Public private partnerships and New Zealand land transport projects
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Public private partnerships
and New Zealand land transport projects
What is a public private partnership?
There are many different definitions of public private partnerships and such arrangements can take on many
different forms. In general terms though a public private partnership or PPP can be defined for the purposes
of this paper as:
“a contractual agreement formed between public and private sector partners that meets clearly defined
public needs through appropriate allocation of resources, risks and rewards and which may also
involve the use of private sector capital to wholly or partly fund an asset that would otherwise have
been purchased or constructed directly by a government agency”.
It is important for this discussion to distinguish between the wider concepts of ‘partnering’ and ‘procurement’
and the more specific concept of the PPP. Partnering is not new in New Zealand and the private sector has
been contracting to provide assets and services to all levels of government for many years. Indeed, in
recent times, the private sector has played an increasing role in the provision of public infrastructure and
public services. However, the key distinction between a government agency contracting with the private
sector to construct or purchase an asset or obtain a service and a PPP is that in the former examples the
private sector takes no ‘ownership’ risk in connection with the asset or service – it merely performs the
functions it is contracted to provide. In a PPP, risks of ‘ownership’ and operations of public infrastructure are
transferred wholly or partly to the private sector party.
PPPs themselves are not new concepts either. They have existed in various forms internationally for many
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years. One study estimates that in excess of 2000 public infrastructure projects have been proposed and/or
developed internationally using PPP with a total value in excess of US$850 billion in the period 1985 – 2004.
The total will certainly be higher today. PPPs have been used to develop both economic infrastructure and
social infrastructure including roading, rail, airports, seaports, water and waste water, hospitals, prisons,
schools, housing and other infrastructure facilities. There have even been several projects in New Zealand
which fall within the definition of PPPs such as the Wellington and Hutt Valley water and waste water
projects, Vector Arena in Auckland, Papakura District Council’s franchising of its water facilities and several
healthcare facilities. There have been other PPP projects planned which have not yet come to fruition,
particularly in the roading and land transport arena such as the Penlink PPP Project.
There are a number of different ways in which a PPP can be structured and most have associated
acronyms. Some of these are:
• Build Operate Transfer/Build Own Operate Transfer/Build Transfer Operate (BOT/BOOT/BTO) –
These are variations on a project delivery method typically involving the design, construction, finance
and operation of a facility whereby the contractor acquires ownership of the facility until the end of the
contract term at which time ownership of the facility is returned to the original public sector sponsor
• Build Own Operate (BOO) – This is a project delivery method similar to BOT whereby the contractor
both owns and operates the facility with no transfer at the end of the term
• Concession – This is an arrangement which grants the contractor full responsibility to finance, build,
operate and / or maintain the facility as a franchisee for a specified period of time
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2004 International Public Works Financing Projects – Volume 187. Public Works Financing. Westfield NJ USA October 2004
summarised in “Synthesis of Public Private Partnership Projects for Roads, Bridges and Tunnels from around the world 1985 -2004”
published by AE Comm Consult Inc.
Buddle Findlay law offices:
Auckland - PricewaterhouseCoopers Tower, 188 Quay Street, PO Box 1433, Auckland 1140, New Zealand
Wellington - State Insurance Tower, 1 Willis Street, PO Box 2694, Wellington 6140, New Zealand
Christchurch - Clarendon Tower, 78 W orcester Street, PO Box 322, Christchurch 8140, New Zealand
w w w . b u d d l e f i n d l a y. c o m• Design Build Operate Maintain (DBOM) – The contractor is responsible for the design, construction,
operation and maintenance of the facility for a specified period of time and payment is predicated on
meeting certain prescribed performance standards relating to physical condition or capacity of the asset
• Design Build Finance Operate (DBFO) – This is an extension of the DBOM project delivery method in
which the contractor is also responsible for financing the project
• Management Contracts – This is a contractual arrangement under which the contractor manages the
provision of a specified function or asset at certain performance standards over a set period of time.
These contracts typically do not involve the use of private financing but do represent additional
responsibilities and risk for the private sector partner beyond a standard operating contract.
Overseas experience of PPPs in land transport
PPPs in various forms have been used for rail and road development for centuries. In modern times Spain
and France pioneered the use of PPPs for the development of motorways in Europe. Spain began inviting
concessionaires to build its motorway network in the 1960s while private autoroute concessions in France
date from the 1970s. These earliest concessions tapped into private funding sources freeing up public
monies to be used on other projects. The private concession companies were generally consortia comprised
of construction companies and banks. The original economic and political drivers for introducing these
concepts for the development of roading infrastructure were principally a need to accelerate infrastructure
development to cope with growing economies and the need to find alternative funding for capital intensive
infrastructure projects. Unfortunately the early experiences in Spain and France ran in to difficulty in the
1970s with the oil shocks. With their heavy reliance on petroleum based inputs, construction costs
skyrocketed while traffic flows declined. The economic pressures of the time also resulted in governments
limiting the rate of toll increases, contrary to the terms of the relevant concession agreements, in a bid to
assist with inflation control. This of course was bad news for the concessionaires operating the networks
who relied on the tolling to meet their debt servicing costs. Over the following years, the governments of
both Spain and France effectively nationalised many of the private concessionaries merging them into
existing public companies.
The UK joined the PPP revolution in the 1980s with the first major project being the Dartford Crossing, the
concession for which was awarded in 1986. Interestingly, with a few exceptions, the UK did not pursue a
direct toll model for roading projects but preferred to adopt the shadow toll approach. Under a shadow toll
arrangement public sector sponsors make payments to concessionaires based on the number and type of
vehicles using the facilities. The amount of shadow toll payments can be adjusted by reference to target
service levels including availability and safety conditions. Motorists themselves pay no tolls directly with the
shadow toll payments generally being funded from fuel and excise tax or the general funds of the sponsor.
