Whether or not transport public-private partnerships (PPPs) are a good idea has once again reared its head in recent times – due to discussion about the Transmission Gully project near Wellington. The Transmission Gully project (which is a decidedly dodgy project regardless of how it’s funded) will cost around $1 billion to build, but because the construction will be done through a PPP the amount of money that will eventually be paid by NZTA is more like $3 billion.
This is what the Green Party noted, after a Select Committee meeting where the figures were discussed:
NZTA head Geoff Dangerfield conceded at the Transport and Industrial Relation Select Committee that it would cost the Government $1 billion to build the Transmission Gully motorway, but that service payments under the preferred PPP approach will be triple that over a twenty five year timeframe.
“The Government is locking tax payers into long-term payments for an expensive and unnecessary motorway that will be very profitable for the private consortium building it,” said Green Party transport spokesperson Julie Anne Genter.
“Public-Private Partnerships are just an expensive form of borrowing, and borrowing to build an uneconomic highway is an irresponsible use of taxpayer money.
In response, the NZ Council for Infrastructure Development last week highlighted that the much larger figure needs to be taken in context to reflect the inclusion of financing costs and maintenance of the motorway, as well as the level of risk taken on by the private partner:
“The benefit under a PPP contract is that, in so far as possible, risk is assessed up front and allocated to the party that is in the best position to manage the risk. When risk is not assessed correctly the party making a mistake is the party that pays for it.
“This is exactly what we have seen in Australia, where several PPPs have underestimated the risk that traffic demand will not be as good as expected. A common misconception is that these PPPs have failed. In fact the opposite is true. In passing demand risk onto private parties, the government, and the tax payer, have not had to carry this cost. It has almost fully fallen on the investors and the financiers who have put their money at risk. Under conventional procurement, we often don’t see these sorts of failures accounted for because the tax payer’s deep pockets keep poorly designed projects afloat and hide the real costs to taxpayers.
“Limited Knowledge also plagues understanding about the total costs of PPPs. In the case of Transmission Gully, it is easy to make headlines by saying the total cost of the project will be three times its $1billion construction cost.
“Again, what is poorly understood is what that $3 billion represents. It includes the cost of construction plus the operation and maintenance of the motorway over 30 years plus repayment of debt plus interest and transfer of construction and operating risk to the private sector. Cost blow-outs or failures do not sit with tax payers and if the road is not open and to standard every day for 30 years, the public withholds payments. The PPP will only proceed if a successful private sector bid to design, build, finance, maintain and operate the new road provides a better overall outcome than more traditional procurement methods.
“This will require bidders to develop innovative solutions to constructing and maintaining the road for the duration of the 30 year concession period, and beyond, maximising the value for every dollar spent.
“Although debt funding will incur capital and interest repayments into the future, the benefit is that people using the corridor in the future will also contribute to its cost.
“The purchase of a home provides a helpful analogy to understanding the structure of a PPP. Before you even bid at an auction or build a home, you may well spend several thousand dollars on lawyers, builders reports, designers, bank loan applications and engineers. These are comparable to the $60 million on Transmission Gully, with the notable exception that the upfront costs for Transmission Gully include sophisticated analyses which must always show that the public is getting best value for money, or the project does not proceed as a PPP.
“After you’ve bought your house, as any homeowner knows, the spending doesn’t stop. Sometimes you find there’s something wrong that needs fixing. That risk sits with you, which is why smart buyers pay for builders and inspections before they buy. Then there are the lawns that need mowing, the drains that need clearing, the repaint, the new roof, a replacement hot water cylinder and all that sort of thing.
“Once you collate all these expenses and add them to the debt repayment over 30 years, whatever you have in total paid for your house looks nothing like the figure you paid for the home. This is the equivalent of the $3 billion figure associated with the Transmission Gully project.
I understand the logic behind borrowing for infrastructure investment – even if it means that you end up paying much more for the project in the form of long-term repayments. This means that those who benefit from the project end up paying for it and can smooth out the cost of paying for large pieces of infrastructure. It’s essentially a larger form of buying your house with a mortgage.
However, it’s pretty easy to borrow money without needing to involve a private partner. Furthermore public agencies are generally able to borrow at lower interest rates than the private sector so there’s actually a disadvantage from the beginning from going with a private partner – if you set the issue of risk aside. And it is that issue of risk that becomes clearly the important issue here: as NZCID note the failed Australian PPPs aren’t actually failures in terms of the public partner, they have actually been quite successful in getting the piece of infrastructure built and it’s the private sector which has worn the messy results of terrible demand risk estimates.
The failure of Australian PPPs on the demand risk issue (i.e. projecting far higher traffic demand than what actually eventuated – a familiar story!) has had a huge impact on the structure of transport PPPs, with the Transmission Gully PPP being structured in a way that doesn’t actually transfer any of the demand risk onto the private sector. In effect, it sounds like NZTA will pay the private partner a set fee each year regardless of how many people actually use the road.
In effect this leaves the only risk for the private partner to take on being related to standard things like construction and maintenance. As far as I know these are things which NZTA already undertakes a lot of ‘risk-sharing’ on – which might sit behind why it’s incredibly rare for motorway projects these days to go over budget.
So to summarise I can’t actually understand what the advantage is from having Transmission Gully as a PPP if there isn’t going to be any demand risk in the deal allocated to the private sector. NZTA might as well just borrow the money themselves at a much lower rate, cut out the middle-man of the PPP’s private partner and undertake a normal risk-sharing arrangement in the construction and operation of the road itself. Of course an even better thing to do would be to simply not build the road because it’s a stupid waste of money – but the PPP arrangement seems to be turning a stupid waste of money into a REALLY BIG stupid waste of money, for pretty much no gain whatsoever (except to the private partner who basically gets a risk-free investment at the taxpayer’s cost).