Implementation Of Public Private Partnerships In New Zealand Construction Essay

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There has been a growing tendency in involving the private sector in providing high-standard infrastructure to meet the needs of rapid economic growth. Many countries are now feeling the success of implementing Public Private Partnership (PPP) projects in places such as Western Europe, United States, and Australia has been attractive alternative for procuring public works projects instead of the usual traditional methods. With benefits such as risk transfer, increased transfer, increased efficiency and innovation and private financing governments around the world are keen to encourage PPP projects.

In New Zealand, the private sector has been involved in the delivery of major public projects and related services at both central and local government level for many years. Public entities have set up various types of arrangements for capital projects with the private sector involvement- such as contracts to design, build and operate facilities; joint ventures; and franchise agreements. There was also evidence of some interest in the public sector in exploring PPPs as a means of financing and delivering new public projects in the future.

Public-private Partnerships have been applied worldwide in a range of sectors. There are examples of both successful partnering arrangements and notable failures. But little research has been conducted previously within New Zealand context on how to apply the international best practices with respect to the specific environment in NZ. Thus, it is worth profoundly exploring this area of research by examining the existing practices in New Zealand and investigating the international best practices which are suitable to import.

Actually, New Zealand is not completely new to PPP idea, but New Zealand still needs to undergo a long way of exploration and investigation to accommodate the application of PPP projects. This is because New Zealand has its own specific environment such as small economy, strong public opposition, and impediments in legislations, so that international practises cannot be directly replicated without modifications. In addition, the existing literature focusing on PPPs in New Zealand environment remains insufficient to provide practitioners workable procurement procedures to carry out potential PPP projects. The only government guideline concerning PPPs - Guidance for Public Private Partnerships (PPPs) in New Zealand lacks of possible and detailed solutions for the tricky issues embedded in PPP procurement process.

Public Private Partnerships in New Zealand

In New Zealand private sector has been contracting with public entities for providing public infrastructure at both central and local government level for many years. A number of examples of partnering between public and private sector include design, build, and maintain (DBM) projects, build, operate, own, transfer (BOOT) projects, design, build, maintain, and operate (DBMO) projects. There appears to be a particular interest in the New Zealand public sector in project alliances. New Zealand Transport Agency has pioneered project alliances for roading schemes by constructing the Maukau Extension, Victoria Park Alliance and the New Market Viaduct which is currently under construction phase.

In spite of the participation of private sector of these projects, now my research focuses on Public private partnerships. For example, the Auckland indoor arena-Vector Arena was procured under BOOT scheme through the participation of private consortium named QPAM Ltd led by Jacobsen Venue Management. QPAM Ltd, as the PPP company, builds, operates and maintains the facility and after 40 years, ownership of the arena will be transferred to Auckland City Council without further payment. Auckland City Council invested $71.1 million and QPAM devoted $12.75 million, which implied that the majority of the project funding is from the local government not the private financing. This project, therefore, cannot be seen as "real" PPP project.

Another example is Wellington Clear Water project. The contract was awarded to a UK-based company to design, build, and operate the plant for 25 years, and Wellington City Council paid the company a lump sum to design and build, followed by an annual operating fee. The project funding did not involve private financing. Furthermore, the payment was not based on service performance but in the form of lump-sum payment, which were not in line with the basic elements of PPPs.

Now Government is planning to undertake New Zealand First Prison at Wiri in South Auckland as a Public Private Partnership (PPP). The proposed 25-35 year concession will include the provision of custodial services as part of the operation of the 1000-bed male prison within the current Corrections framework. The New Zealand Government has also signalled a desire to see Maori representation, or Maori-specific services, incorporated into the successful bid. The private partner is expected to design, build, finance, maintain, and operate the new prison. The expected timeline for the project are

Expressions of interest- fourth quarter, 2010;

Request for proposals- first half, 2011;

Commencement of construction- second half, 2012; and

Commencement of operations- end of 2014

Research Aims and Objectives


This Research Aim is to Investigate on the Implementation of Public-private Partnerships (PPP's) in New Zealand Construction Industry.


In order to achieve the aim the following objectives were identified for this research:

Understand the current application situations of PPPs between public and private sector in New Zealand.

Examine the effectiveness and efficiency of using PPP strategies from past experiences in New Zealand.

