Paul Swain Speech: Public Private Partnerships as part of the infrastructure solution

Good morning and thanks for the invitation to speak here today. As we have been developing our policy on public private partnerships I have had the opportunity to meet with several of the speakers at this conference. I know that they have insights that will be of interest to you.

This conference comes at an interesting time with the Land Transport Management Bill currently before the Transport and Industrial Relations Select Committee. Because of that, I am somewhat limited in what I can say.

However, I would like to take the opportunity to explain the challenges faced by the land transport system, the strategic approach the government is taking to meeting these challenges and some of the things we are doing, including, of course, making provisions for public private partnerships.

The Big Picture

Let me start with the big picture. The government’s goal is for New Zealand to be in the top half of OECD countries. Last February, we launched our Growth and Innovation framework, outlining the direction New Zealand needs to take in order to achieve that goal.

Improving infrastructure, particularly transport, is critical to New Zealand’s overall economic development.

Our expectations of the land transport system far exceed our ability to fund them. While the existing roading network is generally in good shape, there are some pressure points. More will build in the future.

The current and future needs of the Auckland roading network have received a lot of publicity with Auckland congestion costing, by some estimates, $1 billion a year.

Currently there are around 400 road fatalities per annum. This estimated to cost the country around $3 billion a year. The government’s Road Safety Strategy to 2010 sets the goal of getting this down to 300 a year by 2010.

Ttion there is pressure on our provincial and rural roading network, which is not designed to take the volume and freight that is travelling by road. Other funding pressures include regional economic development, passenger transport growth, maintenance costs as traffic volumes grow and the quality and reliability of the rail network.

The release of Transit NZ’s first draft 10-year state highway programme recently and the subsequent reaction to it around the country highlighted the problem that demand for more roading projects will always outstrip our ability to pay.

Over the next 10 years Transit will spend $1.76 billion on the state highway network alone.

Last year we increased petrol tax by 4.7 cents a litre (including GST) to partly address the shortfall.

This, along with changes to road user charges, boosted land transport funding by $227 million up to mid 2003. Of this we spent $94 million on roading projects, $34 million on road safety, $30 million on regional development roading assistance, $30 million on alternatives to roading, $36 million on public transport assistance and $3 million on walking and cycling.

However, just as we need to spend more money on the roading network our ability to raise money from traditional sources is constrained. This is because as car engines become more efficient there is a gradual reduction in the petrol tax collected. Therein lies a problem.

For example, the projection of fuel excise revenue from 1995-1996 shows that if there had been no increase in excise, a 15% rise in traffic would only have produced a 3% increase in revenue.

I hope that the point is clear. Current funding levels and sources are insufficient to meet the transport needs of a growing, dynamic New Zealand economy.

New Zealand Transport Strategy

In order to overcome these obstacles, it is vital that we take a strategic approach to the transport system.

This approach is embodied the New Zealand Transport Strategy - a key document that now guides all transport policy – which the government released in December.

Our vision for the future of Transport in New Zealand is ‘by 2010 New Zealand will have an affordable, integrated, safe, responsive and sustainable transport system’.

One of the key points in the strategy is integration. This means transport policy will help create an efficient and integrated mix of road, rail, sea and air. We can’t motorway our way out of all our problems. For example, part of the solution is to move more people and freight off roads and onto passenger transport and rail. The strategy will also need to ensure the efficient use of existing and new public infrastructure and investment, as well as finding more creative funding mechanisms.

The NZTS focuses on five main objectives. These are to:

Assist economic development

Assist safety and personal security

Improve access and mobility

Protect and promote public health

Ensure environmental sustainability

The New Zealand Transport Strategy sets the scene for the Land Transport Management Bill, so it is to the bill, which I now turn. Land Transport Management Bill

The Land Transport Management Bill is the first major piece of transport legislation, which implements much of the NZTS vision in the area of land transport.

The tolling and public private partnership provisions of the Bill have received much of the public attention, but the Bill also introduces other important changes. I would like to briefly identify these now.

In introducing the Bill we have addressed the deficiencies of the existing funding and policy system. To this end the bill:

Sets out a strategic direction for land transport; Allows an integrated approach to be taken to land transport; Encourages long-term planning; and Introduces flexibility.

Social and environmental responsibilities are being enhanced, including improving participation in the decision making process.

The Bill enables me, the Minister of Transport, to give Transfund and Transit annual instructions relating to the government’s priorities for land transport funding. This does not, however, mean I am able to say “yes” or “no” to individual projects. This remains with Transit.

Contrary to what some people have said a Minister’s ability to issue directions already exists under current legislation. This is nothing new in this and all directions must be tabled in the house. Since the present government has taken office only one direction has been issued. That was late last year when I directed Transfund to 100% fund roading projects in Northland and Tairawhiti (East Cape) which would assist economic development, specifically getting the imminent wall of wood to the ports. Both business and local government welcomed the direction. Because the Bill allows for more flexible funding arrangements to meet an enlarged number of objectives, it will actually result in less need to issue directions of this type, contrary to what some have been saying.

As well as putting in place changes to the framework for decision-making, the Bill also introduces specific new funding and financing methods in the form of public private partnerships and tolling for new roads.

PPPs & Tolling

One of the ways we are addressing the funding shortage, which I talked about earlier, is through public private partnerships. PPPs can introduce new funding sources, smooth the payment profile and, through bundling finance, design, construction and operation, can introduce new efficiencies. The aim is to secure new funding for projects that might otherwise not get off the ground. PPPs are common overseas and have been particularly successful in Australia.

