City Rail Link: The benefits of an apolitical pipeline

Sean Sweeney reckons New Zealand needs to have a “big conversation about the infrastructure we want”. Photo / Jed Bradley

Sean Sweeney is adamant New Zealand’s construction industry faces a major challenge: there is no sustainable pipeline of projects, high costs remain a problem and the absence of a skilled and knowledgeable client base within government, the industry’s largest customer, has led to some costly decisions.

This contrasts with Ireland and Denmark, two similar-size nations. Next month, Sweeney will head to Dublin where he will be programme director on the city’s $20 billion MetroLink project.

“I made the decision to go because they announced a raft of projects which excite me.”

This year, a delegation from Infrastructure New Zealand visited Dublin and Copenhagen resulting in a report, Lessons from Europe and Learnings from the UK, which Sweeney suggests should be studied in depth by government and industry players alike.

“For a long time Ireland and Denmark had lower GDPs than New Zealand. Now both are materially ahead. We are being bypassed.

“Well is this a problem? That’s for New Zealanders to decide. But I think it is.

“Thirty years ago our population was 3 million. It’s 5 million now, but we’ve taken an infrastructure holiday. Everyone talks about the infrastructure deficit, but we don’t yet have a pipeline.”

National conversation needed

Sweeney reckons the country needs to have a “big conversation about the infrastructure we want”.

A key lesson from Infrastructure New Zealand’s visits to Ireland and Denmark was to decouple infrastructure from political cycles.

“Plan it over a medium period and get every political party to commit to the plan and fund it. Then you’ll get an industry that will grow up and build. The benefits would be colossal.”

“If you go to Ireland or Denmark it’s not politicised ... they have pretty much apolitical pipelines that everyone signs up for, so you don’t get this chopping and changing.”

He likens this bipartisan approach to the support for New Zealand’s independent Reserve Bank Act here that took interest rate calls out of the hands of politicians.

But New Zealand is still playing politics with infrastructure: “Both parties do it. No one can escape blame. Labour cancelled the RONs (roads of national significance) and National cancelled light rail.”

“New Zealanders have to decide whether it is a problem or not. I think it is, but I come from a particular corner of the room, don’t I? The rest of New Zealand might say it’s fine.”

Construction industry

Sweeney reckons there is a problem with the structure of the local construction industry.

“We don’t have a New Zealand builder in my area: heavy infrastructure,” he says.

He cites an Australian company that gets mentioned as a potential bidder for jobs. “Their board in Australia tells me they hate doing them.

“They are too risky, they lose money. They just don’t like them.”

The way contracts are put together with contractors bearing risk doesn’t help. Sweeney says the only reason one particular firm was able to join the consortium delivering the City Rail project was that it was structured as an alliance. “They might lose the profit, but they couldn’t lose money”.

Sweeney says the lack of local tier-one construction companies means New Zealand is completely beholden to international construction firms. But the lack of a clear pipeline means we are not an attractive prospect to them either.

“When we do finally get someone here, it’s incredibly costly. That’s an issue for everyone in New Zealand because when we have to build something, we pay over the odds for it.”

Pipeline woes

The Infrastructure Commission has been tasked with forming a priority list for projects that will comprise a 30-year Infrastructure Plan.

Sweeney puts the lack of a confirmed pipeline down to government officials no longer having the necessary skills: “If you’re not building stuff, you’re not going to have people experienced in building stuff.

“Compare this with governments in the Australian states, Victoria and New South Wales, who are building a lot. Their bureaucracies know how to build things. We’ve lost that skill, which means when we do go into the market we are not skilled, and we pay over the odds.

“We tend to over-specify. We write severe contracts because lawyers tell us to double the risk on the builder. The builder then prices that into their bid. It horrifies me.”

Sweeney points to work by the Infrastructure Commission that looked at the cost of hospital building in New Zealand over the past 20 years. “It’s gone through the roof. The only reason I can see for this is that we don’t have knowledgeable clients specifying jobs.

“Light rail was an example. That was because of the scope they were given — put it underground.”

This gold-plating isn’t restricted to central government procurement.

He says when Wellington’s Westpac Stadium (now Sky Stadium) was built 20 years ago, it cost $130 million to build 30,000 seats. “More recently, the Forsyth Barr stadium in Dunedin cost $200m for a 30,000-seat build. The new Christchurch stadium is going to cost $700m to build.

“That’s not all construction cost.

“Something else is going on there. But part of it is construction cost because they’ve got an overseas builder, because there’s no local builder to build it.

“So, that’s a 300% increase in the cost of building 30,000-seat stadiums.

“Everything seems to be really expensive here, and that just means we’re going to build less, but we need to build more.”

Trimming fat

Sweeney spent seven years working on the Te Papa project in the 1990s, working for the project management firm.

At one point the project was coming in too expensive.

“We had a process called value management and we took 30% out of the cost of the building. No one says that it is a bad building. The architect didn’t complain, the client was happy. I don’t see much value management in New Zealand anymore.”

He says this goes back to the client not being knowledgeable: “There’s a skill in controlling costs and your biggest chance to control costs is in the specification.”

The upshot, he says, is the present approach often favours the client, placing too much risk on builders. This leads to disputes and, ultimately, to higher costs.

“I’m told anecdotally that too many government clients tend to run to the contract and their construction lawyer, as opposed to sit down with a builder and solve the problem.

“There’s an Infrastructure New Zealand report that estimates the costs of an uncertain pipeline, and it found the infrastructure companies make a much lower profit than other building companies.

“That’s probably because infrastructure is more risky than house building.

“There’s a view out there that builders make huge amounts of money. Yet, if you look at their annual accounts, you can see the sort of profits they make; not very much at all. That’s not good for us.

“We need a strong, profitable building sector. Government tends to write the biggest contracts and set the terms of trade.”

“That approach means you get cheap contracts because the builders can’t price the risk, which looks brilliant at first, until it starts falling apart.

He notes many major projects are now in dispute, citing the Pūhoi-to-Warkworth road, Transmission Gully and Waikeria prison.

“This is what happens when you write hard contract terms, you end up paying more.”

Sweeney contrasts this with the experience in Ireland.

“I was told by the head of Transport Infrastructure Ireland that they used to write really hard contracts.

“He told me they realised they were destroying the Irish construction industry. Like New Zealand, Ireland was completely dependent on overseas builders because the locals were destroyed.”

Sweeney says it took 20 years of grinding building failure for the Irish to realise this is what happens when procurement is prescribed by Treasury and not by builders: “It looks beautiful and elegant, but it is impossible for builders to price those risks.”

‘Builder’ makes his decision

Make no mistake, City Rail CEO Sean Sweeney would love to stay on in New Zealand. But even if the Government announces a major project tomorrow, he says there’d be no work for a builder for four years and “I am a builder”.

That’s why he made the decision to go to Ireland to head Dublin’s $20b MetroLink after five years building the City Rail Link, because “they could announce a raft of projects which would really excite me and others”.

He notes that by the time a major project goes through its business case here, and then the consenting, it’ll be four years — “and that’s the problem the industry has. They see repeated announcements about projects, but none of them will employ any of their people. The consultants are kept busy writing business cases and doing other things”.

“My anecdotal conversations with the major builders here are it’s quite grim for them at the moment. I don’t know whether Wellington understands that because I see the numbers and Treasury papers and say, ‘well, there must be work because there’s big, big numbers there’.

“But if you just talk to builders about how it’s going — particularly the big end of town — it’s hard.

“No one tells me they’re having a picnic.”