Infrastructure Report: Finding the balance with PPPs

John Bridgman, MD of Aecom NZ, says the PPP approach is a good way of maintaining project momentum. Photo / Glenn Jeffrey

Public-private partnerships link design to project performance.

Aecom New Zealand managing director John Bridgman says while they are not a panacea, public-private partnerships (PPPs) are an effective way of using private investment to fund key infrastructure. He says PPPs play an important role in delivering projects where there needs to be strong connection between the project design and the whole-of-life performance.

The PPP model is still relatively new in New Zealand.

Bridgman says Australia started using them in the mid-1990s and Europe has used them for decades to finance toll roads. Aecom, a global infrastructure design, build and operate firm, is involved in all the current PPP projects in New Zealand including Wiri Prison, Hobsonville School and the Transmission Gully road.

He says though other public procurement models typically focus on lowering capital costs, the PPP approach works best for certain types of social infrastructure because it rewards the companies taking part for investing their initial capital with an eye to reducing operating costs over the long term. This means a company building, say, a school or a hospital under the PPP model, will opt for a design with whole-of-life features that may be more expensive to build, but the partners recover their investment because of lower maintenance costs.

Bridgman says: "The PPP model balances the two elements. This is important with social infrastructure projects where the long-term operational costs can dominate the overall cost of a project.

"With roads the initial capital cost is dominant, maintenance is not as prominent, so a different PPP model is used. In an availability PPP the government pays the private partner when road lanes are open. The driver here is to ensure the road operator uses the most effective way of keeping the roads open and working," he says.

There have been problems with PPP roads in the past, especially in Australia where some projects came in for high-profile criticism. Bridgman says the problems there were about tolls, not about the provision of a road.

Those earlier projects didn't use the availability PPP approach; which Bridgman says delivers a much better connect with what people want from a road.

Bridgman says the PPP approach is a good way of maintaining project momentum. It works well when you need to push through, when projects are set up with transparency about decision-making. On the other hand, he says it is not the best way of working when projects involve a high degree of public engagement and consultation: "There can be tension between a contractor who wants to move ahead with a project when the community doesn't want it to happen." From a bidder's perspective getting involved in a PPP project is initially riskier and more expensive than other procurement methods.

Bridgman says: "It's a high-stakes game: you only get paid if you win. New Zealand only has two road PPPs at the moment. It would be a big ask if three teams were to bid for these projects knowing there can only be one winner." In practice this means there are often fewer bidders than for other types of infrastructure projects.

Another issue with PPPs is that they often come with tight time pressures. Bridgman says PPPs are about the connection between project design and the long-term operation and maintenance, but there might be little time for the bidder to get a design away to the Government.

"You might find the design for a road has to be locked down in a six-week period. That means making lots of decisions so people can price the bid, but there may not be enough time to get input from the eventual operator. The process can move so fast that it's difficult to get that connection between design and operation".

Bridgman says one aspect of PPPs that can be overlooked is that they have an international context. "We're working in an international market. The banks, designers and concessionaires are usually international companies. They look at a slew of projects: prisons, highways, schools and so on in several countries. Often they have a choice of projects to take part in."

He says this means New Zealand needs to look at its ability to deliver on its end of PPP projects: "We need to make sure we play this in a consistent way, with fully transparent processes. It means establishing rules and conditions then sticking by them over the long term. Infrastructure is a vibrant market and there are many players who have shown over the long-term they are committed to the PPP model. We have to be careful to behave well, or we're not going to get these projects."