Investigate the experience of overseas jurisdictions in using PPPs and to extract best practises which can be applied to New Zealand environment.

1.4 Statement of Problem

The overarching research questions addressed is:

How to apply the international best practices on PPPs to New Zealand with respect to the specific environment to facilitate the PPP procurement process prior to reaching financial close phase?

Sub-questions considered are:

How many kinds of PPPs existing in New Zealand according to the level of the private sector's participation (such as DBO, DBM, BOOT, DBFO)?

What are the obstacles in the implementation of each type of partnering?

What are the critical success factors (CSFs) leading to the successful implementation of partnering arrangements?

Literature Review

2.1. Introduction

Public Private Partnership (PPP) is a procurement approach where the public and private sector join forces to deliver a public service or facility. In this arrangement normally both the public and private sector will contribute their expertise and resources to the project and share the risks involved. The definition of PPP may differ slightly between different jurisdictions, depending on which part of the arrangement the importance is focused on. For example, PPP is defined by the Efficiency Unit of the Hong Kong Special Administration Region (HKSAR) government as any agreement where the public and private sectors works together to deliver a public project.

"Arrangements where the public and private sectors both bring their complementary skills to a project with varying levels of involvement and responsibility, for the purpose of providing public private services or projects." (Efficiency Unit 2008a)

Whereas, according to the New South Wales Government the term PPP is used to mean:

"An arrangement for the provision of assets or services, often in combination and usually for a substantial or complex 'package', in which both private sector supplier and public sector client share the significant risks in provision and/or operation." (Infrastructure Implementation Group, 2005)

The definition by Canadian Council for Public Private Partnerships is quoted below:

"A cooperative venture between the public and private sectors, built on the expertise of each partner that best meets clearly defined public needs through the appropriate allocation of resources, risks and rewards." (The World Bank, 2003)

In these definitions there is an emphasis that both the public and private parties share a large proportion of the risks in a PPP project. In reality it is not always that an equal split of risks is experienced. Naturally, each party will want to pass on more risks to the other party. It is noticed that this occurrence is more common in developing countries or jurisdictions where the government has less experience in this alternative procurement method. Such public-private partnerships can encompass any partnering relationship between the public and private sectors which produces an asset or deliveries a service. However, this research uses this term to refer to the common forms of PPPs which are made up by five basic components (design, build, operate, finance and ownership) in different combinations for the delivery of a service, where the provision of the service requires the construction of a facility or asset, or the enhancement of an existing facility. Under a PPP most or all of these components are undertaken over an extended period of time by a concession company which includes designers, builders, operators and financiers. At the end of a PPP, the partnership ends and ongoing responsibility for the asset is usually returned (or transferred) to the public sector partner. To sum up, these types of partnerships between public and private sector can be defined as:

"A long-term contract between the public sector and the private sector covering Planning, design, construction, operation and financing of public infrastructure And services" (Waterview Procurement Project Steering Group, 2008)

The following part of this report is concerned with PPPs of these types, which transfer the "ownership" of risk wholly or partly to the private sector partner.

2.2Traditional Methods of Procuring Public Works

Procurement is broad in scope. The OAG defines procurement as:

… all the business processes associated with purchasing, spanning the whole cycle from the identification of needs to the end of a service contract or the end of the useful life and subsequent disposal of an asset. (NZTA Procurement Manual, 2009)

As Per Technical Paper prepared by the Environment, transport and works Bureau (2004) of the HKSAR government, in the typical public works the selection is based on 3satges. In first stage the Standard Procurement is selected. In the second stage a Sub-category will be selected for procurement and in the final stage the major areas requiring improvement in performance will be identified. Under all this Procurement categories, there are number of sub-categories also. This is listed below in Fig: 1

Designer Led

Lump Sum Contract

Remeasurement contract

Term Contract and

Prime Cost Contract

Design and Construct

Employer's Designer Novated

Independent Designers

Contract Designer

Design, Construct and Operate

Design Build Operate (DBO)

Prime Contracting

Finance, Design, Construct and Operate

Private Finance Imitative (PFI)


Build Operate Transfer (BOT)

Traditional Vs PPP

Client plays the major role and it takes the lead in both approaches. In traditional approach client department will ask for the other relevant works department to design their desired facility. But in the PPP approach client will define their required facility in terms of the service required. After this, Client department will engage external experts and as a group they both will monitor the project.

