The Big Picture: Infrastructure

Defying the deficit with better delivery

INFRASTRUCTURE − DEFYING THE DEFICIT WITH BETTER DELIVERY

Introduction

With infrastructure a key focus in the Government’s Q3 Action Plan released in July, hard on the heels of a May Budget which outlined a forecast NZ$68 billion1 in infrastructure spending for the next five years, the headlines suggest calls to address New Zealand’s well-known infrastructure deficit are being heeded by decision makers.

But those tasked with delivering that much-needed infrastructure know that a plan remains only one part of the equation. Even if the tools are available, the market needs to have the right participants ready to pick them up, with the confidence to invest and a skilled workforce available to use them.

The infrastructure sector is also deeply aware of the vast gap that remains between spending and unmet need. 2 With the country nursing an infrastructure deficit in excess of NZ$200 billion3, a recent report from The New Zealand Infrastructure Commission, Te Waihanga, points out that for every NZ$10 spent on infrastructure, NZ$6 will have to be spent on maintenance just to maintain the status quo for future generations.4

The Budget left the sector with a bit more certainty of the capital pipeline in some areas, particularly roads, and a promised new National Infrastructure Agency to connect local and international capital to infrastructure opportunities.

Subsequently, the flurry of mid-year infrastructure announcements from the Government has brought a sense of impetus, particularly following the recently released Cabinet paper Improving Infrastructure Funding and Financing, which details a significant funding and financing work programme to be undertaken by the Government to reform New Zealand’s infrastructure ecosystem. 5

That work programme alone includes clarity on when the Crown will use its balance sheet to fund and/or finance infrastructure, expanding and enhancing funding and financing tools available to the Crown and local councils, and modernising Crown policies, frameworks and contracting models (including modernising the PPP model and a framework for city and regional deals).

On top of that, we have had plans to modernise the Public Works Act,6 a new fast-track consenting process, the development of a 30-year National Infrastructure Plan7 and new standard form contracts. It is a fastchanging landscape.

Along with these changes, the sector will obviously need to move into a phase of effective implementation and delivery for the Government to be able

to meet its funding and financing work programme from 30 September 2024 onwards. Given market constraints, and the effort required to plan, design, procure and consent significant projects, time will pass quickly before any funded ‘spades’ are breaking ground.

This is the challenge for the infrastructure sector, public and private alike. It is not just about public spending, planning or even attracting private capital. Solutions to the deficit also hinge on good asset management, together with more effective and efficient delivery.

In The Big Picture: Infrastructure, we take a closer look at what the framework for effective infrastructure delivery looks like at this point. Can city and regional

deals assist? How has consenting been reshaped by the new fast-track approvals process? Can embracing different contracting models help us build our way out of the infrastructure deficit and what are the challenges? No one strategy holds the answer, so in this report we also examine how sound management of assets, and pricing to manage demand, may also offer some solutions.

We believe New Zealand can, and will, defy the infrastructure deficit by delivering better.

Coming up for infrastructure in Q3

The Government released its Q3 Action Plan on 1 July.8 The plan included a number of elements that address infrastructure issues, promising to:

• Pass the second Local Water Done Well Bill requiring councils to deliver plans for financially sustainable water services, replacing the previous Government’s Three Waters regime.

• Take Cabinet decisions on a framework for city and regional deals.

• Take Cabinet decisions on legislation to support time-of-use charging to reduce congestion.

Introduce legislation to eliminate barriers to overseas building products being used in New Zealand.

• Take Cabinet decisions to establish a new National Infrastructure Agency.

• Take Cabinet decisions on the scope of RMA and National Direction amendments to unlock development in infrastructure, housing, and primary industries, and drive a more efficient and effective resource management system.

• Take Cabinet decisions on work programme to replace the RMA with a system premised on the enjoyment of property rights.

Take Cabinet decisions on the final design of the Government’s one-stop shop consenting and permitting scheme, incorporating sensible changes suggested through the select committee process.

• Open the NZ$1.2 billion Regional Infrastructure Fund for applications to help reduce New Zealand’s longstanding infrastructure deficit.

City and regional deals

One of the highlights of the Q3 Action Plan was an indication that the Government will progress a framework for city and regional deals (also signalled in the Improving Infrastructure Funding and Financing Cabinet paper).

Bell Gully partner Angela Harford has just returned from an international delegation to the United Kingdom with Infrastructure New Zealand, which focussed on learnings from the United Kingdom’s experience in place-based solutions. It was clear that city deals and devolution in the United Kingdom have been a catalyst for significant economic growth and infrastructure delivery in the cities and regions where they have been implemented, particular Greater Manchester.

It is therefore unsurprising that new prime minister Sir Keir Starmer is moving swiftly forwards with discussions on a major programme of devolution.9 This has included Angela Rayner, the deputy prime minister, recently writing to all council leaders in “devolution deserts” to tell them that the United Kingdom government’s door is open to more devolution deals. This would see local authorities take on more responsibilities through city deals, including in relation to transport and infrastructure.10

CITY DEALS - LESSONS FROM THE UK

In considering an appropriate framework for city and regional deals in New Zealand, it will be important that we learn from the United Kingdom’s lived experiences, including:

We must be patient in measuring success

The United Kingdom’s deals-based model has resulted in change occurring in an incremental way, with success occurring with the “low hanging fruit” first. City deals can deepen over time and be added to – and with this in mind, we should strive for progress, not perfection. Greater Manchester is a good example of this, with the Greater Manchester Combined Authority having agreed multiple subsequent deals with Westminster since achieving early runs on the board with its first city deal in 2011.

Strong leadership is key Political consensus matters

The United Kingdom has had huge success in attracting experienced leaders who have been instrumental in driving change through city deals in their regions – including Sir Howard Bernstein and Andy Street, the former Managing Director of John Lewis. The regions who will likely make the most of a city deals model will be those who have strong champions and leaders to effect change, growth and delivery for their regions.

