English speaking: NZ pursues more PPPs | by Jeff Hutton

English speaking: NZ pursues more PPPs

By Jeff Hutton

In more than 150 schools throughout New Zealand, teachers and principals are forced to scramble for buckets when it rains.

As water rots carpets and damages walls, school principals make repeated calls to tradesmen to patch up buildings. Why? Because in the decade to 2006, the government of the day oversaw a poorly executed renovation spree that saw poor craftsmanship and materials deliver substandard outcomes.

The scandal will result in NZ$1.5 billion in damage; about a tenth of the country’s NZ$13 billion worth of school assets. But the embarrassment of the programme – which saw the government fail to adequately manage its risks – has created a public appetite for greater private sector involvement in infrastructure – particularly in education.

Since his election, Prime Minister John Key and his NZ National Party Government have moved quickly to begin spelling out a pipeline of public private partnership (PPP) projects – the most recent a package of schools announced in April.

But even with a softer public attitude to PPPs and the popularity of the Key Government, the public sector is still taking a cautious approach to PPPs. Officials warn that the shape of PPPs and their justification will differ from overseas markets. Deputy Prime Minister Bill English – who also serves as the country’s Minister for Finance (Treasurer) and Infrastructure – vows that there will be more projects to come if, as widely expected, the Key Government is returned at the election in November 2011.

‘We see the role of PPPs expanding,’ English says in an interview in his Wellington office on the eve of his government’s first announcement that it will build two schools through a PPP model in Hobsonville Point, north-west of Auckland.

‘We own NZ$220 billion in assets. About twothirds of those are physical assets, and we need to manage them better.’

English speaking: NZ pursues more PPPs

Last year, the Key Government unveiled the country’s first PPP ...to build and operate a 1000-bed men’s prison in Wiri in South Auckland. NZCID estimates the project is worth about NZ$500 million.

English’s party has vowed to match his country’s per capita GDP with Australia by 2025. The trick is to woo private sector investment while maintaining broad community support.

The breakneck reform pace under Labour Finance Minister Roger Douglas, and some high-profile failures in reforming public services and undertaking asset privatisations, still looms large in some Kiwis’ minds. The decision by Air New Zealand to take a stake in Ansett shortly before its collapse, and the failed reform of New Zealand’s railways, later sold back to the government, are two examples of when New Zealanders have felt short-changed.

‘The average Kiwi saw private involvement in infrastructure leading to job losses and big profits for companies,’ said Stephen Selwood, Chief Executive of New Zealand’s Council for Infrastructure Development (NZCID).

Last year, the Key Government unveiled the country’s first PPP, inviting bids from the private sector to build and operate a 1000-bed men’s prison in Wiri in South Auckland. NZCID estimates the project is worth about NZ$500 million.

‘Wiri prison is a sort of test case,’ Selwood says. The country’s schools initiative is a second small step. New Zealand spends NZ$500 million a year on its schools and it expects a pipeline of about NZ$100 million – NZ$200 million a year in the coming years, English says.

New Zealand’s growing embrace of PPPs is focused strongly on driving up the value for money achieved in procurement, and enhanced service quality. In the coming years, it’s hoped that PPPs will help drive cultural change among school boards and other public bodies, encouraging officials to consider expenses linked to the life of an asset and adopt skills and lessons learned from similar projects across New Zealand.

‘We do not see PPPs as a funding mechanism,’ says Richard Forgan, Executive Director of the Treasury’s National Infrastructure Unit. ‘They are a procurement and service delivery mechanism, and we are interested in them as a way of improving value for money.

The National Infrastructure Unit is a new department within Treasury that oversees infrastructure priorities and coordinates planning.

Delivering Wiri prison as a PPP is expected to include performance requirements that may be more valuable than bottom line government spending, Forgan suggests. The operator will need to show improvements in inmate rehabilitation.

‘We expect prisons to be secure, obviously. But we want the prison operators to support rehabilitation of the inmates, too,’ Forgan says.

‘That has a real benefit of reducing the strain on the police and the whole of the justice system.’

