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PPPs' appeal diminishing

Nov 22, 2012

The market appetite for large roading public private partnerships (PPPs) is waning.

Cranleigh director and infrastructure specialist Mike Stanton says as the general economy shows few signs of improvement and the failure of some large PPPs overseas throws up red flags, the appeal of PPPs to the private sector is dwindling.

In Brisbane, Australia the Clem Jones tunnel under the CBD has gone into receivership owing $A1.4 billion to 24 banks and Brisconnections, the owner of the airport link, has suspended trading on the ASX saying its debt may outweigh the value of the company. Both PPP projects seriously miscalculated the levels of traffic flow on the new links affecting projected revenue. These and other problems for the contracting industry globally have led to a more cautious climate.

One of the New Zealand's biggest infrastructure projects coming up is Wellington's $882 million Transmission Gully highway to be built under a Private Public Partnership. The NZTA is looking at alternative funding options for the 27km link providing a direct route in and out of the capital.

Stanton says Transmission Gully is consented so it can move forward quickly, but it is not without its hiccups. Large projects need bidders with strong balance sheets and an appetite for risk. Normally Treasury expects to have a minimum of three credible bidders on projects but will probably have to make do with do with two on Transmission Gully. While the the expressions of interest stage has been pushed back so consortia can be formed, it is likely that two strong bidders will step forward in this case.

He says if a PPP is structured carefully there is no reason why it can't work well and, if desired, the road tolled as there is a free existing route. The toll revenues would flow to the Crown rather than the successful consortium.

The private sector can build, pay and maintain Transmission Gully for 25 years removing it from the Government's public debt funding requirement.

The Government likes PPPs because of the risk transfer to the private sector, the whole of life assessment model integrating upfront design and construction costs with ongoing operation, maintenance costs and the innovation PPPs give in terms of using the private sector's management skills.

But he warns PPPs are not the answer for all projects. As they are negotiated for up to 35 years PPP procurement is more complicated. The up-front transaction cost of PPP projects is much greater than the preparation and negotiation costs of conventional procurement methods because of the complexity of the contractural structure, which in turn, results in longer negotiation periods.

The bid costs are an issue for industry as these can run to $10-$20 million for large projects. It really hurts to be an unsuccessful bidder. Although the Government will now refund some of the bid costs to unsuccessful bidders they still face big deficits.

He says while PPPs are largely accepted by central and local government they are not a panacea if either cannot find the money for a project. Setting it up under a PPP won't help with affordability. Both still need to have the revenue to pay project installments.

Stanton says it is good to see the Government and its agencies looking at the whole of life when assessing projects. However, there are limitations with the methodology. A discounted present value basis is used for calculating the whole of life cost for a project. Under this model many infrastructure projects show no benefits after 20 to 35 years, yet some of the bigger schemes, such as Transmission Gully will last for 100 years. Anything after 35 years is not considered in calculations.

Until recently, the buying of major defence force equipment, such as air force planes and navy ships was done of the basis of what it costs today and there was no thought given to buying better quality equipment that would be cheaper to run over the whole of its life.


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