Progress can’t be achieved where the institutional framework changes every ten years. The United Kingdom has managed to achieve a degree of political consensus on city deals which has helped ensure success to date and provides increased certainty for the future for all stakeholders. The challenge in New Zealand will be ensuring a similar multi-party buy-in. Given our increasingly partisan politics, this is New Zealand’s large elephant in the room.

INFRASTRUCTURE − DEFYING THE DEFICIT WITH BETTER DELIVERY

Funding and financing − doing this better

Infrastructure funding and financing is the ongoing hot topic in the New Zealand infrastructure sector, most recently considered in detail by The Helen Clark Foundation and WSP.11

While there are so many positives to being a small island nation that punches above its weight, one downside is that we have a relatively small population base, and therefore a limited amount of money generated by that population base, to ultimately pay for the infrastructure assets that are critical for a well-functioning and productive society.

Given the scale of New Zealand’s infrastructure deficit and the challenges we face, it is encouraging to see the Minister for Infrastructure, the Hon. Chris Bishop and Cabinet are actively focused on the practical question of “what we

do about it”, including, most recently, through the funding and financing work programme detailed in the Improving Infrastructure Funding and Financing Cabinet paper. The Minister has also highlighted the indisputable need for a “credible pipeline of infrastructure projects to attract the capital and talent we need to get building”.12

Although there is no "magic bullet" solution, we think there needs to be a fundamental step-change in the New Zealand psyche around infrastructure, to one that accepts the fundamental ‘Economics 101’ idea of scarcity – we have limited resources, and our behaviour around consumption, funding and spending needs to recognise that. There is an ever-pressing need in the face of climate change and other significant

challenges to do more with what we've got, and make smarter and better decisions.

Inevitably, no matter how many sources of private financing exist, there are only five million or so ratepayers and taxpayers, along with the Government, who ultimately pay the bills and fund our infrastructure under our current system. Put simply, there is no financing of infrastructure without the ability to fund the financing.

It is imperative we make the best decisions we can and live within our means.

We therefore need to consider new and innovative ways for the country to fund and finance infrastructure, to ensure that our spending on infrastructure is as efficient as possible.

The Minister has highlighted that “we need much more of a focus on value for money” and to address the problems that have led to the deficit, namely, “decades of underinvestment in maintenance, poor use of pricing, an unwillingness to use private capital and a lack of desire to use new tools.”13

We are confident that the Government’s intention to broaden and enhance the funding and financing tools available to the Crown and local councils will support progress in this area. We look forward to the reforms that will come as the Government delivers its funding and financing work programme from 30 September 2024 onwards.14

INFRASTRUCTURE − DEFYING THE DEFICIT WITH BETTER DELIVERY

Funding and financing − recognising the true cost

A NEW FUNDING AND FINANCING TOOLKIT

To fund our infrastructure more efficiently and effectively we need to move away from a line of thinking that the use of key infrastructure assets like roading and water is ‘free’, or that they are public goods that everyone is entitled to consume on an effectively unlimited basis, ‘as of right’, without affecting others.

By not charging consumers for the true cost of some of our infrastructure on a more user-pays or “user beneficiary” pays basis for decades, and by deferring important maintenance costs and asset renewals, the fallacy of an infrastructure ‘free lunch’ has come home to roost. It is impossible to get something for nothing – there is always an opportunity cost. As rates bills increase across the country, as water spills into the streets and as we waste frustrating hours sitting in traffic, we are all starting to finally understand the opportunity costs of our societal decision-making.

Basic microeconomics tells us that if something is scarce, the price goes up – which encourages people to use the resource more efficiently or look for alternatives. One of the biggest mistakes we have been making as a country for decades in terms of creating and compounding our infrastructure deficit has been not charging users and beneficiaries for the true cost of our

infrastructure. This has meant our key infrastructure delivery agencies, like local government, have not had the right tools to properly recoup the cost of delivering and maintaining critical infrastructure like roading and water.

If we price the use of our infrastructure on a more “user beneficiary” pays basis, we can create proper funding streams that better match the cost of our infrastructure, we can encourage demand shifts which means we might not need to spend as much as we thought on new assets, and we can create more certainty for financing new investments. Of course, there are equitable considerations that need to be addressed.15 As noted recently in The Helen Clark Foundation and WSP report, all relevant principles of fairness need to be considered and balanced, including vertical equity, intergenerational equity and the benefit and exacerbator principles.16 And, as always, the devil will be in the detail. But it is an institutional step-change that we think is needed to move forward.

Combined with a stable plan and pipeline of (at least some) politically neutral major infrastructure projects, if we price the use and benefits of our infrastructure correctly, we will, over time, see real transformational change that will benefit us all, and importantly our future generations.

A new and improved funding and financing toolkit therefore cannot come fast enough, and we eagerly await updates from the Governments funding and financing work programme from September 2024 onwards – particularly:

– New funding and financing principles that guide the Crown’s rationale and approach to the provision of funding and/ or financing.

– A possible new value capture framework, which would clarify the various forms of value capture tools available and guide decisions about when and where to apply and use different value capture tools.

– Potential improvements to the Infrastructure Funding and Financing Act 2020 to improve the functioning of the levy model, reduce transactions costs and support greater uptake.

– Potential policy changes to infrastructure funding settings to address issues with current funding tools, for example how development contributions and targeted rates can better recover the cost of growth from beneficiaries.

– Possible transport revenue reform, including a possible fleet-wide transition to road user charges, possible time of use charging and tolling reform.

– Possible Local Government Funding Agency reform, to enable greater lending flexibility for water infrastructure.

– Modernising and developing the Crown’s policies, frameworks and contracting models, including:

Z Potential changes to the Crown’s approach to public private partnership (PPP) procurement to apply lessons learned and enhance deliverability.

Z A possible framework for Crown involvement in city and regional deals.

Z Guidance on long-term leasing procurement arrangements.

Z Guidance on assessing unsolicited unique proposals.

Z Possible improvements to council incentives for growth, including potentially sharing a portion of GST from developments and land protection options to lower infrastructure costs.