For private road developers the primary benefit of the shadow toll approach is to minimise traffic risk. Given
that motorists themselves do not have to pay tolls directly, their choice of route is made solely based on time,
distance and convenience and is therefore much easier to predict. Shadow tolls also reduce cost by
removing the need for expensive direct tolling systems to be installed and operated.
At the same time as the UK experiments with its PFI initiative were unfolding in the 1990s, there was also a
resurgence of direct toll motorway development in Europe. The sweeping structural changes which occurred
across Europe during the 1990s supported the use of PPPs as an important tool to meet the European
Union’s infrastructure needs. These included the goal of creating a series of trans-European networks, both
rail and road, that would create new and improved transport connections within the European Union.
Coupled with this bold desire to expand the trans-European networks, European policy also established
fiscal standards and budgetary discipline for member nations. This, at the time, put pressure on
governments to seek alternatives to government debt financing for large capital intensive infrastructure
projects and as a result many turned to PPPs.
Buddle Findlay law offices:
Auckland - PricewaterhouseCoopers Tower, 188 Quay Street, PO Box 1433, Auckland 1140, New Zealand
Wellington - State Insurance Tower, 1 Willis Street, PO Box 2694, Wellington 6140, New Zealand
Christchurch - Clarendon Tower, 78 W orcester Street, PO Box 322, Christchurch 8140, New Zealand
w w w . b u d d l e f i n d l a y. c o mAs you drive through France, Italy and Spain today, tolled motorways are a fact of life. They provide an
excellent service with comprehensive networks linking all major cities. This backbone for the movement of
people and goods throughout Western Europe delivers real economic benefits and those projects operated
by PPPs have largely been successful. One of the most iconic recent PPPs is the Millau bridge project
across the Tarn river valley in southern France. This magnificent example of modern engineering and
design was constructed by the Eiffage consortium under a long term concession arrangement. The toll
bridge has cut up to an hour off the standard alternative journey time. It cost approximately €400M to build
and has been an enormous success, carrying over 4 million vehicles in its first year of operation and also
becoming a tourist destination in its own right.
The European examples, whilst interesting are difficult to translate to New Zealand circumstances because
of legal, political, economic and structural differences in the economies. For New Zealand purposes,
however, there are good examples of PPP frameworks closer to home which are more easily adaptable to
our circumstances. Australia, led by the State of Victoria, has developed an extensive PPP framework and
has a track record of successful PPP projects including a number of land transport projects. The first major
land transport PPP project in Australia was the Sydney Harbour tunnel which was completed in 1992. Since
then PPPs have been used to deliver infrastructure projects and services over a range of sectors including
land transport (road and rail).
The early PPPs in Australia were driven initially by a need for the States to find alternative funding sources
and to achieve off balance sheet financing for the significant cost of infrastructure developments. As
economic conditions during the 1990’s changed and the financing pressures were relieved, the Australian
State governments continued to develop the PPP concepts based on a policy that increased private sector
involvement in infrastructure services could drive growth and efficiency and achieve better outcomes over
what the governments themselves could achieve. The Australian PPPs of the 1990’s were generally
characterised by:
• A high level of risk transfer to the private sector
• The private sector being responsible for full service provision
• The private sector entity not being paid until the commencement of services
• The government not guaranteeing returns as it did in the late 1980s and early 1990’s.
Examples of PPPs of that period in Australia include the Melbourne City Link project, various water and
waste water treatment plants as well as several hospitals. While the economic and financial outcomes of
PPPs from that period are considered largely positive, the quest for maximum risk transfer and private sector
efficiencies led to some contracts being unsustainable with the relevant government sponsors having to
restructure the arrangements or, in some cases, step in and assume control of the projects.
From 2000 to today, the Victorian State government has continued the development of PPPs with the focus
being on the delivery of value for money, public interest and optimal risk transfer. This current approach is
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outlined in the “Partnerships Victoria” policy. The current policy and guidance materials have incorporated
the lessons of the past and are now very comprehensive. There is a clear quest to achieve value for money
with a focus on “whole of life” costing and optimal, as opposed to maximum, risk transfer to the private
sector. The “value for money” assessment is made using sophisticated public sector comparators. The
public interest is protected through a formal public interest test for each PPP project and direct responsibility
for delivery of core public services is clearly identified as being retained by the government. If a project does
not pass the value for money and public interest tests then it is not developed as a PPP and the government
agencies are directed to traditional procurement methods. The Partnerships Victoria model has been
adopted and further developed by other states in Australia and the Australian Federal Government.
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For full details see www.partnerships.vic.gov.au”
Buddle Findlay law offices:
Auckland - PricewaterhouseCoopers Tower, 188 Quay Street, PO Box 1433, Auckland 1140, New Zealand
Wellington - State Insurance Tower, 1 Willis Street, PO Box 2694, Wellington 6140, New Zealand
Christchurch - Clarendon Tower, 78 W orcester Street, PO Box 322, Christchurch 8140, New Zealand
w w w . b u d d l e f i n d l a y. c o mThe New Zealand framework – Land Transport Management Act 2003
The current framework for land transport funding, including the establishment of PPPs in the land transport
sector in New Zealand, is set out in the Land Transport Management Act 2003 (the “Act”). The Act provides
for PPPs by empowering public road controlling authorities to enter into concession agreements between a
third party and a public road controlling authority relating to the construction or operation of a roading activity.