So far it’s in social infrastructure, defence and housing where the government is most likely to put PPPs to use.

English says over the next few years, should the government win re-election, he’ll be looking for private participation in affordable housing, using models in Australia as a guide. The government will also be looking for help from the private sector to help consolidate its defence facilities.

‘We’ve got NZ$15 billion of state housing, and there are models in Australia of non-state provision that could be instructive. New Zealand has done nothing in that area over the past 10 or 15 years.’

Housing New South Wales’ Bonnyrigg social housing PPP is one project that has captured attention from Wellington. Last year, the New South Wales Government announced the completion of stage one of the 12-year, $733 million project that will eventually provide 2332 private and public housing dwellings. The project, delivered by Westpac, Spotless, Becton and St George Community Housing, will see a 70/30 split between private and public housing, and will do much to renew the area’s prospects.

English speaking: NZ pursues more PPPs

Under the PPP – the first of its kind in Australia to provide social housing – Westpac and Becton Property own the development, while Spotless and St George Community Housing are the service providers.

‘We are getting started on that,’ English says. ‘Credible market participants like Westpac are getting started on that and saying they are interested.’

Defence is also a likely candidate for more private sector participation. The government unveiled its first defence white paper since the late 1990s, setting out a blueprint for the next 25 years.

Some 1400 jobs, mainly in support and IT roles, may be contracted out to the private sector. The white paper is targeting about NZ$250 million in savings, in part by consolidating bases and back offices, as the government makes way for about NZ$4 billion in new ships and aircraft.

The government is reportedly planning to consolidate its central North Island defence hub at Ohakea Air Base. That could mean moving operations from Waiouru and Trentham to Ohakea.

‘Defence has a five-year plan for significant efficiency and rationalisation and we would expect PPPs to be a big part of that,’ English says. ‘We are gleaning what we can through the PPP discussion.’

One challenge may be attracting significant foreign interest, given the slow ramp-up of the pipeline and the comparatively modest size of New

One challenge may be attracting significant foreign interest, given the slow ramp-up of the pipeline and the comparatively modest size of New Zealand projects. English knows that the government will have to do more if it wants to attract the Leightons and Lend Leases of the world.

Zealand projects. English knows that the government will have to do more if it wants to attract the Leightons and Lend Leases of the world.

‘Contractors may look at our pipeline and think they would be better off in Western Australia,’ English says.

Forgan at the National Infrastructure Unit says projects need a minimum price tag of about NZ$100 million, before they will realistically be considered for delivery under a PPP.

That’s a higher minimum threshold than in Western Australia, where the state’s treasury has stated projects above $50 million will be assessed for suitability for PPP procurement models.

Western Australia, too, has been competing to attract private interest and investment for its projects. Western Australia has brought forward a range of PPP projects, including the Mundaring Water Treatment Plant – due for completion in 2013; a 5000-vehicle multistorey car park; the 327-bed Midlands Health Campus; and soon, a new prison project at Kalgoorlie. ‘What we’re interested in is good price tension in the market. The more people we can attract, the better. That means developing a pipeline of projects,’ English says.

‘The feedback from the Australian operators is that “well, when it has a few more zeroes on it we’ll come and see”.’

Bankers say that while both New Zealand and Western Australia are showing promise, their primary attention, for now, remains on Victoria, New South Wales and Queensland.

Said one veteran banker: ‘Victoria does a big PPP every year. When they have a project on the go, we send them our “A-team” every time.’

English said he expects interest from mid-tier Australian operators and service providers that aren’t put off by the smaller scale of the projects.

‘We are hoping to attract operators who are able to be a bit innovative and interested in smaller scale.

‘We’re not ruling anyone out.’

Serco says it’s keen to participate in suitable projects in New Zealand as the pipeline firms up.

‘Serco is committed to building capability in New Zealand, as we see opportunities in a number of sectors,’ says Emma Needham, a Serco executive.

‘New Zealand is a long-term, strategic and attractive opportunity for Serco.’