Funding and financing − best practice pricing

Pricing is a critical piece of the infrastructure funding puzzle. Earlier this year, Te Waihanga released its Network Infrastructure Pricing Study on how pricing works in New Zealand’s four main network infrastructure sectors: land transport, water, telecommunications, and energy.17

This important research identifies opportunities to improve pricing performance in all four sectors. For example, transport congestion charging to reduce urban road congestion, implementing water metering to support water conservation and leak detection, managing technology change in telecommunications, and incentivising energy efficiency and decarbonisation.

THREE BEST PRACTICE GOALS FOR PRICING INFRASTRUCTURE NETWORKS

Pricing should guide infrastructure investment to ensure that we can provide and maintain the infrastructure we need. This is the most important aspect to get right, as network infrastructure is longlived and can impact our future choices.

Pricing should send signals to users about when, where, and how they should use infrastructure networks to maximise the overall benefits of those networks. This is the second most important goal as service levels and investment needs are highly influenced by user behaviour.

Pricing should be used to share benefits of providing networks widely through society. This should be addressed through adjustments to pricing once the first two goals are achieved.

It is encouraging to see evidence-based research supporting a more efficient and effective system through pricing. All forms of pricing should be on the table for consideration as part of the Government’s funding and financing work programme – dynamic pricing, tolls, value capture, user charges, timeof-use charging, demand reduction payments, etc. With proper design, we should embrace pricing as an opportunity to move towards a better way of making the most of what we have.

There are good examples of this having been achieved successfully overseas by leading economies. New Zealand now has the opportunity to learn from these examples and build better for the future of all New Zealanders. The obvious question is: are we as a country, in an increasingly partisan political environment, able to deliver on this opportunity? Can we rise to the challenge of becoming an economy that could be a global example of how infrastructure can be effectively delivered to meet population growth needs and benefit future generations?

INFRASTRUCTURE − DEFYING THE DEFICIT WITH BETTER DELIVERY

Private financing models − supporting delivery

There is no financing of infrastructure without the ability to fund the financing. But if we can better address the funding issues, how can private financing models help New Zealand in delivering new or upgraded infrastructure assets to a level greater than the current funding system permits?

Financing helps whoever is paying the bills of the infrastructure asset to spread the cost over its lifetime and over uses of the asset. It is the mechanism by which infrastructure investments can be made.

There are a number of private financing models that can help us deliver infrastructure. Two key models are PPPs and the Infrastructure Funding and Financing Act 2020 (IFF) model.

In general, PPPs are a long-term contract for the delivery of a service, where provision of the service requires the construction of a new asset, or enhancement of an existing asset, financed from external sources on a non-recourse basis. Full legal ownership of the asset is retained by the Crown.18 PPPs are an effective way of spreading life-cycle costs of infrastructure over public-sector budgets over time, and creating investable assets through the private sector.19 They are widely used around the world.

Although PPPs have faced criticism in the market, we note the recent independent review into Transmission Gully validated the use of the PPP contracting model. In particular, the independent review found that external events, budget, governance and consenting issues, rather than the PPP model, were among the contributors to the project’s time and cost overruns.20

As signalled by the Government in leading the review of the best available tools to fund and finance projects to address the infrastructure deficit, we also strongly consider there is a place for PPPs in the New Zealand infrastructure market. As with any contracting model, it is possible to adjust and improve the model, particularly in light of lessons learned in New Zealand and internationally, as the model matures.21 There is also opportunity to consider using innovation as part of this review to find new ways to help deliver infrastructure (such as bundling lower value projects).

IFF created a new regime for the funding and financing of infrastructure assets in New Zealand.

The IFF regime allows for a levy to be charged to the landowners in the areas benefiting from the development (or maintenance) of the relevant infrastructure by a special purpose vehicle (SPV). The SPV is then privately financed and applies the proceeds of such financing through grants to the relevant developer in order to fund the infrastructure development. That financing is then repaid directly through the recoupment of the levy.

One of the key benefits in the IFF regime is that the levy is charged on an intergenerational basis which spreads the cost of the levy out across the life cycle of the asset. The benefit of this funding model for developers such as local councils is that the funding is off balance sheet and would sit outside financial covenant calculations such as those imposed by the Local Government Funding Agency.

To date there have been two levies created under the IFF system – one to fund Tauranga City Council in relation to a group of transport related infrastructure projects, and the other to Wellington City Council to fund the development of a waste water minimisation facility.

While there has been some criticism of the IFF model in relation to functionality and costs, this is to be expected in the teething years of the introduction of a new model. The Minister for Infrastructure has indicated that there will be review of the IFF model, in our view it would be in New Zealand’s benefit for this to be focused on ways to support greater uptake in the use of the model by councils, and for a wider range of projects.

At the project finance level, the IFF model documentation is much simpler than the PPP documentation and as each IFF transaction develops, the documentation is rapidly becoming commoditised and therefore much more cost effective and efficient.

IFF is clearly another useful tool in the arsenal of infrastructure funding and financing in New Zealand. Its implementation and use on further projects will provide another cost-efficient mechanism in tackling the infrastructure deficit.

IFF

PPPs

The Fast-track Approvals Bill

The key development in the consenting space has been hard to miss. The Fast-track Approvals Bill (Fast-track Bill) offers a fast-track consenting process for certain listed and referred projects that will have significant regional or national benefits. The objective of the Fast-track Bill is to reduce consenting costs and timeframes to enable the efficient implementation of large-scale projects. Introduced under urgency, the bill immediately carved out a high-profile presence in the market.

Fast-track consenting processes are available for projects that require one or more of a range of approvals including a resource consent and notice of requirement under the Resource Management Act 1991 (RMA), authority under the Wildlife Act 1953, approvals under the Conservation Act 1987 or the Reserves Act 1977, and proclamation under section 26 of the Public Works Act 1981 to take or deal with land.

Eligibility

A project will become eligible for fast-track by either being:

(a) listed as a project under Part A or Part B of Schedule 2 of the bill; or

(b) referred to an expert panel by the Ministers of Infrastructure, Regional Development and Transport (Joint Ministers) in relation to most applications.