It also provides a separate mechanism for approval of road tolling schemes. A PPP will generally involve
tolling but road controlling authorities can use tolls without having to enter into a PPP, hence the different
regimes in the Act. Concession agreements under the Act can generally contain whatever provisions are
agreed between the public road controlling authority and the concessionaire. However, before entering into
a concession agreement the public road controlling authority must obtain the responsible Minister’s prior
written approval and satisfy the Minister that any conditions imposed by the Minister, have been met. The
term of the concession agreement must not exceed 35 years from the date on which the road is open to the
public. This term may be extended once only for a further period of up to 10 years if there are exceptional
circumstances justifying the extension. Application for an extension can only be made once two-thirds of the
original term has elapsed.
A concession agreement under the Act must not include any provision that provides a disincentive for a
person to pursue other sustainable transport options. For instance, the concession agreement could not
contain a provision preventing the relevant authority from building any competing infrastructure, imposing
any demand management regime on connecting infrastructure or providing any alternative public transport
which would otherwise affect demand for the new road. This requirement will be a key negotiating point in
any concession agreement under the Act, as any concessionaire will naturally seek assurances from the
concession granting authority that, as far as possible, the assumptions upon which the initial analysis of the
project has been undertaken prior to entering in to the concession agreement (a key one being traffic
forecasts) will remain fixed for as long as possible. An interesting example of this in the Auckland context
would be if a concessionaire wins a concession agreement to construct a harbour crossing providing access
to the central business district which is to be tolled at an agreed level and the concessionaire satisfies itself
as to the viability of the project based on certain traffic forecasts and a certain level of tolling. If the
government or the relevant territorial authority subsequently introduces congestion pricing so that motorists
are charged a fee to enter the central business district (similar to Singapore and London) , the combination
of the congestion pricing and the toll on the harbour crossing are likely to significantly impact the traffic flow
and, by implication, the income for the concessionaire. A provision in the concession agreement in the form
of an undertaking from the government or the relevant authority that it will not take any steps which would
have the effect of reducing the traffic flow would not be permitted under the Act and this risk will need to be
addressed in another way.
The approval process for concession agreements allows a public road controlling authority to obtain an
“approval in principle” to enter into a concession agreement. Such approval will specify conditions relating to
the broad terms of that concession agreement. The public road controlling authority will then be able to seek
tenders from potential concessionaires with a sufficient degree of certainty about the key terms of the
concession agreement they will be able to offer. Once the tenders are received and the negotiation with the
preferred tender is completed, the final sign-off from the responsible Minister can be obtained.
Before approving a concession agreement the Minister must be satisfied that the proposed agreement
contributes to the purposes of the Act. The Minister must also have taken into account how the proposed
arrangement assists economic development, assists safety and personal security, improves access and
mobility, protects and promotes public health and ensures environmental sustainability. The Minister must
also have taken into account any relevant existing transport strategies (national or regional), the availability
of alternative transport options, whether the activity is consistent with current priorities for land transport
expenditure and the outcome of consultation undertaken prior to the application being made.
Buddle Findlay law offices:
Auckland - PricewaterhouseCoopers Tower, 188 Quay Street, PO Box 1433, Auckland 1140, New Zealand
Wellington - State Insurance Tower, 1 Willis Street, PO Box 2694, Wellington 6140, New Zealand
Christchurch - Clarendon Tower, 78 W orcester Street, PO Box 322, Christchurch 8140, New Zealand
w w w . b u d d l e f i n d l a y. c o mThe consultation requirements that must be met before an application is made for approval of a concession
agreement are reasonably extensive but credit is given for consultation undertaken under other provisions of
the Act or under other legislation.
The key requirement of concession agreements is that the land and road comprised in the agreement will be
publically owned throughout the term of the agreement. Leases of the relevant land for not longer than the
term of the concession agreement are permitted. Interestingly, other forms of property interests, including
licences, are not permitted. The reason for this appears to be to ensure that the concession agreement
regime does not inadvertently catch day to day contracting by public road controlling authorities, i.e. it is only
arrangements that grant a lease to the concessionaire that are deemed to be concession agreements.
The concession agreement will establish a regime whereby either payments are made to the concessionaire
by the relevant authority under a shadow tolling or some other mechanism or the concessionaire will be
granted the authority to collect direct tolls from users. If tolls are to be levied, the Act provides a separate
regime which requires separate Ministerial consent for the implementation of the tolling scheme. Similar to
the concession agreements regime, extensive consultation needs to have been undertaken by the relevant
authority prior to establishment of a road tolling scheme. Points to note in relation to the establishment of
tolling are the requirement that tolls be levied principally on new infrastructure. Tolls can be levied on
existing roads only if the existing road or part of it is located near and is physically or operationally integral to
a new road in respect of which tolling revenue will be applied. The other point is that prior to approving a
tolling scheme, the responsible Minister must be satisfied that there is an available alternative to road users
which is untolled.
The Order in Council which is finally made upon the approval of a tolling scheme will describe the relevant
road to which toll revenue may be applied and that part of the road or roads which are to be tolled together
with any other conditions that must be met to the satisfaction of the Minister for the scheme to be approved.
The Order may also set the level of tolls or empower the relevant public road controlling authority or toll
operators to set tolls according to criteria to be specified. Differential levels of tolls on any basis approved
are permitted.