In other sessions of this conference you are looking at specific issues relating to the implementation of public private partnerships.

As government, we have sought to put in place a broad framework for such projects. The Bill balances public and private interests, subjecting PPPs to provisions on retaining public ownership of assets, concession length, consultation and so forth.

Where viable, tolls introduce extra funds to the system but there are unlikely to be a large number of projects in New Zealand that are fully toll fundable on a stand alone basis. The framework allows for road controlling authorities to toll new infrastructure only, and for PPPs using the DBFO model that has been successful in the United Kingdom.

Submissions, including some from many of you here, have raised a number of issues regarding the provisions on tolling and public private partnerships.

One issue is the stage at which ministerial approval occurs in the process. Some have asked if the Bill could be changed so that some form of conditional approval could be granted early, in order to give investors more certainty before incurring major costs. This is a fair point. I am sure the Select Committee will look at this matter closely.

Some submitters have raised the issue of the consultation process.

The Bill was never intended to be “the son of RMA”.

However, the fact is that most people are in favour of more motorways and roads that make trips faster, provided the roads don’t go through their backyards. Roading projects need to work for both transport users and local communities. Consultation processes needs to find a balance between the meeting the governments transport objectives and the rights of communities.

The government believes that involving communities and transport users early in the design of roading projects will result in achieving this better balance, leading to fewer problems in the courts and elsewhere later on.

The government will not be dumping the consultation provisions. The Select Committee will be looking at whether we have got the right balance. No doubt there will be some changes.

Finally, some submissions raised the issue of the types of projects available under the concession provisions.

As far as PPPs are concerned we have taken a cautious approach, providing for DBFOs, given that this is the first time such arrangements have been tried in New Zealand.

In the case of the United Kingdom while initial projects had payments based primarily on quantity, more sophisticated mechanisms which take account of safety and lane availability are being used for later projects.

On tolling, once again we have taken a cautious approach. The public will probably accept a toll for a new bridge, for example, but may be less happy to pay for a road that they consider they’ve already paid for. Submitters have asked for greater flexibility in this area, and the Select Committee will be considering this matter.

Additional alternatives such as cordon tolls, zone tolling and congestion charging also offer significant potential as both a source of funds and a tool for traffic management. Following the submissions to the select committee and discussions with local authorities we are having further work done on these issues.

These are complex issues involving, amongst other things, social equity, privacy and the like. There is still much debate to be had.

Borrowing

Public private partnerships and tolls are one specific response to the funding issues we are facing. I have already mentioned the increased funds we have put into the system.

We are also considering a range of other policy responses.

Some commentators have suggested that the Bill introduces a right to borrow. This is not new. Transit (with the approval of the Minister of Finance) and local authorities have always been able to borrow.

To date borrowing has only been used by a few local authorities.

We need to consider whether it is appropriate to borrow more for future infrastructure. One of the advantages and disadvantages of borrowing is that it transfers some of the cost of infrastructure to future users who will also benefit, thus raising inter-generational equity issues.

Borrowing may be suitable for a short-term increase in expenditure and for being able to begin some projects sooner. But borrowing does not add dollars. Indeed loans have to be repaid with interest. Such repayments would inevitably impact on the availability of funds for possible future projects. We need to ensure borrowing does not advance lower priority projects at the expense of higher priority ones. The benefits of all projects must exceed the costs. Borrowing works best where there is an income stream to service the debt – i.e. tolling. More work needs to be done on these issues.

Regional solutions

We are aware that many regions are interested in regional funding solutions to regional funding issues – regional petrol taxes have been proposed. For example, charging a one-cent per litre Auckland petrol tax would raise $10m per year. One cent per litre Auckland petrol and diesel tax would raise $14m per year.

Regional petrol taxes have been tried before in New Zealand but there were problems because the oil companies tended to average prices across the country, with those outside the tax area carrying much of the cost.

There are also issues including boundary effects, compliance, and petrol stockpiling that affect the equitable use of such a tax. However, we are working through these issues to assess the viability of the proposal.

Whichever methods we use for funding and financing, we must also continue to improve the costs of infrastructure construction and maintenance and increase the efficiency of our use of existing infrastructure.

One way of doing this is to focus on traffic management. This is already underway through initiatives with local authorities such as Advanced Traffic Management Systems and Integrated Traffic Management.

Traffic management activities include: Ramp metering on motorways to smooth traffic flows Moving freight in Auckland at night, but this can generate noise problems Improving incident management such as by clearing vehicles more quickly Coordinating traffic signals

It is estimated that ATM/ITS initiatives will improve capacity by up to 5% and will reduce growth in congestion for several years

In the last decade New Zealand has substantially benefited from competitive pricing and improved contract management. We are doing further work on making it easier for road controlling authorities to cooperate in ways that increase efficiencies

Conclusion

New infrastructure must deliver benefits and be consistent with our long-term goals of a sustainable, affordable, integrated, safe and responsive transport system.

By working together, central and local government and private sector practitioners can help to put in place a land transport system that will contribute positively to the country’s overall economic development.

The bill is the product of an MMP environment. It is likely there will be changes through the select committee process. The bill will be passed this year.

I hope I have given you an understanding of the challenges the government faces now and in the future. I also hope that I have given you a context for the Land Transport Management Bill and the provisions it has made to enable PPPs as a means of developing land transport in New Zealand. Thank you.

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