In traditional approach after planning and approvals are obtained, the works department would call for tenders from private contractors to construct or to design and build the facility. On the other hand, in a PPP approach the client group would prepare an output-based performance specification to request proposals for a private sector consortium to design, build, finance, operate and maintain the facility for a specified period.

For both approaches the client department would then conduct a consultation with the general public and Legislative Council panels before obtaining financial endorsement. The successful bidder in a traditional approach would be the one that satisfies the minimum requirements specified by the client department with respect to the quality of service or product, also scores the highest mark in the tender evaluation which weighs both the technical and cost aspects. In a PPP approach, the successful consortium bidder would be the one that satisfies the mandatory requirements specified with respect to the ability of the facility to deliver the service required, the quality of design construction and operation and on terms which provide best value for money.

Once the contact has been awarded the works department would monitor the construction process under a traditional approach. In a PPP approach, the client department advisors would deal solely with the consortium only. The consortium would also manage the specialist contractors involved.

After completion of a traditional project the works department would inpsect the works and upon satisfaction payment would be made to the contractor. On the other hand, in a PPP approach the client department or a third party would verify the facility to be fit for the purpose before payment is made to the consortium.

Types of Public Private Partnerships

Public Private Partnerships come in variety of forms and no two PPP projects are exactly alike. Most of them will be similar ways but the name is differed depending on the country it is used in, whereas in some cases there are major differences to the approach. Some of the commonly mentioned different types of PPP have been listed as follows.

Design Build Finance Operate (DBFO) - With the Design-Build-Finance-Operate-Maintain (DBFO) approach, the responsibilities for designing, building, financing, and operating are bundled together and transferred to private sector partners. Here the government will retain title of the land and lease it to the private consortium over the life of the concessionary agreement (Levy 1996).

Operation and Maintenance (O&M) - A public partner (federal, state, or local government agency or authority) contracts with a private partner to provide and/or maintain a specific service. Under the private operation and maintenance option, the public partner retains ownership and overall management of the public facility or system.

Private Finance Initiative (PFI) - It's commonly used in the United Kingdom, there is a large emphasis on private financing.

Build Operate Transfer (BOT) - one of the most traditional types of PPP used in the early days mainly for transport economic infrastructure projects. BOT involves the construction of the facility as well as the option of it. At the end of the franchise period it will be transferred back into the hands of the government.

Build Own Operate (BOO) - The contractor constructs and operates a facility without transferring ownership to the public sector. Legal title to the facility remains in the private sector, and there is no obligation for the public sector to purchase the facility or take title. A BOO transaction may qualify for tax-exempt status as a service contract if all Internal Revenue Code requirements are satisfied.

Build Own Operate Transfer (BOOT) - it is a form of project financing, wherein a private entity receives a concession from the private or public sector to finance, design, construct, and operate a facility stated in the concession contract. This enables the project proponent to recover its investment, operating and maintenance expenses in the project.

Build Transfer Operate (BTO) - a method of relieving the consortium of furnishing high cost insurance required by the project during operation of the facility (Levy, 1996).

Joint Ventures (JV) - Public and private sector jointly finance, own and operate the facility (Grimsey and Lewis, 2004).

Leasing - where all or a substantial part of all risks associated with funding, developing and operating the facility are assumed by the private sector, with the public sector entity taking the facility on lease (sapte, 1997).

Worldwide Applications of PPP

PPPs are common in the European Union (including the United Kingdom and Ireland), Canada, Australia and some Asian countries. PPPs are also, increasingly, being used in the United States of America. Since PFI (Private Finance Initiative, one form of PPPs) was first introduced by the UK in 1992, tremendous PPP practices have been derived from diverse jurisdictions. According to the government report released by HM Treasury in the UK, till 2008, over 510 PFI (Private Finance Initiative, one form of PPPs) projects had completed construction and were in operation. Since 2000, around 50 major PPP projects worth about $30 billion have been completed in Australia. Moreover, PPPs have been applied to a range of sectors such as roads, water, education, health and so forth. For example, the 510 PFI projects in the UK include 73 open hospital schemes, with a further 27 schemes under construction, 94 education projects covering over 800 schools, 43 new transport projects, and over 300 operational projects in sectors such as defence, leisure, culture, housing and waste.

