With major projects on the horizon and funding costs at historical lows, local consortia need to move quickly if they are to capture the opportunities offered by public-private partnerships, writes David Green.
The public-private partnership (PPP) model has become a key solution for delivering large-scale infrastructure projects in New Zealand, and our version of this model is now recognised internationally. Consistent with the goals of adopting a PPP approach for major projects, innovation and responsiveness are now prerequisites for any consortium wanting to play a part in delivering them.
As the key players in New Zealand infrastructure meet this week at the sector's annual symposium, important projects announced for Auckland and Christchurch and NZTA's growing pipeline of roading projects provide plenty of live opportunities to debate and ensure the sector remains high on the national agenda.
This is a time of notable opportunities as well as challenges for infrastructure development in New Zealand.
The continued support being provided to the global economy by central banks via the creation of liquidity (quantitative easing) and low interest rates has supported asset prices, eased pressure in funding markets and encouraged money to be put to work in many areas, such as infrastructure.
This is now manifesting in the economic improvement in the world's largest economy, the US, and signs of stabilisation in others such as Europe. Though interest rates have lifted of late, major infrastructure projects remain very affordable from a funding perspective.
Infrastructure is a key investment in the long-term productive capacity of the economy.
Planned infrastructure developments in New Zealand remain largely focused on broadband and the public sector. There is more certainty now around Christchurch, and direct government involvement in major transport-related projects, including key road and rail developments in Auckland.
This public sector activity recognises the unique challenges facing New Zealand's two largest cities, and the long-term strategic benefits these projects will deliver both for those cities and the New Zealand economy. A number of other key developments are also proposed or in planning in other regions.
By contrast to this strong pipeline of public sector activity, we continue to see relatively low levels of investment from the private sector, whose appetite for risk remains subdued.
Our construction market, including roading, has in recent years become highly competitive on both terms and price.
As a result, a number of New Zealand contractors are now looking further afield, into Asia and the Pacific - attracted in part by the diversity of work and better margins, and in some cases by the prospect of lower compliance and regulatory costs.
This has the potential to expand the base of our industry and create scale and opportunities for New Zealand businesses. The challenge will be to ensure it doesn't divert resources and capacity from key projects in this country.
It is clear that New Zealand has an active and competitive market to deliver horizontal infrastructure, such as roads, as evidenced by the response to Transmission Gully.
At an estimated cost of $1.2 billion, this strategic highway project will be the largest PPP to date, helping to reduce congestion, improve safety and build economic growth across the Wellington region.
Subject to political will after next year's general election, companies may have opportunities to compete for other major roading developments including the recently announced Auckland projects and the Puhoi to Wellsford Highway.
But for large, above-ground building projects, the collapse of Mainzeal has led to constraints in the industry's capacity to deliver.
Market thinking is evolving on how to address this. But securing financial backing for domestic delivery of such projects now increasingly calls for bid structures that can accommodate and bring together a number of smaller players.
New Zealand's infrastructure roadmap is increasingly driven by PPP opportunities, and the experience to date provides some clear lessons. It tells us that innovation and speed out of the blocks are the major hallmarks of a successful consortium. Those who are first to form, agree their participants and set their guiding principles have been the most successful in securing and delivering infrastructure projects. Having a fully structured bid and making the most of good local advisers can make all the difference.
It is also clear that PPP bidders do not always win on price. The National Infrastructure Unit (NIU), with its mandate to improve service delivery, clearly considers innovation a key driver of that improvement.
The PPP model was originally identified nationally as a way to provide efficient infrastructure while acting as a catalyst to improve service delivery across the public sector.
The NIU's willingness to "test" international practices has since helped give our PPPs a distinctly Kiwi flavour, including greater risk transfer and cost certainty than may be seen offshore.
The New Zealand approach has already won international recognition, with the landmark Wiri Prison project named by Euromoney as Asia-Pacific PPP of the Year. Infrastructure Journal named Wiri as Social Infrastructure Deal of the Year and Wiri is now being considered as a model for prison projects in the Australian state of Victoria.
In a recent Australia-led development in PPP delivery, state contributions have been used to support large-scale strategic developments - helping to boost affordability, while retaining the benefits of private sector involvement, due diligence and incentives.
There would be merit for New Zealand in exploring this approach as a possible addition to existing funding options.
In particular, it could have the potential to improve the affordability of projects some may currently consider too large for existing PPP models.
Though New Zealand has achieved some early success with PPP solutions for major projects, the continually changing environment, evolving delivery models and differences between projects under consideration for PPP treatment will require the participants in the infrastructure sector to continue to adapt. The results achieved in recent years augur well for further landmark infrastructure achievements that contribute to realisation of the growth potential of our economy.
David Green is Managing Director Institutional at ANZ New Zealand