The Act is currently subject to amendment by the Land Transport and Management Amendment Bill 2007
(the “Bill”). This Bill makes a number of changes to the underlying legislation, the principle ones being:
• To reserve fuel excise duty for land transport purposes only and changing the way that fuel excise duty
is set
• Providing a regime for the establishment of regional fuel taxes, the intention of which is to allow regions
to collect revenue to fund more projects
• Changing the mechanisms for development of government policy statements (setting out the
government’s planned investment and funding priorities) to provide more strategic guidance to the
transport sector and introducing regional land transport programmes to regionalise land transport
planning documents, reduce consultation and encourage integrated land transport planning
• Increasing the term of regional transport strategies and the national land transport strategy to 30 years to
recognise the long term nature of transport investment
• Merging Land Transport New Zealand, the office of the Director of Land Transport and Transit New
Zealand into a single entity.
Buddle Findlay law offices:
Auckland - PricewaterhouseCoopers Tower, 188 Quay Street, PO Box 1433, Auckland 1140, New Zealand
Wellington - State Insurance Tower, 1 Willis Street, PO Box 2694, Wellington 6140, New Zealand
Christchurch - Clarendon Tower, 78 W orcester Street, PO Box 322, Christchurch 8140, New Zealand
w w w . b u d d l e f i n d l a y. c o mAll of these changes were signalled last year and the legislation is largely mechanical in terms of its
implementation. From a PPP perspective an important change is the introduction of the mechanism for
levying regional fuel tax by a controlling authority which could be used to fund the payment of shadow tolling
or to make payments to a concessionaire under a PPP arrangement. Perhaps more importantly though are
the changes to the planning regime which should allow for better integration of land transport planning both
regionally and nationally.
Whilst the framework for the establishment of PPPs for development of land transport projects has existed
since 2003, none have yet been implemented. Nor has New Zealand had the need or desire to actively
pursue the development of a more general PPP framework that applies beyond land transport in the same
way in which Australia and the UK have done. Accordingly, the way ahead for PPPs in New Zealand is still
somewhat unclear but, with the government’s announcement on 7 February 2008 of the establishment of a
joint public and private sector steering group to investigate whether a PPP could be the preferred structure
for developing the Waterview connection tunnel project in Auckland, it appears that there is some political
willpower to at least progress the discussion on whether PPP’s could be used in appropriate circumstances.
Advantages of PPPs
The advantages and disadvantages of PPPs have been widely debated here in New Zealand and overseas.
In New Zealand the debate has been largely theoretical due to the fact that there is little real life experience
of PPPs in this country. A paper published by the New Zealand Treasury in March 2006 entitled “Financing
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Infrastructure Projects: Public Private Partnerships” came to the conclusion that there was little that a PPP
could offer in the New Zealand context. This paper appears to have influenced government thinking during
2006 and 2007 but it is encouraging to see that the possibility of a PPP for a major land transport project is
now being actively investigated.
Some of the perceived benefits of adopting a PPP project delivery structure are as follows:
• For the public sector and the public in general, a PPP’s primary benefit is as a tool to deliver more and
better infrastructure and better services for a cheaper cost than what could otherwise be achieved
through traditional procurement methods. UK research has demonstrated that a greater proportion of
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PPP projects were delivered on time and on budget than traditional procurement projects.
• Since the private sector assumes responsibility not only for the construction but also for the operation of
the project, private sector bidders are forced to take a “whole of life” approach to costing. Integrating the
different functions of design, construction and operation releases the synergies between them and
discourages low capex / high opex solutions which have sometimes been the outcome of government
tendering processes which focus solely on lowest delivery cost.
• PPP contracts concentrate on the “what” not the “how”. This is an important distinction and requires a
clear understanding by the government sponsors who wish to explore PPPs as an alternative contracting
option of how a PPP will deliver the best outcomes. The UK and Australian experience has been that in
the past, the public sector specified what it required to the last detail leaving private sector contractors
with little scope to bring innovation in design and specification or to compete other than on the basis of
the lowest cost in the short term. A switch to output specifications allows innovation in design, avoids
gold plating and has been shown to deliver service benefits over the life of the contract.
3
New Zealand Treasury Policy Perspectives Paper 06/02, Dieter Katz
4
www.partnershipsuk.org.uk
Buddle Findlay law offices:
Auckland - PricewaterhouseCoopers Tower, 188 Quay Street, PO Box 1433, Auckland 1140, New Zealand
Wellington - State Insurance Tower, 1 Willis Street, PO Box 2694, Wellington 6140, New Zealand
Christchurch - Clarendon Tower, 78 W orcester Street, PO Box 322, Christchurch 8140, New Zealand
w w w . b u d d l e f i n d l a y. c o m• The public sector receives guaranteed services of a specified quality because it is usually on that basis
that the private sector partner gets remunerated. The private sector partner is motivated to perform,
failing which its income would be jeopardised. Unfortunate though it may be, commercial or market
economic incentives are often more effective at providing motivations to achieve the specified outcomes
than traditional public sector management incentives. This is not necessarily the case in New Zealand as
we have, since the introduction of SOEs, developed a very efficient corporatised model for operating
publicly owned assets.
• Risks can be allocated and managed more efficiently by allocating to the private sector responsibility for
managing and delivering service and to the public sector the responsibility for policy and legislative
frameworks. Risk transfer is a major benefit in PPPs and, as discussed below, one of the key
determinants of whether a PPP should be adopted.
