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Did the NZTA just admit they are incompetent

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.

35 comments to Did the NZTA just admit they are incompetent

  • Mr Anderson

    Good point. I doubt there is any reason why this project requires more “private sector innovation” than other projects like Waterview. In which case either Waterview should be a PPP too, or Transmission Gully really shouldn’t.

  • No risk for the private partner? That’s the way they prefer it in the business friendly parties; socialise the costs and privatise the profit.

    Of course the project can’t be tied to vehicle numbers because there are so few… and once it is tolled there will be even fewer.

    Amazing to think that all NZ needed to make its economy boom was for the vast population of Levin to be able get to Wellington Airport a little quicker and so expensively…..

    • Exactly what I was thinking Patrick. So regardless of vehicle volumes, the private partner will be paid the same? This sounds bizarre – are there examples overseas where this has actually worked? What if the private partner goes broke and can’t meet the maintenance costs? Will the private partner be forced to take out earthquake insurance, thus adding more to the overheads of this project? What are the “specified performance levels”? And private sector efficiency in operation and risk management – does this mean minimise the costs in these areas? So many questions, so few rational answers.

      • Traffic volumes must play a part – presumably if the PPP is structured like this then NZTA will be keeping the toll revenue. If it is lower than forecast then NZTA carries the risk?

        • I actually think this is a good thing. I really dislike the idea of linking operator revenue to volume, when in this country at least, the operators are probably the same people advising NZTA/govt on PT, future roading projects and forecasting. NZTA can manage demand via tolls, which should lead to better outcomes for motorists. Yes there is risk that the modelling turns out to be bunk – but it doesn’t really make sense that the failures in forecasting should impact the operator, when the business case is made by NZTA in the first place.

      • Greg N

        This is simply the next “Novopay” in waiting – except this time its for a RoNS”.so the money is ten times higher than NovoPay.

        But expect the same process of few enforceable penalties of any real consequence and you have a NIL “downside” for the Private Partner versus near zero upside for NZ Inc while NZ Inc are carrying all the risk, means its simply a matter of time before the wheels come off it.

  • Luke C

    A PPP for this is just plain mad, and clearly only reason is that NZTA has run out of money to push all the RONS. A very dodgy back on envelope calculation suggests that NZTA will be paying north of $100 million a year for this motorway, every year for 25 years! That is a huge portion of the transport budget committed to this. The AADT along Pukerua bay is 23,000. So say Transmission Gully gets 15,000 cars at $5 (very high) each thats only $27 million, a fraction of the PPP payment. At $2.20 (same as Puhoi) might get 20,000 but thats only $16 million. Hence why traditional PPP cannot be used.

  • Matthew

    The story in the Dom Post (the one using the same magnify glass graphic) was first put up with dollar figures (and weird cut and paste errors too), but then both the numbers and the errors disappeared. The annual payment over 25 years was $100 million p.a..

    So it will end up costing $2.5 billion. Until last year they were using the figure of $900million. Now it is a billion.

    So it’s a budget blowout, with a huge cost being placed onto future taxpayers to save money that the government doesn’t have so as Gerry Brownlee put it (and I paraphrase) “to save money so we can build other motorways” or some such nonsense. Even the government thinks it is a waste of money. They must realise they are going to look really, really stupid when they inevitably cancel it.

    The Coast Road, single lane, safety-wired and 80km/hr is almost always free flowing. There are always queues leading into Pukerua Bay in the evening rush, and often morning queues leading into Paekakariki. The queues feed the traffic onto the Coast Road at a rate it can handle. The queues themselves are hardly it seems reason to spend billions. (They are way, way smaller than any rush hour congestion in Auckland or in Wellington). If traffic is static or declining then it would be pretty foolish to proceed.

    The Waikanae to Otaki rail electrification project at $30 million would buy more time. A Pukerua Bay bypass, and re-engineering the entry and exit into Paekakariki and extending the wire barriers would seem a whole lot better way to go too. Demand management by upping the frequency of Kapiti Line trains to 15 minutes could be looked at, as indeed should the whole of the Wellington-Palmy rail corridor’s service be looked at.

