PENLINK FINAL S 122C REPORT

Introduction

This report has been commissioned under S 122C of the Local Government Amendment (No.3) Act (the Act) and is often referred to as "the cost/benefit analysis". The report represents the culmination of over two years of effort. A "Draft" S 122C report concerning the project was filed in March of 2001 and this reported progress with the PENLINK project up to November of 2000. This "Final" report updates events affecting the project to February 2002. Much has occurred in the intervening period.

This Reports Objectives

The final report is intended to be succinct and uncomplicated. The final report does not again "go into the figures" - for example the findings of Cranleigh Strategic Limited (CSL) are taken as read.  The final report's content - to retain its brevity and straightforward nature is not replete with financial analysis.  This may be an advantage for readability purposes but for any further detailed argumentation and analysis, the draft report's findings - reworked for subsequent events may still be necessary in conjunction with the pending PENLINK project's final decisions.

Much of the earlier, (November of 2000) report was detailed and dealt with often complex issues. It served a number of purposes including a full documentation of all of the processes involved. The draft report still stands as a matter of record. Its detailed analysis and settled conclusions [ref; Section 1 Summary of Findings] are of continuing relevance.

The draft report was prepared during the term of the Commissioner, Mr. G Kirby.  Many of the uncertainties that existed then and their associated issues have since been resolved.  These will be reported upon.  In addition, there are matters which remain unresolved which are the principal subjects of this report.

The Need to get the "Best Deal"

At the outset it can be stated ("succinctly") that there remains, as was the case earlier the same as yet unresolved and single crucial question for the Council's decision-makers, that is, the gaining of the "best deal" possible for the residents and ratepayers of the Rodney District.  The question of ensuring that the "best deal" is obtained is central to the S 122C legal requirements. The "best deal" issue was a matter extensively canvassed in the draft report and it will remain unsettled right up until the time the final contract, is signed and this is scheduled for "June-August 2002".[ref;  page 6 RDC's website FAQ - "PENLINK update" www.rodney.govt.nz/council/penlink.htm]

Since the draft report was filed the evidence of the intervening events continues to lead to the identification of the "best deal" question as being the single most important outstanding issue. There are other less important questions to be considered but as with any cost/benefit analysis they become of secondary importance if the "best terms" possible are not obtained.

At present, based on the events of the last ten or so months since the new Council was elected it seems reasonably certain that the PENLINK project for a Weiti River toll bridge and road will, for the moment proceed.  The processes leading to the signing of the proposed PENLINK contract are continuing.  Public support for the project as reported in the earlier draft report has continued up to the present and this has by and large been reflected in the discussions and proceedings of the new Council elected in March of 2001.

The new council members have by now had ample opportunity to inform themselves on the merits or otherwise of the PENLINK proposal. With some reservations the Council has voted on a number of occasions to continue with the project's contractual negotiations. Reservations regarding the merits of the proposal when they have been expressed have generally concerned environmental matters, timing for the commencement of the project, (its possible deferral), and the method of proposed funding, the so termed BOOT-type privately funded option.

One Councillor, (Cr Walker) continues to raise numerous other issues that generally oppose construction of the road/bridge and are directed at suggesting alternative traffic management solutions. Some, but by no means all of these are covered in this report. The Council as a whole however, continues quite properly to reserve its position until the terms of the contract that will emerge from the bidding process are fully settled.

The draft report identified a set of sixteen issues [ref;  Section 7 pages 4  and 5] that the Council needed to address before it made its final decision. Of this list, several relate to the responsibility of the Council to reach terms that are satisfactory and which would lead to making the "best deal" possible. The draft report recommended for example that the Council conduct further, principally financial analysis including a review of alternative (public) funding sources, a combination of a Transfund roading subsidy and Rodney District loan funding.

Bench Marking the BOOT Bids

The rationale for this recommendation was, that based on the evidence then available, further analysis was needed to enable a proper assessment to be made of the quality of the bids received by the tenderers using BOOT-type private funding.  The further evidence necessary was referred to as "a Public Sector comparator" (model) for PENLINK.

The further analysis was conducted. It has, amongst other things confirmed the position that if the proposed BOOT-type private funding were to be used the tolling period could be roughly twice as long - a further fifteen or sixteen years longer than if the Council itself was to use conventional funding, that is a combination of a Transfund or other subsidy and grants and its own loan funding.

Subsidy Issues Introduced

Receipt of a subsidy remains a moot point however because as the law presently stands a Transfund subsidy entitlement for PENLINK is at best uncertain.

Pursuing the Rodney District's entitlement to a Transfund subsidy is in itself a major issue.  This issue requires a serious scrutiny because it is such a major component and it impacts on the length of the tolling period to such a degree that a full comparative evaluation of PENLINK including its influence would be essential.

