14 Mar 2011

Short term financing 'could hamper PPPs'

5:57 am on 14 March 2011

An expert on Private Public Partnerships (PPPs), says a lack of finance matching the lifetime of the projects could deter bidders and lead to lower cost savings than hoped for by the Government.

The Government says a chunk of the $30 billion to be spent on infrastructure in the next five years could come from PPPs.

At this stage, that will involve schools and prisons built and operated by the private sector for periods of up to 30 years, theoretically saving the Government millions of dollars.

Three consortiums have recently been shortlisted to design, build and run a proposed prison at Wiri in south Auckland, and a contract should be awarded by July next year.

Phil Lobb, a partner at Deloitte in the United Kingdom, says the Government is doing a good job of attracting international interest in the projects.

But he says New Zealand's lack of a long-term debt market could lower the number of bids the Government receives, and lead to fewer competitive tenders.

Mr Lobb says it's difficult to do a 25-year project when finance is only guaranteed for seven or eight years.

He says if all the risk is put on the private sector, that will affect the price of the contract.

Mr Lobb says operators could lose money on the projects if refinancing is required before the contract is up and interest rates rise.

He says the Government could allay bidders' fears by agreeing to underwrite refinancing costs above a certain level.

Issuance of 20-year Government debt to help banks and other funders with pricing of long-term lending to PPP bidders could also help.

In the meantime, Mr Lobb says, the Government should learn from overseas and keep contracts with the private sector simple.