Last week the NZTA and government announced that they were going to build Transmission Gully using a PPP and in the process seem to either shovelled a whole pile of ideological crap or admitted they are completely incompetent at the one thing we thought they seemed good at, building roads. To see why that is the case, first you need to look at the details of the project and the PPP so lets start with those. The project according to the NZTA:
Transmission Gully, which links MacKays Crossing in the north with Linden in the south, is a 27km section of the 110-km Wellington Northern Corridor Road of National Signficance, which is being developed as a four-lane expressway from Wellington Airport to Levin to enable economic growth, improve road safety and reduce traffic congestion.
Now they make it sound like its a great project but it isn’t all pretty flowers and butterflies. The reality is that despite being talked about for decades, there is a reason it hasn’t been built up until now and that is because it will be incredibly difficult to do due to things like the terrain and geological conditions, as such the project isn’t going to be cheap with this section alone coming in at around $1 billion. It also hasn’t performed well in economic tests with the last BCR seen for it having a result of 0.6 although I have heard rumours that it is even less than that. The short version is that section is clearly in the c”we should not be building this” category. But the NZTA are of course proceeding with it, most likely because their political masters told them to.
So what about the PPP, heres what the NZTA has to say:
The NZTA will use an availability and performance-based contract, which means the PPP consortium will be paid for making the road available to traffic when they have achieved specified performance levels. Payments are not linked to the volume of traffic using the road. An availability PPP contract is more attractive to potential consortium partners as it removes demand risk. As a result, availability contracts offer greater potential of delivering value for money for the government.
What that effectively means is the private company will finance, build and maintain the road and the NZTA will pay them an annual fee for doing so. In other words it is just a form of lending that allows them to keep the debt off the books. Currently all roads are paid for using PayGo where we pay for the project in full up front. Now I don’t mind using debt to pay for projects as in many ways the benefits of particularly these large projects will be felt more in the future than now however it is the use of a PPP for the debt that I do have an issue with. That is because there is simply no way that the private companies can lend the money at rates as cheap as the government can so in an effort to keep debt off the governments books, we as a society end up paying more.
Even the NZTA seem to acknowledge this but give this answer, which seems straight out of the Act party, to the issue,
Although the cost of capital is higher for the private sector than for the government, this cost differential can be offset through private sector innovation and efficiencies in design, construction, operation and risk management. In other words, private sector efficiencies can outweigh the higher private sector cost of capital.
Putting private sector capital at risk is an incentive for the PPP consortium to deliver optimal whole-of-life performance and innovation. Typically, the larger the project the greater the ability for private sector innovation and efficiencies to offset the capital cost differential.
They also say
The NZTA will only proceed with a PPP if it offers a value for money proposition that betters the cost of traditional public sector procurement.
The additional private sector finance costs on a $1 billion project over 25 years are going to add up to hundreds of millions of dollars. It seems to me that they are suggesting that their traditional competitive tendering processes are so bad that we are paying hundreds of millions extra for projects than we need to. If so then those running these tender processes should be shown the door this afternoon. Personally I don’t believe they could be that bad and as such think that the agency is effectively shovelling a load of of ideological crap. It is the crap that says the private sector is always better and more efficient at everything.
This isn’t the only thing with this issue though. One of the points of financing this project through debt is that it reduces the current demands on the NLTF by $1b. We already know that the NZTA has been struggling to pay its bills and even had to get some temporary financial help from Auckland a while ago so what are they going to do with the money that had previously been earmarked for Transmission Gully? Well they will pour it into other state highway projects, including other parts of the Wellington RoNS, to get them going faster.
Really this PPP decision is about the government trying to load up as many road projects as possible to prevent them from being stopped in the future. Further by doing this, all transport capital will be so tied up for so long into the future it will help to make it difficult for any future government to really do much. You really have to wonder if this is the part of last hurrah when it comes to motorway building.