Adrian Wimmers & Greg Knowles: Time to leverage PPP success

Local government needs to heed this central government success story, write Adrian Wimmers and Greg Knowles

Adrian Wimmers.
Adrian Wimmers.

We are now four years into New Zealand's development of public-private partnerships, or PPPs. This has been a central government success story.

Local government has struggled to frame propositions that attract private capital, demonstrating a lack of understanding of what a PPP project would entail, or has showed no interest in considering it.

A raft of significant projects are now developing across local government, particularly with Auckland infrastructure and the Christchurch rebuild.

KPMG sees that PPPs and project finance have a key role to play in delivering the next generation of infrastructure projects. So what could local government learn by observing progress so far in the New Zealand PPP story?

Central government adopted PPPs because of our legacy of over-budget and over-deadline capital projects, plus a widely held recognition that the public sector's asset management needed improvement.

A track record of unexpected capital expenditure such as the leaky schools' repair bill further reinforced the need for change. Long-term, risk-adjusted value for money has been the driver.

It was always acknowledged that a PPP would only suit a minority of projects. The desired characteristics of a PPP-able project include an opportunity to improve whole-of-life asset maintenance, the ability to integrate service and asset design, the ability to define objectives in output and outcome terms (such as, in the Wiri Prison PPP, reducing prisoner escapes and reducing reoffending by released prisoners); also opportunities for innovation and risk transfer, and the opportunity to stimulate wider improvement within the sponsor department.

PPPs require significant procurement discipline that does not suit all projects or procuring agencies. They are complex and costly and require ongoing detailed contract management so they tend to only offer value for money on projects with a capital value in excess of $100 million. They only proceed where that value is delivered at no greater cost than the traditional procurement alternative.

Over the past four years, the New Zealand PPP market has come a long way. In KPMG's view there are many things we have done well and a few areas that could be improved.

We have two very strong and successful pilot transactions, the men's prison at Wiri, and Hobsonville Schools' PPP. The prison has won global social infrastructure awards and the schools transaction was procured in less than 12 months, beating most international benchmarks.

We have a proven Standard Form PPP Contract (Version 2 soon to be released) and a Better Business Case (BBC) process that provides a disciplined assessment of requirements on government projects and which has shown it can weed out projects less likely to succeed as PPPs.

We have a growing pool of officials with increased understanding of alternative procurement approaches, a deeper market for infrastructure finance sponsors and advisors and, in the cases of the Ministry of Education and the Department of Corrections, lessons learned being put to good use.

As the PPP market develops, we see several areas for improvement. This includes developing and communicating a project pipeline to attract domestic and international market interest, boosting the resources of the Treasury's PPP team (who are vital to the good operation of this market), and a more sympathetic tax treatment that recognises that the Government's PPP programme relies on specialist offshore capital investment.

KPMG recently released analysis of Foreign Direct Investment (FDI) into New Zealand.

One feature of PPP that is often overlooked is its profile as one of the most benign and beneficial forms of FDI. Where offshore debt or equity is present in a PPP capital structure, as it always is in some form, it is supporting a project that creates jobs for New Zealanders throughout its construction and operations phase, creating a new asset that is continually owned by the government, offers domestic benefits (such as, roading, educational, custodial) throughout its life, for which we pay no more than under traditional procurement.

At the end of the concession the assets are handed back to the government at a specified condition with a useful remaining life.

It's hard to think of another form of FDI that has less strategic risk to New Zealand. We could, however, do better in seeking to attract these types of investors.

In the business cases for Wiri and Hobsonville, central government formed a clear view on the project requirements, engaged heavily with the potential market to understand what they wanted and the risks they were willing to accept, and designed specific investment propositions that were attractive to both government and potential investors. The Government then ran a well-defined and timely procurement process that managed to extract value and innovation through competition.

The gap we see in Auckland and Christchurch infrastructure development is the conversion of general areas of opportunity into specific investment propositions that target specific classes of private investors. In both cities, significant investment in infrastructure is required and ratepayers and taxpayers will ultimately pick up the burden.

Investment propositions that utilise private finance offer the possibility to either offset capital costs or spread them over time, while offering greater long-term value.

There is still daylight between the capacity that central government has built to determine the right investment proposition for a project and the way large councils are undertaking the same activities.

It is time that larger councils leveraged off the success story that New Zealand's PPP have become. This will require them to learn from the Treasury PPP and BBC approaches, develop a methodical and predictable approach to procurement, develop and stick to a project pipeline that aligns with the national infrastructure programme, and build the capability to develop an optimal, bespoke investment proposition for each project that recognises what will attract the targeted class of investors.

Our ongoing prosperity depends on our ability to extract maximum value for money from the next generation of infrastructure investments.

They will be built using offshore capital, whether through central government or council borrowings or project-specific finance.

The wider benefits and low strategic risk of accessing FDI through PPPs demands that they be considered for the projects to which they are suited.

Adrian Wimmers is a KPMG partner and head of infrastructure and projects group and Greg Knowles is a partner and head of infrastructure tax.

- NZ Herald

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