Politics A Risk To Rewards In First PPP Expressway

BMI View: The decision by the New Zealand government to approve its first-ever public-private partnership expressway project supports our long-held view that New Zealand is planning to rely heavily on the private sector to finance its infrastructure plans. That said, while we believe that the lack of traffic risks should attract private investors to the Transmission Gully highway project, we highlight the scope for political risks.

On November 19 2012, the New Zealand government gave the New Zealand Transport Agency (NZTA) its first ever approval to implement a highway project under a public-private partnership scheme; namely a 25-year design, build, finance, maintain and operate concession. The 27km project is expected to cost about NZD1bn (US$823mn) and would create an alternative route to the city of Wellington from the north. The NZTA is set to request for expressions of interest for the project by this month, with a contract scheduled to be awarded in mid-2014.

Transmission Gully Highway Timeline
Date Milestones
Source: New Zealand Transport Agency.
Aug-12 Initiate study for PPP model
Nov-12 Announce Registration of Interest: To identify consortia interested in and capable of delivering the required services
Jan-13 Announce Expression of Interest: Potential consortia are asked to provide information on their capability to do the work
Apr-13 Identify shortlist of PPP consortia
mid-2013 Issue Request for Proposal: Formal bids on the project requested from the shortlisted consortia
End-2013 Request for Proposal closes
mid-2014 PPP contract awarded
late-2014 Construction Started
2020 Project Completed

We believe the decision by the government to approve its first-ever PPP expressway project supports our long-held view that New Zealand is planning to rely heavily on the private sector to finance its infrastructure plans (see our online service, May 31, 'Budget Highlights Demand For Private Participation'). A need to reduce its burgeoning budget deficit and the significant uncertainties surrounding the timing and returns from the government's plan to partially privatise several state-owned companies has left the government with few options to finance its infrastructure plans (see our online service, February 28 2011, 'Uncertain Privatisation Sparks Needs For Reforms' and September 4 2012, 'Delay To Mighty River Sale A Threat To Infrastructure Potential').

Without private sector participation, the New Zealand government would most likely have to reduce or delay the scope of its infrastructure plans. Instead, a greater reliance on the private sector to finance and build the Transmission Gully project would allow the government to reduce its capital commitments and instead allocate funds towards less profitable projects such as hospitals and/or towards the rebuilding of the quake-ravaged region of Canterbury.

Limited Options To Finance Infrastructure
New Zealand - Total Government Debt, % Of GDP; Fiscal Balance, % Of GDP

We believe that private investors will be interested in the Transmission Gully highway project. This is because unlike typical PPP schemes for road projects, the concessionaire of the Transmission Gully project will not derive revenues from tolls, but from payments made by the New Zealand government. Traffic volumes are notoriously difficult to forecast, as evidenced by the failure of several PPP road projects in Australia due to over-bullish traffic volume projections (see our online service, November 06 2012, 'Clem7 Collapse Raises Brisbane PPP Sets Alarm Bells Ringing' and January 20 2010, Lane Cove Tunnel Owner Goes Into Receivership'). This PPP scheme would therefore shield the concessionaire from traffic risks from the Transmission Gully project. It would not however shield the concessionaire from a potential rise in building materials.

That said, we highlight the political risks to the Transmission Gully highway project. Several opposition parties in New Zealand (namely the Labour and Green parties) have been critical towards the PPP model for the project as the government is still bearing the costs (and risks) of the Transmission Gully project, and is only relying on the credit rating of the concessionaire to raise financing for the project. The cost of the project will therefore be spread over a longer period and potentially during periods where the Labour and Green parties could be in power - a plausible scenario given that the project would only be awarded in mid-2014, just before the deadline for general elections. Should the Transmission Gully highway prove to be economically unviable, this could force the government of the day to make unpopular decisions such as implementing tolls on the highway. Indeed, there are signs that the New Zealand government is already considering the possibility of tolls for the Transmission Gully project, with the Minister of Transport Gerry Brownlee requesting NZTA investigate the merits of tolling the route to offset some of the project's cost.

Therefore, while we believe the use of this particular PPP model is inevitable if the government wishes to build the Transmission Gully project without raising their debt, a political victory by the opposition parties during the 2014 elections could lead to the cancellation of the Transmission Gully concession.

This article is tagged to:
Sector: Infrastructure
Geography: New Zealand, New Zealand, New Zealand, New Zealand