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Treasury paper undervalues benefits of PPPs

Media Release
4 April 2006

Treasury paper undervalues benefits of PPPs

"A Treasury working paper on PPPs has largely ignored international experience that shows public private partnerships can and do provide better value for money than conventional procurement methods", says NZCID Chief Executive Stephen Selwood.

Under the PPP model, the Government or a local authority enters into a contract with a private company or consortium to provide finance and arrange design, construction and ongoing operation of a facility like a road, or a hospital, school or water treatment plant.

The key advantage of PPPs is that by having a vested interest in the performance of an asset over time, the private sector is highly incentivised to innovate and keep costs down over the whole life of the project. The private sector also shares and manages the risks.

But the Treasury paper argues that most of the advantages of private sector construction and management that PPPs provide can also be obtained from conventional procurement methods.1

"This is in stark contrast to overseas experience", Selwood says.

"A series of reports by HM Treasury in the UK have concluded... 'an increasing body of evidence has shown that the better risk management of private finance initiatives results in a greater proportion of assets being delivered on time and to budget. Research into completed PFI projects showed 88 per cent coming in on time or early, and with no cost overruns on construction borne by the public sector. Previous research has shown that 70 per cent of non-PFI projects were delivered late and 73 per cent ran over budget.' " 2

"The NZ Treasury paper concludes that using private sector finance to build and operate new infrastructure may be a good way of procuring services, provided service levels can be specified, performance can be measured objectively and performance objectives are durable. These benefits need to be weighed up against the contractual complexities and rigidities PPPs can entail. NZCID agrees with this but considers that these preconditions can readily be addressed."

"There is a great deal of experience with PPPs internationally. Most countries are taking advantage of the approach and significantly advancing construction of infrastructure projects that would otherwise have taken years to build through traditional public sector financing."

"The reality in NZ is that while the Government could borrow to speed up the construction of roads and other essential infrastructure, it seems very reluctant to do so, at least at a level that will advance critical projects."

"Instead we see a continual deferral of economic projects."

"Many important transport projects, for example, aren't even making it to the funding horizon. Instead, costs go up year after year and congestion, vehicle emissions and road safety statistics continue to worsen. Meanwhile NZ continues to lag behind competing nations in terms of its infrastructure development".

"Using PPPs is an obvious tool that can provide better value for money and help meet New Zealand’s infrastructure shortfall. When the country is facing such a significant infrastructure deficit, it makes sense to use every tool at our disposal", Selwood says.


1 A copy of the NZ Treasury paper is available at http://www.treasury.govt.nz/workingpapers/2006/pp06-02.asp

2 Source:HM Treasury PFI Meeting the Investment Challenge p 43 available at http://www.hm-treasury.gov.uk/media/648B2/PFI_604.pdf NB PFI is the UK equivalent of PPP.


ENDS

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