The much awaited Land Transport Management Bill was introduced to the New Zealand parliament on December32002. It reflects the government's new strategy for transport infrastructure development in New Zealand which was released officially on the same day. The Bill provides for private sector involvement in road schemes and for public-private partnerships (PPPs) in land transport infrastructure, which has historically been funded principally by the government. It is intended to provide flexibility and coordination so that a wider range of land transport solutions can be achieved than has been possible until now.
The purpose of the Bill is to contribute to achieving an integrated land transport system. The focus of the entities responsible for allocating road resources has been changed, moving away from treating roads in isolation towards an approach that considers all forms of land transport (including ferries) together. The Bill also emphasises long-term planning and investment and social and environmental responsibility in land transport planning and investment.
The Bill provides for tolling schemes to be established as a means for funding transport infrastructure and provides a framework within which concession agreements can be entered into between public (the relevant road controlling authority) and private entities. Such concession agreements would provide for the design, building, operation, maintenance and funding of a land transport infrastructure project but would not automatically contain a right to levy a toll (although that could be included if the separate process for the establishment of a tolling scheme is followed). Any new tolling scheme and each concession agreement will require approval by the responsible minister.
The criteria for ministerial approval of a concession agreement includes that:
- the term must not be longer than 35 years;
- the land and road must remain vested in the relevant public body throughout the project life (although a licence may be granted to the concessionaire for the project term);
- the project must not involve the transfer of assets to majority private ownership;
- the public sector must not be liable to compensate any party if traffic numbers fall below forecast levels;
- there must have been extensive consultation with interested parties; and
- the project must have a high level of support from the communities affected.
The Bill envisages that the concession agreement will deal with all those issues usually found in a commercial agreement of this nature. The concession agreement may also allow the concessionaire to exercise certain powers of public bodies in relation to the project assets. As yet, however, no guidance has been given as to exactly what terms will be acceptable in concession agreements.
At present, the significant work required to agree on the form of the concession agreement (between the concessionaire and the relevant territorial authority or the crown entity responsible for the state highway system) does not sit easily with the discretion which the responsible minister may then exercise in giving or refusing approval of the concession agreement or recommending the establishment of a tolling scheme. In order for this regime to have sufficient certainty to be attractive to private investors, it will probably be necessary for the process of approval set out in the Bill to be modified and/or the minister to issue guidelines and perhaps even standard form contracts (as has been done in Australia and the UK).
The criteria set out in the Bill for approval of toll schemes include that tolling may only be used to establish new infrastructure, there must be an alternative non-tolled route, and payment alternatives at the toll collection point must be available. Interestingly, there is no requirement for a tolling scheme to have a "high level of support from affected communities" as is required for concession agreements although there are still significant consultation requirements.
Private sector funding
The formalization of a regime permitting PPPs will provide a significant opportunity for private investors and lenders to become involved in land transport infrastructure. However the Bill as drafted still provides a number of hurdles to such investment. The following aspects of the Bill will be of particular interest to private sector lenders:
- Public funding will come from excise duties on motor spirits channelled into a national land transport fund and from tolling. Both of those sources of funding have inherent uncertainties. In addition, this public funding is subject to ongoing scrutiny and possible political interference.
- Toll revenue has its own uncertainties. First, traffic volume guarantees are not permitted in any concession agreement. When recovery on a project is dependent on tolling, who should bear that risk? It is unlikely that a private sector investor would accept this risk unless the project is in a high-density urban area. Secondly, the responsible minister has discretion in setting the level of tolls. There needs to be debate before the toll level is set so that private investors can ensure the toll levels are sufficient to recover costs throughout the life of the project.
- Lenders are not permitted to have recourse to the land or assets that are part of the infrastructure project. There will therefore be an increased focus on the effectiveness of security over the concession agreements to ensure the lenders have key step-in rights in default situations. Expectations of lenders will need to be considered when the concession agreement is negotiated and subsequently approved by the minister.
Like many other countries such as the UK and Australia, New Zealand has, through the introduction of the Bill, recognized the benefits of increased private sector involvement in infrastructure development.
The key to reaping the benefits of private sector involvement in road infrastructure projects will be striking a balance between local and central government on the one hand and the expectations of commercial participants on the other. This will enable private investors to make a return on their investment, and the relevant government body to provide, and the public to benefit from, a public service which is delivered more quickly, is more efficient, more cost effective and more reliable than if the government body had developed, financed and operated the asset or service itself.
The Bill is in the select committee process and submissions have been made by interested parties. While the overall objectives of the Bill are designed to introduce greater flexibility into land transport funding arrangements, there are still a significant number of detailed issues to be worked through before private investment in road infrastructure becomes a reality.
Jennifer Page and Peter Owles