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Infrastructure Insights - a review of trends and developments

October 18, 2018

Contacts

Partners Josh Cairns, James Hawes, Simon Vannini, Michael Weatherall

Infrastructure funding Local government Urban transformation

This issue of Infrastructure Insights focuses on key trends and developments affecting infrastructure in New Zealand in 2018.

Proposed new independent infrastructure body

In August, Infrastructure Minister Shane Jones announced a new, independent infrastructure entity to be set up by late 2019. The body will have arm’s length independence from any ministry, while providing expert advice from all industry sectors to support the delivery of major infrastructure projects, and drive long-term strategic planning of our infrastructure needs.

The Government described this body as a “one-stop shop” for “high-quality direct foreign [investors]”. It is designed to address the significant pressure on a regional and national level, to reduce or maintain debt levels, by opening doors to private financing and allowing New Zealand to access a large pool of global capital (short of privatisation of infrastructure).

We view this as a positive move by the Government, signalling acceptance that a long-term approach is required to scoping and planning large infrastructure projects. However, the time required to establish the body and see positive output will test the patience of industry members that have become increasingly concerned around a lack of progress from the Government on key projects. 

The Government needs to prioritise commencing some catalyst projects (projects which have already been announced but have not yet commenced) to keep the industry moving, as opposed to waiting for the outputs from the independent body. 

Infrastructure Funding - An interim solution

We note with interest the recent announcement by the Government and Auckland Council that the Government will provide a $340 million interest free loan to enable Council to provide roads and pipes to support up to 7,000 new houses to be built in Redhills and Whenuapai. 

The provision of this loan is against the backdrop of a lot of work that we understand is being done as part of the Urban Growth Agenda on potential funding models to support the underlying infrastructure required for housing developments in Auckland and other high growth regions. 

We think this move by the Government recognises the need to support development projects in a timely manner, rather than waiting for a potentially complex funding structure to be developed and tested, in particular if that funding structure will require political buy-in at a local council/ratepayer level.

Approach to contracting

The evolution of large infrastructure development contracts that place considerable risk on contractors without appropriate recognition, in pricing or other controls under the contract, has created significant issues across the industry. This is evident from the number of significant cost overruns in large projects, and contractors going into formal insolvency processes. It presents a major concern considering the increasing pipeline of large and complex projects.

Recently, there has been a trend towards alliance contracting. More common in highly complex or large infrastructure projects, some key features of alliance contracting include:
•  parties sharing project risks and rewards;
•  a “no blame” philosophy and a prohibition on commencing proceedings against one another (except in limited circumstances);
•  good faith and trust provisions; and
•  sharing of knowledge.

A good example of alliance contracting is the alliance partnership formed between Enable and Broadspectrum to roll out Enable’s ultra-fast fibre network in Christchurch. Enable described this model as being instrumental to delivery of the network 19 months early. 

In our view, alliance contracting is one potential solution for ensuring that the principal and the contractor are more aligned in terms of success of the project, which should increase the chances of a positive contracting relationship and outcomes.