Another spin on the light rail ‘money-go-round’
The NZ Super Fund-led consortium has denied its public-private-partnership (PPP) plan for Auckland light rail would cost massively more than a simpler Government-built and owned version. Dileepa Fonseka takes a closer look at PPPs.
New claims about Auckland's light rail plans have been strongly denied by the fund at the centre of them but others say the costs could be higher with the consortium regardless.
Infometrics Economist Brad Olsen said the Government was playing a “money-go-round” with attempts to take debt off the Crown books through special purpose vehicles and PPPs.
“We’re trying to find any way possible in New Zealand at the moment to essentially have debt that we don’t call debt,” Olsen said.
“We shift things on-balance sheet and off-balance sheet, effectively all they’re doing is playing a bit of a money-go-round,” he said.
Cabinet will make a decision this year on two Auckland light rail proposals: one from the New Zealand Transport Agency, the second a joint proposal by the NZ Superannuation Fund and Caisse de dépôt et placement du Québec (CDPQ) Infra, a wholly owned subsidiary of a Canadian pension fund.
NZ Super Fund has hit back at allegations in a Stuff article that its consortium with CDPQ Infra has proposed the Crown pay back light rail costs over 50 years with 70 percent of that money going to CDPQ Infra.
“We won’t be commenting on the negotiations or any of the parts of our proposal except to say that every single point that the Stuff anonymous source put in that story was incorrect,” a spokesman for NZ Super said.
“We’re not going to get into a ‘is it this’ or ‘is it that’, we’re not going to do that,” he said.
“That’s part of the proposal and the negotiation with the Government after that.”
National MP Chris Bishop said he had heard the agreement had been “whittled down” to 50 years from 99.
“That would be an extraordinary agreement if the Crown was to enter into that deal,” Bishop said.
Transport Minister Phil Twyford’s office echoed NZ Super’s denials and a spokesman said: “Decisions have not been made and this is a commercial process so we won’t comment on any speculation”.
Perhaps they’re all correct
Even if the details were on a piece of paper somewhere and the Government announced tomorrow that it was going with the NZ Super/CDPQ consortium, details on the final contract signed could change drastically.
Max Rashbrooke, author of Government for the Public Good, and a critic of PPPs, said the actual details around PPPs could change quite significantly from proposal to when a contract was signed.
“One of the things that was observed in the deals overseas is that the public sector sort of has an initial price in mind and that gets bid up massively during the procurement process because the consortium manages to convince it that all these other things are needed and so on and so forth,” Rashbrooke said.
Olsen echoed that observation, saying it demonstrated the additional time and money costs a PPP model could bring.
Olsen said the last time he checked Crown borrowing costs were at 0.95 percent and it might be more “efficient and straightforward” to just borrow and invest in light rail.
“To the ratings agencies the kind of additional borrowing we could be doing will not materially affect our financial position as a country,” Olsen said.
Rashbrooke said he had not studied the Auckland light rail proposals in depth, but typically with PPPs, the costs came in the form of borrowing costs and transaction costs.
A disastrous PPP with the London Underground was one of the best international examples of this, he said.
A National Audit Office report into the United Kingdom’s PPP for the London Underground found that the government had paid £450 million more than it would have had it just borrowed the money for the project itself.
Almost equal to those added borrowing costs were the costs of simply signing the contracts.
The Guardian reported that those ran to £500m over the cost of the contract.
Rashbrooke said those huge legal and advisor fees were the biggest problem with PPPs.
“Here you’re trying to sign a deal that would be valid for as long as 50 years...that involves huge swathes of lawyers and accountants and various other consultants.
“When you sign a contract you’ve tried to design a contract that will be valid for up to 50 years and obviously you incur huge legal and advisor fees trying to make the contract watertight,” Rashbrooke said.
“There is actually no way you can do that coherently because it is impossible to anticipate everything that will come up in the next 50 years.”
Rashbrooke said what normally happened was further down that 50 year track a government decided it needed more from an infrastructure project.
For example, a government might want to use a school hall built via a PPP for community functions.
However, because PPP contract terms were so detailed and rigid using a PPP for that might either be impossible, because it wasn’t stipulated in the original contract, or very expensive.
“You end up with a very inflexible system with a huge amount of control vested in a private consortium,” Rashbrooke said.
“They basically allow a private consortium to have government over a barrel.”
The benefits of a PPP
Infrastructure NZ Chief Executive Paul Blair said it was not as simple as putting the two proposals together and comparing low crown borrowing costs to the costs of paying NZ Super/CDPQ.
Twyford has promoted the NZ Super/CDPQ Infra consortium proposal as a historic “public-public” partnership that would pay the pensions of New Zealanders.
But it would also pay for the pensions of Canadians and this part of the scheme is understood to have prompted some objections from New Zealand First around the amount of money that could potentially go overseas.
Blair said both proposals would be analysed against a higher discount rate than the Crown costs of borrowing.
Treasury regulations required a discount rate of 6 percent be used in analyses, and for NZTA a discount rate of 4 percent could soon be used for transport projects.
“The 6 percent is the government’s attempt to say you can’t just borrow and borrow and borrow, you should aim for a return on capital,” Blair said.
He said PPPs also carried other benefits.
Offloading political risks?
Those included offloading political risks associated with cost blowouts. The consortium would use its own money to bear those risks and the public would normally only pay after it was constructed.
Olsen said the long timeframes involved meant the NZ Super/CDPQ Infra consortium would have an incentive to cost the project accurately and build in the price of cost blow-outs into their price.
Blair said even on PPPs that had “failed” or where a consortium had collapsed, the public had still been left with an asset.
“Entities that are not the government can generally move faster and take different risks,” Blair said.
“When I was in Sydney there was a cross-city tunnel...private sector provided it, got the traffic forecast wrong, went bankrupt; that tunnel’s there today,” he said.
“The government didn’t pay for it, the government didn’t take that risk, the government didn’t fail and commuters are still getting that product.”
Transparency an issue
Rashbrooke listed public transparency as one of the casualties of PPPs.
Commercial confidentiality was often cited as a reason to deny the public information on the progress of PPP projects which made it difficult for the public to find out what was going on with assets even after they were being built and used by the public, he said.
That has panned out so far to much protest from interest groups.
At the end of last year Bike Auckland, the Employers and Manufacturers Association, Generation Zero, the Automobile Association, Heart of The City and Greater Auckland blog all signed a letter at the end of last year where they protested being kept in the dark about light rail plans for Auckland.
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