• Access to capital by transferring the responsibility for funding the development of infrastructure to the
private sector under a PPP. This can be a particular advantage where a government sponsor has
funding constraints but it is usually not the only justification for adopting a PPP model in industrialised
countries. Many commentators criticise the funding motivation for undertaking PPPs. Because
governments are usually able to borrow money more cheaply than the private sector, it is argued that
projects should be financed by public debt rather than private finance. This argument however is
somewhat simplistic as the true costs of a project to government should be viewed as not just the cost of
raising the debt but also the costs of assuming the risks of the project. This cost of the risk of the project
has often been undervalued in traditional government contracting. It is also worth noting commentary
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from recent Australian reports which observe that the difference between private sector and public
sector borrowings is that the private sector capital markets explicitly price in the risks of a project. This is
not the case for the public sector borrowing which does not distinguish between general government
debt and debt for specific projects. The result is that if one focuses solely on the government’s cost of
borrowing, it ignores the implicit subsidy by taxpayers of project risks which aren’t reflected in the cost of
finance.
• The achievement of off-balance sheet financing may be seen as an advantage of PPPs. Given the new
IFRS accounting rules which apply in New Zealand and internationally and the New Zealand
government’s own accounting practices, the ability to achieve off-balance sheet financing for a major
infrastructure project under a PPP structure is likely to be limited and this is not of itself generally a
motivation for choosing PPPs over other potential structures but it may be a beneficial outcome.
• The creation of opportunities for technology transfer from the private sector to the public sector. This is
less likely to be a major factor in a roading project where the technology is largely well established and,
in New Zealand’s case, Transit is already a market leader in the design and construction of roading
infrastructure. Where a private sector entity may be able to add benefit is in the associated services
such as tolling technology or, if the project requires innovative engineering solutions. Once again
though, this is only one potential advantage of PPP and technology transfer can also occur under other
structures such as project alliances.
5
Public Accounts Committee NSW – Enquiry into Public Private Partnerships Report 16/53 (159) June 2006 and Review of
Partnerships Victoria Provided Infrastructure by Peter Fitzgerald January 2004
Buddle Findlay law offices:
Auckland - PricewaterhouseCoopers Tower, 188 Quay Street, PO Box 1433, Auckland 1140, New Zealand
Wellington - State Insurance Tower, 1 Willis Street, PO Box 2694, Wellington 6140, New Zealand
Christchurch - Clarendon Tower, 78 W orcester Street, PO Box 322, Christchurch 8140, New Zealand
w w w . b u d d l e f i n d l a y. c o mDisadvantages of PPPs
Some of the regularly discussed disadvantages and criticisms of PPPs are as follows:
• PPPs are often criticised as having disproportionately high costs associated with their implementation,
both for the sponsoring government entity and for the private sector entities participating in the tender
process. This high cost discourages private sector entities from becoming involved in a PPP tender
process which in turn reduces the competitive tension in the process and potentially affects the value for
money which might be achieved by adopting a PPP structure. Various statistics provided by
commentators from a number of jurisdictions give a wide range of bid costs depending on the nature of
the project with some projects having bid costs of over $10 million. There are a number of ways in which
this often valid criticism can be addressed. In Australia and the UK the government entities responsible
for administration of PPPs have attempted to address the issue by:
- development of very clear standardised criteria for PPP projects which apply to all government
sectors seeking to utilise the structure;
- development of standard form documentation;
- improving the quality and clarity of tender documents, particularly with respect to the output
specifications required;
- not requiring the tenderers to have committed sources of finance to be locked in at the expression of
interest stage; and
- using a more consistent and transparent risk allocation process aligned with published guidance
material.
New Zealand clearly does not have the luxury of having a well developed framework for PPPs of the
standard of the Partnerships Victoria model. In any PPP project entered into in New Zealand it will
however be very important to have very clear criteria for the projects which are under consideration and
a transparent tender process. This process should include early and full disclosure of the assumptions
and calculations which are used in the public sector comparator developed by the government sponsor
to assess any bids against a standard government procurement model. Also, government sponsors will
need to have or develop the skills to actively manage the PPP process. This will involve a commitment
to cost and time by the sponsor. PPPs are not a solution that allows the sponsor to award the contract
and walk away until the end of the concession. The arrangement is after all a partnership which requires
active input over the life of the project from both parties.
• In a small market like New Zealand there is no benefit in adopting a PPP structure as there are not
sufficient numbers of experienced private contractors to create the competitive tension required to
achieve the best value for money. It is true that New Zealand is not a large market. However, there are
a number of world class contracting entities operating in New Zealand who have the capability not only
to construct but also manage and finance a major infrastructure project. The expectation is that, given
the proximity and similarity of the legal and political systems, any PPP project in New Zealand would be
likely to attract interest from entities who currently undertake similar projects in Australia and a
consortium between one of the local construction companies and a foreign infrastructure investor and
operator is a likely and sensible outcome.
Buddle Findlay law offices:
Auckland - PricewaterhouseCoopers Tower, 188 Quay Street, PO Box 1433, Auckland 1140, New Zealand
Wellington - State Insurance Tower, 1 Willis Street, PO Box 2694, Wellington 6140, New Zealand
Christchurch - Clarendon Tower, 78 W orcester Street, PO Box 322, Christchurch 8140, New Zealand
w w w . b u d d l e f i n d l a y. c o m• PPP arrangements are inflexible and result in the government subsidising the private sector. An obvious
concern given that PPP agreements are typically long-term arrangements is that both the public sector
party and the private sector party will have to ensure that the agreement has clear provisions to deal with
a change in circumstances. An example of the type of situation that will need to be considered is where
the pricing of the service offered under the PPP or the tolls charged will escalate unreasonably or fail to
keep step with the market pricing if the market is expected to fall. The risk from the government sector’s
perspective is that this could lead to the private sector entity making “super profits” which would be
politically unacceptable. Equally, from the private sector’s perspective, if the PPP arrangement has
transferred risks of operation to the private sector party such as, in the case of a transport project, traffic
demand risk, there is an equal argument to justify the private sector party earning and keeping any
upside given that it is also taking the downside risk. These criticisms often overlook the obvious
‘counter-factual’ which is that if the project had been developed using traditional government
procurement methods the government would be assuming the same risks as the private sector party
and/or, on the flipside, enjoying the equivalent benefit. The “super profits” question has been addressed
in the UK and Australia by including in the contract documentation provisions to ensure that any such
gains which arise as a result of a change in the underlying assumptions upon which the project was
originally priced are shared between the public and the private sectors. These benefit sharing provisions
generally also apply to the situation where the private sector refinances its initial investment at better
rates, improving on the assumptions in the original pricing model. The key of any mechanism that seeks
to address changed circumstances is to ensure that the fundamental risk allocations and economics of
the project are maintained.