The Joint Ministers must consider whether the project is consistent with the purposes of the Fast-track Bill; if it has significant regional or national benefits, and if it meets the eligibility criteria. They must also consider whether the fasttrack process will be timelier and more cost-efficient than the normal process, the impact the project will have on the efficient operation of the fast-track process, and whether the application has sufficient information.

In determining whether the project will have significant regional or national benefits, the Joint Ministers may consider whether the project aligns with a listed priority, benefit or industry including housing, primary industries and the development of natural resources.

Ineligibility

Ineligible projects under the Fast-track Bill includes activities which impact on land that is mostly associated with Treaty, Māori and customary land and reservations (including national reservations), including customary marine areas without written permission, unless it is land set aside under Part 17 of Te Ture Whenua Māori Act 1993 or is a national reserve under the Reserves Act 1977.

Offshore wind is also ineligible until permitting legislation is put in place.

The fast-track process

Under Schedule 2, Part A-listed projects are automatically referred to an expert panel without requiring referral from the Joint Ministers. Part B listed projects must be referred to an expert panel by the Joint Ministers.

Part A LISTED PROJECTS

Part B LISTED PROJECTS

There are currently no listed projects under the Fast-track Bill. An advisory group has been established to recommend projects to be listed in the Fast-track Bill during the Committee of the Whole House stage. Joint Ministers

Expert Panel

On referral, an expert panel will have six months to review a project and recommend any relevant consent and/ or permit conditions. The project will then be sent back to the Joint Ministers who may approve or decline the project, or refer the project back to the expert panel if they consider that the conditions are too onerous.

INFRASTRUCTURE − DEFYING THE DEFICIT WITH BETTER DELIVERY

The fast-track process − stages

STAGE 1

THE DECISIONS OF THE JOINT MINISTERS ON REFERRAL DECISIONS

Mandatory engagement e.g. iwi and Councils

Apply for referral to Joint Ministers for Part B & other projects

Completeness check of referral application

Joint Ministers obtain and consider report

Notification of decision

Substantive application for Part A and B, and other projects

Joint Ministers’ referral decision

Joint Ministers may request further info

STAGE 2

THE EXPERT PANEL'S RECOMMENDATION

Completeness check by EPA

Panel must invite written comments

Joint Ministers invite written comments

Panel may request further info/ reports

Panel makes recommendation

Panel consults certain Ministers on draft report

Panel provides comments on draft conditions

Panel considers application and comments

The role of the Expert Panel is to make recommendations setting out whether the project should be approved or declined, and if approved, recommend any conditions appropriate to manage adverse effects. Panels are unable to seek wide input from the public and can only require written comments from a limited range of affected parties. It is also not mandatory for the panel to hold hearings, although it has the discretion to do so.

The fast-track process − the decision

STAGE 3 THE JOINT MINISTERIAL DECISION

CONFIRM DECISION

• The final decision on whether projects are approved is made by Joint Ministers

DEVIATE FROM PANEL

REFER BACK TO PANEL

• Analysis of recommendations and conditions in accordance with criteria

Appeal to High Court on question of law

STAGE 4 THE APPEALS PROCESS

Apply to Supreme Court for leave to bring appeal

Grants leave Refuses leave but further appeal justified

Supreme Court hearing Court of Appeal hearing

Refuses leave

• Part or whole of Panel’s recommendations

• May give directions to Panel

The fast-track − implications for infrastructure delivery

The Fast-track Bill will offer a streamlined decision-making process to facilitate the delivery of infrastructure by providing a ‘onestop shop’. Approvals under what would have been separate regimes, such as concessions under the Conservation Act 1987 and consents under the RMA, can now be sought under the Fast-track Bill.

Although the Fast-track Bill provides a more streamlined process for consenting nationally significant infrastructure, there a still limitations to its efficacy. For example, the Fast-track Bill does not make provision for the processes required under the Public Works Act 1981 (PWA), which is known to be a large barrier to the timely delivery of projects. 22 The PWA is now under review with legislation to modernise it expected to be introduced in mid-2025. 23

Additionally, there is no timeframe provided for the Joint Ministers to refer projects to the Expert Panel. The greater centralisation of decision-making means that the Fast-track Bill is exposed to the political environment more than existing processes. Joint Ministers will change depending on the government of the day. 24 This is likely to introduce greater uncertainty around ministerial appetite to approve projects. Some infrastructure providers have submitted that decisions

should instead be made by the Expert Panels rather than the Joint Ministers.

Many of the submissions on behalf of infrastructure bodies request amendments to the bill to ensure an Expert Panel has the skills and experience required to understand the complex legal and factual issues related to many infrastructure projects. Similarly, there is also the need for the Expert Panel to be provided with better resourcing to attract the appropriate talent and expertise. 25

A number of infrastructure providers are concerned about the provision that allows any person with an interest in the decision that is greater than that of the general public to appeal. They seek this provision is amended to allow a limited number of people to appeal decisions.

The current Fast-track Bill also has a two-year lapse date for consents and designations. Although the Fast-track Bill is required to speed up consenting, various factors are at play when it comes to the delivery of large infrastructure projects and a longer lapse period will be required to recognise this. 26

The Government’s Q3 Action Plan notes Cabinet will make decisions on the final design of the Fast-track Bill “incorporating sensible changes suggested through the select committee process”. 27

INFRASTRUCTURE − DEFYING THE DEFICIT WITH BETTER DELIVERY

Bridging the gap between current needs and new projects

The Government said in June that the National Infrastructure Pipeline has climbed to over NZ$120 billion, with around NZ$44 billion of projects currently under construction.28 While it is encouraging new projects are being planned, and available tools are being reviewed and designed to tackle the deficit, there is almost daily reporting on problems we already have with our existing infrastructure.

Headlines speak to eye-watering amounts needing to be spent to just maintain, repair and replace existing critical infrastructure.

Te Waihanga recently released findings from new research into the country’s need to look after what we already have. In response to the critical question of “are we investing enough on renewals?” 29 findings from the research shows that around 60% of investment needs to go to renewing existing assets.

