Roads, schools, prisons - business wants a share of the action, but the Government is in no rush, reports Nick Smith.
All the private sector wants by Christmas 2015 is a couple of prisons, a handful of new schools, a few hospitals, a convention centre, a couple of housing projects, water and wastewater schemes, some urban rail, one big harbour bridge and a hell of a lot of roads.
All delivered by public-private partnership (PPP), please Santa.
Christmas comes early this year. The business case to build and operate a PPP prison at Wiri will be put to Cabinet early next month. Finance minister Bill English promises the "contract will be pretty innovative by world standards".
A PPP plan for new schools or school buildings is not expected on the Cabinet table until April because, according to Treasury, specific projects have yet to be identified. Corrections has engaged a British PPP expert to lead its project team and the Education Ministry is seeking a similar specialist.
Two new potential PPP schemes are also expected to be unveiled before Christmas. These may involve a Defence Force project and provision of social housing.
"We're looking at significant change in the way we run Housing Corporation and deliver housing policy," English says when asked about the new PPP projects. "There are areas like defence where, by international standards, we underutilise the private sector compared to most other developed countries' defence forces.
"There will be a range of opportunities there, from housing [for Defence Force staff] to base management, which is how it's used everywhere else."
In an earlier speech to the Council for Infrastructure Development, English raised private sector hopes for a slice of the $30 billion-plus of spending over 10 years identified in the Government's National Infrastructure Plan.
"From today, all Crown agencies proposing new infrastructure with a whole-of-life cost over $25 million will need to consider and evaluate alternative procurement options, including a PPP," English said in August.
"Let's start with roads," responds infrastructure development council chief executive Stephen Selwood. "The [Whangaparaoa] peninsula link to the motorway - that could be a PPP. Transmission Gully [north of Wellington] could be a PPP; there's Puhoi to Wellsford and the Waikato Expressway.
"The inner city rail route in Auckland - that needs to be a three-way partnership between government, local government and private provider," says Selwood.
"The big cities have all got swimming facilities and leisure facilities and you could do those under PPPs," offers Steven Proctor, executive director at Morrison & Co, which established the PIP Fund, New Zealand's first dedicated public infrastructure partnership fund, with the New Zealand Superannuation Fund as its cornerstone investor.
"The national convention centre would be an ideal PPP," Proctor says of the proposed Auckland project that might be developed at one of several suggested sites in the city.
The fund has yet to invest in New Zealand but has bought an Australian PPP project, the Melbourne Convention Centre.
Despite the extensive wish-list, Proctor and Selwood say the private sector's potential share of government infrastructure expenditure will be less than 10 per cent of total spending.
Even a 10th of the estimated $11.4 billion needed for water projects over the next 10 years is substantial. More than $9 billion is earmarked in the Government's infrastructure plan for roading projects to 2012. Another $16 billion worth of road work is identified as a future need.
Education could account for $7.1 billion in the decade to 2019, with $245 million for new schools and $69 million on new school sites by 2012. School projects worth another $3.2 billion are under consideration.
Health projects valued at $1 billion are needed by 2013 and the ministry is considering proposals for a further $4.3 billion in spending on infrastructure for this sector.
Treasury is preparing a more detailed investment statement, to be released in December, which will provide more detail and clarity about upcoming infrastructure projects, some of which can be expected to be procured under a PPP model.
Selwood observes that the traditional pay-as-you-go funding model is not enough. New Zealand needs to get smarter about delivering projects of national interest.
"I'm sure there will be plenty of work here," comments Proctor.
"The market's been pretty impatient - and that's good," is English's verdict. But the private sector will have to strain at the leash a little longer because the Government is treading very carefully, and not just because of political concerns about scaring the horses.
Previous governments have promised plenty of state sector action to the market but failed to deliver, notes Fiona Mules, the investment banker headhunted by Treasury to lead the National Infrastructure Unit's new PPP team.
Given large bid costs, particularly around risk assessment, this has dented market confidence in the government's ability to deliver, she says.
"We're really wary about going out all guns blazing, saying 'we're going to do this and that'," Mules says. "We're only publicising things when we're fairly certain that we're going to get a transaction."
