Legislative roadblocks hindering the efficient operation of public-private partnerships are being removed, writes Michael Weatherall.
The National-led Government has put infrastructure at the top of its economic agenda. Of the six policy drivers forming the core of its economic programme, "investing in productive infrastructure" is one.
No question that the focus is on investment, not merely expenditure. This means infrastructure that will produce a positive economic return in terms of increases in productivity for every dollar spent. But how is this investment going to be delivered?
The recently evolved "Public Private Partnership" or "PPP" model involves private sector finance, often incorporated into a single agreement between the public and private sector covering not only the provision of finance but also the design, construction, maintenance and operation.
This PPP model was squarely out of favour with the previous Government, which introduced legislation to tightly control, or even prohibit, PPPs.
The Local Government Act 2002 included restrictions on contracts for the operation of water and wastewater infrastructure including limitations on the duration of contracts for such operations to an uneconomic (in PPP terms) 15 years.
The Land Transport Management Act 2003 introduced a means of obtaining authority to toll roads, but also complex and ultimately discretionary process requiring ministerial approval for PPP agreements. Prior to the LTMA 2003 no such restrictions on contracts between the public and private sector had existed. Only public toll roads have been built since the LTMA 2003 was introduced.
The Corrections Act 2005 expressly precluded contracts for the management of prisons by any persons other than the Crown.
The National-led Government, with infrastructure at the top of the agenda, seems to have a more open mind.
Infrastructure Minister Bill English said at the New Zealand Council of Infrastructure Development Conference last year that:
"The Government will enter into PPPs only if they work and deliver value for taxpayers... Private Sector involvement will happen where it makes sense."
So, some qualified support, but behind the scenes a lot of work is being done to open the way for PPPs.
Legislative roadblocks are being removed. The Corrections Act has now been amended to expressly allow contracts with the private sector for management of prisons. Under the Local Government Act Amendment Bill, which is before Parliament, the 15-year period for contracts with the private sector relating to the provision of water and wastewater services has been extended to 35 years, a much more realistic period to allow a private sector operator to generate an economic return on a PPP project.
The LTMA has yet to be amended to provide for a more certain process for the delivery of PPP roads, but there has been a lot of talk around identifying suitable candidates from the list of major roading projects in the Government's infrastructure plan.
The newly established National Infrastructure Unit, within Treasury, has also produced model guidelines and standard documentation for PPP projects, which will be able to be used by all Government departments, and by local government considering the PPP model for infrastructure delivery.
PPP projects are happening. The operation of Mt Eden Prison is to be contracted out to the private sector, and the next major prison on the Government's agenda, Wiri Prison in South Auckland, is going to be delivered under a PPP model based on the new guidelines and documentation.
Many PPP detractors question whether this model can truly deliver greater value. Many cannot get past the difference in cost of debt to the public sector compared to the private sector (which has only increased in recent years). They find it difficult to accept this increase in the cost of funding can be offset by efficiencies in the PPP model.
However, there are many pieces to the value jigsaw when it comes to infrastructure delivery. Risk and time are two. The bundling together of all the obligations, from finance and design through to construction and operation, under the PPP model allows the maximum allocation of risk to the private sector.
Utilising the PPP model will also allow many projects to be delivered sooner. The Government is talking about investment in productive infrastructure. That means infrastructure that will deliver an economic return by boosting productivity. The benefit of bringing forward productivity increases needs to be factored into the value equation.
Also, in the future, the higher cost of finance to the private sector may not continue to be the given it has been to date. Interest has been shown by China Road and Bridge Corporation to be involved in consortia with New Zealand contractors in delivering some of the Government's largest road infrastructure projects. It may be able to obtain funds at a cost comparable to or lower than the cost of public sector finance in New Zealand.
The Government's cautious approach to PPPs, providing support, qualified by the requirement that PPPs "deliver value" seems to be the right approach. But will PPPs prevail in this environment? The adage that the "proof of the pudding is in the eating" comes to mind.
Michael Weatherall is a partner at Simpson Grierson and is one of New Zealand's leading specialist infrastructure lawyers.
