Contractor Roads of National Significance

The original seven RoNS for dummies

ALAN TITCHALL looks at the origins of the ‘Roads of National Significance’ (RoNS) in part one of a three-part article series that will also cover project highlights and contractor performance, and future projects and their funding.

WHEN IT COMES to grand schemes there can be none grander than the National Government’s National Infrastructure Plan released as a discussion document in September 2009.

The reasoning behind it

To say the Government set off on this infrastructure spend back in 2010 to keep roading contractors afloat during the recession would be incorrect, as the programme involved a lot more than just roading.

The idea was to take the high ground on the state of the nation’s infrastructure assets; find a direction for future infrastructure investment; improve alignment between national and regional infrastructure planning; and improve public awareness of why central Government has to spend its taxes on big structural things for the future of the country.

Sectors in this grand plan included telecommunications, water supply, social services and, of course, roading.

In a country reliant on exports, around 92 percent (by weight) of all our freight is moved by road. While high-volume highways make up only 6.5 percent of our total roading network, they carry 17 percent of total kilometres travelled, and 19 percent of all freight volume kilometres. A National Freight Demand Study in early 2014 identified around 236 tonnes of freight moved around the country each year and this figure is predicted to increase by 50 percent over the next three decades. Freight tonnage in the Auckland and Canterbury region is projected to grow by 78 percent and 73 percent respectively.

Early road infrastructure map

Within the National Infrastructure Plan came roading – in the form of the National Land Transport Programme (NLTP) and a new State Highway Classification System. The NLTP is funded from the National Land Transport Fund (NLTF). These are two very important acronyms.

Under the NLTP five high-use roading projects, based around our five largest population centres, were identified and given the title – with a flair for slogans reminiscent of communist China during its Great Leap Forward period – “Roads of National Significance”, or RoNS. This is the third important acronym.

Seven RoNS were announced in the Government Policy Statement (GPS) on Land Transport Funding 2009/10 to 2018/19, and $12 billion was earmarked for these projects, which came under the responsibility of the New Zealand Transport Agency (NZTA).

How the NZTA came about

The country’s roading infrastructure is partly owned by the Crown (state highways) and partly by local councils (local roads). Over the past 25 years, the management and funding of this roading infrastructure has been in the hands of a number of different central government agencies.

In 1989 an entity called Transit NZ took over roading from the Ministry of Works and Development (which was funded and guided by the National Roads Board). Funding for Transit came from road user charges, less an amount of petrol excise duty that was retained for the Crown account.

In 1996 the funding arm of Transit was separated out to form Transfund, which was then combined with the Land Transport Safety Authority to form Land Transport NZ. In 2008, Land Transport NZ and Transit were merged to form the Crown entity still in control of our state roading – the New Zealand Transport Agency.

The NZTA has statutory independence (designed to ‘de-politicise’ decision-making around individual road projects) over determining what roading activities are included in the NLTP and approving all NLTF funding for roading activities.

In 2009, under pressure to capitalise on favourable recessionary purchasing conditions at the time, the NZTA formed an Industry Liaison Group made up of consultants and contractors to kick around ways of getting the first seven RoNS projects funded.

Road funding in general

So far, this country has been able to fund roading from road user charges, unlike Australia where road spending has outstripped road charges and revenue, but this could change.p24-Seven-RoNs-300x300-3

Since 2009 road user charges – Fuel Excise Duty (FED) revenue and the Road User Charge (RUC) – have gone directly into the NLTF, which funds most of the country’s land transport programme (including the RoNS).

This was achieved through the Hypothecation Act of 2009 (hypothecation being to allocate the revenue raised by a tax for a specific purpose). There are also modest contributions to the NLTF from sources such as the rental or sale of state highway land, and interest from cash invested. From time to time the Government also provides extra funding from outside of the NLTF for transport-related projects.

Local authority road funding is derived from a mixture of rating revenue and funding from the NLTF through the NZTA’s Funding Assistance Rates (FAR), which varies according to the project and the local authority. Generally, the NLTF provides just under 50 percent of local road funding. Local councils, according to their association Local Government NZ, spend over $800 million annually building, fixing, renewing and maintaining roads, funded through each council’s rating base and FAR.

Funding the RoNS

The Hypothecation Act of 2009 put more funds into the NLTF and the Transport Minister at the time, Steven Joyce, was able to shift about $300 million into the fund to kick the first RoNS projects off.

Initially, the NLTP allocated $1,359 million towards these projects for the period 2009–2012, while other state highway improvement projects were allocated $1,539 million. In July 2011 the Minister of Transport released a Government Policy Statement (GPS 2012) covering the financial period 2012/13 to 2018/19.

