COVID-19 has dealt the massive Transmission Gully project another blow and if we weren’t already, it’s something that should give us more pause for thought when it comes to Public Private Partnerships (PPPs).

When announcing the cost increase in February, the NZTA said the project would also be open by Christmas this year. Like all projects around the country, Transmission gully was put on hold in March as part of the Government’s response to COVID-19. But as construction ramps up again, Transmission Gully seems to have a unique problem as many of its workers are no longer in the country – I understand the project was flying in construction staff from Australia

Close to 100 people who were working on Transmission Gully are overseas unable to return to the project site under Covid-19 border restrictions.

There is growing concern the now billion-dollar project could be significantly delayed, after having already been behind schedule resulting in a budget blowout.

The 27km four-lane motorway is being built through a public-private partnership, the Wellington Gateway Partnership (WGP), with CPB Contractors and HEB Construction sub-contracted to carry out the design and construction.

The massive lower North Island motorway was meant to open on November 1 this year, but following five weeks of lockdown, will undoubtedly be delayed.

That we’re having to fly staff from overseas to build these big projects raises questions of how many more large transport infrastructure projects the country is able to handle as part of the government’s overall recovery plans, not to mention all of the big infrastructure projects announced in the NZ Upgrade Programme in January. Although the NZTA also say:

Other roading projects around the country were not affected in the same way, as they were largely locally delivered.

Of course this isn’t the first issue we’ve seen with Transmission Gully and the project has been beset by issues over the last few years. This has included needing 50% more earthworks and just this morning it reported that large sections of the road need to be relaid due to errors. Earlier this year there was news the NZTA would need to pay the builder another $191 million on top of wiping late fees to complete the late running project and saw the cost of the project rise above $1 billion. The government have also announced they won’t toll the road as the NZTA say if they did, more cars would use the existing coastal road and that raises questions of just how valuable the investment really is as travel time savings play a large role in justifying mega projects like this.

The $191 million extra the NZTA are paying is just over half of builders were reportedly asking for ($352 million) and were preparing to take the agency to court over. If they didn’t get a payout, I suspect there was a good chance the builder would simply walk away form the job and given they didn’t get what they fully wanted, presumably that means they’re losing money on the deal.

If the builder’s job is now further hampered by not having access to staff because they chose to fly them in from overseas, could that raise the possibility they would walk again? If that were to happen the NZTA would then need to find someone else to complete the job and I wonder what that does for the PPP and the time to deliver the project.

The key reason of going for a PPP, other than the previous government making the agency do it for ideological reasons, is that it is meant to transfer some of the risk to the private sector. That is why, despite it originally estimated construction costs of ~$850 million, we would need to pay an increasing amount starting at $125 million annually for 25 years for the project.

Of note, when the contract was awarded, the NZTA said.

“PPPs allow large and complex projects to benefit from private sector innovation and additional scrutiny of risk from the financiers. This increases certainty of delivery and drives better value for money, as well as effectively identifying and reducing risks and where appropriate transferring these to the private sector. This innovation can also be applied across the wider New Zealand transport network because we don’t just get the road, we also retain the intellectual property.

“The contract guarantees unprecedented certainty for a highway project, as Transmission Gully must be delivered for a set price, and must perform to measurable performance standards for the full 25 years.”

The press release also talks up the builders bring in “innovative approaches from overseas”. While no one would have expected a pandemic to strike, it is surely now a risk that needs to be considered more carefully. It also highlights that the builders are really the meat in the sandwich between government and private financiers who will still get the interest rate benefit.

Of course, this isn’t the only transport PPP we’ve got underway. The Puhoi to Warkworth project is also being built as a PPP and it will be interesting to see if they have any similar issues.

Perhaps more important is the question of what impact this has for PPPs going forward and specifically the Light Rail project which is currently being looked at as a PPP. The government have been deciding between getting the NZTA to build it or a PPP by NZ Infra, a joint venture involving the NZ Superfund and CDPQ, the infrastructure arm of a Canadian pension fund. One of the selling points of the NZ infra bid is meant to be the international experience the Canadians bring but perhaps that is now a bit more of a liability. Their REM project in Montreal is also a PPP and in January also saw costs increase by CA$230 million.

