Paul Callow: Is New Zealand open for business yet?

Paul Callow. Photo / Supplied

Have you ever been to a shop where the sign says "open" but the door is locked? Confusing isn't it? And yet this is exactly how New Zealand's infrastructure sector has looked to private sector investors until late last year.

Labour ministers told them New Zealand was "open for business" but in the next breath said the Government could build infrastructure much more cheaply. Unsurprisingly, the investors went to the shop next door with the friendly Australian shopkeeper.

This changed overnight with the election of the National Government, and those in the new administration made it clear they believed the private sector had an important part to play in providing the country's infrastructure.

Investors have responded quickly and are committing resources to investigating the emerging New Zealand infrastructure market. What they are finding in reality is a willingness to investigate the concept of partnerships with the private sector, but an absence of many of the institutional arrangements within Government needed to deliver a project under this model.

However, we now have a minister for infrastructure, and the Treasury has established an infrastructure unit where public-private partnerships (PPPs) are likely to form part of the mandate. Both are important roles with the potential to provide leadership and direction to public sector agencies considering PPP delivery of infrastructure projects.

We also have a banking market able to draw on the Australian experience of structured finance to provide debt funding, and a reasonably deep contracting market able to provide competition in construction services. Both can be readily supplemented with international capacity to respectively provide the liquidity and capacity we will need.

What we need to import is the operating expertise needed to drive real value from PPP projects, and equity capital from investors who understand the risks. What we need to grow at home is the capability within Government to transact with the private sector and ensure this value is captured for the benefit of the Government and taxpayer. This need not be a long process. The capability can be hired in, and overseas models quickly adapted for our market. There is much we can learn from other countries where many public infrastructure projects have been delivered under PPP models. One example is the allocation of risk - and making sure it stays where it has been transferred. If a project promoter believes it will be bailed out by Government, it will possibly take on excessive risk, safe in the knowledge that when things comes unstuck it will be paid out (together with a healthy return on its capital).

Overseas experience, notably with the Sydney Cross City Tunnel has demonstrated that, when push comes to shove, the private sector is perfectly capable of sorting out failed projects.

Equity, and occasionally debt, is written off and new owners acquire the project at a lower price on which an acceptable rate of return can be earned. By this time the infrastructure has already been built, with the taxpayer enjoying the benefits while the problem is sorted out. Such salutary examples provide a reminder of what risk transfer means and increase the level of scrutiny applied to subsequent projects by public and private sectors, improving the likelihood of success.

With risk comes reward and another important lesson is how these can be shared between the public and private sectors. Early PPPs in the UK provided useful learning on how risk is priced as a project matures; developers were able to refinance mature projects at much lower rates and extract a windfall gain, much to the embarrassment of the Government sponsors. Subsequent projects were required to offer up a proportion of these gains to the public sector through lower pricing of services, and this proportion has tended to increase over time.

In New Zealand, we have a habit of taking proven models from overseas and carefully adapting them into something more or less guaranteed not to work. To avoid this in the PPP arena, we need to start with a project well-suited to the PPP model, for which an international capability pool exists, and a competitive market can be created in New Zealand. We need to invest in making sure we have an informed purchaser - the Government. A tall order, but roading, prisons and social infrastructure all present opportunities for suitable projects.

We must not forget that as PPPs form only around 10 per cent of public sector procurement so they are not a panacea for decades of neglected infrastructure. But properly planned and delivered, they are a vital contribution to growing our economy more quickly than would otherwise be possible.

Who knows, they might even help us back into the top half of the OECD: wouldn't that be nice?

* Paul Callow leads the infrastructure practice for Deloitte in New Zealand.