Research conducted in PPP

With the increasing popularity of adopting PPP projects around the world, research in this field has also become more important to both researchers and practioners (Al-Sharif and Kaka, 2004). A comprehensive literature review of PPP research was previously conducted by Ke et al. (2008). A total of 148 recent publications from renowned journals were studied. The findings showed that the researchers from the United Kingdom were found to be the originators of most PPP papers, followed by the United States, Singapore, Hong Kong, China, Australia and Germany. It was assumed that construction education, national economics and mother language were all factors affecting which countries published more PPP papers.

In academic institutions, Nanyang Technological University in Singapore, The University of Hong Kong, National University of Singapore, and Glasgow Caledonian University were all identified as active in pursuing PPP research. It was also found that various models of PPP have been applied in different parts of the world, and the diverse concept of PPP has been publicly accepted instead of the more traditional BOT scheme alone.

PPP topics that were found to be of particular interest to the researchers included "Risk", "procurement" and "Finance". In which seven more specific categories were derived from these topics including (a) Investment environment (b) Procurement (c) Economics viability (d) Financial package (e) Risk management (f) Government issue and (g) Integration research. For these research studies, the techniques adopted vary from qualitative to quantitative analyses, some of which have included more vigorous techniques/theories in researching.

Positive Factors of Public Private Partnerships

The positive factors of PPP have been discussed by many previous researchers. The very first PPP project that opted for this approach was simply to bring in private investment for public services and facilities. PPP has developed over the years and the advantages have become more obvious. Walker and Smith (1995) suggested three main reasons for using the PPP approach:

In general, the private sector possesses better mobility than the public sector. For example, the private sector is not only able to save the costs of project in planning, design, construction and operation, but also avoid the bureaucracy and to relieve the administrative burden.

The private sector can provide better service to the public sector and establish a good partnership so that a balanced risk-return structure can be maintained.

The government lacks the ability of raising massive funds for the large-scale infrastructure projects, but private participation can mitigate the government's financial burden.

In addition, Walker et al. (1995) supported that PPP is a win-win solution and a number of benefits to the general public and government are recognised:

Relief of financial burden;

Relief of administrative burden;

Reduction in size of (inefficient) bureaucracy;

Better service to the public;

Encouragement of growth; and

Government can better focus and fund social issues such as a health, education, pensions and arts.

It is anticipated that there will be more PPP projects due to two main reasons according to Ghobadian et al. (2004). Firstly, the private sector will get to know the needs of the public sector client over time. Secondly, the private sector has more to give than the public sector in terms of skills, technology and knowledge therefore providing better quality facilities.

Askar and Gab-Allah (2002) summarised eight advantages of PPP in his paper:

The use of private sector financing to provide new sources of capital, thus reducing public borrowing and improving the host government's credit rating;

The ability to accelerate the development of projects that would otherwise have to wait for scarce sovereign resources;

The use of private-sector capital, initiative, and know-how to reduce project construction costs and schedules and to improve operating efficiency;

The allocation of project risk and burden to the private sector that would otherwise have to be undertaken by the public sector;

The involvement of private sponsors and experienced commercial lenders, providing an in-depth review and additional assurance of project feasibility;

Technology transfer, training of local personal, and development of national capital markets;

In contrast to full privatisation, the government's retention of strategic control over the project, which is transferred back at the end of the contractual period;

The opportunity to establish a private benchmark to measure the efficiency of similar public sector projects and thereby offer opportunities for the enhancement of public management of infrastructure facilities.

Risks in Public Private Partnership:

PPP projects carry several risks that are unique to this type of delivery system in addition to the risks associated with more traditional assignments. Some of the risks in PPP are:

Market and revenue risks -Revenue risk is the uncertainty in relation to the revenue that a project would actually generate. The market and revenue risks that a PPP project may face can be grouped into the three broad areas discussed below.

Insufficient Income from fares or Tolls: In the case of a PPP project operating under a government concession, it would be expected that the concession company would request cash compensation from the government for a deficiency in income from fares or tolls, request authority to increase tolls or fares, or extend the concession period. Here it is necessary to identify its risks clearly with respect to cash or its returns, as they may be affected by an extended concession period.

