7. Issues of Relevance to NZ Situation
7.1 PPP in a User Pay Environment
This review did not find any situations where PPP models had been successfully applied to large scale water enhancement projects designed primarily for irrigation projects. The reasons are not clear. In the country experiences reviewed emphasis was given to using PPP as a way to provide core public services.
The closest match with the subject of this study is the use of PPP for providing and operating public water supply systems, considered to be a core state responsibility with elements of user-pays. However, it is these types of projects where difficulties in relationship between private owners of infrastructure and customers are most common.
The PV policy is primarily aimed at provision of core public services for which Government is the client. The PV Guidance Material does not deal as specifically with community infrastructure that operates in a user-pay environment, and where Government may have no operational role – toll roads, port facilities, and car parks. It is interesting to note that in other potentially user-pay projects (fully or partly) – like the provision of water supply and sewerage services – PV requires a government agency to interact with the consumer/customer.
The role of Government in non-core infrastructure projects under PV is not clear from the PV material. The material refers to Government "driving the process" and "facilitating", and protecting the interests of the community in contracts where the private sector is involved. Given that the focus of this report is on water enhancement projects where there is considerable private benefit involved – as well as regional and national benefits – it was necessary to explore the role of Government by investigating actual experiences in the application of PV policy to such projects.
7.2 Government Perspectives
One conclusion of study 2 is that some Government involvement is required, particularly in the early stages, if the current NZ suite of water enhancement proposals are to be implemented. The material reviewed in this study shows that access to private capital resources is a high priority for Governments in similar economies, and that creating a suitable environment for this to happen requires Government action. This is in line with the study 2 conclusion.
Involvement of Government in PPPs ranges from acting as a facilitator through to taking an equity interest when benefits to the community are significant and it is impracticable to access sufficient revenue to support the investment required.
The political and social situation in Victoria is similar in many respects to that in NZ, except that the Government policy in Victoria appears to be more interventionist in ensuring that general governmental policies and responsibilities are recognised in infrastructure developments and in use and management of natural resources. In particular, the Government of Victoria sees that it has a responsibility in regard to:
- facilitation of an investment environment that serves economic policy;
- optimisation of natural resource use;
- achievement of state economic growth objectives;
- achievement of regional development objectives;
- compliance with federally negotiated international agreements;
- current and inter-generational equity and fairness;
- ensuring probity in all transactions.
The NZ Government has similar general objectives and obligations. Based on the investigations of this study, the key perspectives of the Government of Victoria in regard to PPP developments are presented below, and related to the NZ situation.
- The Victorian Government has established the policy and operating framework for PPP schemes and published detailed guidance material, thereby making the investment climate transparent. It has been prepared to change current legislation when needed to facilitate PPP adoption. It should be noted that Victoria does not have dedicated PPP legislation – the legislative changes have been in the environment in which PPP operates.
There is no formal PPP policy in NZ and it may not be justified, but if any steps were considered in this regard, it is considered that this has to be suitable for investment in any sector where PPP may be useful – not just for water enhancement. This would indicate the development of generic policy along the lines of PV, with specific sector modalities. It is noted that there is current interest in developing transport infrastructure under PPP in the Auckland region, and that legislative adjustments are needed to make this possible.
- The Victorian Government is prepared to invest considerable resources in assisting the private sector to obtain all of the statutory and regulatory approvals.
The support available in NZ for pre-feasibility studies in minimal. It has arisen from an ad-hoc decision of the previous Government, and continued within the context of the Sustainable Farming Fund by the current administration, rather than a strategic commitment to irrigation. Given the nature of the RMA legislation in NZ, it will be difficult for any NZ Government to facilitate securement of resource consents. This is considered by the private sector in NZ and Australia as a major constraint for early involvement in PPP in NZ.
- The level of private sector interest in PPP involvement in NZ is directly related to the stability and security within the operating environment for investment.
The NZ Government does not have a policy position to support or encourage international investment, in contrast to other jurisdictions. It is clear that a significant access to international private capital in this area of investment would benefit from any Government interventions that addressed private sector concerns about the security of their investments.
- The Victorian Government has recognised the need to provide for step-in arrangements in the event of private sector failure under PPP and to adjust legislation to allow private sector operators to gain access to facilities in times of emergency. The basis of these powers is to protect the interest of the communities and the resources involved.
