Simon Gray: Financing New Zealand's infrastructure and improved social outcomes

The Transmission Gully road under construction last year at Paekakariki, Kapiti. Photo / Mark Mitchell

Opinion

OPINION:

To grow the economy and improve social outcomes, New Zealand needs sustained and ongoing investment in its infrastructure.

Last year's budget did not allocate enough money to address the infrastructure deficit, which is estimated to be $75 billion.

New Zealand must address this to meaningfully improve living standards.

Central and regional authority funding will always be vitally important to improving infrastructure, but appropriate private sector finance has a key role to play in advancing these objectives and addressing New Zealand's infrastructure requirements.

What are the benefits of private sector financing?

Appropriate private sector financing (used prudently) can accelerate the delivery of infrastructure necessary for social and economic development.

Many private sector entities, including investment companies, the investment arms of insurers and pension providers, and commercial banks, are looking for opportunities to deploy capital and increasingly have wider social objectives at the heart of their mandates.

Accelerated delivery brings real improvement to the livelihoods of those connected to the infrastructure.

In the public sector procurement of infrastructure, the procuring entity and public sector benefit from:

• greater price certainty and incentivisation to deliver the infrastructure on time and on budget;

• a strong level of risk transfer to those best able to manage them;

• its resources being freed up to focus on core business, rather than asset management; and

• private sector expertise and innovation.

Such financing also brings with it the investors' and financiers' oversight of project governance and performance, supplementing the public sector's due diligence.

Private sector financing of public infrastructure

The New Zealand Public Private Partnership (PPP) model was developed more than a decade ago with a focus on better service outcomes for the procuring entity at an equivalent or lower whole of life cost.

This year, the New Zealand Infrastructure Commission, Te Waihanga released its review of the PPP model to better understand how it has operated in practice and derive lessons that could be applied to the future procurement of major infrastructure projects (which are not necessarily limited to PPPs).

The report found that, although there have been challenges on some horizontal projects, the model has been generally successful in delivering major infrastructure projects with greater time and cost certainty for procuring entities.

Te Waihanga considers that the model should continue to be regarded as a procurement option for major infrastructure projects (the model can still be considered under current government policy for projects outside of the education, corrections and health sectors), and made recommendations designed to improve the costs and complexity of the model.

Simon Gray. Photo / Supplied

Non-PPP procurements can also benefit from adopting the model's disciplined approach to risk identification, quantification and optimal allocation, incentivisation and its whole of life considerations.

Last month Te Waihanga released the findings of its review into the Transmission Gully PPP, making recommendations for changes that could be made by procuring entities in relation to future procurement and PPP policy management.

These recommendations build on the lessons learned by procuring entities from other PPP projects, which Te Waihanga also identified as having been positively applied in subsequent procurement.

Other models are also available that facilitate infrastructure development through the use of private sector financing.

The Infrastructure Levy Model, for example, allows the construction of infrastructure for housing and urban development to be financed through private sector debt by levying those who benefit from the infrastructure.

This model is based on the structure of a successful development, and councils and other stakeholders are exploring the viability of possible pilot projects.

The establishment unit recently announced by the Government in relation to the proposed City Centre to Māngere (CC2M) light rail project provides further opportunity to refine and improve these models, and/or develop further funding and financing models, to optimise available funding and the broader social objectives.

Key requirements for success

Private investment in public infrastructure must meet the needs of all stakeholders, including the communities benefitting from the infrastructure and taxpayers generally. It must deliver value for money for those stakeholders.

This is reiterated by Te Waihanga's reviews of the PPP model, and comprises part of the CC2M establishment unit's mandate.

Different private financing models may be better suited to certain types of projects, but to be successful long-term options to address the matters identified in last year's budget, public support is essential. Identified issues in procurement should be positively addressed.

Te Waihanga's review of the Transmission Gully PPP observes that internal and external stakeholder groups would benefit from the publication of additional information relating to the use of and business case for the model. From the outset:

• public and private sector objectives should be clearly articulated and aligned;

• risks identified and appropriately allocated, acknowledging that the private sector cannot price all risks; and

• the business case for the benefits accruing to the public clearly communicated.

Ensuring public support requires strategic direction and transparency, and for stakeholders to educate and take responsibility, and to remain accountable.

Private sector finance has a key role to play in infrastructure procurement

In last year's budget the Government committed to closing New Zealand's infrastructure deficit and ensuring the country has modern infrastructure to support a more productive, sustainable and inclusive economy.

These objectives remain just as important a year on: the counterfactual offers New Zealanders a lower standard of living.

Shortfalls in government funding are often cited as a limitation on our ability to advance these objectives. This need not be so.

Improved infrastructure, sustainable growth and improved social outcomes can be achieved successfully through appropriate private investment (utilising debt and equity) in public infrastructure, coupled with strategic direction, transparency, responsibility and accountability.

- Simon Gray is special counsel - banking and finance at MinterEllisonRuddWatts.