Clearly new projects and infrastructure will take considerable time to plan, procure and build. So along with the focus on new tools and funding mechanisms to tackle the deficit, there is the obvious issue of how the country will be able to effectively “sweat” its existing infrastructure assets through a programme of repair, maintenance and replacements.

The challenge is that the scale of New Zealand’s existing infrastructure assets places a considerable demand on the resources required to maintain those assets, particularly in the necessary consulting disciplines and the contracting sector. Along with attracting new international consultants and contractors, New Zealand must retain existing talent and resources in order to have the capacity to address the practical need of keeping the country’s existing infrastructure working.

The size of this issue points to the need to find scale, and smarter ways to costeffectively procure national and regional programmes for the maintenance, repair and replacement of existing infrastructure.

Given the Government’s focus on innovative ways to bridge the infrastructure deficit gap, central agencies and local government have the

opportunity to look at how programmes could be bundled (including interagencies and across local government) to achieve economies of scale to meet the country’s immediate asset repair needs.

The public sector should look more closely at how procurements could be shared and contracted, rather than different public sector entities actively competing in a market that is practically constrained by a lack of available resource. There are useful recent examples of asset management and facilities management (AM/FM) contract bundling between Government departments that point in this direction.

Making the most of rapidly improving technology can also help us make the most of our existing infrastructure assets. We have recently seen the launch of a revolutionary, New Zealand-leading platform by Wellington City Council through an Underground Asset Register

“Between 2013 and 2022, depreciation costs for infrastructure were equal to 58% of new capital investment. For every $10 we spent on new infrastructure, almost $6 of existing infrastructure wore out. If we want to maintain our existing infrastructure for future generations, that’s roughly how much we need to spend on renewal. That leaves $4 out of every $10 of investment available for new or improved infrastructure.”

- TE WAIHANGA

to map buried pipes and cables in Wellington, that has the potential to save significant amounts of infrastructure investment dollars. 30 It is the start of a digital twin of the infrastructure under the city’s streets, and there is ambition to build a platform that can ultimately be scaled up for the whole of New Zealand. This is exactly the type of bold and collaborative progressive thinking that will create practical and cost-effective efficiencies to help us deliver our way out of the infrastructure deficit.

INFRASTRUCTURE - DEFYING THE DEFICIT WITH BETTER DELIVERY

Building our way out of deficit

It is vital that projects are designed and built in an efficient and sustainable manner in order to overcome New Zealand’s infrastructure deficit, as well as making better use of what we already have through effective asset maintenance and management.

This entails early and appropriate selection of the contractual model, sensible selection of conditions of contract and allocation of risk across the lifecycle of the asset, and effective and prudent contract administration.

In some cases, a tried-and-tested contractual model, such as a design-build or build-only, may be the most appropriate. In other cases, either out of necessity or opportunity, alternative contractual models may achieve better overall outcomes. Determining which contractual model is the most suited for any given project necessitates a holistic assessment of the project-specific context and risks, from design through to completion and operation.

Major projects have traditionally been contracted on a standalone basis, often relying on conditions of contract which allocate significant types and levels of risk to the contractor, without a proper assessment of whether the contractor is best placed to manage and/or mitigate the particular risk. While such an approach may

still be appropriate in certain circumstances, the industry has come to recognise that it is not a ‘one size fits all’ solution which guarantees on time, on budget and appropriate quality delivery in each instance. Indeed, there is growing awareness that the consequences of burdening contractors with extensive project risks may well affect the ongoing viability and sustainability of our domestic construction industry.

Thankfully, there is growing awareness and understanding in the construction industry of the range of contractual options and features which exist to facilitate successful project delivery, some of which we canvass here.

The design-construction interface and ECI

In a build-only procurement, it is common for the majority of tender clarifications to relate to the design, that is, design discrepancies and omissions, or issues with buildability. In some cases options for value engineering are also raised for consideration. Resolving such matters takes time, can precipitate the onset of an ‘us and them’ mentality between the design team and the contractor, which can contribute to a claims-based project culture.

Involving the contractor in the project during the early design phases can help to mitigate such outcomes. This typically occurs via an early contractor involvement (ECI) phase, during which the contractor works

closely with the design to team to interrogate the design for buildability, and develop its construction methodology. The aim is to reduce design-related issues (and the extent of consequent time and cost issues) during the delivery phase.

ECI can also be used in conjunction with a design-build procurement, where the ECI phase runs in parallel with the early design phases. As the design is progressed from concept through to preliminary and potentially developed design, the ECI contractor provides similar services and inputs to those common in a build-only procurement. This enables the contractor to develop a holistic understanding of the early-stage design solution, and potentially contribute to the development of the principal’s requirements.

This approach may, in turn, facilitate more accurate preliminary and general pricing (to the extent rates are not already locked in under the ECI agreement) and certain trade package pricing. It may also assist with assuring the contractor as to the viability of the design solution, in circumstances where the design team is to be novated to the contractor.

Understood in this way, ECI leading into a designbuild contract can produce similar outcomes to those associated with the progressive design-build model, which by all accounts is gaining in popularity in certain offshore markets.

INFRASTRUCTURE − DEFYING THE DEFICIT WITH BETTER DELIVERY

Building our way out of deficit − more options for successful delivery

NZ standard form contracts and special conditions

The release of NZS 3910:2023 is a step in the right direction for achieving standardisation in the delivery of build-only projects. Much has been said and written about the merits and shortcomings of the revised standard.

We do not restate those here other than to say that while its publication is a positive development, it is not, in and of itself, a set of inconvertible conditions for use on all build-only projects.

The reality is that each project is different, and each project participant is different. Depending on the nature and extent of those differences, it may be necessary to modify standard conditions to accommodate those differences and facilitate successful project delivery, whether the NZS, FIDIC or NEC suites of contracts or some other form is used.

All this is not to oppose standardisation, or to defend bespoke contracts. Rather it is to promote the application of the principles of objectivity, prudence, practicality and commerciality in assessing and devising fit-for-purpose conditions of contract.

On some occasions such principles may be applied quickly and easily to standard conditions, and result in minimal or no changes. On other occasions, applying

such principles will be more complex and may result in the use of special conditions. Where the latter applies, it is essential that the special conditions are drafted as precisely as possible, presented transparently, and underpinned by a rational explanation, to preserve the value inherent in the remaining standard conditions.