It is clear that the NZ government should have a position to protect the community and to ensure optimal use of resources where these are of national significance, if they wish to encourage large-scale water enhancement under PPP arrangements. Governments have considerably more powers than communities and it may be appropriate to see what can be done to empower and protect communities through Government actions.
- In Victoria the view is that finding willing private partners and finance is not a problem in regard to irrigation of agricultural products for export, but aspects outside of private sector control – political risk, changes in the regulatory environment, for example – act as disincentives for investors.
If the NZ government is interested in encouraging private capital investments, local or international, it could usefully undertake a more detailed study to identify private sector aspirations and to determine if changes to the current investment environment are needed and acceptable to Government.
- The view of the Victorian Dept of Treasury is that PPP projects are most appropriate where long-run risks to the community are high, and technological innovations are likely to result in cost savings and timely delivery.
The risks involved in large scale water enhancement projects are potentially considerable, and may be outside of the abilities of communities to manage. It would be appropriate for the NZ Government to categorize investment opportunities of interest on the basis of long term risk and prospects for cost savings as candidates for PPP.
7.3 Private Sector Perspectives
The investigation involved discussions with PPP stakeholders in the private sector. These comprised investment bankers and pension fund managers from the investment side, and professionals who provide services to them, as well as professional advisers to Government and communities on the other side of the investment equation.
Whilst some of these views are expressed in the section above about Government perspectives, there are other aspects that relate to the aspirations of the private sector itself.
- The private sector needs to be sure that the public or community partner is absolutely clear as to its requirements, which requires a comprehensive analysis of requirements in regard to service delivery and risk management on the part of the public or community partner.
The knowledge and skills to successfully develop a potential proposal for PPP are not available in NZ. Experience with the main community groups involved in developing water enhancement projects indicates that a considerable amount of support is needed to allow them to participate strongly in any PPP arrangements.
- It was recommended by a number of private sector players that any PPP initiative in NZ in the first instance should be directed at pilot projects where the potential problems are judged ex ante to be lowest, and to learn from that experience. This was also the position taken in the investigations of PPP in Ireland.
A possible response of Government to initiation of PPP for water enhancement projects in NZ would be to identify a suitable candidate pilot project and use this as a learning experience. This approach is also emphasised in reviews of PPP in other jurisdictions.
- The private sector is less comfortable if service delivery is dependent on management of facilities that it does not control.
A typical example of an unsatisfactory situation is where a private sector operator is contracted to develop and operate a water treatment facility and distribution system, but is dependent on a third party who controls raw water supplies. In the NZ rural water enhancement environment this would include situations where headworks – dams, diversions – were controlled by other parties, and the private sector was contracted to meet water demands downstream of source works. Local discussions revealed considerable concern about control of water sources passing to non-NZ interests.
- Investment analyses by the private sector under PPP consider the prospect of new customers and the arrangements and terms under which they are accommodated. Whilst this is a key issue for urban water supply connections, it is also of relevance to water enhancement for irrigation supplies.
This will be an aspect that needs to be clear at the early stages of any PPP proposition. The situation has arisen in the Opuha and Waimakariri-Ashley Schemes and the responses taken are detailed in study 2 report.
- The private sector does not want to be used for public partners or communities to "test the market". The private sector will need prior assurances that the PPP will proceed if it proves to be more effective – with transparent measures of effectiveness – than traditional alternatives.
This will require honesty and transparency in the PPP process; otherwise current interest of the private sector in NZ PPP opportunities will be lost, perhaps for the long term.
- The literature shows clearly that the private sector interest is enhanced and terms more favourable, if there is a developing portfolio of PPP opportunities.
This will clearly be a problem in NZ where the level of infrastructure investment will always be less than larger economies. One response would be to identify a number of investment opportunities for study to see if a longer run activity may be developed.
In summary, private sector interest in PPP investment models in NZ will be enhanced if the investment environment is secure. Key issues in this regard are: (i) securing all necessary consents and approvals before PPP process is started; (ii) confidence that the investment is sheltered from political risk as far as is possible: (iii) early commitment of users and accompanying guarantees from Government to reduce financial risk; and (iv) control by the private sector of all the physical resources on which the service delivery depends.
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