English determined to catch up with Australia

Bill English believes it is time for New Zealand to change the paradigm on infrastructure investment. Photo / Marty Melville

Finance Minister Bill English believes it will at least five years to catch up with Australia on infrastructure.

English - who also has the infrastructure portfolio - has spent considerable time in recent months wrestling with how to bridge the obvious infrastructure gap when Government revenue streams are dwindling.

"They understand the rules of the game over there," he says in frank admiration of the way Australian Governments have enlisted their private sectors to collaborate on projects.

"In Australia they have moved from projects dealing with roads, rail and telecommunications right through the social areas building prisons, schools, health facilities, defence HQs and water - you name it."

His advisers point to the economic benefits of getting infrastructure built to the right standards on time and to cost. And the deep industry strata including construction firms, lawyers, accountants and bankers who understand how to use innovative partnerships to "get stuff built".

"We're a bit of a backwater at the moment," says English. "The payoff from it is just better facilities for school kids, old people who need health care ... what you are after in the end is a just a better service."

He says Australia, the UK and Canada are well ahead of New Zealand on how to aggressively manage risk - "not just rely on their ability to tax which is what we've been doing".

"It doesn't matter if anything goes wrong because I can make you pay me some more tax ... and I just fix the problem. But the economic risks are there regardless of whether there is a tax flow or not."

The Finance Minister's belief that it is time for New Zealand to change the paradigm on infrastructure investment will be music to the ears of lobbyists like the NZ Council for Infrastructure Development, which has proved an influential voice in promoting debate on the issue.

Speculation is rife that the Government is now actively considering public private partnerships - or PPPs, as they are known in the burgeoning infrastructure financing market - for Auckland's controversial Waterview project and the new prison at Wiri.

The Waterview project excited controversy during the recent Mt Albert by-election after Transport Minister Steven Joyce announced the Government had dumped its predecessor's gold-plated plan for a twin tunnel under Helen Clark's former electorate.

Former Finance Minister Michael Cullen brought a review panel together to consider whether it should be the country's first major PPP. The consensus view was there is no way the project would be cash flow-positive if the $1.4 billion was ultimately funded purely from tolls. There is simply not enough road traffic to make this bankable. But other funding mechanisms were possible.

The infrastructure industry has since heavily lobbied the National Government to open the way for some private structure involvement on an "availability" basis. Auckland City Council's decision this week to approve the $1.4 billion "surface/tunnel" plan clears the way for a central Government funding decision.

"We're getting the funding and the projects aligned so we don't need to do PPPs or tolling," says English. "But as it comes together we would want to look at innovative financing arrangements where those are applicable.

"So it's quite possible that Waterview would be looked at within context of whether it's an opportunity for innovative financing.

"But we don't need to do it."

English stresses the seven "roads of national significance", which were announced early this year, will be Government-funded. But outside these projects other financing mechanisms could be considered.

There are suggestions that Treasury has also scoped the proposed Wiri prison as a PPP.

Infrastructure investor Morrison & Co - which recently launched a $500 million public investment partnership fund - is very interested. Morrison executive Paul Newfield says if the prison is announced as a PPP, the fund would bid for the project. Newfield says correctional facilities are among the social infrastructures the fund is focused on. "But it would not be involved on the operational side."

Other potential investors include Macquarie Capital (NZ).

The open speculation signals the major mindshift that has taken place since the National Government indicated it was prepared to more intimately involve the private sector in infrastructure planning and delivery.

English promises a "bare bones" infrastructure plan will be released for consultation which would raise issues around certainty of financing, the deal pipeline, and, quality of the plan. "Think of it as Version One rather than the definitive answer."

It will canvass the Government's infrastructure plans (roads, rail and energy), as well as proposals contained in local government long-term plans, and the Government's own capital asset management work.

English concedes the first plan will be "patchy".

But there will be input from the Government's new Infrastructure Advisory Board and both private and public sectors before the long-term plan is firmed.

"If you take roading, we've got seven projects of national significance with a reasonable idea of what they cost and how they will be funded ... other areas like, say, rail are a bit of a black hole."

At issue is English's desire to make better and more efficient funding decisions - something, which is at a premium given the impact of the recession on the Government's rapidly dwindling purse. "We believe that open-ended process is better than the Government deciding everything it is going to do - which would take two years - and producing what it believes is the answer to everything.

The Government has three major infrastructure priorities:-

- Roading - "We've been clear about that and our plan has come together pretty well."

- Electricity transmission.

- Broadband.

Roading and electricity transmission are the most obvious infrastructure bottlenecks. "In both cases there's increasingly detailed plans and over the next five year some $7 billion to $8 billion committed."

While Transpower has its own debt-raising programme under way to fund the long-overdue national grid upgrade, English cautions that the Crown doesn't have a very good idea on what the risk parameters should be. He says the Crown needs to take a "much more sophisticated view of what risks it takes on its balance sheet" - whether it is Transpower, other state-owned enterprises, or Crown financial institutions doing the borrowing.

"At the moment it's pretty ad hoc."

He says crown financial institutions have had a range of outcomes. "The ACC is OK, but the super fund's lost a lot of money ... do we understand why that's happened?"

English clearly sees PPPs as an opportunity for the Crown to get a better understanding on how it undertakes risk investment and asset management.

"What we want to do is get the understanding of those techniques across the $100 billion of assets the Crown is running from finance assets, through to roads schools hospitals. Because a lot of it is sunk capital, but it could still be managed much better."

He stresses the Government is not chasing PPPs "for the sake of it ... those private sector skills could be an important addition to the Crown's management tool kit."

During his recent trip to Australia to meet Federal Treasurer Wayne Swan, English took time out to meet infrastructure officials from various state governments.

The most important lesson to him was how get the Government well set-up to deal with the private sector - on infrastructure collaborations - "otherwise there are some risks to the Crown".

"The second thing is even when these things commercially go wrong, the Government gets an asset available for use.

"The so-called failures of PPPs have still left the state with an asset someone else paid for which is available for use even if the commercial operator lost a lot of money on it.

"Well stiff cheese, that's their problem not ours - that's precisely the point."

English concedes it is a "bit of a challenge" importing the Aussie mindset here, as the political direction has been "so anti-private sector".

"So we are going through what is turning out to be a more challenging process than we expected of getting the two to interact."

English believes New Zealand has a good understanding of alliance tendering techniques but the application has been mainly been limited to roading projects.

"There's a little bit with the housing assets - but there's quite a long way to go to get a comfortable relationship and get the constructive tension that you are after."