Government treads cautiously on public-private partnerships

David Green. Photo / Supplied

New Zealand's leading infrastructure financiers have been sharpening their pencils as the bidding war for the National Government's first public-private partnerships enters the final phase.

Dubbed "Think Small" by infrastructure specialists, the Wiri prison and Hobsonville school public-private partnerships are miniscule compared to the $7 billion of Think Big energy projects the Muldoon Government sponsored to shelter New Zealand from rampant oil prices during the early 1980s.

But ANZ's David Green says the painstaking process should result in good benchmarks for future PPPs.

"It's important. We can't just take what was done in Australia or the UK and just roll it out in New Zealand," he says. "It has to apply to New Zealand's unique circumstances and what the market believes is the correct way for the private sector to engage in the delivery of public infrastructure."

Green, chief executive of ANZ's New Zealand institutional arm, stresses getting the process right is very important for the delivery of social infrastructure.

It is a view shared by Green's counterpart at Westpac, David McLean, who stresses the result will be "good for the taxpayers. It's a much better outcome. More certainty around costs to taxpayers, and at last companies are doing things in this space."

McLean favours widening the use of PPPs to hospitals over time. But he also points to considerable opportunities for banks and private construction firms to develop social housing. There are models in New South Wales and elsewhere where Governments have allowed the private sector to acquire ownership of large tracts of public housing to use as the basis for spanking new developments where the State emerges with brand new housing for the socially disadvantaged funded by the sales of additional new dwellings to private owners.

"They are integrated not ghettoised and there are no additional costs to taxpayers. "

McLean sees this as the private sector having a role in unbundling risk. But he notes it is a slow burner.

On the equity side, the construction boss for NZ's biggest listed company, Fletcher Building, says equity is still relatively hard to come by. Mark Binns believes banks are also selective about what they will fund. This factor - combined with the collapse of many Kiwi property developers - has slowed the rebound of privately-owned construction projects.

BNZ's recently appointed infrastructure head, Ross Campbell, notes the funding gap for the latest National Infrastructure plan points to the increased likelihood of private sector participation in PPPs. But there are also risks associated with PPPs that private bidding partners need to take on board.

Construction companies and their bankers will have to wait some time before Infrastructure Minister Bill English green-lights any big ticket public project. English - and his officials - emphasise that large PPPs (like that originally proposed for the $1.85 billion Waterview tunnel) will not go ahead until sufficient expertise has been built up within Treasury and other key departments. Meanwhile, they will be funded from the Crown's balance sheet. "We need to get good at the smaller projects first," says English.

The lengthy recession here, compounded by the serious effects of the global financial crisis, took its toll on the Kiwi construction industry. Nearly 13,000 jobs have gone according to latest Government statistics.

The Christchurch rebuild will soak up some of the slack. But there are other major projects on the boil: investment in additional power generation as the economy picks up; the rollout of fibre-optic broadband and the proposed Pacific Fibre undersea cables. Combined with the major national roading projects this will be a fillip to the NZ infrastructure sector.

Green notes that though the NZ debt capital markets are performing well there is also a growing appetite among Asian investors to follow the well-established path previously forged by US funders, who have long played a key role in underpinning infrastructure investment here. The Asian investors have access to strong capital markets fuelled by massive domestic savings, a growing understanding of New Zealand's infrastructure needs, and proximity. The major earthquakes in Christchurch and Canterbury put New Zealand on the radar screen of some major Asian infrastructure firms and their bankers.

Green will not disclose exactly which of the predominantly Chinese firms have been scouting New Zealand for opportunities. "They see Christchurch and ask 'How can we help out?' Not just with expertise and resources but with associated access to capital from Chinese banks that are very supportive of their companies as they go offshore."

The important aspect is the debt is very long-term. ANZ - which has been developing very strong business relationships in Asia - is helping big companies develop an understanding of where the opportunities are, and is opening doors for them. Green says the firms understand the need to form partnerships - "they can't just come in and expect to understand the NZ market".

Among other new developments is the emergence of export credit agency financing for the acquisition of large equipment offshore where finance is able to be sourced from the relevant agency in the manufacturing country.

'This is relatively new," says Green.

With the New Zealand dollar at post-float highs against the greenback and at a very beneficial rate against the euro, it has also been a good time for companies to source imported content for major energy projects such as wind turbines. "If you buy a wind turbine the cost has gone down in New Zealand dollar terms. In the past the 'Go, No Go' trigger has been the cost of the imported component for the generator, labour and fuels."

Irrigation projects are another major opportunity for the NZ trading banks. The amount of NZ land under irrigation could be boosted by about 50 per cent if viable funding structures are established. Right now, farmers do not have sufficient free capital to underwrite all the proposed schemes themselves.

Green notes the benefits to New Zealand would be considerable if the developments come through. With the majority of the proposed projects in Canterbury there would be a "boost to the region at a time of setback".

"Spending on infrastructure in that region to increase productivity is something that looks pretty attractive."

Funding more irrigation projects is a political hot potato which will require strong Government leadership to get the stakeholders on board - it is a common industry refrain.

But with NZ's dependency on the primary sector and potential to supply much more protein for the developing countries in Asia, it is seen as a no-brainer.

The Pacific Fibre project which aims to connect Australia to the United States using two fibre optic cables, via New Zealand, is a major development. ANZ, Credit Suisse and First NZ Capital are leading the fund raising for the new undersea cable.

"It's a large project with some pretty committed New Zealanders behind it," says Green. ANZ is raising the debt portion of the US$400 million project on a project finance basis, and is also lead arranger.

The growth in domestic savings - particularly through KiwiSaver - will ultimately result in more funds for long-term infrastructure investment.

Auckland will be a major beneficiary as the council starts to fund key projects through bond issues and other avenues.