Tunnel vision over PPPs is wrong

August 13, 2008

By Brian Rudman - The New Zealand Herald

Another election and once more politicians on the right are dangling the carrot of public private partnerships (PPP) for building roads and other infrastructure before a drooling commercial audience. Last week the National leader promised a John Key Government would "make greater use of public-private partnerships".

When he addresses a New Zealand Council for Infrastructure Development (NZCID) talkfest on the issue tomorrow, he'll no doubt repeat the promise to sympathetic ears. Conference organisers will also be hoping Finance Minister Michael Cullen, who speaks today, will trump Mr Key's promise with an announcement of his own.

In a press release promoting today's meeting, NZCID chief executive Stephen Selwood asks: "With John Key having laid down the challenge ... will the private sector get the green light to advance the $2 billion Waterview tunnel in Auckland as a public private partnership?" He's likely to be disappointed if he's expecting a statement today. A spokesman for Minister of Transport Annette King said on Monday that the issue has not gone to Cabinet yet and there would be no announcement for several weeks.

Mr Selwood, of course, knows what the recommendation is of the steering group appointed by the Government in February to investigate the feasibility of a PPP for the Waterview Connection. He was a member, along with Auckland Chamber of Commerce chief executive Michael Barnett and his counterpart at Business New Zealand, Phil O'Reilly, all of them pro-roads, private partnership lobbyists. With them were cooler heads from Treasury and the Ministry of Transport.

At the time the steering group was set up, it seemed like a clever move by the Government to silence its critics. Go away and come up with a feasible proposition, or shut up, seemed to be the message.

It'll be interesting if Mr Selwood et al have been able to come up with a scheme that matches his earlier hype. "One would expect that a PPP will enable this essential road link to be completed earlier and delivered and maintained to a higher standard than would otherwise be possible," he said at the time.

Providing a dose of cold water to the enthusiasm will have been the Treasury paper from March 2006 which concluded the traditional funding methods were usually preferable, for the state anyway, to the use of PPPs.

PPPs are not always a great deal for the private partners either. Mr Key need only ask former National Party leader Jim McLay, described in last week's Sunday Star Times as "one of Key's mentors" who "is consulted regularly for advice", about this. Mr McLay is a member of NZCID and executive chairman of investment bank Macquarie New Zealand, the local offshoot of the Australian company described by researchers as "the market leader in toll road financing in Europe and North America".

Earlier this month the launch of the Macquarie underwritten BrisConnections Brisbane toll roads float bombed. The share price dropped 60 per cent on the day. The underwriters appeared to have to take up most of the offer. The Sydney Morning Herald headline declared: "Macquarie model has one foot in the grave, the other foot on a banana skin."

Financial observers noted that the failure of other PPP projects such as Sydney's Lane Cove Tunnel and the Cross-City Tunnel now make investors nervous.

It wouldn't be so bad if it was only the private investors that suffered, but the public partner is too often the fall guy. Earlier this year, the British Government had to bail out the banks funding the private consortium that went bust modernising the London underground to the tune of $4.65 billion of taxpayers' money.

A commentator in the Independent observed: "the Metronet loans would have been much cheaper to finance had the whole thing been done through the public sector, yet under the terms of the PPP, the Government was obliged to redeem the great bulk of them in any case.

"The primary justification for the PPP - that it would transfer the risk of the project on to the private sector, be more efficient and enable expenditure that the public sector couldn't otherwise afford - was shown to be a sham".

Proponents will argue that nothing like that could happen here. But it's dreaming to imagine smart international operators won't build a dozen escape hatches into any PPP scheme to ensure they don't end up carrying the losses, if things go awry.

When the Waterview PPP steering group was announced, I pointed to comments made by Mark Binns, chief executive of Fletcher Construction, the country's largest construction contractor, writing in the Herald during the Eastern Highway furore in November 2002. The PPP concept, he said, "is not the panacea for the country's significant infrastructure requirements".

He talked of the skyrocketing costs involved in the initial bidding and then for both the successful bidder and the Government, the costs and time delays involved in pinning down all the legal agreements.

This salutary article is on the Herald website. Delegates to today's conference should take the time to read it. So should the carrot-waving politicians.