The most immediate road bump, however, is systemic state sector unfamiliarity with PPPs. It is this inexperience that underpins the Government and Treasury's caution, and something that Labour finance spokesman David Cunliffe quickly seizes on.
"Most state sector government agencies don't have the expertise to write a PPP analysis and they'll either hire high-priced consultants to do it or do it themselves badly," Cunliffe predicts.
While he praises the partnership between Morrison & Co and the Superannuation Fund, and the decision to give Treasury a lead role, Cunliffe says inexperience will still see state agencies being "fleeced by sharp-eyed investment bankers".
Perhaps he means people like Mules, who cut her teeth at Westpac Institutional Bank, was more recently a PricewaterhouseCoopers director on its corporate finance team, and who has spent the past dozen years solely focused on market deals.
"We do recognise we're still babies at the game at the moment," Mules says of the state sector.
As a consequence, all government agencies must consult Treasury's infrastructure unit when developing a PPP proposal and members of Mules' team will sit on either the project steering committee or working group.
In other words, there will be a lot of hand-holding and baby steps along the PPP path. One concern, however, might be local government, which is equally inexperienced but not required to seek Treasury's expertise. In the midst of this month's elections, expensive promises were made. Mules is diplomatic, and hopes that councils contemplating large PPP projects make use of Treasury's services.
On a national scale, English says small, one-off projects will be the predominant feature of the early deals. Large headline-grabbing projects will have to wait, at least until the public sector has accrued enough institutional knowledge and experience.
This National Government seems to want to Think Small instead of Think Big, a National Party initiative in the 1970s.
"We need to be sure that, in negotiating the large complex projects, we know what we are doing," English explains. "We want to get good at the smaller projects and we are going to get good at it. Once we've got a few in the bag, there will be the confidence to pick it up."
But, as the minister admits, smaller projects deliver less of an economic bang for the Government's buck, providing further ammunition to critics of PPP schemes.
Cunliffe: "The scale is far too small for the benefits to stack up higher than the cost of capital differential."
His point is that governments can borrow money at cheaper rates than the private sector - Cunliffe estimates a 3 per cent wedge - "and there must be a quantifiable case why the risk-adjusted returns are higher than that wedge".
Scale is important and Treasury partly backs Cunliffe's analysis, suggesting English's headline-grabbing figure of $25 million was pitched too low.
"There is a materiality threshold for PPPs and to our minds it's around the $50 million mark," Mules says. "We can't be doing it for very small projects [because of] the transaction costs associated with doing a PPP and the complexity around the negotiation."
Private companies wouldn't be interested and it would be a poor return for state sector effort, she says.
Politics, says infrastructure council chief Selwood, is "the biggest single impediment to successful PPPs".
"We need long-term bipartisan commitment to infrastructure planning in New Zealand," Selwood adds. "We can't have planning that changes every three years. We need to be assured that the political partners [are committed].
"If you're investing millions of dollars, you don't want to make those investment decisions if the partner is shaky or unstable."
Bipartisan consensus is lacking, however, particularly around the prison project, with which Labour has a "philosophical problem", says Cunliffe. He's not too happy about schools, either. Social housing will also likely prove a deal-breaker.
English believes the political risks are minimal. The public is "not going to tolerate politicians going on ideological binges, wasting public dollars just to prove a point. I think any proposition that shows value for money is going to stick."
Cunliffe himself asks how far he and his party would go. "Would Labour rescind all these contracts? Labour respects private property rights and is extremely loath to make any retrospective changes."
However, his party overturned private sector management of Auckland Remand Prison and renationalised accident compensation, Cunliffe reminds the private sector. Bidders for the Wiri prison will need to "factor in that regulatory risk", he warns.
Getting Wiri away will be crucial for the Government. For all English's talk of starting small, the prison represents a bold initiative.
"To be honest, as a first one" admits Mules, "it's one of the most complex you'd ever want to try and deal with."
Morrison & Co's Proctor can see the benefits private provision might bring to the corrections sector but his fund won't be investing.
"We don't like service provision and we don't like custodial," he explains. "It's a difficult area [and] investing in prisons, in locking people up - I don't think there's a lot of good news in that."
So what will he invest in? "Schools. Hospitals. That enriches people's lives. And roads actually improve people's lives. Prison? It's not such an easy sell."
