New Zealand’s giant infrastructure hole has been estimated at $210 billion, meaning we would have to spend 10 per cent of our annual GDP, about $31b a year, for the next 30 years to build the new assets we need.
That’s according to Te Waihanga, the New Zealand Infrastructure Commission.
Where will that money come from? Is it time to reach for a public-private partnership (PPP)?
That’s certainly what National Party leader Chris Luxon and infrastructure spokesman Chris Bishop have in mind. In early June, they announced their plans for a national infrastructure agency to engage domestic and overseas investors to fund big projects via PPPs.
Such an agency would also provide opportunities for local investors including ACC, the NZ Super Fund and KiwiSaver funds to invest in long-term infrastructure assets, they said.
The agency would explore public-private partnerships — agreements between the Government and the private sector — as a way to deliver new infrastructure.
Whether it’s new hospitals, roads, bridges, schools or airports, we appreciate those projects when we have enough of them and they work. “It’s like flying,” said one delighted motorist after driving the new Ara Tūhono-Pūhoi to Warkworth motorway, which opened in June.
But when we visit outdated hospitals, send our children to overcrowded schools or drive on clogged roads, the outlook isn’t so positive.
There is no shortage of proposed new infrastructure projects. In Auckland alone, there is a second Waitematā Harbour crossing and light rail. But how can they be built? Public-private partnerships or alliances?
Certainly, the PPP scene is heating up with the arrival of a giant from overseas.
A British-controlled business — International Public Partnerships — was given Overseas Investment Office approval to buy PPP contracts to manage and run a prison, schools and student accommodation two months ago. The sites are Auckland Prison at Paremoremo, five schools in Auckland, one in Hamilton, four in Christchurch and one in Queenstown, as well as AUT’s North Campus student accommodation on Auckland’s North Shore.
The British business bought assets from New Zealand investment and asset manager Morrison & Co, taking over running aspects such as cleaning, maintenance and building management, and contracted to the Government to provide those services under the PPP model.
Why is Morrison & Co getting out?
It said late last year that it was selling because it had achieved an excellent return for investors for more than a decade – some of the assets would have been taken over as new – and has said it was returning capital to investors.
Morrison also said the assets such as the schools had done well, increasing their student capacity by almost 50 per cent.
International Public Partnerships (IPP), which hasn’t been in New Zealand before, looks likely to use this as a platform in this country. The Sydney office of London-headquartered Amber Infrastructure Group is the Australasian adviser and manager to IPP in this part of the world.
Vaughan Wallace, head of Asia-Pacific for Amber, told the Herald two months ago when the deal was cleared as an overseas investment that the business would employ a team of people to manage the contracts, including some from Morrison.
“The key point I want to make is that very little will change. The same service providers will continue on all 13 assets. We’re employing people in Auckland right now,” Wallace said from Sydney in June.
And the buyer wants to get involved in more PPPs here. According to the Overseas Investment Office decision: “The main benefits to New Zealand are economic benefits as the investment is likely to result in enabling the PPP market to operate, preventing stranded assets, developing the Rolleston College, and having [funding] for future school expansion projects and possibly other PPP projects.”
Public-private partnerships enable the building of new assets and infrastructure that costs a fortune, without straining the Government’s balance sheet and loading it up with too much debt at one time. It’s a funding model that can give us the schools and so on that, we want, but allows the Government years to pay for those assets.
However, it can be argued that this advantage isn’t all it seems, and when a government agrees to pay service fees or other repayments, it’s about the same as having to repay debt. As one construction expert notes, if a government does enough PPPs, pretty soon the service fees are much the same as paying for a new project every year. The reason some politicians like PPPs so much could be that they get a short-term cashflow advantage, and get to cut the ribbon during their term, while the repayments can take 25 years.
All jobs involve private contractors, whether they’re schools, roads, footpaths or hospitals. But they’re not all PPPs or alliances. Some involve sole contractors, such as building a new Dunedin Hospital, a job that has been awarded to a head contractor.
The difference between a PPP and an alliance is a matter of when those involved get paid by the Government, council or other public body.
A PPP party gets paid when a concession period begins, often once work on a project is completed, then for perhaps the next 25 to 30 years, earning interest as well as repayment of the principal invested.
An alliance gets its money much sooner – as the contract progresses – usually in the form of progress payments, often paid monthly.
One contractor the Herald spoke to said a PPP was far more risky for the private sector — “you can lose it all” — whereas an alliance was just a group of contractors and others coming together to complete works. An alliance had less long-term responsibility than a PPP, he said.