Insufficient Income from Other Operation: In this case, similar opportunities exist for requesting the government to provide cash compensation for deficiencies and/or extending the concession period. In addition, the concession company would have opportunities to increase rents or pursue different business strategies, including alternate uses of major portions of the concession facility.

Insufficient Traffic: It is important for the PPP contractor to obtain a commitment from the government, to the extent possible, with respect to anticipated traffic levels and to negotiate a sufficient compensation arrangement for deficiencies. In the event that the government has not offered to provide such additional compensation, needs review its role carefully as it relates to traffic and earnings forecasts for a PPP project.

Design Risks

This risk relates to any defect in the design of the infrastructure facility or the design requirements stipulated for the project. This is an inherent risk in the project as it is very difficult to conclusively ascertain that damage to the facility is actually caused due to the defect in the design parameters or the very design itself. Generally it is the design contractor who is responsible for the design aspects of the project. In the event of the design parameters being stipulated by the grantor of the concession or license, the risk would be within the control of the grantor.

Construction Risks

The construction risks are essentially a bundle of various individual risk factors that adversely affect the construction of a project within the time frame and costs projected and at the standard specified for the facility. Construction risks are associated with PPP projects, more traditional construction projects and the simpler forms of design/build projects. They include:

Land Expropriation- These risks may flow to both the government and concession company. Available actions include claims under expropriation legislation or claims by the concession company of liquidated damages from the contractor.

Cost Overruns and Time and Quality- These risks affect the concession company directly. The available actions are to either claim liquidated damages from the contractor or draw down standby finance from the project lenders. (A major issue is that design requirements in PPP projects are different than those for a traditional owner.)

Cost and Scope of Identified but Unspecified Work and Variations- These risks flow directly to the contractor and the concession company and represent a potential area of future disputes.

Increased Financing Costs- This risk flows directly to the concession company, which may attempt to mitigate the risk either by a new injection of equity or subordinated debt from the sponsors. Alternatively, the concession company may draw down standby finance from project lenders.

Contractor Default- This is a risk to the concession company, which may claim liquidated damages from the contractor or make a claim against the contractor's performance bond and bonding company.

Default by Concession Company- This is the flip side of the prior risk. This risk is to the contractor, with the primary mitigating measure being claim of liquidated damages from the concession company.

Environmental Damage- This risk accrues to the concession company primarily and may result in claims on insurers or the party causing the damage.

Force Majeure Event- This risk accrues to the concession company primarily and would result typically in a claim to the project insurers.

Operating Risks

Some of the risks that we may face in a PPP project apply also when we are providing operations and maintenance (O&M) -type services. Except for termination of the concession by the concession company, these risks flow directly to the concession company. Some of the risks and actions available to the concession company include:

Performance risk- The completed facility cannot be effectively operated or maintained to produce the expected capacity, output or efficiency.

Operation cost overrun- The operating costs exceed the original estimates · Operating Contractor Default- The concession company may terminate the operations and maintenance contract and appoint a new O&M contractor

Force Majeure or Environmental Damage- In this type of event, the concession company would most likely place a claim with its insurers because risks of this type would be normally insurable.

Default- The default may be caused by the actions of a third party, in which case the concession company could make claims of damages against that party.

Financial Risks

Financial risks fall into these categories:

Exchange rate risk- relates to the possibility that changes in foreign exchange rates alter the exchange value of cash flows from the project. Prices and user fees charged to local users or customers will most likely be paid for in local currency, while the loan facilities and sometimes also equipment or fuel costs may be denominated in foreign currency. This risk may be considerable, since exchange rates are particularly unstable in many developing countries or countries whose economies are in transition. In addition to exchange rate fluctuations, the project company may face the risk that foreign exchange control or lowering reserves of foreign exchange may limit the availability in the local market of foreign currency needed by the project company to service its debt or repay the original investment.

Interest rate risk- Force the project to bear additional financing costs. This risk may be significant in infrastructure projects given the usually large sums borrowed and the long duration of projects, with some loans extending over a period of several years. Loans are often given at a fixed rate of interest (for example, fixed-rate bonds) to reduce the interest rate risk. In addition, the finance package may include hedging facilities against interest rate risks, for example, by way of interest rate swaps or interest rate caps.