• PPPs carry an implicit government guarantee and therefore should be priced as government risk. It is
natural for public sector sponsors to worry about service delivery failure of its counterparts. It is true that
in Australia and elsewhere there have been a number of PPP projects which have failed and which have
required the government sponsor to restructure the project or to step in and assume the ownership and
operation of the project. Interestingly, in many projects in the UK and Australia which have suffered
difficulties, the difficulties often arose due to deficiencies in the establishment of the initial criteria and
scope of the project rather than failure by the contractor to perform its obligations. For example, the
Spencer Street Station redevelopment in Melbourne imposed unrealistic working requirements on the
contractor which led to excessive delays. One could argue that the contractor should not have bid so
aggressively when the working constraints were disclosed as a condition of the tender. However, the
government sponsor also needs to be realistic in its risk allocation and in the setting of the performance
standards. Failure of a private sector counterparty is also a risk for a government sector entity entering
into a PPP contract. Some of these risks can be mitigated by parent guarantees, bonds and other
common contractual provisions. Equally, the private sector contracting entity should not assume that
because they are contracting with a government entity and providing a public service, that they will
always be kept whole if any of the assumptions on which they have based their involvement in the
project change over time and price the risks they are assuming accordingly.
• Some critics of PPPs claim that they are equivalent to privatisation. This appears to be a philosophical
objection about the line between what is privately provided and what the state should provide. There is
no right or wrong answer to this critisicm but it is worth noting that the private sector contracts
extensively with the government sector for provision of what are effectively public services already. The
only difference with PPPs is the length of the contract and the extent of the responsibilities which are
passed to the private sector. In all PPPs, the government entity will continue to own and have ultimate
control over the asset and the provision of the services. This is particularly so in the New Zealand land
transport context given the framework outlined in the Land Transport Management Act where the
government continues to own the land and will have ultimate control as the contracting party under the
concession agreement to terminate the concession in the event that the private sector entity fails to
perform its obligations.
Buddle Findlay law offices:
Auckland - PricewaterhouseCoopers Tower, 188 Quay Street, PO Box 1433, Auckland 1140, New Zealand
Wellington - State Insurance Tower, 1 Willis Street, PO Box 2694, Wellington 6140, New Zealand
Christchurch - Clarendon Tower, 78 W orcester Street, PO Box 322, Christchurch 8140, New Zealand
w w w . b u d d l e f i n d l a y. c o mPractical issues
It will be important in any PPP project to very clear about the reasons why the PPP structure is being
adopted for that particular project. PPPs are not right for all projects. The underlying criteria for the project
will need to be established based on the financial and political consideration of the government sponsor. In
a New Zealand context where the government is able to obtain financing at a much cheaper rate than the
private sector and, at least currently, has budget surpluses, the justifications for adopting a PPP project will
need to be based on a clear “value for money” criteria which is an expression of the economy, efficiency and
the effectiveness of the PPP structure over a more traditional procurement method. In accordance with
6
Australian guidelines , the major factors to be considered when assessing value for money in PPP
programmes are, in addition to basic cost considerations:
• Risk transfer – relieving the government entity of the substantial, but often under-valued, cost of asset-
based risks
• Whole of life costing – integrating upfront design and construction costs with ongoing service delivery
and operation, maintenance and refurbishment costs
• Innovation – providing wider opportunity and incentive for innovative service delivery solutions
• Asset utilisation – providing greater opportunities to generate revenue from the use of the asset by
third parties (which may reduce the cost that government would otherwise have to pay as a sole owner
or user)
• Output based specification – linking payment for the asset to the quality and timing of the service
delivery
• Performance measurement and incentives – securing the delivery of the services to the required
standards and encouraging continuous improvement in a manner which is more efficient than the public
sector could achieve
• Private sector management skills – delivering management and operational efficiencies by using
private sector management skills.
It is suggested that these are the same consideration that should apply in New Zealand as well.
The value for money of a project is easier to demonstrate where there has been effective price-led
competition and it is therefore in the interests of the government sponsor to procure a high level of
competition during the bidding stage if possible. The bids received from potential PPP participants should
ideally be prepared in a manner which is consistent and allows for valid comparisons both between the bids
and against the public sector comparator. For this reason it is important to design a robust and transparent
tendering process. The design of the tender process also needs to be carefully balanced to ensure that the
government sponsor does not use any bargaining power which arises from the competitive nature of the
process to transfer risks in the project to the private sector which cannot reasonably be managed by them or
which it is not appropriate in the long-term interests of the project to transfer. If this does occur, either the
private sector participants will wish to charge higher risk premiums or, if the price is driven down so low due
to the competitive nature of the bidding process, projects may ultimately fail because the risks that do arise
have been allocated to the parties where they cannot be well managed.
6
Australian Government Department of Finance and Administration - Australian Government policy principles December 2006.
