Southbase at OneNZ stadium.
Public private partnerships, or PPPs, are making a comeback.
Southbase chief operations officer Will Birch says the market has been expecting to see the Government give PPPs the green light for some time and that this has recently come to fruition.
“In June, Government shortlisted the PPP consortium for the Northern Expressway. And there’s also the redevelopment of the corrections facility in Canterbury that has a request for proposal [RFP] coming to market in early August.”
He says other government agencies like Treasury, the Ministry of Justice and Health NZ are all showing renewed interest in PPP projects.
Birch says there are four reasons the PPP route is attractive to government: time and cost certainty, innovative design, all-of-life asset management, and reduced risk to the Government.
“You could make an argument that time and cost certainty, innovative design and reduced risk for government could all be achieved through a traditional design and build procurement process if it is done right.”
But New Zealand faces a $200 billion infrastructure deficit. We can’t finance every essential project today. PPPs give us what amounts to a build now, pay later way of getting those assets. And that comes with all-of-life asset management. It covers the capital expenditure and the operational expenditure.
Birch says a key attraction of PPPs is that the asset management service comes as part of the proposition. Partners build the asset, operate and manage it for a period of, say, 25 years, at which point it is transferred to the Government.
“You get a much higher quality asset with the PPP model than you would with the traditional procurement model. Say you build a school or a classroom, it needs painting. Things need fixing. There’s a warranty for the asset, but it can all go out the window if basic maintenance is missed.”
In contrast, when a building comes off, say, its 25-year PPP concession period, it will still have another 20 to 25 years of useful life ahead of it. Birch says properly structured PPPs incentivise higher asset standards compared to traditional procurement. They are built to last.
There are examples of past PPPs where an asset was handed back in poor shape at the end of the concession. Birch says that’s because some earlier PPPs suffered from poor contract terms, unclear asset handover conditions and, as a result, had inadequate maintenance.
“We’re now in a second round of PPPs. There have only been eight to 10 PPPs in the last 15 years. New Zealand hasn’t had many in recent years, but in places like Canada and the UK contractors have delivered hundreds of successful PPPs.
“Both sides have learned how to refine the proposition, this includes understanding what you get at the end of the concession.”
Experience learned elsewhere is now available to New Zealand. “From what we are seeing in market engagement for upcoming PPPs from Corrections and the Ministry of Justice, they are now a lot more upfront about what they want,” Birch says.
The Crown is learning and improving. It now provides more detailed briefs and reference designs. The risks are allocated more clearly.
Government now recognises the high cost of bidding for PPP contracts and offers limited financial support to offset those costs. This is in line with a general move towards more mature relationships with contractors.
The market remains subject to political cycles that affect the continuity and certainty of projects, but there is better awareness of the problem and attempts to solve it.
Meanwhile, the industry is also learning how to perform better with PPPs.
Birch says Southbase’s recent involvement in PPP projects means it now understands far more about risk allocation. He says some companies are shy of getting involved for these reasons, but his organisation now has processes in place to manage the risks.
For contractors, the risks include the high cost of bidding for contracts - although there is now some mitigation. The shallowness of the local New Zealand market does not help, nor does the thin supply chain and the skills base. Companies also face risks when becoming part of a consortium or joint venture.
The impact of political cycles adds to risks and ultimately to costs. Like many in the sector, Birch wants to see greater continuity. “It drives investment and gives people certainty. Investment in New Zealand can bring in the kind of offshore capacity that is needed to deliver large-scale products. Hopefully they will partner with New Zealand-based contractors like ourselves.”
This can add another layer of risk for the local industry. Many of the international players now eyeing New Zealand projects have not previously worked here. Aligning on culture and expectation takes time. Partnering with them or entering a consortium means going in with your eyes wide open.
New Zealand’s lack of certainty is also a drain on productivity. “You can only address that with a pipeline of continual work. You can’t afford to have a three-year boom, bust cycle. There needs to be something keeping moving otherwise it’s going to go backwards and that infrastructure deficit will get bigger.”
This shows up in the subcontractor supply chain. Many of the projects need key specialist skills. If you build a hospital, you need professionals with specific electrical and mechanical expertise.
“These people don’t want to pull cables for a living, they want to work on their specialty. No matter what layer of the supply chain or delivery team, the moment you turn off the project pipeline, they will leave and it takes a long time to recover, to rebuild that skill set”.
Birch says the company’s design and build, digital-first approach has helped Southbase attract high-calibre candidates from both New Zealand and overseas.
Southbase’s strategy to address the risks and potential of PPP projects has been to form a major projects division. This focuses on large-scale infrastructure and PPP work, separate from the company’s regional businesses. That way, Southbase can pitch for large, complex projects while continuing to serve its existing clients.
At the same time, the company has developed and retained its expertise in being able to deliver rapid deployment of modular, standardised structures. Birch says there have been recent moves towards looking for modular, rapidly built units, especially at Health New Zealand.
Southbase is an advertising sponsor of the Herald’s Infrastructure report.