Editorial: PPPs could get infrastructure plan rolling

Bill English. Photo / Mark Mitchell

Finance Minister Bill English calls his National Infrastructure Plan an important step towards better infrastructure management. "Even a small improvement in this area could reap gains worth billions - making our infrastructure dollars go further and ensuring a better return for taxpayers," he says.

The multibillion-dollar sums sprinkled throughout the plan leave no doubt about the size of the commitment. Equally, the OECD's view that investment in infrastructure, especially transport and communications, boosts long-term economic output more than other kinds of physical investment emphasises this is a road that must be travelled.

It is somewhat surprising, therefore, that, in straitened economic times, the plan is reluctant to use the private sector to accelerate projects and share the financial burden.

Its Treasury authors note the Government plans to use public-private partnerships "where they represent value for taxpayers". But Mr English, wearing his Infrastructure Minister's cap, has indicated they will be used for building schools and a new prison before being considered for transport projects.

He says this caution is needed because the Government has had no capacity for evaluating PPPs until recently. That is surprising, given the wealth of information on PPPs, both successful and failed, available from overseas.

There is also the experience of the previous Government. It failed to attract roading investment because the private sector considered it would be taking on too much risk for too little prospect of a viable return. Ownership was denied it, and with it, a degree of control during a concession period.

The Government, like its predecessor, does not seem sold on fixing this by adopting the bold option of build, own, operate, transfer (Boot) schemes, even though they have been widely used in Australia. The plan is not specific, talking only of PPPs expanding "the scope for innovation in design, construction and management of new assets".

But it also pays attention to their potential downsides. These include the "reduced flexibility due to the long-term nature of the contract, and the cost that arises from unanticipated contract variations". The latter can, of course, be mitigated by precise framing, so the private partner is in no doubt about the risk to itself.

Far more emphasis should have been placed on the advantages of PPPs at a time when, despite the squeeze on its finances, the Government is eyeing spending $8 billion to $9.6 billion on designated roads of national significance over the next decade. These pluses include not only the reduced cost to the Crown but the economic value of private investment decisions if they have to carry a fair share of the risk.

As the plan notes, "the commercial disciplines that come from investors risking their own money are difficult to replicate in the public sector".

Private companies need to make projects profitable, particularly if, as should be the case, they cannot be bailed out by their public partner. They, therefore, make realistic risk-based assessments of cost and use.

That same level of assessment is not guaranteed under the normal funding for infrastructure, where the Government controls and finances a project and contracts the private sector to build it. Frequent cost blow-outs and delays highlight this shortcoming.

To make PPPs work, the Government must arrive at a better formula than its predecessor. Regrettably, it is showing little urgency.

Infrastructure planning is commendable, but every possible resource must be used to take pressure off the public purse and to ensure the construction timetable is met. Public-private partnerships should have a substantial role to play.