Proof PPPs can hold public good to ransom
Tough call facing Government on light rail and the Super Fund's PPP
What just happened in Transmission Gully? Wellington’s absurd transport predicaments don’t often feature on the Auckland horizon, but recent events on the new road north out of Wellington should bring every transport lobbyist and planner in the country — not to mention taxpayers — out in a cold sweat.
That’s especially true for anyone interested in Auckland light rail. The Ministry of Transport is taking two options for that massive project to the Cabinet next month.
For Transmission Gully, the NZ Transport Agency (NZTA) has given the “Wellington Gateway Partnership” (WGP), the consortium building the road, an extra $190 million to keep it on the job. That’s a 22 per cent bump in the contract price for the project.
Literally, to keep it on the job. WGP was threatening to take NZTA to court and the inference we were all welcome to draw was that if it didn’t get its way, it might drive its diggers into the sunset.
The reasons for the extra payout, it was reported, included difficult engineering challenges, the impact of “storm events” and the Kaikōura earthquake. All of which, you might think, are complications with a high probability of occurring.
Why is this important? Because Transmission Gully is a PPP (publicprivate partnership). It would be generous to call this use of the word “partnership” a euphemism.
In a PPP, the government outsources the construction and operation of a service facility, like a road. Someone else gets to own it, or long-term lease it, and make money from it, in return for taking on the financial risk.
In reality, they don’t take on the risk at all. Private partners typically enter the arrangement because, if they do the job properly, they are guaranteed a certain income. Sometimes they get it from a toll. Other times they might receive regular ongoing payments, “based on the level of service provided”.
That option is called the “availability model” and is in place for both of New Zealand’s current PPPs, Transmission Gully and the Puhoi to Warkworth motorway.
We don’t know the important details of PPP contracts because they’re “commercially sensitive”. But it’s instructive that NZTA caved in on
Transmission Gully. The risk the project would be abandoned must have been real, which probably means the reasons for cost escalation on that project were recognised in the contract.
Remind me, which side was supposed to shoulder the risk?
Which brings us to Auckland’s $6 billion light rail project. Of the two bids being prepared for the Cabinet, one is by NZTA itself. It would be funded by government through the 1.1 per cent loans it is able to raise.
The other is by a consortium called NZ Infra, which consists of the NZ Super Fund and a Canadian company run by CDPQ, the sovereign wealth fund of Quebec.
NZ Infra proposes a “public-public partnership”, because NZSF and CDPQ are publicly owned. That’s semantics. It’s a PPP. The senior partner is not an asset of the New Zealand Crown.
It’s common for sovereign wealth funds to get involved in mass transit. CDPQ has already built 12 light-rail services and key personnel from those projects are involved in the Auckland proposal.
But they’re not in it for the love and nor should they be. Their job is to build wealth for citizens to draw on in retirement, and we want them to do that well.
So how do they expect to make their money? Not from fares, that’s pretty clear.
Under regulations set by the previous government and still in place, our public transport operators are required to gather 50 per cent of their operating income from fares. It’s called farebox recovery.
Auckland Transport, with the Government rightly turning a blind eye, has let that fall to 41 per cent. In some cities around the world it’s much lower than that. One way or another railways, just like roads, require support from the Government, aka taxpayers.
This means a light-rail PPP is likely to include ongoing payments, just as our two roading PPPs do. Also, a whole series of agreements designed to keep the service “efficient”. That’s financial efficiency, note, which is different from social good.
Will the operator be allowed to shut down routes or reduce frequencies if patronage falls? Will they control fare prices? Will the Government agree to limit competition? That might mean, for example, that AT couldn’t build up its rail-plus-rapid-bus service, Britomart-Puhinui-airport, even though work on the busway has already been greenlit.
Will a PPP for one light-rail line get to build all the others we’ll need in time? Bye bye competition? That’s exactly what’s happened in Australia, where the Melbourne company Transurban has a near monopoly on tolled expressway construction in most of the major cities.
The Super Fund’s proposal may not include such measures. It would be untenable if it did. But you can bet they would like to have them in there.
Auckland has form with transit contracts that don’t serve the public well enough: just ask Waiheke ferry patrons.
Politicians are split on PPPs. National likes them. Within Labour, ministers aren’t talking: they’re constitutionally obliged to slit their wrists in the bath if they share their thoughts ahead of a Cabinet decision.
But Labour’s Finance Minister Grant Robertson is on record as a PPP sceptic and it’s widely assumed Transport Minister Phil Twyford is sweet on the Super Fund.
As for Winston Peters, he doesn’t like light rail at all. Among Prime Minister Jacinda Ardern’s many reasons for not provoking him into bringing down the Government, this is one of them. Before the election, Labour and the Greens, absolutely to their credit, want progress on light rail in Auckland.
The Cabinet will choose a provider in March, and the ownership structure and ongoing cost implications will be critical to that. In time there will be many things to decide, too, including cost, routes, technologies, frequency and other service quality factors.
It’s likely, though, that the options will be similar. Both proposals will be for the start of a network that is elevated in parts: almost certainly neither line will run along the ground on Queen St or Dominion Rd. Both will be driverless, fast and frequent. The Super Fund deserves credit for driving innovation in the concepts.
If the Cabinet does decide on the PPP, it will have to reassure us there are no hidden costs. And that it has not locked out competition, or new technologies, or the capacity to deal with anything else that changes the demand over time.
Also, a compelling answer as to why any private project is in the public interest when the Government can borrow at 1.1 per cent would be helpful.
By the way, we’re not really thinking big about transport in this country yet. Heard about the Boris Bridge? British PM Boris Johnson wants to build a bridge from Scotland to Northern Ireland.
If the Cabinet does decide on the PPP, it will have to reassure us there are no hidden costs.