English speaking: NZ pursues more PPPs

New Zealand’s evolved and stable regulatory system and economy, coupled with its deep pool of talented engineers, financiers and other specialists – and an easier labour market – should help to make New Zealand attractive to Australian companies, says Martin Welsh, New Zealand’s Sydney-based Consul General.

‘The ease of doing business and a relatively competitive taxation regime support the investment argument.’

In the short term, New Zealand’s PPP pipeline appears likely to focus on social infrastructure projects. The NZ$1.7 billion Waterview Motorway in Auckland, for instance, is currently being bid as a competitive alliance between contractors and the New Zealand Transport Agency.

But business expects the next round of major transport projects, such as the expansion of the NZ$2–3 billion Waikato Expressway from Auckland to Hamilton, to be considered for delivery under a PPP. The expressway is part of a national network that the government has labelled Roads of National Significance. Other parts of the network too, including Transmission Gully motorway and a motorway between Puhoi and Wellsford, may be considered for private delivery.

But Forgan said any new motorway offered as a PPP would likely be a greenfield project, rather than an extension of an existing asset.

‘It’s early days investigating use of PPPs in road projects, and there’s always the question as to whether to trial such a model on an expansion to an existing asset, or something new and more self-contained,’ Forgan says.

Support for the alliance model for transport infrastructure runs deep, in part because under the alliance model, the government assumes much of the risk if development proposals are blocked by environmental assessments and other objections, NZCID’s Selwood says.

Bid costs are another barrier to entry for overseas contractors. Modest pipelines risk making the effort of cobbling together a bid uneconomic.

‘There is a perception by government that the existing NZTA is pretty efficient in procurement procedure. But it’s a perception; we just don’t know,’ Selwood says. ‘We’ve never had a competitive model so we just don’t know.’

Still, as traffic congestion in Auckland intensifies, and as prices for New Zealand’s biggest commodity exports, including wool, dairy and lamb test new record highs, worries are mounting that the country’s infrastructure faces a growing funding gap.

Over the next decade New Zealand will need to spend NZ$40 billion on transport, electricity transmission, broadband and local council infrastructure, such as water and sewerage.

The New Zealand infrastructure sector says that the country faces a sizeable funding gap in economic infrastructure over the next 20 years – over and above the reconstruction of Christchurch. Key investments include a broadband network rollout and a backlog of investment in public transport, roads and water infrastructure. Plans for a rail loop through Auckland’s CBD face a NZ$2 billion shortfall. Upgrading the national rail network also faces a NZ$3 billion shortfall.

‘We haven’t done any significant rail construction in this country for more than 100 years,’ Selwood says. ‘Companies like Leighton have that experience across Australia’s states.’

Existing budget limitations have been further exacerbated by the reconstruction requirements from the devastating Christchurch earthquake. The stretched public sector balance sheet and mounting funding gap will likely strengthen arguments in favour of the value for money outcomes achieved by private delivery models.

Even so, PPPs will be of limited use in Christchurch, at least in the short term, where engineers and emergency workers struggle to bring some sense of normalcy to the country’s secondlargest city. Portable toilets still dot neighbourhoods. City residents had to boil drinking water until early April. The only sounds in the CBD, where the earthquake was concentrated, are the wind and the crackle of walkie-talkies.

More than 900 buildings will need to be demolished or repaired, including stores that for now still contain their merchandise, and restaurants where cups and plates remain where patrons left them in the rush to escape.

‘We need a coordinated reconstruction effort, and that ideally means only digging up streets once to repair sewerage and other services,’ Forgan says.

The Christchurch earthquakes impacted on an area that accounts for about 17 per cent of the country’s GDP. English says he’s not ruling any procurement models out for the reconstruction efforts.

English speaking: NZ pursues more PPPs

THIS PAge: Upgrades to Auckland’s roads should put wind in New Zealand’s sails.

‘The government is going to be open to any proposition that will get more done sooner and at a reasonable price, because it’s so important to rebuild confidence,’ English says.