    So IMHO even in the long term Transmission Gully will never be needed.

    Who the hell is going to pay a toll to drive Transmission Gully when the parallel route is perfectly adequate?

    Really it’s not the road to Kapiti that is holding Kapiti back. It is Kapiti’s distance from Wellington. It is too long a drive to pretend you’re a suburb of Wellington. No fancy, schmancy road is going to change that reality.

  • obi

    “In other words it is just a form of lending that allows them to keep the debt off the books.”

    No, it also moves the responsibility of construction and maintenance quality to the road owner over an extended period. This reduces long term risk to the government.

    This isn’t too different to the way government uses office real estate. With few exceptions, government doesn’t own office buildings. It lets a commercial business build them and maintain them, and government pays a guaranteed rent for the space it leases. The risks of constructing and maintaining the building fall on the building owner, not the government. I don’t think that anyone argues that this form of PPP doesn’t make sense, or that interest rate differentials factor in to the issue. I’ve certainly never heard anyone making a case for the government building and owning hundreds of office blocks around the country, or employing thousands of cleaners and workers to maintain them.

    • Your analogy doesn’t fly Obi and you must know it. The real estate market is a real competitive one, the gov can be more certain of capturing economies there through this model because there are many buildings and owners vying for their tenancies. There will only ever be one road here, we can’t decide to stop ‘renting’ this road to ‘rent’ another elsewhere to get a better deal.

      • obi

        That’s true if you consider the large number of buildings the government occupies. But at the point the government leases space in a single building, there will be a number of competitors wanting to (build and?) rent space and then the government is stuck with its decision for the life of the lease. That is the same situation as building a single road, where a number of road builders will compete to win the right to build the thing and then maintain it for a period of time.

        You could also compare this situation with the proposed CBD rail tunnel. This will presumably be built by Kiwirail using money it has borrowed, and most likely be paid for by some sort of annual subsidy paid for by someone. Auckland Council, or the Government, or some combination. Kiwirail won’t want to take a $3.7billion punt on passenger numbers eventuating and being able to repay the debt from fares, so they’ll be looking for a guaranteed subsidy unrelated to passenger numbers. That’s a PPP, and the only way the tunnel will ever be built since neither the government or Auckland Council has $3.7billion sitting in their account. And neither wants to own a rail tunnel.

        • Wrong in every detail. Kiwirail will neither build nor own the CRL. AT/AC will. The gov and the city will pay for it. It won’t cost anything like 3.7. Try to use facts on this site.

        • And before you try to claim that $3.7b was a typo, it’s not even $2.7b if we exclude the rolling-stock purchase. Auckland’s already paying the government back, in full, for that particular purchase. The CRL is somewhere in the vicinity of $1.5b, plus roughly another $900m for the stations.

    • Nick R

      Obviously Auckland Council doesn’t agree with you Obi. They’ve just elected to buy the ASB tower outright to use as their new HQ, because it saved a hundred million over 30 years in comparison to the lease option.

  • Seamonkey Madness

    This just smacks of the same situation Labour were in when they bought the trains back off Toll before the election. To be fair, in the long term, that will cost less than a fantasyland motorway.

    Same s***, different politicians.

  • Remember this is the project with the appalling 1950s urban flyovers. Here is a good piece on NZTA’s attempts at ‘communication’. http://wellington.scoop.co.nz/?p=50602

  • axio

    There must come a point when the coastal option should be reconsidered. I recall ten or so years ago there was a comparison done and Transmission Gully came out on top – but that was also when it became clear just how steep the road was going to be and thus whether some of the benefits were overstated (given how slow trucks would go to climb it). Centennial Highway seems okay as it is now because there are no roads on and off it so once on traffic flows quite nicely. Perhaps we should just be looking at a Pukerua Bay bypass and the proposed grade separation at Paekakariki.