Programme procurement

Where there is a pipeline of similar projects to be designed and built in succession, a programme-wide approach to procurement should be considered rather than a fragmented, project-byproject approach. There are limited instances where such an approach has been taken in New Zealand, but two prominent examples are the SCIRT Alliance and Watercare’s Enterprise Model. Overseas, it is more common and standard form documentation (such as the FAC-1 Framework Alliance Contract) exists to help facilitate such an approach.

Encouragingly, we have seen certain principals adopt a programme-wide approach to bundle common projects together, and we are aware of others in the market preparing to take such an approach. As more projects are procured on this basis, we expect the model will be further refined, which may ultimately result in market standard documentation,

Consistency of design and construction methodologies across common features of projects in the programme to achieve efficiencies and avoid ‘reinventing the wheel’.

Early risk identification and incentivisation to develop and implement appropriate strategies to mitigate project risk.

BENEFITS OF A PROGRAMME-WIDE

APPROACH

Certainty of forward-work for the programme participants to encourage investment in people and equipment.

such as FAC-1, being developed. In turn, this should make the model more accessible to principals who do not have the resources or capability to devise and implement such a model on their

Sharing the ‘lessons learned’ across projects, to avoid repeating the same mistakes.

own, and provide greater opportunity for consultants and contractors to bid and secure appointments to such arrangements.

INFRASTRUCTURE − DEFYING THE DEFICIT WITH BETTER DELIVERY

Building our way out of deficit − risk-sharing and alliancing

Risk-sharing

In the last few years, there has been increased focus on the sharing of certain risks between principal and contractor during the delivery phase. Again, there are various different ways that risks can be jointly owned, or at least apportioned, between principal and contractor, including:

• The use of variation benchmarking to identify, assess and allocate specific project risks between participants, rather than relying on generic variation time and cost entitlement provisions. While the process of developing and agreeing a variation benchmarking register can be time and cost intensive at the outset of a project, it can help to ensure the parties are aligned as to how project specific risks are to be treated under the contract while in delivery.

• The use of a target outturn cost (TOC) and associated pain/gain mechanism pursuant to which the parties share (in accordance with pre-agreed portions) the risk of the actual cost of the contract works being more or less than the TOC. Notably, such a pricing option has been included in NZS 3910:2023, although it will likely need to be bolstered by special conditions to ensure it operates as intended.

• The use of a non-cost performance pool and associated KRAs and KPIs to incentivise achievement of qualitative outcomes and proactive identification and management of various risks, such as disruption during construction.

These features are commonly used in the context of alliance contracts. While there are limited examples of alliances being used in vertical projects, both in New Zealand and Australia, such contractual features can be used independently of a full alliance and in the context of other, more traditional, contract types to help more equitably share risk.

Alliancing

Alliances are a relatively common model to deliver large scale horizontal infrastructure projects in New Zealand. Alliancing is best suited to complex matters where the ultimate outcomes are understood, but the scope of what is required to achieve those outcomes is unclear and possibly subject to change.

The Bell Gully Environment and Planning team has had the privilege of being part of the legal team for Te Tupu Ngātahi the Supporting Growth Alliance. We share some personal insights and observations on what it takes to make an alliance work.

Building and maintaining a successful alliance

Culture is everything

Through my time on the Alliance, I have seen how important it is to have a strong culture to maintain a successful Alliance. You can have a group of highperforming individuals but they may not be an effective team if there are cultural issues and a lack of leadership. While it can be difficult to articulate what is a good “culture”, people intuitively know whether it is positive or not and this drives people’s experiences and behaviours on an Alliance.

Trust equals speed

It may seem self-evident, but the more a team trusts each other then the faster they can get through the work required. In my experience, the fastest way to build trust is to spend time together both professionally and socially. This is one of the reasons why many Alliances require people to be co-located and work together from the same project office.

Have fun along the way

Alliances often involve demanding deadlines, long hours of work, and at times, considerable pressure. The teams who cope the best appear to make the time and space to have some fun together along the way. This can be through small gestures and team behaviour embedded in daily life, or setting aside formal times for social functions.

Clear role clarity and accountability

Alliances usually involve establishing a “no blame” culture, but this does not mean having no accountability. Issues often arise because it is not clear whose role it is to progress or resolve an issue. This is why it is so important to have role clarity from the outset. In my opinion careful consideration should be given to appointing a lead for every technical discipline involved in the Alliance. It is important to take everyone on the journey from the start. While it may be tempting to save time at the formation of an Alliance, it will probably only cost you more time in the long run.

Live and breathe the principles

One way to shape a culture is for the team to collectively devise and agree a set of clear principles, and then ruthlessly live by them. This requires everyone to be on board and make an effort – the Programme Alliance Board, Alliance Management Team, Discipline Leads, Owner Interface Managers, and all team members.

Alliance participants must be prepared to have difficult conversations, and be honest with each other about issues. It serves no one to pretend otherwise, as issues simply fester and result in underlying tension which detracts from the core work.

Natasha Garvan Bell Gully partner and legal lead for a number of Supporting Growth Alliance projects.

