As the Government enters a second term, it has drawn the finance and infrastructure portfolios together as part of its overarching priority to drive economic recovery from Covid-19. The Government also has ambitious plans to address New Zealand's infrastructure deficit, which is particularly acute in areas such as transport and water supply, and to accelerate the transition to renewable energy.
In the context of the focus on infrastructure and how it can be funded, it will be important to find ways to harness the funding and expertise available in the private sector.
What are the benefits of private finance?
Private sector investors can make a significant contribution to major infrastructure in New Zealand. They obviously bring new sources of funding (demonstrated in recent years by the large-scale investment in infrastructure projects, including public private partnerships) but with the right structures in place, they also remove risk from the public sector and bring expertise, innovation and high-quality management of infrastructure assets.
Private sector investment also brings rigour to business case development and risk assessment that can help direct investment towards the projects that offer the best outcomes (that is, projects that will deliver a justifiable return on investment, whether from a financial, wellbeing or climate perspective). Bringing the public and private sectors together can unlock a new source of funding and deliver innovation, expertise and collaboration to achieve a better overall outcome. As an example, private finance has been used in Australia for major expansions of public transport networks and for the drive into renewable energy.
What models are available for private finance?
There are a number of models that can be adapted for new infrastructure projects. The Government has already begun work on coordinating the infrastructure pipeline and finding new ways to unlock private sector investment in infrastructure delivery. For example, the Infrastructure Funding and Financing Act 2020 (IFF) offers a new model for the provision of housing and urban development using special purpose vehicles to raise finance for new or upgraded infrastructure, with the cost paid over time through the rates system.
The range of contractual and funding structures available offer choice and flexibility and can be adapted to fit the needs of each project. New Zealand already has expertise using special purpose vehicles to finance new or upgraded infrastructure. These were used for public private partnerships in the 2010s and adapted by the Government for the IFF model as well.
One successful model used offshore is the co-investment model, where a Government agency invests alongside the private sector. An example of this is the mutual investment model adopted in Wales. The structure is based on a public private partnership but with a Government agency investing in the special purpose vehicle alongside the private sector. Another example is an infrastructure bank that unlocks co-investment from the private sector.
This approach ties in nicely with the Government's focus on climate change.
There are a number of examples overseas of a government-sponsored investor being established to grow the green investment sector in partnership with the private sector. In the last term, the Government took some initial steps in this direction by establishing Green Investment Finance to catalyse the development of a green investment market and facilitate private investment. There is a great deal of experience and expertise in the private sector in structuring and funding new renewable energy projects (including wind and solar in Australia) that can be harnessed to help achieve New Zealand's development of new renewable generation and electrification of transport networks.
What about risk allocation?
A key issue is ensuring that for any project the risks are managed effectively and transparently through the contractual frameworks. This needs to involve an honest assessment of which party is best placed to bear the risk. Some risks and responsibilities sit more naturally in the public sector because the private sector is unable to price and manage those risks (the recent Covid-19 shutdowns might be an example of such risks).
While there have been challenges in some public private partnerships (in New Zealand and elsewhere), these often arise from the complex nature of the projects involved, and the contractual frameworks need to have transparent and robust ways for managing these projects.
New Zealand has built up considerable experience and expertise from private sector investment in infrastructure projects in the past 10 years. We should take the learnings from those projects, continue to harness the benefits of private sector funding and keep learning from best practice and innovative solutions around the world.
- Tom Hunt and Bevan Peachey are infrastructure specialists at Russell McVeagh.