Even so, with government determined to pay for the rebuild through savings, and worries of a credit downgrade looming large, Selwood says PPPs will need to be part of the mix. ‘There is a stronger impetus now for PPPs.’

As well as rebuilding lives and restoring confidence in Christchurch, there is a broader goal at stake for New Zealand: an obsession, of sorts, with recapturing the glory years when preferential access to the United Kingdom for its wool and lamb helped make New Zealand one of the wealthiest countries.

An often stated goal is to be ranked in the upper half of the 29 countries that make up the Organisation for Economic Cooperation and Development (OECD). But every year New Zealand’s standing seems to ebb. In 2009 it ranked 23rd out of 29, with the country’s overall output of goods and services the equivalent of about $25,000 per person. That put New Zealand just ahead of the Czech Republic. Australia ranked 16th.

The National Party’s stated aim ahead of its 2008 general election win was for New Zealand’s GDP per capita to match Australia’s by 2025. English admits that’s going to be a tough slog as Asian economies clamber for Australia’s energy and mineral wealth.

Upgraded roads in Auckland and a favourable exchange rate ought to put more wind in New Zealand’s sails, he says, adding that the country is competing for scarce capital and skill. Infrastructure development over the next few years is one way to have a better environment that supports manufacturing and logistics, he notes. For better or for worse, New Zealand lacks many of the severe bottlenecks that are plaguing Australia’s major cities and ports.

But despite these advantages, English is right to argue that it will be a big ask. New Zealand’s GDP would need to grow by an average of four per cent a year (compared with about 2.5 per cent now) by 2030, when the country’s population is expected to have risen about 17 per cent to just under five million.

According to the World Economic Forum’s 201011 Global Competitiveness Report, New Zealand’s infrastructure was considered the biggest obstacle to business. Almost one in five respondents to the survey said that an inadequate supply of infrastructure was their most problematic factor for doing business, outranking access to finance, or tax arrangements.

‘We have an opportunity to get on top of our infrastructure priorities in the next three to five years and be in pretty good shape,’ English says.

‘We don’t have the huge demands for growth already pressing down on us, like Australia.’ Continued on page 80

English speaking: NZ pursues more PPPs

English speaking: NZ pursues more PPPs

Continued from page 78

But the optimism of government and public sector leaders about a greater role for private finance still faces its share of opponents. The school PPP in April was greeted by predictable opposition from the teachers’ union, who accused the government of a ‘bulldozer’ approach and a lack of consultation with educators.

‘Principals and teachers should be focusing their attention on teaching students and spending less time on maintenance,’ English says.

He downplays worries that the opposition may seize on mishaps in PPPs overseas to torpedo efforts to expand their use in New Zealand.

‘The public is indifferent as to how it will be delivered, but they will be demanding about the quality of services,’ English says.

‘The public get their services and the government is focused on value for money – so we’re making the private sector sweat it.’

As PPPs gain more currency in New Zealand, English stresses that he will be examining how to improve on the model, learning from the Australian experience and reinterpreting it for the domestic market.

Tight credit and managing demand risk are some of the biggest issues determining how PPPs are structured and whether they go ahead in New Zealand.

‘The private sector is more worried about the downside than they were seven or eight years ago,’ English says.

‘We are trying to pick up the best of the Australian models and move them further, based on the state government experience,’ English says.

‘If anyone in the Australian industry is interested in pushing the model a bit further, we’re open to that.’

He said that New Zealand is looking for more innovation in how PPPs are financed and structured, citing approaches to PPPs in Victoria and Queensland.

English says he’s proud of the progress his government has made in recent years and encourages Australian businesses to watch this space.

‘Eighteen months ago we didn’t have anyone in government who knew anything about this stuff,’ English says.

‘We’ve covered a lot of ground and the pipeline will build up to a point that will get more attention in the Australian market over the next two or three years.’

‘We are trying to pick up the best of the Australian models and move them further, based on the state government experience,’ English says.

‘If anyone in the Australian industry is interested in pushing the model a bit further, we’re open to that.’