Political Risks

The project company and the lenders face the risk that the project execution may be negatively affected by acts of the contracting authority (Government), another agency of the Government or the host country's legislature. Such risks are often referred to as political risks

Nationalisation of project

Changes in law

Development approvals

Adverse government action or inaction

Payment failure by government

Increases in taxes

Political force majeure (including changes in government)

Termination of concession by government (or unplanned competition).

Legal Risks

Some of the legal risks that a PPP project can face are related to:

Title/lease of property

Ownership of assets

Corporate and security structure

Financial failure or insolvency of Concession Company

Breach of financing documents

Enforceability of security

Environment Risk

These are risks relating to occurrence of environmental incidents during the course of implementation of the project. These risks are generally within the control of the construction, and the operation and maintenance consortium. This risk has increased due to the presence of strict legal liability in relation to such environmental incidents, which can result not only in adverse affects on the financials of a project but may also cause a closure of any work or operations of and in relation to the facility.

Risk Mitigation Strategies

Infrastructure Facility- The main aim of the government should be to ensure the construction, operation and maintenance of the required infrastructure facility at specific standards, within a certain time frame and ensure its transfer at certain standards, upon the developer obtaining the agreed returns.

Certain Costs- The government should ensure that the cost of construction, operation and maintenance of the infrastructure facility are certain and can adequately balance the requirements of the private developer and those of the general users or consumers and the lenders.

Prevent unjust enrichment by Developer- The government should ensure that the private parties vested with the control and operation of a public service or a public facility should not abuse their position to unjustly profit from the venture at the expense of public money.

Prevent Abuse of Monopoly- The government should ensure that the private developers do not abuse their natural monopoly position in respect of the provision of an infrastructure facility and that they exercise their rights specifically vested with a public character in the interests of the public, as a public utility.

Return of the Facility to Public- The government should ensure that the facility is transferred for use to the public after the satisfaction of the terms on the basis of which private participation had been based.

Environment- The government should ensure that the facility is constructed, operated and maintained with the minimum possible impact on the environment or an acceptable level of impact on the environment.

Rehabilitation and Social impact- The government should ensure that the persons displaced by the implementation of a project are adequately rehabilitated and the social impact of the project is ascertained prior to its planning and implementation as to provide for suitable mitigation measures.

The government should support the development of infrastructure projects as it does not have the revenue or the technical resources to develop the required infrastructure in various sectors.

The government should provide for a suitable legal framework and policies within which the specific concerns relating to the development of infrastructure projects through private participation and bankability of projects can be addressed.

The private developer should not become the basket for storing all risks simply on the basis that it is obtaining a commercial return. It should be kept in mind that the Commercial return would be derived over a long period of time and at the risk of a high degree of upfront investment. This also enables the government revenues from becoming free from the demands of providing such infrastructure facilities and at the same time allowing for the development of such facilities.

Certainty of Costs- Each application, each risk and each uncertainty has an attached cost. The aim of the developer should be to ensure that project costs can be determined and controlled in a certain manner.

Return on Investment- The project and the documentation should be capable of providing an adequate return to investors in the project. This is a universal necessity in order to justify any private investment in any venture.

Bankability- The project and the documentation should be bankable so as to enable the developer to arrange for the required debt facilities to implement the project.

Distribution and Management of Risk- The documentation in relation to the project should be such so as to enable passage of various risks that are not within the control of Special Purpose Vehicle but it has been allocated to it under the main concession or license. The developer should not be straddled between the various documents with risks it has no control over or is not capable of absorbing. Thus, the risks allotted under the concession or license should flow down to the various contractors under the relevant documentation with the contractors.

Vesting of Adequate Rights- The special purpose vehicle should be vested with all the rights required for enabling it to develop the project. This includes the right to create adequate security in favour of the lenders.

Control over the Revenue Stream- The special purpose vehicle should have adequate control over the revenue stream to create security in favour of the lenders.

Provision of level playing field- In most infrastructure sectors, there is a great conflict of interest between the government as the service provider and government as the grantor of the concession. There should be specific arrangements provided for minimizing the adverse impact of such a potential conflicts of interests.