Buddle Findlay law offices:
Auckland - PricewaterhouseCoopers Tower, 188 Quay Street, PO Box 1433, Auckland 1140, New Zealand
Wellington - State Insurance Tower, 1 Willis Street, PO Box 2694, Wellington 6140, New Zealand
Christchurch - Clarendon Tower, 78 W orcester Street, PO Box 322, Christchurch 8140, New Zealand
w w w . b u d d l e f i n d l a y. c o mIt should also be remembered that financiers of the private sector participants will have their own view on the
appropriate risk allocations within the project and, given that financiers will be providing a large portion of the
investment in the project, their requirements will be a major influence on the final risk allocation in most PPP
projects. For this reason, government entities should expect to be required to enter into tripartite
arrangements with the private sector partners’ financiers under which the financiers obtain step in and cure
rights and certain direct contractual obligations against the government sponsor of the project. These
agreements should be seen as beneficial to the government sponsor as they provide good leverage to the
government sponsor if the private sector partner does suffer financial difficulty. From the private sector
partner’s perspective, risk management is also very important. The concessionaire or project company will
most likely be a special purpose vehicle which will itself enter into separate contracts with construction
contractors, operators and financiers. Through those contracts the project company will be seeking to ‘back
to back’ as much of the project risks as possible. This is a difficult balancing exercise and one which
requires skilled negotiation and professional advice.
It is a well known truism in any project financing that success or failure of the project is dependent on
accurate identification of risks and allocation of project risks to the parties who are best able to manage the
risks. Some of the major risks in any project which will need to be considered, whether it is a PPP or
otherwise, are:
• Design, construction and commissioning risks – One of the government sponsor’s objectives in PPP
transactions should be to take advantage of the private sector’s ability to bring design innovations and
construction expertise to the delivery of the projects. In almost all PPP deals the private sector party will
be required to assume the risk for the design, construction and commissioning of the facilities. The
government sponsor will need to have provision in the concession agreements to allow for appointment
of its own independent technical advisers to monitor delivery of the project on behalf of the government
sponsor and to carry out valuation and certification roles both during construction and operation phases.
• Completion and delay risks – In any construction contract this is a significant risk which is normally
assumed by the contractor. PPP deals are no different. The private sector entities should, subject to a
few limited exceptions, have an absolute obligation to bring the facilities to completion by a pre-
determined date. There will be extensive negotiation over the circumstances which entitle the private
sector entity to extensions of time and the amount of any penalties payable for delay in achieving
completion.
• Ground conditions and geotechnical risks –This is a standard risk in any major construction project
which is generally passed to the construction contractor. For roading projects and other civil engineering
works it is obviously a key risk and one which is likely to lead to delay if unexpected geotechnical
conditions are discovered. Arguably neither party is in a better position than the other to manage this
risk and therefore it is generally a point for negotiation.
• Planning approvals – Generally, the government sponsor should be responsible for obtaining the
planning and Resource Management Act consents for the project although the project company would
take responsibility for obtaining any variations to the approvals which will be required as a result of
design modifications and, any subsequent renewals of any consents. In the New Zealand context, given
the importance of any likely PPP project, it is suggested that it would be appropriate for the government
sponsor to assume the risk of obtaining necessary RMA consents. It should also be incumbent on the
government to obtain all of the necessary land rights by exercising its rights under the Public Works Act
or otherwise, rights which cannot be delegated to the private sector.
Buddle Findlay law offices:
Auckland - PricewaterhouseCoopers Tower, 188 Quay Street, PO Box 1433, Auckland 1140, New Zealand
Wellington - State Insurance Tower, 1 Willis Street, PO Box 2694, Wellington 6140, New Zealand
Christchurch - Clarendon Tower, 78 W orcester Street, PO Box 322, Christchurch 8140, New Zealand
w w w . b u d d l e f i n d l a y. c o m• Facility management and upgrade – Generally project companies will be required to operate and
maintain the facilities under a concession agreement in accordance with best practice and the project
objectives. These will generally oblige the concession company to meet minimum maintenance and
operating standards but also to undertake improvements where appropriate. This risk of being required
to make improvements is one that should be expected to be passed to the project company in most
cases unless the improvements required are as a result of a change in the service standards imposed by
the government sponsor in which case the project company should expect to be compensated for the
costs of any such improvements.
• Refinancing risks – Any refinancing by the project company will be subject to the approval of the
government sponsor. In order to avoid the possibility of the project company profiting from a refinancing,
in recent transactions in Australia and the UK the government entities sponsoring the project have
required a share of any financial benefits arising from the refinancing undertaken by the project
company. The exception to this will be if the refinancing has been expressly contemplated in the original
financial model for the project (in which case the benefit arising from the refinancing has already been
factored into the bid price) accepted by the government and any refinancing gain realised should
therefore belong to the project company. This risk also arises from the fact that the project company is
unlikely to get financing that is of the same term as the concession agreement. There is therefore the
risk that the project company is unable to refinance when its initial financing expires leading to a default.
This risk should be a project company risk not a government sponsor risk.
