Think twice about PPPs before jumping in, warns Binns

Mark Binns says if major projects are not carefully planned we may be lumbered with inefficient models. Photo / Supplied

Fletcher Building's infrastructure chief Mark Binns is concerned the public-private sector partnership debate is being captured by vested interests - "right wing ideologues or lawyers and investment bankers".

He maintains PPPs - as public-private sector partnerships are usually referred to - might serve some markets well. But against an economic environment where the Government is looking to bring infrastructure projects to market quickly as part of its fiscal stimulus programme, policy-makers need to think twice before jumping into PPPs.

"As a small country with limited resources we just need to be careful to understand the implications of anything we are getting ourselves into."

His comments come on the eve of a major infrastructure symposium in Wellington at which three Cabinet Ministers will shed more light on the Government's thinking.

Binns says while the Government acted quickly to bring projects forward, the key questions now are: how the spend should be prioritised and how the Government will pay for it in these straitened times. "It is a crucial question as want to avoid the construction bust of the early 1990s that saw the skill base decimated - and if we do not think long and hard about how projects are procured we may get lumbered with some inefficient models."

PPPs are a form of long-term partnership between the public and private sector to build and maintain public assets. In a typical PPP project the Government would engage one party to design, finance, construct, maintain and in some cases operate the facility; only make payments after the facility has commenced operations and provide payments over the contract term based on services delivered against the achievement of key performance indicators with payments at risk for non-performance.

Right now Fletchers is in control of its own destiny: "We go and bid something and we win or lose it on our design-build capability," says Binns."We do PPPs, then not only do we have to do design and build very well, we could be the best, but also we still lose it because we're got the wrong financier or the wrong operator on board. And for the privilege of passing our destiny into other people's hands, we pay a load more in terms of upfront bid costs and if we get the wrong financier or operator then we're goosed."

Binns talks from bitter personal lessons learnt during Fletcher Construction's prior involvement in two Australian PPPs: the Victoria Hospitals Co-generation project which went to arbitration and ultimately cost Fletchers some $50 million, and, its private-public partnership with UK's Group 4 for Melbourne's Laverton prison. He explains Fletchers had responsibility for the design and build responsibility at the prison and Group 4 took responsibility for operations. But under indemnity agreements with the Victorian Government if anything resulting from the design-build screwed up the 30-year cash flows, it "would indemnify and pay the facility out ... it was a big downside."

As it turned out "fit for purpose" terms in the contracts incorporated "suicide free" cells. But Fletchers wasn't prepared for what happened when one prisoner later strangled himself by tying a shoelace to a bar and performing a "crocodile roll", and, another snapped his neck after doing a handstand on to the toilet and plunging his head down into the bowl.

"They were threatening to can the whole contract three years after we finished the build," says Binns. "The whole thing could have imploded."

Among other downsides: Australian bidding processes were "horrendously expensive" (Fletchers faced $3 million-$4 million bills on set-up - with documentation on one project more than a metre high); after nearly two decades of activity, legal documentation for PPPs is yet to be standardised; bidding costs are so high and margins so low, construction partnerships need to win one out of two to "stay ahead of the game."

"You've got to have a $150 million to $200 million [project] to justify the cost."

Binns is upfront about charges he is "talking his own book" on public private partnerships." Yes, I am as far as construction companies are concerned."

But he points out that eventually somebody needs to pay for higher bid costs - it is not a "sustainable proposition"' to expect the construction industry to swallow them. He suggests other options instead of following the Australian model where all members of the partnership potentially face financial ruin if one player screws up.

If the Government is focused on efficiency it could use alliances like the Victoria Park tunnel consortium, which has Fletcher Construction, Beca Group and Higgins in a partnership contracting with NZTA. "You can start with three alliances doing the preliminary design, get it down to two, than see who can deliver best, and, then work with one - it gives you all the competition you need."

Binns maintains the construction industry should only really embrace PPPs if they result in more projects coming to market - "increasing the size of the pie, if you like".

'If the market wants it and the Government wants it then we're in there boots and all. We're not going to let our market share be eaten by somebody else and we've got some experience. But how many other New Zealand firms have the balance sheet to do it?"