Communication, engagement, and transparency are key to addressing the risks in New Zealand's infrastructure programme, as experts from legal firm Kensington Swan explain.
The Government has a multi-year, multibillion-dollar infrastructure programme planned, but it is increasingly unclear who will build the projects the country needs.
The construction industry faces challenges. It is not just bit-players that have found the going difficult, Mainzeal's collapse five years ago heralded an era in which even the country's largest construction firms have found business difficult.
"Projects come with all types of risk," says Paul Buetow, Partner in Kensington Swan's Construction and Major Projects team. "Political risk as to whether a project will go ahead.
Timing risk as to when it will be undertaken. There is also consenting risk, management of stakeholders and procurement risk — will the model that is going to be adopted be one that a contractor is prepared to entertain? And, of course, there is contract risk. Risk should lie with the party best able to manage it, but this is often not the case."
Experts suggest an ongoing open early dialogue between parties goes a long way towards providing comfort around the risks major projects present.
Political risk
There is a general consensus that New Zealand's infrastructure is crying out for investment. But how to meet the need — and fund new developments — is subject to fierce debate.
The Government Policy Statement on Land Transport published in June marked a departure from the trend under the previous National government. Less focus on roads, greater emphasis on rail, walking and cycling, and public transport.
The expansion of Waikeria Prison is another case in point. National had proposed a 1500-cell prison, to be constructed under a public-private partnership model in a project valued at around $1b. But in June it was announced the facility would be a 500-bed expansion with a mental health facility of a further 100 beds.
"One of the things that I've noticed over the past 10 years is that the timing and funding of projects has become more politically driven," says Nicky McIndoe, Partner in Kensington Swan's Environment and Planning team. "There has been a trend for projects to be bigger, so the stakes are higher."
This sort of uncertainty is a fact of life in a democracy, particularly one like New Zealand with a three-year electoral cycle. The UK's runs over five years, and the US and Australia go to the polls every four years.
But these risks can be mitigated and addressed. Collaboration and communication removes some uncertainty from the environment and allows for the necessary planning and resourcing on the part of contractors.
"There needs to be more bipartisan, cross party decision-making and greater collaboration and communication between central and local government. Government and Auckland Council working more closely to address Auckland's transport needs is an example of the type of collaboration required."
"The major political parties may have some differences, but we need to agree for New Zealand's benefit on the key projects that everyone accepts must be undertaken. We need a pipeline of projects coming through and some certainty around timing. This provides the market with certainty and allows contractors to resource to meet upcoming needs." Buetow says.
Engagement
The consenting process can be a stumbling block, particularly for projects that attract public interest and opposition. The Resource Management Act does not require applicants to consult anyone before seeking consent. However, it is best practice and McIndoe says engaging stakeholders early can yield rewards.
"If you engage with the community, not only will it ease your consenting path, but if there is a groundswell of support for a project a political party would be more nervous to reverse a decision to proceed. Engaging addresses both the political risk and the consenting risk, so it is a good solution."
Early stakeholder engagement is particularly significant to projects that will impact upon tangata whenua. "Unsurprisingly, iwi and hapu appreciate meaningful, up front and early engagement," says Mihiarangi Piripi, Senior Associate in Kensington Swan's Corporate and Commercial team, "and it's much better for the relationship going forward."
Mihiarangi Piripi.
While engaging with Māori stakeholders may include the same considerations as consulting with other parties impacted by a proposed project Piripi, who works in Kensington Swan's Pakihi (Māori Business) practice, says there are additional and unique factors when Māori stakeholders are involved.
"There can be added complexity when the area is unsettled from a Treaty perspective, and there are groups that might assert rights and interests in the area. It becomes quite difficult — who do you talk to?
"You need to be open and transparent in your dealings and where possible deal with representative entities as opposed to individuals."
Many major projects, particularly significant state highway projects, require land to be compulsorily acquired to free up the corridor for development.
Balancing the need to spend public money pruently, and appropriately compensate landowners, can be complicated. But, again, an open dialogue begun early in the process is key.
Kensington Swan Partner Matthew Ockleston is a specialist in the Public Works Act, the legislation that provides for government entities to acquire land for the development of public infrastructure or services.
Matthew Ockleston.
He says acquiring someone's land or relocating their business is "a very personal thing".
"Building a relationship with them and keeping them informed, feeling like they retain a degree of control is often the key to closing those deals. Closing the deals is the key to delivering the land on time, which is the key to enabling the project."
Contracts
Properly allocating risk in construction contracts is a major current challenge. Buetow says one way of managing risk is to price it, but this is difficult when projects are often being assessed on lowest price, and even when they are assessed on best value, price remains a critical component. Downward pressure on pricing combined with increasing input costs makes it difficult for contractors to place an appropriate risk premium in their bids.
"Profit shouldn't be a dirty word," Buetow says. "It's the contractor's insurance premium for the risk they take on board."
Indeed, assessing risk is becoming more difficult as new infrastructure plans, like the CRL, and light rail proposals for Auckland and Wellington, represent new ground in the New Zealand context.
McIndoe says infrastructure developers are asking their contractors to demonstrate innovation in their approach, giving rise to further uncertainty.
Nicky McIndoe.
"As soon as you are doing something unusual there is a risk," she says. "There is the potential for great benefits, but it is not always clear who's wearing the risk of that innovation."
Kensington Swan acts for infrastructure providers, major contractors and consultants, and industry associations. Buetow says he is aware of occasions recently where major contractors have elected not to bid for work having decided the risks did not justify the rewards.
Being open about the demands of projects, and fair about the compensation for shouldering risk, is necessary to calm contractors' nerves and ensure the health of the sector.
"Let's be really clear from the outset as to where risks lie, who bears them and how they are to be managed," Buetow says.
"That way everybody goes in with their eyes wide open, knows exactly what risks they are taking on board, and knows how they intend to address them."