With interest rates at record lows and much of the risk still sitting with the government, it’s hard to see what value PPPs bring – other than lining delivering good returns to the private financiers. As a procurement expert once told me, the alliance model, like used on Waterview, City Rail Link and other big projects, delivers all of the same design ‘innovation’ benefits as PPPs without the extra interest costs.

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75 comments

  1. So much for bringing overseas innovation. I heard that part of the problem was that Australian specialists had no idea if what they were getting into with NZ geology, and that’s how the initial huge underestimates of earthworks required were made.

    1. No the BCR of these dud projects just get better and better due to all previous money getting written off as a sunk cost. Even the “ruinously expensive” CRL (Economist Tim Hazeldine NZ Herald 28/04/20) will eventually get a benefit cost ratio that gets over 1.0. It started at somewhere between 0.4 and 0.9.

  2. I hope they stick to the original contract and if transmission gully isn’t opened by the agreed date they pay the fines. Yes the contractors were unlucky with the pandemic but the upside to PPPs is the risk is suppose to go to the private sector so if something goes wrong they lose the money.

    1. This was the whole point of it being a PPP. NZTA would have been well aware of the large risks, of both the geology and dealing with an Australian contractor. Lawyers should have been on it from day 1 to defend the inevitable claims for money that would come from the Aussie lawyers who also would have started on day 1. Appears NZTA or the govt have really dropped the ball, coughing up $191M and waiving late penalties. Having done that, now we’re really screwed with covid popping up and having no leverage to get them working. Its far from over yet and I can see Aussie lawyers preparing claims for far more taxpayer money, not to mention there’s probably a fixed amount of cash we’re paying them per year, regardless of the road not being finished.

  3. Surely heads at NZTA need to roll over this fiasco.

    Start with the marketing dept who wrote that diatribe above.

    And with an election a few months away this is a good reminder of how much damage John Key and his 4 way coalition did, and why they shouldn’t be trusted even teflon John has now gone.

    Excellent article btw Matt! If only MSM could print stories like these.

    1. Hey, how’s that blisteringly expensive unsolicited not-to-spec tender for the Auckland Light Rail system coming along? Or is it the Auckland metro? Who knows! I’ll bet it’s Key’s fault too, somehow!

    2. You can argue about whether projects were worth spending money on but at least they had the skills to enable something to get built. What have Jacinda and Phil done? Couldn’t manage their way out of a paper bag. And before you go praising this govt about their COVID response, all Jacinda has done is regurgitate information from MOH officials – thats not leading, that’s just saying what some other person said. Even Simon would’ve looked competent with Ashley Bloomfield there…

      1. Ashley Bloomfield, is an example of the contribution an empowered and competent government public servant can make to getting huge things done.
        The massive power construction projects just after WW2 were led by empowered and competent public servant engineers of the PWD/MOW and State Hydro/NZED.
        We certainly we need to get away from the financier led PPP model.
        Australia, and now increasingly New Zealand, is suffering the consequences.
        Perhaps Back to the future with a Ministry of Works?

      2. National is not any better. They signed the agreement for Transmission Gully, so the costs of it wasn’t setting on the government books. Private enterprise doesn’t necessary know best, as we have found out.

        If National had handled the COVID heath emergency, they would have adopt the Australian model and we may have ended up with cases and deaths than we have at the moment.

        1. I assume you missed the word “less” on purpose given that if we had adopted the Australia model we would have had 148 less cases and 3 less deaths! (based on latest stats which has their case rate at 270/million vs our 309/million and death rate at 3.81/million vs our 4.36/million)

      3. What a ridiculous thing to say. That’s what good political leadership is all about. Listening to their expert advisors and making decisions based on this evidence & balancing what they tell you and other factors. The opposite is doing stupid pet projects based on your own whims and ego. Eg Hitler, Trump & many National Party MPs.

      4. Yeah, but there comes a time when you should stop listening and start doing. And if its an eff up, own it, at least you tried. I voted for Labour because I thought National dropped the ball on housing and transport. I didn’t think things could get any worse, but little did I know…

  4. Runoff from the project has contributed to sediment build-up suffocating wildlife in Porirua Harbour.
    People demand these beautiful, wide, and with perfect surface motorways for cruising at 100 or 110. At great cost to save 7 minutes. The road won’t be tolled as drivers can still use the old road.
    I think the whole thing could be much cheaper without all those earthworks, wide median strips and verges.