The finding relating to the extended tolling period when private funding is introduced is a very material matter. It must weigh heavily in the final decision-making. In reaching the "best deal" outcome a doubling of the toll period, representing an additional cost to road users of over $80 M cannot be ignored.

Risk Assessments

In the preparation of this final report, discussions with elected members have centered upon their concerns relating to risk. Councilors have often repeated the view that the Council will benefit from PENLINK most from transferring Council risks associated with PENLINK to private interests.  They have pointed to the draft S 122C report [ref Section 1 page 16], a statement that reads:

" the major justification for private sector funding was the transfer of risks. The risk of future operating losses was highlighted as the principal exposure"..

Some Councillors clearly feel that a privately funded PENLINK is superior to other options mainly due to the shedding of this risk. This report will outline reasons why this view may be overly simplistic and may not be the justification it is held out to be for proceeding using private funding. 

A contrary viewpoint of risk is that the Council itself, utilising its own Transfund subsidy, other agencies subsidy entitlements and loan funding is just as capable of covering its risk from future operating losses as is the BOOT-type private funder.

This operating result risk can be managed by the Council if it were to do the project funding itself merely by it (the Council) mandating, in a relatively uncomplicated fashion an extension of the tolling period, an extension sufficient to cover any unforeseen operating losses that may have arisen.  The ability to prudently manage risk is therefore not solely confined to private interests as may have seemed to be the case as evidenced by the recent observations of some elected members.

The RDC - as "Insurer" of the Scheme

What is more, it is not correct to state the view that a private funder would be taking without any qualifications, responsibility for future operating risks. The proposed terms of the PENLINK contract [ref;  Draft PENLINK agreement - inter alia Clause 14.4 page 50 "Variations comprising Appendix Event"] allow for joint Council/private funder negotiations to be entered into, at some time in the future to allow, under some as yet unspecified circumstances for permission to be granted for an extension of the tolling period should expected returns (operating losses) arise!

This contractual term, apart from the very difficult task of specifying workable procedures for its implementation, amounts to a form of underwriting of the operating losses risk. This situation has the effect of removing much of the value presently being placed upon the supposed "transfer of risk" to private interests. If the removal of risk issue, as is often claimed, is the single most desirable reason for PENLINK proceeding in its present form, then the current expectations of decision-makers may not be well founded due to the fact that Council could end up becoming its own de facto insurer for the BOOT funded scheme.

Macro Economic Roading Issues

It has also, over the course of the past year become apparent that there are bigger (macro) economic, policy and roading funding issues abroad than just PENLINK. The PENLINK project has attracted considerable interest from the nation's politicians including the Minister of Transport. The future funding of New Zealand's roads is currently a topic of considerable public interest. It is far from being settled.  Much of the reported planned reforms, due shortly to be announced could have a material effect on the PENLINK project.  Opinions will undoubtedly vary on the extent and the nature of the impact of the new Transportation policies.  There is no way of knowing.  Basic prudence alone however insists that recognition be given to the possibility of the effects.  Excellent timing and judgement will be required to factor in the effects of this particular "imponderable".

The PENLINK project is viewed as being "the first cab off the rank" in what may, in New Zealand, in future be a series of similar privately funded projects. Unfortunately, as is often the case when a guinea pig (the Rodney District Council) is found, the "testing of the water" processes involved by being first off the rank has its pitfalls. Along with the very material transactional costs being run up in developing procedures including the promotion of special legislation, the chief problem faced by the Council is that PENLINK is proceeding in a fluid and fast changing policy environment and not all of the anomalies arising (including the issue of subsidy entitlements) have yet been adequately addressed.

PENLINK Funding Issues

Whereas a tolled PENLINK might have proceeded earlier as a conventionally funded project, that is with loan (and some subsidy and grant) funding, the project, in seeking private funding is breaking new ground. PENLINK will be the first roading project of its kind in New Zealand, primarily due to the nature of its proposed funding.

A major anomaly has arisen which must be resolved if a "good deal" is to be struck. No allowance has presently been made (nor it must be stated may it arise) for any value substitution or compensation for Rodney District's loss of the subsidies and/or grants. A loss of subsidy arises if a BOOT private funder is found. A grant may? still be made to the Council though this matter has not been fully investigated.  Only a Council, as the law stands at present can receive a Transfund subsidy but the entitlement is lost if the Council does not conventionally fund the project itself.  This holds true if the Council itself was to toll the facility.  This matter is the subject of more detailed analysis later in this report.

During the course of the drafting of this final report the "atmosphere" affecting its preparation has palpably altered.

