By Paul Buetow, solicitor, Kensington Swan
There has been a lot of discussion about Public Private Partnerships (PPPs) over the last few years. This has included a lot of press about the possibility of a PPP being used for the Penlink (the Weiti toll road) and more recently the announcement of an investigation into the feasibility of progressing the Waterview Connection of the Western Ring Route as a PPP. Other projects which could be considered for a PPP include the completion of the Waikato Expressway between Auckland and Hamilton, and Transmission Gully in Wellington.
So what is a PPP and how does it differ from other forms of procurement?
Put simply, a PPP is a contracted relationship between the public and private sector to deliver an output or service. However, in order to understand how a PPP differs from other procurement models and why it has been used around the world it is necessary to compare it to the different procurement options that can be used.
The traditional procurement model adopted in New Zealand is a public authority (such as Transit or a local authority) entering into a consultancy agreement with an engineer or architect, a construction contract with a contractor, and a financing contract with a bank or financier (if required). These contracts are largely based on separate parties having separate responsibilities, with the public authority usually taking over responsibility for the operation and maintenance of the asset or awarding a separate contract with an operate and maintain contractor.
There are variations on this model including design-and-build contracts which require the contractor to take responsibility for the design as well as the construction of the contract works (and which usually require the novation – or transfer – of the principal’s design consultants to the contractor at the time of signing the contract or the entering into of separate contracts with these parties). There are also design-build-and-operate-and/or-maintain contracts which are becoming more widespread and which reflect the importance of recognising the whole of life costs of a project (the capital and maintenance costs) and not just the upfront capital costs. Guaranteed maximum price contracts (GMPs), (which place a cap on the lump sum price offered) alliancing contracts and collaborative working arrangements are also becoming widespread.
All of these procurement methods rely on the financing of the project to be provided by the public procurement authority either off their own balance sheet or through external loans. This requires either the money to be available in the public authority’s budget or willingness for the public authority to be in debt.
What differentiates a PPP from these other procurement methods is that the public sector transfers the financing aspect of the project to the private sector. The private sector procures the money to pay for the construction of the asset and in return is granted a concession to manage the asset on behalf of the public authority for a fixed period of time for the payment of a monthly service charge. The private sector’s performance is measured against the public sector’s requirements and deductions are made from the monthly service charge if standards are not met.
In order to ensure that this arrangement is best value to the public sector, a great deal of the project risk is also transferred to the private sector. For example, the risk of the project completing late or costs running over is entirely with the private sector. This means that the public sector’s exposure over the duration of the contract is greatly reduced providing budget certainty. In addition, the fact that the public sector is paying for an asset over a long period of time rather than entirely up-front (in the same way as a mortgage), enables public money to be freed up for other projects.
You may have heard of the terms private financed projects (PFPS) or private finance initiatives (PFIs). These terms are used to discuss projects undertaken in Australia and the United Kingdom that work on this basis. The term ‘PPP’ is used loosely but in relation to projects such as Penlink and Waterview when people talk about PPPs in New Zealand they are talking about PFI/PFPS style projects.
PPP projects involve the agreement of complex contracts, that must carefully deal with both the long term obligations and substantial risk transfers that are part of a PPP. In addition, extensive and careful due diligence is required both from a legal, technical and financial nature as the external funders involved need to be satisfied that their investment in the project is sound. Given this, PPP procurement is best suited to large complex projects of a high capital value. A project such as Waterview meets this criteria as it is of a very substantial value and in the absence of private sector funding would absorb significant public funds. PPPs are usually suited to smaller and simpler projects and should never be regarded as a single solution to all of NZ’s infrastructure needs.
PPPs are used in only about 10-15 percent of infrastructure projects in Australia and the UK, and would be used far less in New Zealand. Nevertheless PPPs are a highly useful option that governments across the western world have used in conjunction with other methods to substantially improve their overall infrastructure. Where appropriate they should be considered as part of the procurement options that are available to meet New Zealand’s infrastructure needs.
• This article is not a substitute for independent legal advice.
Contractor Vol.32 No.3 April 2008
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