Finance and Infrastructure Minister Bill English has indicated the need for more private sector involvement in national infrastructure projects as the government tries to boost infrastructure investment and productivity. In a speech to the New Zealand Council for Infrastructure Development, English pointed to the importance of Public Private Partnerships (PPP) in managing risks and maximising the economic efficiency of infrastructure investment. English said that the private sector generally remained better at assessing investment risks than the public sector, and hence the government was open to involving the private sector more in infrastructure decisions and projects:
The accepted wisdom is that all investments contain a bundle of activities. They include forecasting demand, designing facilities, obtaining regulatory approval, construction, financing, operating and maintenance. Public-private arrangements are about unbundling these activities, so that each side undertakes the parts it does best. For some projects, this is complicated. Even so, the gains can be worth it. The important lesson is that every investment carries risk, regardless of how it is financed. Our intended $7.5 billion of capital spending over the next few years contains a great deal of design, patronage and construction risk "“ it's just that they are seldom separately identified. From a taxpayer perspective, the fact that these risks exist is an argument for, not against, some private sector involvement. The private sector generally remains better at assessing and managing risks than the public sector. In a sense, New Zealand already uses the private sector more than it might first appear. The Government does not build infrastructure, it mostly designs and finances it. The private sector undertakes construction.
English also traced the current theme of using Australia as an example for where New Zealand could be headed with its infrastructure policies.
From overseas experience, it's apparent that, with some projects, private sector innovation can provide a better asset for a cheaper whole of life cost. We can get some idea about how the New Zealand market might evolve by looking across the Tasman. The Australian infrastructure industry is deep, well developed and vibrant. Most of your organisations will have Australian connections, and will no doubt expect New Zealand to become somewhat integrated, with similar players and practices. That is our expectation as well. It is interesting to examine Australia's record. The first private public partnership projects were completed more than 20 years ago. All states have participated, with Victoria being the acknowledged leader. Since 2000, around 50 major PPP projects worth about $30 billion have been completed in Australia. They range from the traditional road, rail, water and energy, through to areas such as defence facilities, hospitals, schools, prisons and radio networks. These totals are impressive. Total Australian infrastructure spending is running at around A$50 billion a year, or almost 5 per cent of gross domestic product. Less than 20 per cent of total Australian spending is financed privately. Most infrastructure remains traditionally funded. I'm sure this will also be the case in New Zealand. I believe the Australian experience can usefully help a more sophisticated discussion in New Zealand.
One area in which a there could be more private sector involvement was prison construction, English said.
For example, in response to prison population forecasts, the Corrections Department is investigating building more prisons. There is a range of opportunities for more private sector participation in this process "” from the current approach where private sector input is limited - through to designing, financing, building, operating and maintaining prison facilities. We've asked Corrections to look at alternatives to conventional procurement for delivering extra capacity "“ including a new prison. We're happy to proceed with that if the case stacks up. We expect to be in a position to make decisions about that early next year. We want to see options genuinely considered and appraised "” not simply ruled out on the basis of some ideological knee-jerk response or for political expediency.
English said there had been a strong level of interest from the private sector in the government's infrastructure plans, but warned they would only enter into PPP arrangements if they 'made sense' and would increase the performance of public assets.
The Government will enter in to PPPs only if they work and deliver value for taxpayers. Our interest is in increasing the performance of public assets across the board. I have been impressed by the level of interest from the market in working with the Government. But let me be clear "“ this is not about ideology: Private sector involvement will happen only where it makes sense, period.
What are your views? Should the government involve the private sector more as it sets infrastructure policy? What are the pros and cons of more private sector involvement in national infrastructure policy? We welcome your comments below.