INFRASTRUCTURE − DEFYING THE DEFICIT WITH BETTER DELIVERY

Endnotes

1 Willis, N. (2024, May 30). Budget Speech. https://budget.govt.nz/budget/pdfs/speech/b24speech.pdf

2 Mercier, K., The Helen Clark Foundation, & WSP. (2024). Bridging the Infrastructure Gap: Funding and financing for a resilient Aotearoa New Zealand. https://www.wsp.com/en-nz/ insights/hcf-bridging-the-gap

3 Infrastructure New Zealand. (2024). InfraRead: Bridging the Infrastructure Gap. https:// infrastructure.org.nz/wp-content/uploads/2024/02/InfraRead-February-2024_WEB_FINAL. pdf

4 New Zealand Infrastructure Commission, Te Waihanga (2024, May 9). How is our infrastructure tracking? Monitoring progress against New Zealand’s first Infrastructure Strategy. Wellington: New Zealand Infrastructure Commission/Te Waihanga. https:// tewaihanga.govt.nz/our-work/research-insights/how-is-our-infrastructure-tracking

5 New Zealand Treasury. (2024, May 22). Cabinet Paper ECO-24-SUB-0076: Improving Infrastructure Funding and Financing. https://www.treasury.govt.nz/sites/default/ files/2024-06/cabinet-paper-eco-24-sub-0076.pdf

6 Penk, C. (2024, June 18). Making it easier to build infrastructure [Press release]. https://www. beehive.govt.nz/release/making-it-easier-build-infrastructure

7 Bishop, C. (2024, May 30) Fixing New Zealand’s infrastructure deficit [Press release]. https:// www.beehive.govt.nz/release/fixing-new-zealand%E2%80%99s-infrastructure-deficit

8 New Zealand Government. (2024, July 1). Coalition Government’s Q3 Action Plan for New Zealand. https://www.beehive.govt.nz/sites/default/files/2024-07/Q3%20Plan.pdf

9 Morton, B. (2024, July 9). Starmer promises regular meetings with mayors to discuss devolution. BBC News. https://www.bbc.com/news/articles/cml247l74zko

10 Crerar, P. (2024, July 16). Labour to invite England’s ‘devolution deserts’ to take on more power. The Guardian. https://www.theguardian.com/politics/article/2024/jul/16/labour-toinvite-englands-devolution-deserts-to-take-on-more-power

11 Mercier, K., The Helen Clark Foundation, & WSP. (2024). Bridging the Infrastructure Gap: Funding and financing for a resilient Aotearoa New Zealand. https://www.wsp.com/en-nz/ insights/hcf-bridging-the-gap

12 Bishop, C. (2024, June 14) Speech to the LGNZ Infrastructure Symposium. https://www. beehive.govt.nz/speech/speech-lgnz-infrastructure-symposium.

13 Bishop, C. (2024, June 14) Speech to the LGNZ Infrastructure Symposium. https://www. beehive.govt.nz/speech/speech-lgnz-infrastructure-symposium.

14 New Zealand Treasury. (2024, May 22). Cabinet Paper ECO-24-SUB-0076: Improving Infrastructure Funding and Financing. https://www.treasury.govt.nz/sites/default/ files/2024-06/cabinet-paper-eco-24-sub-0076.pdf

15 New Zealand Infrastructure Commission, Te Waihanga (2024, February 2). New Zealanders’ views on what’s fair when it comes to paying for infrastructure. Wellington: New Zealand Infrastructure Commission/Te Waihanga. https://tewaihanga.govt.nz/our-work/researchinsights/new-zealanders-views-on-what-s-fair-when-it-comes-to-paying-for-infrastructure

16 Mercier, K., The Helen Clark Foundation, & WSP. (2024). Bridging the Infrastructure Gap: Funding and financing for a resilient Aotearoa New Zealand. https://www.wsp.com/en-nz/ insights/hcf-bridging-the-gap

17 Infrastructure Commission, Te Waihanga. (2024, May 17). Network infrastructure pricing study. https://tewaihanga.govt.nz/our-work/research-insights/network-infrastructurepricing-study

18 New Zealand Infrastructure Commission, Te Waihanga. (n.d.). Public private partnerships (PPPs). Infrastructure Commission, Te Waihanga. https://tewaihanga.govt.nz/our-work/ project-support/guidance/public-private-partnerships-ppps

19 Burke, M. S., & Lipshitz, C. (n.d.) The infrastructure gap: financing and funding the future. Retrieved July 17, 2024, from https://infrastructure.aecom.com/infrastructure-funding

20 New Zealand Infrastructure Commission, Te Waihanga. (2024, May 10). Transmission Gully review finds PPP model not to blame [Press release]. https://tewaihanga.govt.nz/newsevents/transmission-gully-review-finds-ppp-model-not-to-blame

21 New Zealand Treasury. (2024, May 22). Cabinet Paper ECO-24-SUB-0076: Improving Infrastructure Funding and Financing. https://www.treasury.govt.nz/sites/default/ files/2024-06/cabinet-paper-eco-24-sub-0076.pdf

22 Genesis Energy Limited. (2024, April 19). Submission on the Fast-track Bill. Transpower New Zealand Limited. (2024, April 19). Submission on the Fast-track Bill. Retrieved from https:// bills.parliament.nz/v/Bill/083f0a7b-f182-41d5-0897-08dc3e31559c?Tab=sub

23 Penk, C. (2024, June 18). Making it easier to build infrastructure [Press release]. https:// www.beehive.govt.nz/release/making-it-easier-build-infrastructure

24 Fonterra Co-operative Group Limited (2024, April). Submission on the Fast-track Bill. Retrieved from https://bills.parliament.nz/v/Bill/083f0a7b-f182-41d5-089708dc3e31559c?Tab=sub

25 New Zealand Port Company CEO Group (2024, April). Submission on the Fast-track Bill. Retrieved from https://bills.parliament.nz/v/Bill/083f0a7b-f182-41d5-089708dc3e31559c?Tab=sub

26 Meridian Energy Limited (2024, April 19). Submission on the Fast-track Bill. Retrieved from https://bills.parliament.nz/v/Bill/083f0a7b-f182-41d5-0897-08dc3e31559c?Tab=sub

27 New Zealand Government. (2024, July 1). Coalition Government’s Q3 Action Plan for New Zealand. https://www.beehive.govt.nz/sites/default/files/2024-07/Q3%20Plan.pdf

28 Bishop, C. (2024, June 19) National Infrastructure Pipeline worth over $120 billion [Press release]. https://www.beehive.govt.nz/release/national-infrastructure-pipeline-worth-over120-billion

29 New Zealand Infrastructure Commission, Te Waihanga (2024, February 23). Greater focus on maintenance needed: First assessment of the value of New Zealand’s infrastructure published. Wellington: New Zealand Infrastructure Commission/Te Waihanga. https:// tewaihanga.govt.nz/news-events/greater-focus-on-maintenance-needed-firstassessment-of-the-value-of-new-zealand-s-infrastructure-published

30 Wellington City Council. (2024, July 11). “Once in a lifetime opportunity” to map city’s pipes and cables [Press release]. Wellington City Council. https://wellington.govt.nz/news-andevents/news-and-information/our-wellington/2024/07/wuam-beta-launch

Bell Gully’s infrastructure practice

Bell Gully has New Zealand’s leading infrastructure practice. We have a deep history of delivering infrastructure solutions for New Zealand Inc., and we are ready and geared up to do more.

