Time’s up for PPPs

COVID-19 has dealt the massive Transmission Gully project another blow and if we weren’t already, it’s something that should give us more pause for thought when it comes to Public Private Partnerships (PPPs).

When announcing the cost increase in February, the NZTA said the project would also be open by Christmas this year. Like all projects around the country, Transmission gully was put on hold in March as part of the Government’s response to COVID-19. But as construction ramps up again, Transmission Gully seems to have a unique problem as many of its workers are no longer in the country – I understand the project was flying in construction staff from Australia

Close to 100 people who were working on Transmission Gully are overseas unable to return to the project site under Covid-19 border restrictions.

There is growing concern the now billion-dollar project could be significantly delayed, after having already been behind schedule resulting in a budget blowout.

The 27km four-lane motorway is being built through a public-private partnership, the Wellington Gateway Partnership (WGP), with CPB Contractors and HEB Construction sub-contracted to carry out the design and construction.

The massive lower North Island motorway was meant to open on November 1 this year, but following five weeks of lockdown, will undoubtedly be delayed.

That we’re having to fly staff from overseas to build these big projects raises questions of how many more large transport infrastructure projects the country is able to handle as part of the government’s overall recovery plans, not to mention all of the big infrastructure projects announced in the NZ Upgrade Programme in January. Although the NZTA also say:

Other roading projects around the country were not affected in the same way, as they were largely locally delivered.

Of course this isn’t the first issue we’ve seen with Transmission Gully and the project has been beset by issues over the last few years. This has included needing 50% more earthworks and just this morning it reported that large sections of the road need to be relaid due to errors. Earlier this year there was news the NZTA would need to pay the builder another $191 million on top of wiping late fees to complete the late running project and saw the cost of the project rise above $1 billion. The government have also announced they won’t toll the road as the NZTA say if they did, more cars would use the existing coastal road and that raises questions of just how valuable the investment really is as travel time savings play a large role in justifying mega projects like this.

The $191 million extra the NZTA are paying is just over half of builders were reportedly asking for ($352 million) and were preparing to take the agency to court over. If they didn’t get a payout, I suspect there was a good chance the builder would simply walk away form the job and given they didn’t get what they fully wanted, presumably that means they’re losing money on the deal.

If the builder’s job is now further hampered by not having access to staff because they chose to fly them in from overseas, could that raise the possibility they would walk again? If that were to happen the NZTA would then need to find someone else to complete the job and I wonder what that does for the PPP and the time to deliver the project.

The key reason of going for a PPP, other than the previous government making the agency do it for ideological reasons, is that it is meant to transfer some of the risk to the private sector. That is why, despite it originally estimated construction costs of ~$850 million, we would need to pay an increasing amount starting at $125 million annually for 25 years for the project.

Of note, when the contract was awarded, the NZTA said.

“PPPs allow large and complex projects to benefit from private sector innovation and additional scrutiny of risk from the financiers. This increases certainty of delivery and drives better value for money, as well as effectively identifying and reducing risks and where appropriate transferring these to the private sector. This innovation can also be applied across the wider New Zealand transport network because we don’t just get the road, we also retain the intellectual property.

“The contract guarantees unprecedented certainty for a highway project, as Transmission Gully must be delivered for a set price, and must perform to measurable performance standards for the full 25 years.”

The press release also talks up the builders bring in “innovative approaches from overseas”. While no one would have expected a pandemic to strike, it is surely now a risk that needs to be considered more carefully. It also highlights that the builders are really the meat in the sandwich between government and private financiers who will still get the interest rate benefit.

Of course, this isn’t the only transport PPP we’ve got underway. The Puhoi to Warkworth project is also being built as a PPP and it will be interesting to see if they have any similar issues.

Perhaps more important is the question of what impact this has for PPPs going forward and specifically the Light Rail project which is currently being looked at as a PPP. The government have been deciding between getting the NZTA to build it or a PPP by NZ Infra, a joint venture involving the NZ Superfund and CDPQ, the infrastructure arm of a Canadian pension fund. One of the selling points of the NZ infra bid is meant to be the international experience the Canadians bring but perhaps that is now a bit more of a liability. Their REM project in Montreal is also a PPP and in January also saw costs increase by CA$230 million.

With interest rates at record lows and much of the risk still sitting with the government, it’s hard to see what value PPPs bring – other than lining delivering good returns to the private financiers. As a procurement expert once told me, the alliance model, like used on Waterview, City Rail Link and other big projects, delivers all of the same design ‘innovation’ benefits as PPPs without the extra interest costs.

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