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Private sector investment in public infrastructure

24 August 2006

Government inquiry into rates increases should look at greater private sector investment in public infrastructure

The NZ Council for Infrastructure Development is calling on the government inquiry into local authority cost structures and funding to consider greater use of private sector investment as a means to help reduce the rates burden.

"The fact is that local bodies face massive cost increases for basic infrastructure. In many cases they are trying to do this all by themselves and are forced to put up property rates to pay for it", says NZCID Chief Executive, Stephen Selwood.
"On the other hand, using public private sector partnerships (PPPs) to finance, build, operate and provide services can often provide better value for money and more direct user pay options.

Instead of the local authority having to fund the development and cover all the asset management costs, under the PPP model the local authority pays an agreed annual service fee, or users pay directly for the services they receive. At the end of the contract, which typically run 25 to 30 years, the assets revert to local authority ownership.

PPPs can be used for all sorts of infrastructural services - drinking water, wastewater, storm water, roads, libraries, leisure centres, and public housing, for example.

They are used extensively overseas where they have been shown to facilitate higher quality and more cost-effective public services earlier. [1]

A key advantage from the local authority's point of view is the ability to spread the cost over an extended period of time, meaning improved intergenerational equity.

The local authority knows in advance exactly how much it will pay for the service, and has the right to withhold payment if the service is not up to standard.

Alternatively, services can be provided on a user pays basis, reducing the burden on those ratepayers who don't use the services but would otherwise have to pay for them in their rates bill.

Costs are managed down through a competitive tendering process. The private sector carries the risk of all costs over the entire life of the contract and only and makes its profit through innovation, good asset management and by applying its resources and specialist skills.

While PPPs are not the total answer to reducing rates increases. Overseas experience has shown that they can and do provided better value for money than traditional public sector procurement methods when applied correctly in the right circumstances. NZ should always be open to learn from international best practise", Selwood says.


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