Karen Silk: Clearer vision of the future

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Long-term political focus is needed to drive our significant infrastructure investment, says Karen Silk

Karen Silk is General Manager, Institutional Banking, at Westpac NZ.
Karen Silk is General Manager, Institutional Banking, at Westpac NZ.

New Zealand faces a significant challenge over the next decade or more, as substantial infrastructure investment is required to be delivered to meet a variety of social and economic outcomes. This large and growing pipeline has developed from a variety of origins"

• Historical underinvestment in key sectors.

• Population growth, particularly in the north.

• Christchurch rebuild and seismic resilience.

• National and regional economic growth aspirations.

• General network replacement and resilience improvement.

• Better economic and environmental management of our resources (water).

Infrastructure is a key plank of the Government's Business Growth Agenda which is focused on raising New Zealand's international competitiveness, supporting the growth of our productive sectors, rebuilding Christchurch and delivering public services and infrastructure within tight fiscal constraints.

Though there is strong central government focus on the requisite infrastructure to support these goals, for New Zealand to successfully navigate this period of significant investment it will require:

• Continued and accelerated use of alternative procurement models at both central and local government level.

• Access to new pools of debt and equity capital.

• Innovative design and an ability to implement innovative supply and manufacturing techniques within a strong regulatory framework.

• A strong building and construction sector capable of managing large scale projects and with balance sheet capacity.

• Most importantly, a clear long-term political focus with a stable regulatory environment.

The benefits for central government of procurement through a single National Infrastructure Unit (NIU) are clear. The NIU has enhanced our understanding of infrastructure and network resilience across each sector, has implemented best practice business cases that robustly test new infrastructure investment, and most importantly provide centralised expertise for alternative procurement options including public-private partnerships (PPPs).

Though many commentators argue alternate procurement models delay delivery as a result of increased complexity, the Government's first PPP, the NZ Schools project at Hobsonville Pt in Auckland is a good example of how alternative procurement methods need not be slow and overly complex. This pathfinder project, financed by equity from Morrison & Co's PIP Fund and debt from Westpac, was executed in less than 12 months from the launch of the expression of interest.

Continued success in execution by the NIU will add to the debate around the creation of a similar unit to work across local government to:

• Co-ordinate investment between regions where infrastructure is part of a wider network.

• Bundle smaller projects to gain scale efficiencies and attract more private sector participants to the bid process.

• Facilitate and educate local government teams on the use of "better business cases".

• Assist with the procurement of infrastructure utilising alternative methods such as PPP.

From a Westpac perspective, debt and equity capital would not appear to be an issue with global capital sources, superannuation funds, sovereign wealth funds, global banks, and specialist infrastructure investors, continuing to push more capital into infrastructure assets. For the first time since the Global Financial Crisis, European and US infrastructure projects are beginning to access capital from bond markets through the higher risk construction phases of various projects.

There is the potential that New Zealand PPPs may be refinanced from bank debt into bonds once they have established a track record of performance in the operational phase.

In the New Zealand context, while taking a different philosophy and approach to PPPs than other jurisdictions (i.e. the strong focus on outcomes rather than lowest cost procurement), the Government's first pathfinder PPPs were extremely well bid by both domestic and international equity funds and domestic and offshore banks. The latest New Zealand PPP, Transmission Gully, has also attracted both domestic and global infrastructure funds to invest resources through the bid process.

The building and construction industry is evolving as global construction firms become increasingly focused upon New Zealand infrastructure opportunities. This has been evident through both investment and partnerships with local players as well as direct bidding on larger scale projects. Whether these offshore firms are here to stay is not certain, as it will require a consistent pipeline of professionally procured larger-scale projects, and a stable and consistent political and regulatory landscape to convince these firms to invest in permanent domestic operations. In the short-to-medium-term, we will no doubt continue to see more global firms partnering with local firms on larger projects that need increased levels of risk appetite, specialist design and technology.

It has been proven in Britain and more recently in Australia that long-term consistency in policy settings and a well-understood regulatory framework are essential ingredients in attracting private sector capital and operational experience in the development and management of social infrastructure, including social housing.

Within both Britain and Australia the development of new social housing stock is increasingly the domain of Not for Profit Housing Associations competing directly with state agencies on a level playing field. This is increasingly referred to as the third sector. Parties within the third sector are contracted to not only bring private sector experience to housing development and management but are also engaged to undertake broader community services designed to achieve defined social outcomes.

Significant debt and equity capital has been able to be sourced in part as a result of a consistent and collaborative approach to the development of a supportive regulatory framework that balances the economic needs of private sector participation with desired economic and social outcomes of government and the community.

In Australia these projects range from smaller greenfields developments at least partially funded via vested capital or housing stock transferred under the Community Housing Asset Ownership Policy through to large scale brownfield urban regeneration - such as the Bonnyrigg PPP in West Sydney.

Though there are a number of strong and capable parties working collaboratively to grow this sector within New Zealand, the sector may struggle to attract material levels of private capital and build internally the necessary skills and experience to enable larger scale projects unless a clear and consistent regulatory framework is able to be introduced that allows these groups to compete with state providers on an equitable basis.

This year's announcements by the Government to extend the Income Related Rental (IRR) subsidy from state only to private social housing providers is a good first step in creating an even playing field.

However, inconsistencies remain with only the highest needs tenants able to participate fully in the IRR.

All other private sector tenants are still required to pass a needs review every three years which would potentially place tenant subsidy income at risk and therefore increasing the level of risk associated with any private debt or equity transaction.

Facilitation of investment in the necessary skills, experience and capital required to support the delivery of the central and local government growth and infrastructure agendas will undoubtedly develop more rapidly in an environment that offers a clearly defined and stable regulatory framework, the political will and consensus to stay the course, and a consistent pipeline of appropriately scaled projects procured in a consistent, professional manner.

Karen Silk is General Manager, Institutional Banking, at Westpac NZ.

- NZ Herald

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