The two procurement methods have different uses – the question is when a government wants the cost of a project on its balance sheet.
A PPP defers the payments, while an alliance doesn’t. A PPP partner only starts to get their money back once the project is finished and when the concession period starts. If there’s a problem, the regular payments can be adjusted.
So the two are opposites when it comes to timing their funding.
PPPs have their critics, such as ex-Fletcher Construction boss Mark Binns, who is concerned that they are being promoted by vested interests — “right-wing ideologues or lawyers and investment bankers”.
He thinks PPPs might serve some markets well. But he has expressed the view that policymakers need to think twice before jumping into such arrangements.
”As a small country with limited resources, we just need to be careful to understand the implications of anything we are getting ourselves into,” Binns warned.
And he’d know. The lawyer has headed some of our largest infrastructure projects, including the construction of the Wiri prison, Waterview Connection, Eden Park’s new stand, Te Papa and a Manapōuri tunnel. He worked at Fletcher Building and its predecessor, Fletcher Challenge, for 22 years.
In 2018 he was appointed chairman of Crown Infrastructure Partners, initially set up to manage the Government’s investment in ultra-fast broadband, though its responsibilities have since been broadened.
Waikeria Prison near Te Awamutu was built in a PPP arrangement, but NBR reported last October that the 600-bed facility could cost $1.18b due to the private sector consortium claiming an extra $430m for pandemic-related costs and big delays. That claim on the Department of Corrections was disclosed as a contractual dispute in the Government’s financial statement for the year to June 2022.
Problems have also emerged with Transmission Gully, still unfinished despite the motorway north of Wellington having opened more than 15 months ago.
Regional Transport Committee documents reveal progress continues to be slow, “with a considerable amount of work remaining to be completed”, the Herald reported last month.
One fan of PPPs is Michelle McCormick, a policy director at Infrastructure NZ, who wrote in the Herald’s infrastructure special report in June: “The ultra-fast broadband rollout across the country was a great example of a successful PPP. The partnership between the Government and Chorus leveraged $1.7b of government funding to attract $5b of private capital. This programme was delivered on time and on budget and resulted in superior technological connections and coverage across Aotearoa. Think about how it helped us survive Covid lockdowns!”
Even when the Government makes money available for infrastructure, National claims the takeup is slow. A question on Tuesday from a National spokesman to a Cabinet Minister has revealed that only $1 million of the Government’s $1 billion-plus Infrastructure Acceleration Fund (IAF) has been spent, despite it being in place for more than two years.
Chris Bishop, National’s housing spokesman, asked Housing Minister Megan Woods this week how much of the IAF’s $1.07b allocation was actually spent.
She revealed it was only $1m, but said most of it was “allocated” and would be spent, but that would take time.
The Government announced the fund in 2021, with Woods saying then that it was designed to allocate money to infrastructure projects to unlock housing development in the short to medium term and might allow about 8000 new homes to be built.
Bishop wanted to know how the scheme had gone in the past two years. “It’s just a staggering level of incompetence from a government, to have only $1m actually go out the door of $1b allocated. As per usual with Labour, they talk a big game but the delivery just never happens. It’s pitiful under-delivery. It makes KiwiBuild look successful,” Bishop said.
He thought far more might have been spent.
New Zealand needed new infrastructure and the Government said it was investing in that, “but they’re hopeless at getting money out the door”, Bishop said.
But Woods retorted that most of the $1b had been committed — just not spent yet.
She confirmed the numbers and said in response to Bishop’s question: “Kāinga Ora-Homes and Communities advises me that the current size of the Infrastructure Acceleration Fund is $1.076b. Of the $1.076b, $1.069m has been spent to date on specific infrastructure projects.”
But a spokeswoman for Woods said there was more to it because although it hadn’t yet been spent, nearly $1b had been allocated to projects.
“The reason is that funding is made available in stages as the infrastructure projects reach certain milestones, as per standard practice in large-scale funding and financing projects. It is important to ensure that conditions are being met and outcomes are being achieved along the way,” the spokeswoman said.
“To date, $926.7m in IAF funding has been allocated to critical infrastructure projects in 28 towns and cities, from the Far North to Otago. Combined, these IAF-funded projects are expected to enable around 30,000 to 35,000 new homes for New Zealanders over the next 10 to 15 years,” Woods’ spokeswoman said.
And while there is no shortage of people arguing that New Zealand should be doing more, much is being done.
