Editorial: Toll road plan too much of a gamble

No sensible person would entertain Lotto's extremely long odds if the top prize for a $5 ticket were just $50. So it is on all rungs of the investment ladder. The riskier an asset, the higher the expected return investors will require of it - if they are tempted at all. And so it will be if public-private partnerships are to be a vehicle for badly needed road construction. The private part of the equation must not have so much of a burden of risk, and so little the prospect of a viable return, that it deters investment. Unfortunately, that seems the likely outcome of the Government's proposed partnership structure.

The scheme, as included in the Land Transport Management Bill, has been greatly influenced by the Greens, who made it part of their co-operation agreement with the Government. By the admission of co-leader Jeanette Fitzsimons they are philosophically opposed to PPPs. Presumably they have nightmares about privatisation by stealth.

Thus, they demanded more controls if PPPs were to operate here. This, said Ms Fitzsimons, ensured that problems experienced in other countries were eliminated. Regrettably, the Greens also created a new set of problems. On one point they were right. Roads built by the Government and local councils in partnership with private companies will almost invariably be tolled, and it is reasonable that an alternative route be available. That option, in itself, would not be a disincentive for the building of, say, Auckland's proposed eastern highway. What is more worrying is the hand of the Greens in dictating that the public sector will not be liable to compensate the private partner if traffic numbers are below forecast.

Experience in Mexico seems to have loomed large in this condition. There, only a fifth of traffic projections eventuated on 5000km of roads built between 1989 and 1994. Public money came to the rescue. However, the Mexican private companies may not have gone into partnership without the guarantee of compensation. Certainly, their level of risk was more acceptable than will be the case here. The arrangement also benefited road users. Traffic volume agreements have meant that relatively modest tolls can be charged. If less traffic than expected uses toll roads here, the fee could be cut to encourage patronage or, more likely, raised to boost return. Either way, it equates to added risk, especially since the latter alternative could drive away traffic.

Not only is there no guaranteed return but there is effectively no asset. The PPP scheme selected for New Zealand eschews the Boot model commonly used overseas, under which the private sector builds, owns and operates the road and transfers it back after a number of years. A decision to keep the roads in public hands has led to a design, build, fund and operate structure. That arrangement has obvious financing implications for the private sector, as does the ministerial discretion that overlies decision-making. New guidelines in Victoria, New South Wales and Queensland embed ownership for a concession period. Would a financial backer here want to participate in a project in which such control is absent?

The Minister of Transport is sidestepping such questions. Paul Swain says that he expects only three or four PPPs will be viable. That may well be the case given the relatively small size of most roading projects. Yet Mr Swain also talks of extending the concept to rail networks. He knows the potential for harnessing private sector management, expertise and financing. He also knows the disparity between the demands on the public purse for transport infrastructure and the resources available to meet them.

PPPs have an obvious allure, and it is vital that the Government furnishes a formula that does not transfer an untenable risk to the private partner. The present scheme will not do. It has the potential and appeal of a charity raffle. A genuine investment opportunity must be provided.

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