The aim has been to complete the first seven RoNS projects within 10 years, but the NZTA concedes that, to achieve this, these projects will require funding “beyond” that already identified through NLTF projections.

The Transport Agency’s three-year 2015–2018 NLTP (which started in June 2015) involves a $13.9 billion forecast expenditure. About $10.5 billion of this comes directly out of the NLTF; the rest from local councils through rates.

The Ministry of Transport in June last year said the Government intends (presuming it lasts in power after next year’s election) to spend $19.5 billion on state highways (and $8.5 billion on local roads) over the next decade, with $9 billion directed at RoNS projects.

Crown debt of $375 million is also being used to help fund the Auckland Accelerated Programme, bringing forward the construction of major projects ahead of when they could have been built funded only on a pay-as-you-go basis. The debt, says the NZTA, will be drawn down over a five-year period and is then scheduled to be repaid from the NLTF over eight years.

Something for the provinces

When the RoNS programme was announced it was an obvious win for a recession-stressed contracting industry, plus there was also a new $30 billion budget towards rebuilding Christchurch, jointly funded by the Government and the global insurance industry. However, the industry was concerned that the grand schemes would suck money out of the provincial roading system at the expense of small contractors.

This was answered by the Prime Minister at the National Party’s annual conference in June 2010 where he announced $212 million in additional funding – the Accelerated Regional Roading Package – for regional roads.

Extra funding avenues

Four years ago the NLTF was under pressure from the cost of the Canterbury earthquakes and reduced economic and revenue growth forecasts.

To delay or cancel projects would have been a tough option for a Government that has made the RoNS a centrepiece of its economic growth agenda.

The NZTA came under pressure to cover a $160 million shortfall. One solution was the infamous ‘sweating of the roading asset’, or delaying road maintenance until it is absolutely needed (see Contractor December 2015 coverage of the NOC model).

Another solution (made in 2012) was to simply increase petrol excise duty and road user charges between 2013 and 2015. This significantly boosted the projected size of the NLTF, including another $2.5 billion for the RoNS projects.

More recently, the Ministry of Transport told Contractor magazine that: “Expenditure levels in the Government Policy Statement on land transport (GPS 2015) assume that the Government will increase rates of fuel excise duty and road user charges each year by the rate of inflation.

“However, this is dependent on the latest revenue forecasts, and Ministers will consider advice on this later in 2016, based on planned expenditure and up-to-date revenue forecasts.”

A more upfront approach to RoNS funding has been achieved within the projects themselves, namely through PPPs and tolling.

The PPP model

In October last year work started on Wellington’s $850 million Transmission Gully section of the Northern Wellington Corridor RoNS. It is the very first motorway in this country to be constructed, financed and maintained under a Public Private Partnership (PPP) contract.

The PPP roading model is essentially the same as that used for the Hobsonville Schools and Wiri Prison projects, where the Treasury’s National Infrastructure Unit had already built up a core contract agreement for PPPs with the payment regimen, terms and conditions mapped out.

The NZTA had only to customise this ‘template’ to a large roading project like Transmission Gully. The agency says it is considering PPPs for other RoNS projects that have a similar scale and complexity.

Financing projects under PPPs (covering construction, maintenance and renewal costs over the contract term) is a form of debt funding. It provides the NLTF with a funding ‘holiday’ while the project is being constructed. This not only means projects can be advanced, but funds can be used for other activities in the meantime. The model also transfers the construction risk to the builder who is paid back over time through the NLTF (and perhaps tolling).

When the Transmission Gully project is delivered, ready for full use, annual availability payments from the NLTF, which incorporate finance, interest, maintenance costs and transferred risk, will start over 25 annual instalments.

The cost of private finance means projects procured under a PPP arrangement are usually more expensive than a traditional government-funded project, which places pressure on the private sector to innovate to save project costs – during the building of the asset and with ongoing operational costs over the concession period. That’s the theory anyway.

It tolls for you

Tolling is another option. The country already has a successful precedent in tolling – the Northern Gateway motorway, and tolling reinforces the fairness of the actual user base helping to pay for a project.

And now we have the recently completed Tauranga Eastern Link RoNS, where $107 million of the $459 million construction and property costs were funded from debt.

“In this case the debt, which was raised by the Crown, will be repaid from tolling revenue over 30 years, including interest charged from the date the loan was drawn down,” says the NZTA.

• Next issue (May 2016): Part two – RoNS innovation and performance so far.

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