• Changes in law – Project companies generally take the risk of changes in law from non-discriminatory
or non-specific legislation although price change negotiations if this risk materialises may be permitted in
some cases. The project company would normally expect to be able to recover from the government
sponsor cost increases arising from any discriminatory changes in law or specific changes in law
affecting the project such as, for instance, if the government places a new restriction on the level of tolls
which can be charged by the project company or the government introduces other legislation which
adversely affects the expected traffic flows on the relevant infrastructure. In such circumstances, it
would be usual to expect the concession agreement to contain a renegotiation clause which will apply if
certain specified events occur such as a law change, force majeure event, act of prevention or other
project specific events. If a renegotiation event occurs the project company should be entitled to
negotiate the compensation to redress the financial impact of that event. These negotiations should
seek to restore the project company’s ability to service its senior debt and to restore a notional initial
investor to their original base case equity return from the project either by extending the length of the
concession term, increasing the tolls or charges that the project company can collect or some other
mechanism. Such a renegotiation clause is the quid pro quo for the expectation by the government
sponsor to share in any super profits which may be realised by the project company. In a New Zealand
context however, such a provision in the concession agreement will require careful consideration given
the parameters set out in the Land Transport Management Act which prohibit concession agreements
from containing any fetter on the government’s ability to undertake or permit alternative sustainable
transport options.
The Australian Federal Government Department of Finance and Administration has published a number of
7
papers in relation to PPPs including one which specifically addresses risk management. It is a guideline for
any government entities contemplating PPPs as how best to manage the identification and analysis of risks
likely to arise in any project. This paper and the practices which it recommends are consistent with the
Australian/New Zealand risk management standards (AS/NZS4360: 2004) and should be a useful guide for
considering the risks which may arise and the best method of managing those risks for projects in
New Zealand.
7
Australian Government Department of Finance and Administration – Public Private Partnerships: Risk Management December 2006
Financial Management Guidance No. 18.
Buddle Findlay law offices:
Auckland - PricewaterhouseCoopers Tower, 188 Quay Street, PO Box 1433, Auckland 1140, New Zealand
Wellington - State Insurance Tower, 1 Willis Street, PO Box 2694, Wellington 6140, New Zealand
Christchurch - Clarendon Tower, 78 W orcester Street, PO Box 322, Christchurch 8140, New Zealand
w w w . b u d d l e f i n d l a y. c o mAnother practical challenge for any public sector entity proposing to enter into a PPP is the development of a
public sector comparator or benchmark against which the PPP proposals can be judged. Because the
alternative public sector procurement mechanism for the project is likely to be significantly different to the
PPP structure, it is important that the public sector comparator is adjusted to reflect the transfer of risks to
the private sector inherent in the PPP structure and other benefits which the public sector may obtain under
a PPP. Development of a public sector comparator which is a useful analytical tool guiding the value for
money evaluations, assessment and management of risk and contractual negotiations is a challenging
exercise and should not be underestimated. It is likely to demand a significant amount of time and cost for
the government sponsor.
The development of a public sector comparator needs to be a two stage process involving a raw PSC or
base costing which includes all the capital and operating costs (both direct and indirect associated with the
government constructing, owning, maintaining and delivering the service or asset over the same period as
the PPP proposal). This raw PSC then needs to be adjusted for transferable risks (the risks which the
government would bear under a traditional approach but is likely to transfer to the private sector), retained
risks (the risks which the government proposes to bear itself under the PPP arrangement) and a competitive
adjustment (an adjustment which removes the net competitive advantages that accrue to a government
agency by virtue of its public ownership (eg. tax exemptions)). There has also been debate in Australia as to
the appropriate discount rate which should be applied to the public sector comparator to calculate a net
8
present value of future cashflows . The risk adjusted discount rates are an attempt to incorporate in the PSC
an assessment of the systemic or market risk of the project as defined in various capital asset pricing
models. Identifying the market risks which are transferred in a PPP model as opposed to a public
procurement is inherently difficult and involves an element of “crystal ball gazing”. The debate on this issue
only serves to underline the importance of developing a public sector comparator which is realistic but which
is not over engineered. The public sector comparator should only be one factor in conclusions as to whether
or not a PPP represents value for money, particularly for large or one-off projects where the analytic
comparison should be against a range of benchmarks rather than simply one alternative public procurement
model which is then risk adjusted.
There is also the question of, if a public service comparator is used, whether or not the underlying risk
assumptions are disclosed to the bidders so that they can incorporate them into their own base case models.
Generally, the government sponsor would be served by increased transparency of the underlying
assumptions in the public service comparator so that the private sector bidders are able to bid on the same
assumptions and therefore enable the bids to be compared on a “apples for apples” basis. If the private
sector bidders are unaware of the assumptions which are being used by the government sponsor to
construct the public sector comparator and to analyse their bids, they will potentially either under or over
value the risks adjustments leading either to a higher risk premium being incorporated in the bid price or,
alternatively under pricing risk which could lead to difficulties for the project during its life.
Lessons for New Zealand
The debate over whether PPPs are an appropriate structure for the development of roading infrastructure in
New Zealand has been underway for some years now. There is, unfortunately, a reasonable degree of
rhetoric in the debate, some of which is uninformed and misleading. Because of the nature of the projects
(provision of ‘public’ assets or services) the issues surrounding PPPs appear to be inherently political which
tends not to assist in the clarity of the debate. On 7 February 2008 the issue of PPPs was put back on the
public agenda in New Zealand when Ministers Michael Cullen and Annette King announced that a steering
committee was to be established to investigate the possibility of utilising a PPP to develop the Waterview
Connection, a $2 billion tunnel project which will complete the western ring route in Auckland.
8
Review of Partnerships Victoria Provided Infrastructure – January 2004 ibid
Buddle Findlay law offices:
Auckland - PricewaterhouseCoopers Tower, 188 Quay Street, PO Box 1433, Auckland 1140, New Zealand
Wellington - State Insurance Tower, 1 Willis Street, PO Box 2694, Wellington 6140, New Zealand
Christchurch - Clarendon Tower, 78 W orcester Street, PO Box 322, Christchurch 8140, New Zealand
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