Our multi-disciplinary infrastructure team are market leaders and are consistently appointed to New Zealand’s most complex and transformative projects. Our work demonstrates our unrivalled experience in advising on major projects throughout the country, acting for central government, local government, Māori tribal organisations (iwi) and private sector and investor clients alike.

We specialise in providing comprehensive advice across the entire lifecycle of infrastructure projects. From initial procurement, project structuring and financing to the construction, operation, maintenance, and asset disposal or acquisition, our team offers expertise at every stage.

Our market leading expertise covers:

• Procurement, probity and regulatory

• Environment, planning and consenting

• Iwi relations

• Funding and financing

• Project structuring

• Tax structuring

• Project delivery

• Asset management and operations

• Infrastructure M&A

• Disputes

Our deep understanding of infrastructure, coupled with our pragmatic, business-oriented approach enables us to deliver integrated, highquality services to our clients across the infrastructure market, including the following key sectors:

• PPPs

• Water

• Transport

• Energy and renewables

• Social infrastructure, including housing

• Digital infrastructure

The scale of the projects we have advised on and the depth of experience they require demonstrates that our infrastructure practice is unmatched in the New Zealand market.

Bell Gully’s team is consistently ranked by global legal directories as being top tier for projects and resource management, real estate and construction, energy and natural resources (incl. environment) and project development, including by The Legal 500 Asia Pacific, Chambers Asia Pacific and IFLR1000. Individually, all members of our infrastructure leadership group, consisting of Angela Harford, Ian Becke, Natasha Garvan, David Chisnall and Sarah Anderson-Butler are recognised as leaders in their fields by the same international legal directories.

Bell Gully’s infrastructure leaders

If you have any questions about this report, please contact one of the team listed below or your usual Bell Gully adviser:

AUTHORS

STRUCTURING, FUNDING, CONTRACTING AND DELIVERY STRUCTURING, FUNDING, CONTRACTING AND DELIVERY ENVIRONMENT, PLANNING AND CONSENTING

Angela Harford PARTNER

DDI +64 4 915 6764 MOB +64 21 875 905 angela.harford@bellgully.com

Ian Becke PARTNER

DDI +64 9 916 8795 MOB +64 21 804 096 ian.becke@bellgully.com

STRUCTURING, FUNDING, CONTRACTING AND DELIVERY FUNDING AND FINANCING

David Chisnall PARTNER

DDI +64 4 915 6966 MOB +64 27 594 8505 david.chisnall@bellgully.com

Sarah Anderson-Butler PARTNER

DDI +64 9 916 8851 sarah.anderson-butler@bellgully.com

Natasha Garvan PARTNER

DDI +64 9 916 8956 MOB +64 21 329 179 natasha.garvan@bellgully.com

Bell Gully’s wider infrastructure team

Toni Forrest PARTNER

DDI +64 4 915 6524 MOB +64 27 5055 910 toni.forrest@bellgully.com

Graham Murray PARTNER

DDI +64 9 916 8832 MOB +64 21 909 870 graham.murray@bellgully.com

Dean Oppenhuis PARTNER

DDI +64 4 915 6921 MOB +64 21 317 697 dean.oppenhuis@bellgully.com

Scott Lochhead

SENIOR ASSOCIATE

DDI +64 9 916 8689 MOB +64 21 228 4574 scott.lochhead@bellgully.com

Mathew Brown PARTNER

DDI +64 4 915 6537 MOB +64 27 420 5363 mathew.brown@bellgully.com

Laura Littlewood PARTNER

DDI +64 9 916 8928 MOB +64 21 828 429 laura.littlewood@bellgully.com

Melissa Ahlefeldt SPECIAL COUNSEL

DDI +64 04 915 6541 MOB +64 21 569 082 melissa.ahlefeldt@bellgully.com

Philip Zander SENIOR ASSOCIATE

DDI +64 4 915 6758 MOB +64 27 368 7580 philip.zander@bellgully.com

INFRASTRUCTURE M&A

Charles Wong

SENIOR ASSOCIATE

DDI +64 9 916 8650 charles.wong@bellgully.com

Ruth Keats SENIOR ASSOCIATE

DDI +64 4 915 6829 ruth.keats@bellgully.com

Nicola Yong

SENIOR ASSOCIATE

DDI +64 4 915 6994 MOB +64 21 875 122 nicola.yong@bellgully.com

Zac Kedgley-Foot PARTNER

DDI +64 4 915 6820 MOB +64 21 535 253 zac.kedgley-foot@bellgully.com

Sam Dykes PARTNER

DDI +64 9 916 8323 MOB +64 27 4162 146 sam.dykes@bellgully.com

Anna

Dean Alderton PARTNER

DDI

David Coull PARTNER

DDI +64 4 915 6863 MOB +64 21 800 308 david.coull@bellgully.com

Chris Hodges PARTNER

DDI +64 9 916 8321 MOB +64 21 687 335 chris.hodges@bellgully.com

rachael.brown@bellgully.com

Tim Fitzgerald PARTNER

DDI +64 9 916 8882 MOB +64 21 770 472 tim.fitzgerald@bellgully.com

Kirsty Dobbs PARTNER

DDI +64 4 915 6514 MOB +64 27 405 8086 kirsty.dobbs@bellgully.com

Karl

karl.anderson@bellgully.com

If you have any questions about this report, please contact one of the team listed above or your usual Bell Gully adviser

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NEW ZEALAND

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Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any further action in relation to the matters dealt with in this publication. The views expressed are our own. No client views are represented in this publication.