Michael Weatherall: Many pieces to the jigsaw

The construction of Vector Arena gave Auckland a world class venue delivering international acts that have previously bypassed the city altogether. Photo / Martin Sykes

Opinion

With a change in Government and the global financial crisis hitting our shores, the spotlight has turned on infrastructure. There is a growing recognition that New Zealand cannot achieve its economic potential without significant improvement in our national infrastructure. The employment of labour and resources in developing infrastructure is also seen as a productive way to stimulate economies at the local level.

But of course infrastructure does not happen by itself. There are many pieces to the jigsaw. The legal framework is one. There are two parts to this: the Legislative Framework; and the Contractual Framework.

The impact of legislation on the delivery of infrastructure cannot be understated. The legislation essentially provides the rules that infrastructure owners and developers must operate within. Recent New Zealand Governments have systematically and consistently introduced legislative restrictions on how infrastructure could be delivered.

The Local Government Act 2002 included restrictions on contracts for the operation of water and wastewater infrastructure, including limitations on the duration of contracts for such operations. These provisions were aimed at restricting the scope for private sector involvement in the operation of water or wastewater infrastructure.

The Land Transport Management Act 2003 (LTMA) introduced a means of obtaining authority to toll roads, but also introduced a complex and ultimately discretionary process requiring ministerial approval for concession agreements (i.e. agreements between the road owner and private sector operators for the development and operation of roads). Prior to the LTMA 2003 no such restrictions on contracts between the public and private sector had existed.

The Corrections Act 2005 expressly precluded contracts for the management of prisons by any persons other than the Crown.

Roads, water and wastewater, and prisons - three sectors of economic infrastructure where, internationally, public private partnerships (or PPPs) have proven to deliver value. By contrast, in New Zealand such legislation imposes significant constraints on PPPs. In areas where such legislative constraint have not been imposed, PPPs have shown their worth. Two examples are the Vector Arena in Auckland, and Auckland/Manukau Material Recovery Facility for the processing of those cities' recyclables.

Where the PPP structure can provide value in the delivery of infrastructure, the question has to be asked: Why preclude it?

PPPs are often dogged by the stigma of privatisation. However they often involve no more privatisation than current public sector contracting models. Take roads for example. These are already designed, built and maintained by private sector consultants and contractors. The public sector usually raises finances from private sector sources as well. The PPP structure simply combines the multitude of contracts for the design, construction, operation, and financing of infrastructure into a single contract in order to gain efficiencies. There may actually be no increase in privatisation whatsoever.

In the absence of legislative restrictions, the "best value" structure for delivery of infrastructure will naturally come to the fore. Developers, contractors, consultants (and even lawyers) in this sector all strive for best value. New systems, methodologies or structures that deliver this value are readily adopted. Those that don't are readily dropped.

The new Government appears to be taking steps to review the legislative restrictions brought in by our previous Governments. This includes reviewing the legislation mentioned above, and such challenging tasks as reviewing the Resource Management Act 1991. They have also established a National Infrastructure Unit (NIU) within the Treasury, as a partial response to the call from many sectors for a Minister of Infrastructure.

The location of the MIU within Treasury is an interesting one. Infrastructure investment has to be unique in the infrastructure sphere in that the cost of the investment often dominates any discussion of the returns the investment might provide. How often does the cost of new infrastructure project make the headlines compared to the forecast economic return?

Perhaps the link within Treasury will result in a refocus of infrastructure investment decisions based on returns, rather than costs.

So from a legal framework perspective, progress does appear to be being made towards making infrastructure happen. Legislative restraints are being reviewed and will likely be removed from the statute books.

Government is looking at other avenues for facilitating infrastructure investment and among other steps has established the National Infrastructure Unit.

Even with progress being made in this quarter, infrastructure is not likely to appear at a vastly greater rate overnight. But on this piece of the jigsaw at least, progress is being made.

* Case studies

Vector Arena

Auckland City identified the need for a large capacity indoor venue for sports and entertainment located close to the CBD. Experience said that council development and operation of such facilities could result in a large burden on the ratepayer.

The result was a 12,000 seat indoor stadium in downtown Auckland developed and operated entirely at the risk of the private sector developer and operator. Auckland City Council contributed a significant proportion of the upfront development cost but was entirely shielded from development cost blowouts reportedly exceeding $20 million.

And the city has a world class venue delivering international acts that have previously bypassed Auckland altogether.

Auckland/Manukau material recovery facility

With a stated objective or reducing waste to landfill, Auckland And Manukau Cities identified the need for a state-of-the-art facility to process the curbside collections of recyclables.

However the development cost risk, and the market risk of sales of such processed recyclables were significant.

By engaging a private sector operator to build and run such a facility, the councils avoided incurring any upfront development costs whatsoever, avoided all operational risk, and allocated the risk of market prices for processed recyclables entirely to the private sector.

* Michael Weatherall is a partner and Head of Construction for Simpson Grierson.