The literature of Public Policy archives abounds with material concerned with various phenomenon associated with public sector decision-making - one of these topics concerns the influence on decision makers of the force of "inertia".  The word describes an inability to act or decide - in an unfettered manner.  The inability to freely act or choose is attributed to influences upon opinions which have been conditioned by preceding events.  Often the preceding events include a build up of sizeable preliminary expenses to a point that their value would be put at risk if a project did not proceed.

Although evidence of influences such as inertia will always be subjective it appears that the force is at work in connection with PENLINK.

The enthusiasm for and the growing inertia to complete the project has so far resulted in what can only be termed an emphasis by the schemes proponents on the positive aspects of the project.

The intractable nature of dealing with some issues for example the subsidy problem, may explain some of "the inertia attitudes".  These attitudes have been encountered in discussions held with some Management and with Council's professional advisors.  A reluctance on the part of some to confront certain issues is understandable, the position of the Transfund subsidy is a case in point.  A later section dealing with "the CSL report" takes these matters further.

Subsidy Problem

The problems with the present law relating to subsidies are well known.  As a recent contributor to the New Zealand Herald Letters to the Editor [ref;  NZH 13 December 2001] titled "Putting the Boot into roads" put it (the second paragraph is of particular relevance):

            " There are simplistic assumptions being made that private enterprise will find the most economic solutions.. It is surely preposterous to claim that the public interest, too, will be well served by such private investment. Will it? It was public clamor that forced politicians to remove tolls at Tauranga and Auckland. The toll- paying motorist obviously has a different view.

            What's needed in this discussion is a survey of the full economic costs of such proposals and the reasonable distribution of existing automotive taxes. The superficiality of whether private enterprise can raise loan money and thereby make profits, is simply a façade to avoid the critical political and economic issues of funding roading construction costs ".

The writer of this letter has hit the nail on the head. He identifies the flaws and inherent anomalies in the present mechanisms for the funding of New Zealand roading.  There are critical political and economic issues that are presently in abeyance.  The soon-to-be announced roading reforms - the new Transportation strategies of the present government are likely to provide a forum for the debate regarding subsidies.

The recommended full economic analysis of BOOT-type funding would highlight the loss of value to motorists, arising from such schemes. The so termed "double dipping" which arises via tolls collected, often over extended periods by private operators/funders coupled with no compensation for the loss of roading subsidy - funded from road user charges and petrol taxes, amounts to motorists paying twice, once with a tax or user charge, again as a user paying tolls.

The Transfund subsidy entitlement payable to Councils for roading expenditure under current rules simply vanishes if BOOT funding is used. The Council as the law presently stands would not receive any compensatory payment.

Transfund currently is not able to reimburse this loss, although some mechanism must surely be debated in future to cater for these circumstances and could lead to appropriate amendments to the governing legislation. Unfortunately for the residents of the Rodney District and the motorists who will pay tolls, the present environment for BOOT funding might because of the "double dipping" issue be viewed as a "Lose/Lose" situation.  A case of the guinea pig suffering?

One further point arises from the quoted Letter to the Editor. Whereas the Tauranga and Auckland tolled facilities remained in public ownership the long-term concession arrangements for PENLINK effectively puts the control of the Weiti facility, if not its ownership into private hands.  No amount of public lobbying, as occurred in for example Tauranga for early removal of the PENLINK tolls will be possible without significant compensation claims first having to be contemplated and met from the Rodney District's financial resources.

The introduction to this final report has raised all of the principal and remaining uncertainties-issues, that relate to gaining the "best deal" possible.  These critical issues must be properly addressed. A "best deal" cannot be reached unless their satisfactory resolution is achieved.

Partiality - part of a changed "Atmosphere"

In concluding this section, and as alluded to earlier, it is disappointing to report the recent emergence of some partiality of the Council's position, reported in the public domain in favour of PENLINK proceeding as proposed.  Evidence of this is given later in this report.

The disquieting emergence of a more advocacy position in favour of the PENLINK proposal on the part of the Council is obvious from the content of a recent, December 2001 PENLINK item appearing on the Council's web site. .[ref;  page 6 RDC's website FAQ - "PENLINK update" www.rodney.govt.nz/council/penlink.htm]  The item gives only reasons for proceeding with the project. The content does not achieve a reasonable balance. The item ignores all of the more important uncertainties-issues raised in the draft S 122C report.  In addition, a number of writers of Letters to the Editor (local press), and Councillors have observed a similar trend.

But for this shift of Council's public position, (not in evidence when the earlier report was completed) the tenor of this report would probably have been more "positive".  This report has, as a result of the partiality displayed (and influenced by inertia?) of necessity attempted to redress the balance a little.  The report's purpose as stated earlier is intended to provide elected members and members of the public with a balanced view to assist in gaining for the District the "best (PENLINK) deal" possible.