Te Waihanga, the NZ Infrastructure Commission, said that as of March, the total value of infrastructure projects in the pipeline stood at $92.3b, up 17 per cent from December. Spending on transport, water and social sectors dominates planned spending over the next five years.
Sixty-six contributing organisations provided project information on the pipeline of more than 3000 planned and active projects.
The forecast value of transport project spending is due to reach $4.3b this year, or 33 per cent of the total annual infrastructure spend. This value reduces slightly next year to $3b and then stays relatively constant through to 2026, when it equals $2.3b.
Annual spending on water projects is forecast to peak next year at around $2.6b and then decrease steadily to about $1.9b a year by 2027.
A relationship-style arrangement between the Government or other organisation as the client and one or more other parties to work together to deliver a project. Collaborative procurement methods are usually used for highly-complex or large infrastructure projects that would be difficult to effectively scope, price and deliver under a more traditional delivery mode.
The Government pays bills during the work, often monthly.
· City Rail Link: $5.5b twin tunnels, with two new stations and one station being upgraded. Being built by the Link Alliance made up of Vinci Construction Grands Projets S.A.S., Downer NZ, Soletanche Bachy International NZ, WSP New Zealand, AECOM New Zealand and Tonkin + Taylor.
· Waterview Tunnel: Built by The Well-Connected Alliance — Waka Kotahi NZ Transport Agency, Fletcher Construction, McConnell Dowell Constructors, Parsons Brinckerhoff, Beca Infrastructure, Tonkin + Taylor and Obayashi Corporation.
· Central Motorway Junction, or Victoria Park Tunnel: Waka Kotahi, Fletcher Construction, Beca, Higgins and Parsons Brinckerhoff with many other suppliers and subcontractors.
A long-term contract, often for 25-30 years, to fund, design, build and maintain a new asset, financed from external sources, with full legal ownership of the asset retained by the Crown, councils or other public organisations.
Government or other organisation pays over the long term, with principal and interest payments, often monthly. Those payments start only at the beginning of a concession period, once construction works end and the asset has started operations.
· Ara Tūhono Pūhoi-Warkworth Motorway: By Waka Kotahi and a private consortium, the Northern Express Group (NX2), which is responsible for financing, designing, building, maintaining and operating the motorway for up to 25 years. Equity providers are ACC, Fletcher Building, Spain’s Acciona Concessions and Morrison & Co. Asset management and maintenance is by Higgins Contractors and Acciona.
· Transmission Gully, Wellington: Delivered by the Wellington Gateway Partnership, which is a private group of financiers and contractors, to design, construct, finance and then operate and maintain the new motorway for the 25 years following the construction period. Those in the PPP are Pacific Partnerships Pty, ACC and InfraRed Capital Partners. Wellington Gateway Partnership contracted a joint venture of CPB Contractors and HEB Construction for motorway design and construction and contracted Ventia to operate and maintain the new motorway for the 25 years following construction.
· Ultra-fast broadband: Often described as a successful PPP, delivered on time and on budget. The procuring agency was Crown Infrastructure Partners and the tenderers were Chorus, Enable Group, Northpower and Tuatahi First Fibre. That entailed installing a fibre network nationally in 412 cities and towns, bringing fibre-to-premises services for about 87 per cent of New Zealanders.
· Waikeria Prison, Waikato: Morrison & Co, manager of the Public Infrastructure Partners Funds, won the contract to design, construct and maintain this as the majority equity partner. Other members of the Cornerstone Infrastructure Partners consortium were CPB Contractors (construction), Pacific Partnerships (equity), Cushman & Wakefield (asset management and facilities management services) and Honeywell (electronic security systems).
· Prison, schools, unit accommodation: Sold for $205m to British investor International Public Partnerships a few weeks ago. Involves Auckland Prison at Paremoremo, AUT student accommodation at Northcote, Hobsonville Point Primary School, Hobsonville Point Secondary School, Ormiston Junior College, Te Uho o te Nikau Primary School at Flat Bush, northwest Auckland’s Matua Ngaru Primary School, Hamilton’s Te Ao Marama School, Christchurch’s Shirley Boys’ High School and adjoining Avonside Girls’ High School, its Haeata Community Campus, Rolleston College and Queenstown’s Wakatipu High School.
Anne Gibson has been the Herald’s property editor for 23 years, has won many awards, written books and covered property extensively here and overseas.
Other large healthcare hubs near the site include Southern Cross and Auckland Eye.