    The other part in it all I can’t figure out is that presumably you would be feeding two two-lane roads together (to three lanes) at Linden. Assuming most of that traffic is going all the way into Wellington then the motorway through Johnsoville will become a significant bottleneck – and looking at the terrain and build-up that must be pretty close to impossible to widen (without shifting half a suburb). As it stands the corner just north of the J-Ville southern ramp is incredibly tight with no shoulders a cliff on one side. The only way I can seem them building out of that is by demolishing the properties on the eastern side of J-Ville Road. And even then we end up with a three lane motorway down to Ngauranga where it merges with the Hutt road/motorway – 3+2 = 3 won’t work so well their either.

  • SteveC

    with the private sector entering into competitive tenders to plan, design, build and maintain transport infrastructure at the moment, it is hard to see that the minimal project management component of any exercise that NZTA undertakes is actually going to represent a significant part of the overall budget to make large scales savings possible

    its just more rhetoric

  • Question 9 in Parliament today:

    Hon PETER DUNNE to the Minister of Transport: What factors led to the Government announcement last Wednesday to proceed with the construction of the Transmission Gully Highway as a public-private partnership

    Brace yourself for more spin. Benefit cost wasn’t one of them.

  • Jeremy

    How is this different from the Northern Gateway Toll Road?

  • Anthony

    Just like where SH20 meets SH1 at manukau

  • Malcolm M

    The initial BCR of about 0.4 was based on an upfront cost of ~$1b plus a few million in maintenance over the 30 year period. Surely with a $2.5b cost over 30 years through an expensive PPP, the BCR would drop to about 0.16 ?

    If this government doesn’t get re-elected, perhaps a subsequent government could impose a RONS levy on road user charges. If the road freight industry asked for the infrastructure, they should surely pay for it.

  • This, yes:

    “If this government doesn’t get re-elected, perhaps a subsequent government could impose a RONS levy on road user charges. If the road freight industry asked for the infrastructure, they should surely pay for it.”

    • Luke C

      According to some talk trucks won’t even use Transmission Gully. The Road is very steep, as steep as Ngaraunga Gorge but much longer length and in both directions. Therefore trucks may use the existing SH1 that will now be quieter, while cars use Transmission Gully. Of course this will further reduce toll revenue.

      • There could be some money saved by just banning trucks from TG and consequently not having to construct the run-out pits and other safety measures necessary due to the steepness and length of the road. If they’re probably not going to use it anyway…

        • 2.5 Billion saved by not bothering with the thing at all.

          • Luke C

            There is a lot of support among usually PT supporting Wellingtonians for this project. I’ve met a few who hate RONS overall but argue for T Gully most of all for earthquake resilience and safety reasons. It is hard to value the earthquake resilience value of the project and even harder to argue against that. The recent Wellington lifelines study said TGully would reduce Wellingtons cutoff time from 4 months to 1 month. Would really like to see more in depth research on this. Watching the fly through video of Transmission Gully shows huge cuts into the landscape, which would be highly likely to slip. After seeing the Manawatu gorge closed for so long not convinced they would open it in a month, or even four. Making it a PPP further complicates this earthquake resilience issue, and if anything slip likely to be cleared slower if Private Partner in charge, and could result in fun legal battle at the end.

  • Stu Donovan

    Transmission Gully is a poor investment to begin with; to make it a PPP just exacerbates the losses. I do feel sorry for NZTA a little though – I’m sure that most of them don’t agree with either decision; they’re just being told what to do by an ideologically driven government.

  • Let’s not forget that this project would have proceeded under Labour, it relented because of Peter Dunne in its final term. Had it not succumbed to pressure from Dunne and Porirua City Council, there would be an upgrade of the current road already underway (Pukerua Bay Bypass as the first step)

    The project is a dud, and is covered in politics, and don’t start pretending the Nats are the only ones who have their fingers in this pie.

    If the private sector couldn’t build, own and toll the road in its own right, it shouldn’t be built – and of course, it doesn’t even remotely stack up commercially.

  • Luke C

    It wouldn’t of proceeded in any hurry. Ongoing investigations were funded, however there was no mention in NLTP of it proceeding, certainly in the sort of timeframes we are seeing. I understand Labour said they would give half the money, but left a several hundred million funding gap for the region to figure out, which they had no way of doing so. This could be easily interpreted as keeping Dunne happy until they could get by without him.

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