A whole of life approach for new assets

Unprecedented demand for new infrastructure is bringing increasing acceptance of the benefits of greater cooperation between the public and private sectors — particularly with public-private partnerships, writes

Public-private partnerships (PPPs) have suffered from legacy perceptions based on the overseas experience of them. It’s also likely that PPPs are not very well understood by the general public.

As a relatively late adopter of PPPs, New Zealand has the advantage of learning from the experiences of other parts of the world, improving on the best elements and avoiding the pitfalls.

A PPP is simply a type of procurement model, among a range of options available to the government for building public infrastructure. All procurement models involve the government paying private sector partners (for example, construction firms) to build an asset.

In some instances, particularly large complex projects with requirements for ongoing management and service, a PPP offers the best opportunity to deliver the government value for money. This is because the private sector partner’s return is tied to the long-run performance of the asset, not just its construction.

Public Infrastructure Partners LP (PIP) Fund, managed by Morrison & Co, is the finance partner in PPP consortiums delivering a number of major public infrastructure assets in New Zealand, particularly in the schools sector. These include the Hobsonville Point primary and secondary schools, which opened in 2013 and 2014 respectively; Rolleston, Aranui and Ormiston schools, which will start taking pupils in Term 1 next year; and the Wakatipu High School which will open in 2018.

Under a PPP, private sector partners design and build assets with a focus on their useful life — a “wholeof-life” approach. The private sector puts up the capital for the project (usually by contributing equity and borrowing debt) and then manages the asset over an extended, defined period known as a “concession” (typically around 25 years), recovering the initial construction costs and ongoing financing, maintenance and lifecycle costs through regular, fixed payments.

At the end of the concession, the asset reverts to Crown ownership, usually with a specified minimum life expectancy remaining.

There are strong incentives for quality construction under a PPP because if the asset fails to deliver at the required standard at any point during the life of the concession, the government can withhold some or all of its fixed payment to the private sector partner.

By comparison, under traditional procurement models the private sector partner would have been paid and received its profit, and any defect guarantee would have lapsed.

We need only look to the leaky building crisis to see the risks inherent in this approach.

As well as ensuring greater accountability from the outset for the lifetime performance of the asset, under a PPP the private sector partner is responsible for the asset’s ongoing maintenance for the duration of the concession.

This frees up the public sector managers of those assets to focus on their core areas of specialisation. For example, in a school procured under a PPP, principals and teachers are no longer responsible for managing property, enabling them to focus more on teaching.

One example of these benefits in action is the replacement, costing the PPP consortium $2 million, of the faulty air conditioning system at Hobsonville Point Primary School.

Because this is under a PPP contract, this cost is covered by the consortium — whereas under a traditional contract additional government funding would need to be allocated to fix the issue.

The involvement of financing in PPPs also enables central/local governments to spread the cost of new assets over their life, enabling more infrastructure projects to be delivered faster and delivering better intergenerational equity.

Many New Zealanders are investors in the PIP Fund either directly or indirectly through their investments in the PIP Fund’s owners — the New Zealand Superannuation Fund, New Zealand Social Infrastructure Fund and a number of local community trusts.

With a specific mandate to seek opportunities to invest in New Zealand infrastructure projects, we welcome the Government’s growing confidence in PPPs as another way of helping to advance critical infrastructure development. Steven Proctor is Executive Director, PIP Fund at HRL Morrison & Co The PIP Fund is the finance partner in consortiums delivering a number of PPP projects: Recent PPP contracts awarded include:

Hobsonville Point Primary and Secondary Schools (opened in 2013/14)

Other schools, including Ormiston Junior College in Auckland, Aranui Community Campus and Rolleston Secondary School in greater Christchurch (opening in 2017), and Wakatipu High School in Queenstown (opening in 2018).

Auckland (Paremoremo) Prison — design, construction, finance and maintenance only (excludes operation). Construction due for completion end of 2017; expected to be operational by mid-2018. Melbourne Convention Centre University Of Wollongong student accommodation PPP Preferred bidder status:

Puhoi to Warkworth roading project — contract negotiations expected to be completed late 2016.

Auckland Skypath, which has wide community support based on its potential benefits of promoting a modal shift in transport (to cycling/walking), contributing to the liveability and appeal of the city, and becoming a tourist attraction/iconic feature.