    1. So if the time savings aren’t worth it to drivers, ie they will choose the slower route to avoid even the low tolls NZTA has elsewhere, then isn’t the whole basis of economists’ financial value of travel time just a load of made up junk?

      Drivers it seems value their money more than their time, well more than economists think they should, or to the degree that is used to claim these vast and destructive duplicate roads are worth it.

      1. They could slow down the coastal route, make it more cyclist & pedestrian friendly. That might encourage motorists to pay the toll.

        1. Well this is an important point. We have a consistent history of building the bypass but not taking the place quality dividend at the place bypassed. Calming the old route should be in the budget of the new one. Same goes for Waikato expressway and everything.

          Why, for example, is K Rd still 4 lanes after they built Hopetoun bypass? At the very least it should be full time busman plus one lane each way.

    2. They may have been able to get away with not tolling this section before the pandemic crisis but things have changed completely. Toll it!

    3. “Runoff from the project has contributed to sediment build-up suffocating wildlife in Porirua Harbour.”
      I remember arguing with people online about the Transmission Gully over 5 years ago and warning them that run-off would inevitably end up in the fragile pauahatanui inlet and Porirua harbour. People then posted assurancing public statements from… …whoever… …that it wouldn’t happen.

      Don’t ever imagine that NZ is immune to barefaced lies and corruption (and idiots who lap the lies up).

      1. If you’re looking for bare faced eyes look at Bridges who has admitted that he is prepared to lie to get back on the Treasury benches. His idol is the leader of the free world

        1. Funny you mention him: He may have been the minister at the time. Or it was Brownlee or Joyce…

    4. Let’s look at the sediment run off as they attempt to do work they intended to do during the summertime, too…

  5. I suggest the real concern is why NZTA awarded the TG contract to CPB with no experience of New Zealand conditions but very good experience of making sure a contract put risk on the NZ government. It is nothing to do with it being a PPP as such, more the naivety of going for the lowest cost operator regardless of contractual conditions. Compare with Puhoi to Warkworth where the risk sits with the Fletcher led consortium who are wearing the cost increases.

    1. Remember this was Simon Bridges baby. He is also for the Auckland E-W link which would be the world’s most expensive road per km

    2. I agree, Fair Dinkum, it sounds like a really badly written contract which completely favours the private partner. In which case it should never have made it through. Not a fault of PPP’s per se.

  6. I’ve never understood what private sector innovation you expect to get with a PPP for building a road. NZTA knows how to build roads fairly well already, and it is not like they are letting the designers ignore the standards these types of roads are built to normally. PPPs are meant to be about having somewhat intangible public good outcomes to aim for that the private entity can innovate to achieve. E.g. reduced recidivism for people released from prison or getting unemployed people in to work something similar. Roads just aren’t complicated enough for a PPP to be of value. In terms of construction innovation (building the road efficiently) this can just as easily be achieved by D&C or Alliances. Alliances are actually far better at getting construction innovation because of the pre-allocated and shared risk / liability.

    I also don’t understand what risk is being transferred that you cant transfer via a D&C or an Alliance. It is just a contract after all and these other contract types can have liability periods or maintenance periods attached in case of defects showing up after opening. The PPP entity subcontracts the construction and maintenance anyway with normal D&C type contracts and these will be “back to back” with the PPP contract to the government. So the construction risk of a PPP primarily ends up sitting with a contractor on a regular D&C contract anyway.

    1. “Private sector innovation” is just a smokescreen. The real attraction to certain politicians is transferring the cost to future governments.

      1. Hard to see the logic behind that given crown borrowing does exactly the same thing (transfers the cost to future governments/taxpayers). It is not like we are pre GFC Greece trying to get around our bad credit rating.

        1. Yes but transport is supposed to funded by Pay As You Go, from transport taxes. So this was literally the previous govt spending the next govts+ budgets from the National Land Transport Fund.

          And this is partly why more of current transport spending is coming from general taxation via borrowing cos the future NLTF budgets are pre spent; Joyce being devious, essentially.

          ‘Private Sector Innovation’ is entirely a smokescreen, plus some right wing ideology.

