Infrastructure

A PPP grave paved with money pits

Transmission Gully's PPP mess is far from the only one. Dileepa Fonseka surveys the global landscape for public private partnership debacles and why they won't be used here again any time soon

Taxpayers and Wellingtonians may think they're getting a raw deal out of Transmission Gully, but spare a thought for the people who ended up paying for a school after it shut down or faced a four-year wait for lawyers to negotiate a Public Private Partnership (PPP) contract. 

PPPs have come in for heavy criticism across the globe. Proponents believe they absolve governments of construction and financial risks, but critics say the taxpayer always ends up as the ultimate backstop because it is politically difficult for them to walk away from an unfinished road or hospital.

The previous National Government wanted more of them and used Transmission Gully as a flagship project, signing the contract shortly before the 2014 election and committing future governments to it up until its expected completion in 2020 for $850m in net present value terms, or $125m a year for 25 years. But the cost has now blown out by more than $200m and the project won't be completed until late next year.

Labour campaigned in 2017 on not using PPPs for hospitals or schools, but was open to them for big transport projects, while National has remained keen on them until the implosion of the Transmission Gully project. National is now believed to be backing away from using PPPs, while Labour is now debating whether to use a PPP structure for the monster $6b plus light rail project in Auckland, via joint bid by the NZ Superannuation Fund and Canada's CDPQ Infra.

The alternative is a more conventional NZTA-led project where the Government borrows money at less than one percent and simply pays for the construction up front, rather than over decades at effective interest rates of closer to 8-10 percent.

Binns no fan of PPPs

The Infrastructure Reference Group headed by Mark Binns hasn't put any Public Private Partnerships forward for the Government's $3b infrastructure fund. 

“I have done PPPs before in New Zealand and Australia, so I’m not necessarily a great fan personally," Binns told a Wellington Chamber of Commerce online audience on May 28.

“There were no projects in the list [sent to Ministers and Cabinet] that were being proposed to be put forward in a PPP format.”

However, with $136b worth of projects competing for a pot of $3b, WSP managing director Ian Blair said the model would inevitably be suggested as a way many of the projects that didn't make the cut could be funded. 

"We've got thousands of shovel-ready projects being considered by Cabinet at the moment. More will not get up than will get up."

"And therefore when that's known you may have investors going 'well actually we'd be prepared to back that on these terms'."

How it starts

With a traditional procurement model if an organisation like NZTA wanted to build a road they would typically put out a tender, invite companies to compete for it with bids, then pay the winning bidder to complete the work. 

Blair said PPP deals he worked on often started with a bank who became aware of an infrastructure project waiting in the wings that a public entity couldn't, or wouldn't, fund. 

The bank would then approach a government unsolicited - similar to what happened in the case of Auckland Light Rail - with a proposal for how private entities might raise funds and construct it. 

"Ultimately you're trying to harness private interest to the public good, but that's very hard."

This part of the courtship phase is long. It can involve documents of over 1000 pages and detailed design work as the consortium woos Ministers with visions of what they would build and projections of how they would pay for it.

In overseas jurisdictions payment would often come in the form of a user-charge, like a road toll. New Zealand has often been seen as too small for this approach to work so our governments have preferred to pay them back over time or guarantee a long-term maintenance contract.

If a government agrees to a PPP the negotiations to set one up can stretch on for six to 12 months.

The "partnership" between government and private entities is meant to last a long time. Often consortia that win these contracts are on the hook for years worth of maintenance.

In theory that incentivises them to take care building a particular piece of infrastructure, but that's also where the difficulty lies, according to Max Rashbrooke, author of Government for the Public Good.

"Ultimately you're trying to harness private interest to the public good, but that's very hard."

Victoria University of Wellington School of Government lecturer Barbara Allen said that was also where PPPs began to break away from their initial promise. 

"If you're a lawyer or on the government side you sort of want to put as much detail into the contract as you possibly can, but PPPs are supposed to say 'well we'll have this relationship and we'll outline it generally and then if there's a problem we'll work together to sort it out'." 

Blair said the agreements that came out the other side of such negotiations were very complicated. And long.

"There's risks all the way from design through to construction through to operation and the long term asset management."

"So there's a lot of things that can go wrong over that time and therefore the documentation has to address those risks."

'Where's my f***ing tanker?'

A PPP project in Britain to replace its tanker aircraft (used to refuel planes mid-air) shows just how difficult those negotiations can be.