Cunliffe is clearly aiming to inflict a black eye on the Government by queering the pitch for the bid process. Just as obviously, English's "innovative" Wiri contract will surely contain provisions to protect private providers from any future government seeking to unwind its provisions, likely to be of 25-30 years duration.
Yet even PPP critics such as Sue Newberry, a former Christchurch academic and now associate professor of accountancy at the University of Sydney, say private prisons bring public benefits.
She studied these arrangements for her doctorate under the previous National Government in the mid-1990s and says private sector involvement helped change the prison staff culture, which had been a headache for the old Ministry of Justice.
"We aren't closed-minded to the idea about PPPs," Cunliffe insists. However his party is implacably opposed to Wiri and is generally opposed to social infrastructure PPPs (schools, hospitals) unless a compelling case can be mounted for private provision.
If PPPs are to be used, they should be for large economic infrastructure PPPs (roads, bridges, tunnels), where the financial benefits, to Cunliffe's mind, are clearer.
But the market for economic infrastructure is almost dead, reports Selwood, without government taking on some of the project risk, which somewhat defeats the purpose of PPPs: shifting the risk to the private sector.
The global financial crisis and some spectacular failures in Australia is the cause, Selwood says.
This may explain the Government's preference to start with social infrastructure, rather than a big roading project. "The track record for these [roading] projects tells you the private sector is going to be pretty picky because they've done their money on a few of these," says English.
But, as Selwood and Proctor point out, only the investors and banks lost money. The Australian taxpayer got great tunnels and roads for naught but the toll price for using them. "In six years, Sydney built the equivalent of the western ring route, which has been on New Zealand's books since the 1970s," Selwood notes.
New private providers have taken over the Sydney projects and, says Proctor, "I bet you that second-order investment makes good money".
Mules predicts private sector appetite for risk will return once markets stabilise, while Selwood says there is a more realistic approach to predicting traffic and revenue flows, factors that sank Sydney's cross-city tunnel and Lane Cove projects and may do the same to Brisbane's Clem7 tunnel.
Compare those projects with the cost to the New Zealand taxpayer from leaky school buildings "and the nightmare they are now facing", Selwood urges.
Instead of running a school fair to raise funds to fix the gymnasium roof, "the head of a PPP school [will] ring up the provider and say 'the roof's leaking; fix it'."
According to the Treasury, "the school property portfolio has a portion of the buildings built between 1995 and 2005 which is subject to the leaky buildings issue as a result of poor design, inappropriate materials, poor workmanship and deficient building project oversight".
Mules confirms that the ministry has no financial recourse to recover the cost of leaky buildings. "Whereas the PPP contract has direct financial penalties for either asset or service failures," she says. "We don't pay for what we don't get."
The Government's draft standard PPP contract was released for public consultation last week. It stipulates "very clearly what our view is on the sharing of the risk and the risk allocation," Mules promises.
Performance indicators must be met or the provider will lose some of their fee. Those indicators would be weighted differently, in terms of the proportion of payment at stake, but if a private sector partner missed a single important indicator, says Mules, it could lose up to half its money.
Failure to meet many of the requirements would result in contract termination and "they can walk away having lost a fairly large proportion of their shirt".
Michael Deegan, Infrastructure Australia's infrastructure co-ordinator, is a close observer of New Zealand and says: "You're doing a pretty good job."
"I'm always impressed with what you guys are doing and learn a lot," Deegan admits. "The longer-term thinking, this new national infrastructure unit - it's quite a clever way of doing things."
Deegan does have a warning though: "You can't underestimate the importance of public trust and engagement in these big infrastructure discussions."
Public protests are a certainty if the Government tries to force through unpopular projects. "If you don't have public trust, then you won't get the infrastructure built," is his verdict.
What's a PPP?
Details vary, but, says the Treasury - a PPP is a long-term contract with the private sector to deliver a service that involves building or improving asset. The private partner finances and builds the facility, operates it, and receives payments from the Government or the users (as in a toll road). Usually, at the end of the contract, the asset is handed to the public sector. Benefits can include cost control and faster construction. Disadvantages include the hefty costs of bidding, and the difficulty in specifying performance standards.