        2. Yeah that still doesnt really explain why its better to do a PPP rather than just change the funding details to include borrowing. They are basically equivalent except one is far more expensive and complicated.

        3. I havent looked at it recently but as of a few years ago the Treasury position on PPPs was very clear – the funding mechanism is not a valid reason to do a PPP. Which makes sense given the expense.

        4. Global financiers like PPPs, and ratings agencies prefer whatever financiers like. In exchange, NZ’s debt pool gets to keep low interest rates while living beyond our means.

  7. Given NZTA seems to be wearing the downside risks on TG, will NZTA get to see the upside of lower interest rates?

  8. All large construction projects in NZ are highly reliant on foreign specialists cause we just don’t have people with that training/experience locally (or at least not enough of them). Go visit City Rail Link, Puhoi to Warkworth or Central Interceptor and you’ll find them staffed by a mixture of locals and foreigners recruited specifically for the project. This isn’t necessarily a bad thing except when a pandemic sweeps the world and everyone has to close their borders.

    The problem with Transmission Gully is that it’s being delivered by CPB, who are also fumbling the delivery of the Southern Corridor Improvements (Auckland) and Acute Services Building (Christchurch). The way they operate is to bid low and then try and claw back their margins by claiming every little thing as a variation. If they don’t get their own way they threaten litigation or to pull out of the contract completely. They do the same thing in their home market: https://www.theage.com.au/national/victoria/west-gate-tunnel-builders-threaten-to-tear-up-contract-over-soil-contamination-20200129-p53vo2.html

    1. Civil engineering is very international these days anyway with contracting companies often being global & having offices all over the world. And they hire staff from all over the world anyway.

    2. “who are also fumbling the delivery of the Southern Corridor Improvements (Auckland)”

      Makes sense of why that project is so late as well.

  9. I’ve said all along that once this boondoggle is completed; people will drive on it a few times, face what people warned them all along about the long inclines, and then go back to using the centennial highway and pretend they didn’t support it.
    And it will be an enormous white elephant.

    1. If it saves time and is free people will definitely use it. There are many motorways around the world with significant inclines, the Adelaide hills being a relatively local example.

      I agree though that it is a waste of money, the fact they can’t toll it without risking the majority of people using the coastal route makes that clear!

      1. I’m skeptical that it will save much if any time. The slowest part of the existing journey is the Ngauranga gorge section (going northward). The southbound incline of the Transmission gully will be steeper incline for three times as long
        Plus, it’s more mentally demanding and draining to drive long inclines every day.

        We’ll see if my prediction that within 5 years; people won’t be wanting to use it, is correct.

        1. Daniel Eyre – i sort of agree with you, but I have a different prediction. I’m predicting that the car drivers will take to the Transmission Gully route with alacrity, but that the truck drivers will stay away due to the inclines as you say. And yes, as you note, the trip inwards to Wellington will still get stuck in the pinch point from Johnsonville to Ngauranga, so probably no faster trip into work for most commuters. But definitely faster trips on the way home for car commuters, as they can miss out the slow section at Pukerua Bay on to Paekakariki.

          Either way, I think that technology is now at the stage where google maps will predict to the driver which route will be faster to get home on – they will make their decision which route, just before the junction.

      2. You are forgetting that Transmission Gully is a major fault line and that fault line cuts through the feeway in a number of places. The Australian’s are not that experience is fault lines unlike NZ engineers are.

  10. CPB is an Aussie company formed in 2016 with the merger of Leightons and Theiss (Leytons did the Rainbows End spaghetti junction in Auckland). It is a subsidiary of the CIMIC Group which is largely owned (70%) by the German construction giant Hochtief which focuses on PPP work in Australia, North America and Europe, and has a stake in the world’s largest toll roading company.

  11. Donald Trump once said during his campaign “No PPP!”. He actually meant no TPP but turns out he got it right for all the wrong reasons.

      1. I didn’t make that up. One of the Miss mfwics thought it was so funny at the time she kept saying no PPP, so we would respond “no puppet, your the puppet” from his debate with Hiliary.

  12. I have never been a great fan of Transmission Gully and wish more money went into local public transport. But living locally and spending quite a bit of time doing trap lines on the hillsides above Centennial Highway i do understand why there was an argument for an alternative for when an earthquake eventually brings down those hillsides. And that road is also very vulnerable to coastal erosion. But all the expressway building up the coast is encouraging strip development all the way to Levin and will create more traffic. But where are they all heading to?