Britain made the decision to use the PPP financing model to build a new tanker to replace its existing stock in 2000.  

By 2004 it had entered into exclusive negotiations with the 'Air Tanker' consortium to build the new Airbus A330 Multi Role Tanker Transport aircraft.

"It was so bad that its acronym FSTA (Future Strategic Tanker Aircraft) was known in the industry as 'F***ing Short of Tankers Again'.

When the consortium actually got around to building the plane most of the contract's milestones were met. Some were even ahead of schedule.

However, negotiating that deal took four years on its own. The contract was only signed in March 2008. 

Rashbrooke said the deal's protracted negotiation period attracted a lot of public mockery at the time. 

"It was so bad that its acronym FSTA (Future Strategic Tanker Aircraft) was known in the industry as 'F***ing Short of Tankers Again'.

The 'Ghost' train and 'Ghost' school

Locking private companies and governments into long complex agreements can prove costly for both parties if it later turns out those infrastructure projects aren't needed. 

Blair said that was what happened with the Sydney Airport Link Railway which is "affectionately referred to as the 'Ghost Train'".

Announced in 1994 the 10-kilometre underground two-track railway still exists today and provides a rail link between Sydney's CBD and the airport. 

The original deal was for the New South Wales government to contribute A$470m to pay for the tunnels and track while a private consortium ALC would spend A$125m building and operating the stations which would be ready in time for the Sydney Olympics. 

"PPP failure after PPP failure after PPP failure we still go down that route because the argument is made that these things are going to get us what we want."

Under the terms of the agreement the state government had to financially guarantee a certain level of patronage to repay ALC's investment, but the number of passengers using the service ended up significantly lower than predicted. 

ALC folded within six months of the railway opening in 2000, but the state government was still locked into its 30-year contract and in the end had to spend A$800m to get out of it.

That was more costly, but perhaps less embarrassing than the 'ghost school' of Balmoral High School in Northern Ireland. 

Built in 2002 the school roll dropped dramatically and had reached zero by 2007. The UK government was still on the hook for a 30-year maintenance contract of £9.2m a year through its PPP agreement though, and had to continue paying that even though it had no students. 

The PPP credit card

Victoria University's Allen said PPPs had a financial allure to politicians, because it meant high infrastructure costs didn't have to be paid for by today's taxpayers or put onto the government's balance sheet.

"PPP failure after PPP failure after PPP failure and we still go down that route because the argument is made that these things are going to get us what we want."

"It's like taking your credit card and saying 'Oh I'd like to buy a road. I need it sooner rather than later and yeah I'm willing to pay overtime and yeah [I know] my fees might go up over time too.'."

"Well you might end up with a road or a bridge, but you've overpaid for it."

A big premium to borrow privately

The cost of financing a project privately is almost always more expensive than the State doing so off its own balance sheet. That is even more pronounced now with interest rates below 1 percent while many PPPs demand rates of return of 6-7 percent. 

"There's nothing wrong with the traditional [non-PPP] procurement process if it's done right."

"Somehow, many governments over many years have been convinced that it is not good enough and it's too expensive and it takes too long."

Blair said it wasn't just about who could raise capital the cheapest.

Sometimes governments would choose PPPs because of the expertise and skills a particular firm brought to the table.

At other times a private entity would be better placed to manage the risk of unexpected construction events or cost blowouts than government would.

However, it is during unexpected events that many PPPs have fallen apart in a spectacular fashion. In the case of Transmission Gully the PPP project has experienced an earthquake, Covid-19 shutdown, construction issues, and alleged financial issues with one of its builders

Allen said surprises like that were simply a function of the timeframes involved.

"Where does that risk start and stop? At some point it seems to be that the private sector goes 'okay enough it's over to you, it's not our fault anymore'."

The long lives of PPPs were supposed to be a strength - because they theoretically encouraged companies to think long-term about the piece of infrastructure they were building - but often proved to be a weakness because the future couldn't be fully predicted.

"Imagine the number of things that can happen in 20 to 30 years to a [private] company.....Covid lockdown has shown how vulnerable some of these contracts were to labour changes and, well, there's a number of things going on isn't there?"

"Putting a road through Transmission Gully and expecting nothing surprising to emerge in terms of the environment? I don't know what to make of that."

"I mean a long, flat road through the Canadian prairies is one thing...but through volatile ground...I don't know. To me it's curious."

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