The road to PPPs

By Richard Michael, CEO, New Zealand Contractors' Federation

Discussion about public private partnerships (PPPs) has been around for a number of years now, particularly as the pressure on our infrastructure has increased. There has been renewed interest in the subject in recent weeks after comments by the leader of the opposition, John Key. In this column I want to have a look at what they are all about, some of the politics around them and where the Contractors’ Federation stands on all of this.

PPP has become a bit of a generic term for a range of ‘arrangements’ between public clients and the private sector. These arrangements come in a number of forms but generally involve the private sector financing all or part of the construction costs of the project.  They may then own and operate the project for a defined number of years before handing it back to the government. The income for the project, in the form of tolls for the road or bridge, etc, over this period is taken by the constructor to pay back the original construction cost and a return on investment.

The discussion here has centered around roading, but these schemes can work for any infrastructure project that generates a return of some type.

Generally this return on investment is guaranteed by the public client. This is a key requirement given the large amounts of money involved and the length of the investment. This is a particular sticking point in New Zealand as the Land Transport Management Act (LTMA) specifically precludes any form of government backing of this type. There are other things in this Act that mean in reality it would have to be amended before and large scale PPPs will feature on the New Zealand transport scene.

This is exactly what the Opposition is planning to do. Along with an endorsement of PPPs and a suggestion that they will look closely at their use, John Key has rightly identified the LTMA as requiring some major surgery. It is likely that this would happen as soon as possible after the election if National wins, however the makeup of the parliament will obviously be crucial, and any review will probably require cross-party support – not always an easy thing to achieve.

Changing any law is a tough job at the best of times, so there may be a bit of water to go under the bridge yet before we see any large scale PPP projects underway, even if the government changes.

The advantages are that projects that currently are not on the 10-year funding horizon, such as a new harbour crossing for Auckland, could be bought forward and this will have tangible economic benefits. With congestion costing Auckland alone $1 billion per year, it will not be hard to see a good payback.

There has also been an argument made that high risk or high tech projects would be better done by PPP. I cannot really see that this is true and, in fact, the private sector is likely to fully cost in any risk, so there would not be much of a saving there.

PPPs would be a great way to invest some of the Cullen super fund on shore. These projects use large amounts of money, over a long period of time, normally at a guaranteed rate of return. This is a perfect investment vehicle for long-term, large-scale investors and has the advantage of investing our money in our own economic future, rather than somebody else’s, as is the case if the money is invested off shore.

There have always been some reservations about PPPs and they have not found much favor with the current Government. Although technically feasible under the LTMA, they are effectively outlawed. Also the Government and, interestingly, Treasury have made the point that the Government can always borrow money at lower rates than the private sector so there is no economic advantage for private funding and possibly the risk premiums will be higher. The real question is what is the optimum level of government debt? With this figure at historical and internationally comparable lows, there is certainly scope to move here.

The NZCF view has always been ambivalent. The reason for this is that we are not too bothered where the money comes from as long as the work gets done as soon as possible. Our infrastructure spend as a percentage of GDP is still on the low side, especially for a country coming out of a long period of under investment in infrastructure. If PPPs make this happen faster then lets get on with it.

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