After having representatives of numerous sovereign funds troop through the mayoral door over the last 3 years looking for major investment opportunities, Auckland mayor Len Brown went to accountancy firm Ernst & Young for a position paper on public-private partnership models.
Auckland Council still needs to find half the $3.8 billion-odd to build the city rail loop, assuming the Government doesn’t first get so many roads completed that the gain in commutes on the existing rail network doesn’t reach the Government’s required figure.
If that happens and the Government pulls out of the rail project, the council would have to find even more money to make it work.
The 67-page position paper, by Grant Hodges, Libby Proctor & Ben King and released selectively over the last 2 days, concludes public-private partnerships are an option for Auckland.
Mr Brown said one of the benefits of the Auckland amalgamation was creating the scale to make PPPs at a civic level possible for the first time.
Ernst & Young said the key decision for Auckland Council to make for individual projects or programmes in a construction collaboration model was whether speed/uncertainty outweighed the risk transfer benefits of long-term service models.
The paper refers to Hawkins Construction Ltd’s disastrous entry into a public-private partnership to build the $A400 million Ararat prison in Victoria, where “the consequences are yet to play out”. The PPP collapsed last year when the 2 builders, Hawkins & St Hilliers, struggled to meet their obligations under a construction joint venture.
Ernst & Young said this experience might constrain the field of construction companies able or willing to bid for PPPs in Australia in the short term, but didn’t appear to have reduced market interest for the Transmission Gully project in New Zealand.
The paper gives examples of PPPs for streetlighting, water infrastructure & leisure facilities, and said the council’s lengthening of concessions for transport projects could make PPPs for them more viable.
“The DBFO / DBFM model (DBFO = design, build, finance & operate; DBFM = design, build, finance & maintain) is a long-term contractual arrangement that makes the private sector responsible for, and bear the risks of, designing, building, financing, maintaining &/or operating a public-sector asset to output specifications set by the public sector. Under the availability-based model, the public sector commits to make a unitary payment to the private sector for use of the maintained asset once it is operational, over the life of the contract (typically 20-30 years).
“DBFO/DBFM structures are usually highly geared, with around 80-90% of the finance coming from debt and the remainder coming from equity.”
The paper doesn’t suggest what an expected rise in interest rates might do to this model.
And it says whole-of-life insurance – including reinstatement for earthquake damage, for example – might not be value for money, given New Zealand’s current seismic activity. The answer, the paper said, was to mitigate this risk “through early engagement with insurance advisors to assess the scale of any issue and to develop a value-for-money risk-sharing approach acceptable to Auckland Council, Treasury & bidders”.
Public-private partnerships are primarily a construction & management mechanism, at high cost for a theoretically better return, enabling the manipulation of the timing of council funds. They don’t replace the need for finance from rates.
In essence, while the paper presents a thorough examination of many aspects of PPPs, it offers the council a one-dimensional view of the future. It doesn’t weigh up PPPs against alternatives and it doesn’t offer other ideas on how to fund major infrastructure.
Mr Brown said he aimed to kickstart a process of looking at options that might work for Auckland, that would clearly define PPP models and what they can – and can’t – deliver: “I wanted a realistic, warts-&-all assessment of PPP models. I wanted to know exactly what value PPPs can deliver – both so we don’t miss opportunities, but also so we don’t trip up.
“PPPs will seldom if ever deliver lower capital costs. We can borrow money at least as cheaply as the private sector. For a PPP to make sense, the prerequisite equation is the value that it delivers – whether it be through applied expertise, commercial synergy, improved service delivery or risk allocation – is greater than any additional cost of finance.
“If Auckland is to be ambitious & prudent, we need to be smart too. While our balance sheet is strong, it cannot sustain the pressure of the magnitude of investment Auckland needs. And the same is true of the Government.”
Mr Brown said he would ask council staff to use the framework presented in this position paper to create a work programme through which the council & wider community “can have a good hard look at all the options and apply the ones that will deliver real benefits for Aucklanders”.
Link: Position paper
Attribution: Mayoral release, position paper.