Trend update: Public Private Partnerships (PPPs)

We are expecting PPPs to become more prevalent during this electoral term, as they emerged as a theme from Jones’ recent Fund announcement, National’s coalition agreements, and the current government’s fiscal direction paired with focus on hard infrastructure. The recent Infrastructure NZ event on the $1.2B Regional Infrastructure Fund gave a further glimpse into the government’s direction on infrastructure. 

A key phrase alluded to by the Hon. Shane Jones during the Fund’s launch was public-private partnerships (PPPs). He referred to the role of private financing to deliver the four-lane highway alternative to the Brynderwyns. But the Fund will not be solely limited to the Brynderwyns project. The projects delivered through the Fund, in Jones’ words, will make use of “smart, blended capital” on a “modest scale”. 

This commitment to using private financing is consistent with National’s coalition agreements, with the ACT coalition agreement explicitly “allowing PPPs, tolls and value capture rating to fund infrastructure”. It is also consistent with the fiscally constrained environment that the government is currently operating in.  When government funding is limited, there is room for private capital to step in and help bridge the gap. 

What is a PPP? 
The NZ Infrastructure Commission defines a PPP as “a long-term contract for the delivery of a service, where provision of the service requires the construction of a new asset, or enhancement of an existing asset, that is financed from external sources on a non-recourse basis, and full legal ownership of the asset is retained by the Crown”.

Key features of a PPP are:

• Construction of infrastructure assets for public use e.g. roads, hospitals, prisons, schools.
• Public and private sector involvement and risk allocation (typically financing, design, construction and maintenance provided by a private entity, with public ownership).
• Long-term contract (generally 20-35 years).
• Payment for performance (once the asset is operational). The payment may be user-pays e.g. toll roads, or government-pays e.g. government makes periodic payments, once operational. 

In 2015, the Treasury described two types of PPP models:

1. Design, Build, Finance, Maintain and Operate (DBFMO) – often used to maximise innovation, with the private entity providing all services e.g. a prison.
2. Design, Build, Finance and Maintain (DBFM) – where the procuring entity retains operational responsibility e.g. schools.

Recent examples of PPPs in NZ include:

• Transmission Gully: NZ’s first PPP road project ($1.25B, 25-year contract).
• Puhoi to Warkworth motorway ($710M, 31-year contract).
• Hobsonville Point Primary and Secondary Schools ($100M, 25-year contract).
• Waikeria Prison ($750M, 25-year contract).

Examples of PPPs in Australia include:

• Sydney Harbour Tunnel ($670M AUD at contract award in 1987, 30-year contract).
• Melbourne’s Southern Cross Station ($309M AUD at contract award in 2002, 34-year contract).

Transmission Gully became a well-known example of a PPP, due to its highly-publicised timeline and budget increases, as well as being the first project of its kind in NZ. This illustrates how PPPs can be a constant journey of careful planning and on-going management and delivery (including risk mitigation), to ensure value for money and quality outcomes are continually sought and secured.

Key aspects for PPPs that procuring agencies should be aware of include:

• Carefully considered feasibility studies/ business cases.
• Project risks should inform payment models, and other commercial, contract and governance requirements. 
• Need to plan for and undergo a robust supplier selection process (including negotiations).
• Strong ongoing management of the PPP contract.

Conclusion
We see PPPs as an opportunity for both central and local government, based on Height’s experience in the infrastructure sector and working with multiple central government ministries.

The opportunities PPPs provide are immense. They range from the build and long-term upkeep and maintenance of assets, through to spreading risk and reduced impact to ratepayers in the short-term. Recent engagements Height has had with the public and private sector have indicated a positive reaction to the direction of PPPs that the Government is taking, and we are finding more clients (new and old) approaching us to help put this into reality. 
 

Photo by Jared Murray on Unsplash