    1. Transmission gully is a fault line itself; at least as vulnerable as the centennial highway is to a seismic disaster.

    2. They are heading to a narrow Vivian and Willis Streets and the traffic shambles around the Basin Reserve.

  13. Tolling the road would have made Transmission Gully a greater waste of money as people would use the road. What is happening with tolling for Puhoi to Warkworth?

    1. It is effectively tolled by the existing tollroad as you can’t just drive the Puhoi to Warkwork section as there are no onramps/offramps that allow it. You can exit at Puhoi going north but not going south, and enter at Puhoi going south but not going north, so you will always use at least the existing tolled road.
      (yes, I think this there should be all four)

        1. It is only a question of will they increase the toll to cover the new section. I think they should as there is an easy alternative.
          To answer your other comment, you haven’t needed to stop to pay for the toll for many many years.

    2. You can still just drive the old SH1 the whole way. Nothing stopping you do that. It’s more scenic anyway if your in that kind of travel mode.

      1. I know someone who prefers the free road just because its more scenic. Apparently time saving on the toll road is eaten by the time it takes to pay the toll.

        1. Whoever is passenger usually just pays it on their phone when we drive through, doesn’t result in any lost time.

          I always suggest to visitors to go the old route though as it is definitely more scenic.

  14. Hard to justify any PPP on financial grounds given a) if private funding is involved, the cost of government funding (particularly now) is always going to be cheaper than privately and b) risk transfer is usually illusory, as it seems the case here.

  15. Agree these PPP’s seem to be a waste of time and money. Certainly from what we have seen here so far.

    I think transmission Gully is more about road network resilience than time saving if you ask me.
    If Wellington wasn’t built where it was we wouldn’t have this problem. It’s earthquake prone. Also Christchurch as we well know. So much risk associated with it all. All mainly thinking in retrospect of course.

  16. All this talk about PPPs and nobody has mentioned bringing back the Ministry of Works.

    There I’ve done it for you.

    Do not be under the illusion that what was normal in 2019 will the new normal from now on. Bridges has already said that a National government will set all it’s priorities on roading whereas Labour has hinted on a broad brush approach involving road, rail, public transport, cycling and walking.

  17. can some one explain the cost differences – graphic has 25 years annual payment 125 million which is astronomical – 3 billion? crazy for capital cost of what 1.2 billion FFS

    1. The difference? Cost to build plus interest to the money guys. Like your mortgage. Interest adds up. Profit for financiers, the private P, or perhaps PPP is really, profit, profit, profit, or perpetual private profit….

      Really really dumb, how to spend much much more than necessary for a thing, cos govt can borrow much more cheaply itself. And then can procure the work in a much more straightforward way, that can handle risks like pandemics… galaxy brain Nats.

  18. And you know the biggest irony ? My father remembers the Americans during the war offering to build the Transmission Gulley motorway free of charge. Foundations and all. They needed to transport loads out to the camps at Paekak & Pprm.
    Imagine: 4 lanes, free. And what did the pollies at that time say ? -“Thank you, but it’s quite alright, thanks.”
    Wll someone please polish Wellington’s crystal ball.

    1. There are heaps of these urban myths about the Americans promising to build stuff floating about. Happy to be proven wrong but I doubt any of them are actually true.

      1. I’ve heard the same for Auckland’s northern, eastern, northwestern and southern motorways. There is no way the American army would have committed resources to building motorways at all, let alone in far off and strategically unimportant New Zealand.

        Perhaps a temporary service road or two to access camps, which I assume they did build when necessary.

    2. It’s bollocks. The US marines were based on the Kapiti coast and they were not equipped for the job. The marines train for general battle and specialise in taking defended beaches. Their construction work is done by the US Navy, the Seabees (from Construction Battalion) just as the US Navy provides for the Marine Corps medical aid, the corpsmen. The US fairly soon figured out NZ was not a very useful training ground for war in the Pacific as it was neither close to where they were fighting nor did we have the terrain and climate.

      1. Trouble is, your scepticism is based on being too young to remember. You weren’t there, as were my father and uncle.
        And you also aren’t thinking big, as did the Yanks.

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