The investment dilemma

The government has kicked off a massive infrastructure investment plan to save our economy from sliding backwards, and signalled that it is prepared to involve the private sector. The problem is – it’s not sure how.   BY ALAN TITCHALL.

Tauranga_1.jpgWith the exception of communications, public infrastructure investment in most sectors in this country has been going downhill over the past three to four decades.

That has changed with the Government budget promise to spend $7.5 billion on new infrastructure in addition to billions committed to electricity transmission infrastructure.

Speaking at the NZ Council for Infrastructure Development (NZCID) Building Nations Symposium this year, infrastructure and finance minister Bill English made it clear the Government was ready to embrace private investment partnerships, but was at a loss to how it should go about it.

And it is not just about the $7.5 billion capital spending over the next five years that will be used to build and upgrade roads (kick started with the ‘seven projects of national significance’), housing, hospitals and telecommunications. Other needy investment sectors, such as rail, prisons and schools are a “black hole” English conceded.

In the past, the country’s infrastructure has been built on traditional procurement, but to achieve the levels necessary to catch up on decades of investment neglect, the government will have to seriously look at funding partnerships with the private sector as it anticipates cash deficits of between $10 billion and $12 billion over the next four years. “On current forecasts, we will not be back in surplus for 10 years,” said English.

Meanwhile, a new ‘infrastructure framework’ has been put in place by the Government.

“Earlier this year, we set up the National Infrastructure Unit within the Treasury. This will be the centre of Government expertise, covering areas such as major project evaluation, infrastructure-related regulatory issues and contracting with outside finance,” said English. “Almost all mature infrastructure markets we have looked at have a similar body.”

One of the unit’s roles is to produce the country’s first National Infrastructure Plan that will take stock of current demands and planned investment.

“From the Government side, it will allow us to take stock of our spending and relevant infrastructure-related regulations, ensuring this is appropriate and contributing to productivity,” he said.

“From the industry’s viewpoint it will provide some direction and certainty about where the sector is headed. Private sector participants have long been calling for such a document.”

The new unit is backed by an advisory board of private sector experts, who will assist the Government with the plan as well as general policy.

“The board is new and we expect it will exert growing influence over time. But it’s important to recognise that it is the Government, rather than the board, generating the National Infrastructure Plan.”

While the Government is undecided in what role private and state funding should play in financing larger infrastructure projects, we are at least in the unique position to evaluate overseas investment models before going off half-cocked (a problem the country has gained a reputation for in other sector reforms).

As a late starter, New Zealand is in a position to pick up the best practices from overseas when it comes to infrastructure investment through a mixture of user pay debt financing, bonds, and public private partnerships (PPPs).

The country already has a good understanding of alliance tendering techniques, although it has been limited to roading projects over the past decade.

“We want to see options genuinely considered and appraised – not simply ruled out on the basis of some ideological knee-jerk response or for political expediency,” English told the NZCID symposium.

“We can get some idea about how the New Zealand market might evolve by looking across the Tasman,” he indicated.

The Australian infrastructure industry is well-developed and most organisations who would possibly become involved in new investment in Kiwi infrastructure have Australian connections and, “will no doubt expect New Zealand to become somewhat integrated, with similar players and practices. That is our expectation as well,” said English.

The first private public partnership projects in Australia were completed more than 20 years ago and since 2000, around 50 major PPP projects worth about $30 billion have been completed there – not all without some pain, it must be said.

“Total Australian infrastructure spending is running at around A$50 billion a year, or almost five percent of gross domestic product,” said English. “Less than 20 percent of total Australian spending is financed privately. Most infrastructure remains traditionally funded. I’m sure this will also be the case in New Zealand.”

In many ways, New Zealand already uses the private sector more than it might first appear, English points out.

“The Government does not build infrastructure, it mostly designs and finances it. The private sector undertakes construction.”

The term “PPP” is misleading, he added, as it tends to be used for a wide range of procurement arrangements.

“The accepted wisdom is that all investments contain a bundle of activities. They include forecasting demand, designing facilities, obtaining regulatory approval, construction, financing, operating and maintenance. Public-private arrangements are about unbundling these activities, so that each side undertakes the parts it does best.”

While for some projects, this is complicated, said English, the gains can be worth it.

“The important lesson is that every investment carries risk, regardless of how it is financed. Our intended $7.5 billion of capital spending over the next few years contains a great deal of design, patronage and construction risk – it’s just that they are seldom separately identified.”

From a taxpayer perspective, the fact that these risks exist is an argument for, not against, some private sector involvement, said English. “The private sector generally remains better at assessing and managing risks than the public sector.”

Whatever path the Government pursues, delegates at this year’s NZCID Building Nations Symposium were heartened by a ‘sea change’ in attitude towards fast tracking infrastructure investment. The past two decades have seen major projects painfully drawn out.

Auckland’s 48 kilometre Western Ring Route, for example, is a project that began with the completion of the Mangere Bridge (already being rebuilt) in the early 1980s and won’t finish until the Waterview connection is completed in 2015. It took 12 years just for the four kilometre Mt Roskill extension of this project to be approved. By comparison, Melbourne’s 40 kilometre Eastlink eastern motorway was built as a single construction project after being given special legislation enacted by the state government, and took just three-and-a-half years to build.

English told the symposium delegates that the Government welcomed engagement from private sector expertise in its future deliberations.

“I have been impressed by the level of interest from the market in working with the Government.

“But let me be clear – this is not about ideology: Private sector involvement will happen only where it makes sense – period.”  

Contractor Vol.33  No.10  November 2009
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