First published in The Independent, 27 February 2008.
The Government's recent announcement that it may consider a public private partnership (PPP) model for the Waterview Connection in Auckland is a very significant one and signals a shift in policy that may have long-term implications for New Zealand’s creaking infrastructure.
The issue of New Zealand’s decades of under-investment in infrastructure, and the resulting poor state of aspects of our transport and utilities networks, is a well known one. Pressure on these networks continues to grow.
From a purely legal perspective, roading is the logical sector in which to begin a programme of PPPs. The statutory framework is in place to create PPP structures consistent with international practice and, importantly, in line with the expectations of the likely participants in the sector. However, there are a number of hurdles that will need to be cleared before this becomes the reality.
The first hurdle is the political one. Toll roads can be unpopular and carry a degree of political risk. That said, the Waterview Connection is unique both because of its scale and the direct benefits it would provide to Auckland. Given the current congestion issues, which are forecast to worsen with time, a tolled alternative harbour crossing may be well received.
In conjunction with this, the Government will need to establish procedures to test the economics of any proposed PPP against traditional procurement methods. This is consistent with international practice - if the PPP route does not provide the best value for money in the circumstances, it will not be used. Significant up-front work will be required to establish these procedures for New Zealand’s first PPPs. Both the Australians and the English have dedicated PPP/PFI units within their Treasury departments or equivalent and have developed expertise in assessing the merits of PPP proposals.
Assuming the Government takes the decision to proceed, the Land Transport Management Act 2003 provides a framework to establish concession agreements under which the private sector could design, build, finance and operate roading projects of this nature. However, the Act is not designed to allow swift decision making and has a heavy focus on consultation. New Zealand has a history of projects getting bogged down in consultation processes. Private sector contractors and funders will be reluctant to get involved in bidding on a project, which comes at significant cost, until there is a reasonable degree of certainty that it will proceed. Consultation will need to be managed with this in mind.
Once these hurdles are met the challenge will then be to develop the project in a manner that appropriately passes risk on to the private sector, while remaining attractive to contractors and funders. Bidders tend to be cautious with the first sizeable project in any jurisdiction but, again, New Zealand can draw from the experience of the Australians and the English in developing the project documentation. A project of this size will need to be 'bankable' on a stand-alone basis to attract international interest and to achieve the most attractive and cost-effective funding package. While not immune from the current credit issues facing international debt markets (and those facing monoline insurers in particular), the long-term nature of the financing of projects such as the Waterview Connection means it is typically not as affected by transient market issues as other, shorter term, areas of debt finance.
PPPs have negative connotations in some circles and the worst examples from around the world certainly deserve this. Cost overruns, delays, and contractor insolvency, which are among the main criticisms, can occur under any procurement model and are not inherent within PPPs. Properly documented PPP arrangements, with their focus on shifting risk to the private sector and the involvement of third party financiers as well as the Government, tend to manage these risks more stringently than traditional procurement.
Given their success in the UK and Australia it is positive to see PPPs being considered locally. However, it is important that we get this right first time if New Zealand is going to gain the confidence of both the domestic and international players who will be crucial to the success of PPPs in this country.
* Hugh Kettle is a partner with law firm Bell Gully. He worked on a number of PPP projects for one of the UK's largest law firms from 2002 to 2005.