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Financing New Zealand’s Infrastructure And Improved Social Outcomes

To grow the economy and improve social outcomes, New
Zealand needs sustained and ongoing investment in and
improvements to its infrastructure. Last year’s budget did
not allocate sufficient funding to address the
infrastructure deficit which is estimated to be $75bn. New
Zealand must address this to meaningfully improve living

While central and regional authority
funding will always be vitally important to improving
infrastructure, appropriate private sector finance has a key
role to play in advancing these objectives and addressing
New Zealand’s infrastructure requirements.

What are
the benefits of private sector financing?

private sector financing (used prudently) can accelerate the
delivery of infrastructure necessary for social and economic
development. Many private sector entities, including
investment companies, the investment arms of insurers and
pension providers, and commercial banks, are actively
looking for opportunities to deploy capital and increasingly
have wider social objectives at the heart of their mandates.
Accelerated delivery brings real improvement to the
livelihoods of those connected to the infrastructure. In the
public sector procurement of infrastructure, the procuring
entity and public sector benefit from:

– greater price
certainty and incentivisation to deliver the infrastructure
on time and on budget;

– a strong level of risk
transfer to those best able to manage them;

– its
resources being freed up to focus on core business, rather
than asset management; and

– private sector expertise
and innovation.

Such financing also brings with it the
investors’ and financiers’ oversight of project
governance and performance, supplementing the public
sector’s due diligence.

Private sector financing of
public infrastructure in New Zealand

The New Zealand
Public Private Partnership (PPP) model was developed over a
decade ago with a focus on achieving better service outcomes
for the procuring entity at an equivalent or lower whole of
life cost. Earlier this year, the New Zealand Infrastructure
Commission, Te Waihanga released its review of the PPP model
to better understand how it has operated in practice and
derive lessons that could be applied to the future
procurement of major infrastructure projects (which are not
necessarily limited to PPPs).

The report found that,
while there have been some challenges on some horizontal
projects, the model has been generally successful in
delivering major infrastructure projects with greater time
and cost certainty for procuring entities. Te Waihanga
considers that the model should continue to be regarded as a
procurement option for major infrastructure projects (the
model can still be considered under current government
policy for projects outside of the education, corrections
and health sectors), and made recommendations designed to
improve the costs and complexity of the model. Non-PPP
procurements can also benefit from adopting the model’s
disciplined approach to risk identification, quantification
and optimal allocation, incentivisation and its whole of
life considerations.

Last month, Te Waihanga released
the findings of its review into the Transmission Gully PPP,
making recommendations for changes that could be made by
procuring entities in relation to future procurement and PPP
policy management. These recommendations build on the
lessons learnt by procuring entities from other PPP
projects, which Te Waihanga also identified as having been
positively applied in subsequent procurement.

models are also available which facilitate infrastructure
development through the use of private sector financing. The
Infrastructure Levy Model, for example, allows the
construction of infrastructure for housing and urban
development to be financed through private sector debt by
levying those who benefit from the infrastructure. This
model is based on the structure of a successful development,
and councils and other stakeholders are exploring the
viability of possible pilot projects.

establishment unit recently announced by the Government in
relation to the proposed City Centre to Māngere (CC2M)
light rail project provides further opportunity to refine
and improve these models, and/or develop further funding and
financing models, to optimise available funding and the
broader social objectives.

Key requirements for

Private investment in public infrastructure
must meet the needs of all stakeholders, including the
communities benefitting from the infrastructure and
taxpayers generally. It must deliver a value for money
outcome for those stakeholders. This is reiterated by Te
Waihanga’s reviews of the PPP model, and comprises part of
the CC2M establishment unit’s mandate.

different private financing models may be better suited to
certain types of projects, to be successful long-term
options to address the matters identified in last year’s
budget, public support is essential. Identified issues in
procurement should be positively addressed. Te Waihanga’s
review of the Transmission Gully PPP observes that internal
and external stakeholder groups would benefit from the
publication of additional information relating to the use of
and business case for the model. From the outset:

public and private sector objectives should be clearly
articulated and aligned;

– risks identified and
appropriately allocated, acknowledging that the private
sector cannot price all risks; and

– the business case
for the benefits accruing to the public clearly

Ensuring public support requires
strategic direction and transparency, and for stakeholders
to educate and take responsibility, and to remain

Private sector finance has a key role to
play in infrastructure procurement

In last year’s
budget the Government committed to closing New Zealand’s
infrastructure deficit and ensuring the country has modern
infrastructure to support a more productive, sustainable and
inclusive economy. These objectives remain just as important
a year on: the counterfactual offers New Zealanders a lower
standard of living. Shortfalls in government funding are
often cited as a limitation on our ability to advance these
objectives. This need not be so. Improved infrastructure,
sustainable growth and improved social outcomes can be
achieved successfully through appropriate private investment
(utilising both debt and equity) in public infrastructure,
coupled with strategic direction, transparency,
responsibility and accountability.

Simon Gray is a
Special Counsel at MinterEllisonRuddWatts specialising in
the financing of infrastructure

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