Media Release 29 August 2007

Expert calls for Public Private Partnerships in the wake of Local Government inquiry

Deloitte Infrastructure expert Paul Callow is calling for all political parties to build policy initiatives around public private partnerships in the wake of the recent local government inquiry.

The Government inquiry over local government rates funding ordered after a threatened ratepayer revolt, resulted in a report released yesterday suggesting councils need to show more spending restraint. Local government rates are anticipated to rise 8% a year with councils expected to go into deeper debt and further user pay charges introduced nationwide, but according to Paul Callow from professional services firm Deloitte many of the country’s problems with its infrastructure deficit could be resolved with the adoption of public private partnerships models for procurement.

“We’re heading into an election year, and it’s time politicians thought outside the square as to how we fund the renewal of our ageing infrastructure. Current central government and local Government fighting over finances will not go anyway to resolving our infrastructure funding problems,” says Paul Callow.

“There is no doubt that New Zealand is falling behind the rest of the world in the quality of its infrastructure. You only have to look at the new Motorway networks around most Australian cities and the investments made in the UK road, prisons and health sectors and it is easy to see that we are probably 10 years behind Australia and 15 to 20 years behind the UK. An important part of this investment, particularly the Australian motorways, has been funded by PPP and PFI initiatives. It is now almost impossible to find a country without an active PPP programme with Governments from Mexico to the Czech Republic and pretty much everywhere in between actively promoting partnership programmes.”

“Councils are facing the requirement to substantially increase rates to fund deficits in infrastructure such as roads and water as well as other social infrastructure such as housing. Essentially councils are trying to fund the construction of long term assets from current revenue, a little like trying to buy a house from this year’s salary for example.
This creates issues of social in- equity, today’s ratepayers paying in full for assets which will benefit tomorrows generation of users. This can be partly addressed by using debt but increasing debt levels present councils with the risk of having to meet increasing interest costs as interest rates rise as well as refinancing risk as debt terms are typically only 5 to 7 years in New Zealand,” says Paul Callow.

“Public bodies and Governments overseas have for a number of years been using partnerships with the private sector to overcome these difficulties and spread the cost of major capital assets over the expected life of those assets. Under these arrangements private sector partners meet the up front capital cost of infrastructure projects and then operate the project over an extended period, recovering the capital cost as they go.”

“These types of arrangements spread the burden of paying for the asset over periods much longer than the financing which councils can typically raise and substantially reduce the burden on today’s rate and on tax payers, avoiding the need for large increases in rates. They also transfer much of the project risk to the private sector partner, in particular the risk of escalation in capital and operating costs where some areas of Government have performed poorly in the past, is transferred to the private partner.”

“The Government report focuses almost exclusively on the revenue side; how can we raise more tax revenues by either casting the net wider or raising tax levels on existing commodities such as petrol? This does not solve the problem and simply increases and reassigns the burden amongst today’s tax payers.”

“ The report’s findings make it quite obvious that a more innovative approach to procurement and financing using precedents which are already well established overseas, in particular partnerships with the private sector will not only solve the immediate rates increase problem but deliver long term value to the public sector in New Zealand. We are not going to solve today’s infrastructure deficit with the same thinking and funding structures which created it in the first place,” says Deloitte Infrastructure specialist Paul Callow.

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