with public-private partnerships.

Last week's government decision to go ahead with a PPP for the $1.3 billion Transmission Gully motorway north of Wellington should just be the beginning, Council for Infrastructure Development ceo Stephen Selwood says.

"The PPP model is applicable right across the infrastructure sector, from roads to water supply, local councils, schools and hospitals.

"There are few sectors where the model does not have the potential to add value."

Rather than being an alternative funding source, PPPs provide an incentive for the private sector to provide innovative but cost-effective solutions to projects, he says.

"One of the tendencies in New Zealand – and it goes back to the reforms of the 1980s and 1990s – is when a capital investment is made for infrastructure, the focus is totally on the up-front capital cost and a desire to minimise that."

Mr Selwood says that makes the total cost of the project over its life higher because inferior materials are often used to keep costs down.

"What PPPs do is transfer the risk of that whole-of-life performance across to the private sector, and the private sector has to compete against traditional procurement effectively to deliver a better whole-of-life outcome at a lower cost."

The traditional method is for the government to put a contract out to tender, with the construction costs totally paid for by the time the project is completed.

However, for projects as expensive as Transmission Gully, it is preferable for the government to pay it off over time and free up funds for other transport projects, he says.

The overseas approach

The Ontario government in Canada took a similar approach to its massive Highway 407 project, opened in 1997.

It was built and operated by a private company, which will hand it back to city ownership after 2031.

A recently announced $C1 billion extension to the highway will be owned by Toronto but financed and built by the private sector.

In Europe, the concept is taken even further and fully private highways are common.

In Italy, for example, 56% of the country's toll roads are controlled by a private firm, Autostrade Concessioni e Costruzioni, according to Forbes.

It was a state-owned company until 1999, when it was privatised and partially floated on the stock exchange.

New Zealand's Green Party are quick to point to problems with the PPP model in Australia, such as Sydney's Cross City Tunnel and the Lane Cover Tunnel in Brisbane.

These projects have "lost billions", according to the party's transport spokeswoman Julie Ann Genter.

"Why should we copy in New Zealand what has already failed in Australia?" 

However, what has allegedly failed in Australia has been a roaring success in other parts of the world, such as Italy and Canada.

The model works when it is executed right.

Not the solution for everything

Mr Selwood says a PPP is a borrowing rather than a funding solution.

Auckland's proposed inner-city rail loop, for example, would still need a significant contribution from the government or council.

"Even if the $2 billion-plus which is required for the rail loop would be funded over time, you've still got to have the revenue stream, whether it's through rates or petrol taxes, to repay that debt.

"The challenge for the rail loop is not so much how it will be financed, but where does the revenue come from to repay that finance."

For a highway, a private consortium might add a petrol station with fast-food restaurants to provide another revenue stream.

"That's an example of where a PPP would provide a solution which the government wouldn't consider – looking for ancillary opportunities."

Mr Selwood says the future of PPPs probably lies mainly in the roading a public transport sector.

"That's where the really big investment is required in New Zealand infrastructure."

However, he says PPPs should also be used in the education sector.

"There is billions of dollars of rebuild required both in Christchurch and to refurbish a whole lot of leaky buildings across the education sector.

"Had those schools suffering leaky buildings been built under a PPP, then the liability to fix them would fall on the private sector."

Being careful not to make PPPs sound like a one-size-fits-all solution, Mr Selwood explains there are some difficulties.

"They are complex deals to do which require extensive investigations into the future risk.

"That requires a lot of professional expertise which is expensive, so you would only do PPPs where you can get sufficient scale to warrant that fixed overhead in doing that analysis."

He says for projects costing less than $50 million more traditional funding methods would be more appropriate.