The New Zealand Government has released an update to its guidance on the NZ Public Private Partnerships (PPP) framework (the Framework) and related PPP model (PPP Model) as a blueprint for public sector agencies delivering future projects by PPP procurement.^[1]

The update (led by the New Zealand Infrastructure Commission in consultation with Treasury) incorporates recent market sounding feedback from both public and private sectors on areas for refinement of the existing PPP Model to address some of the issues on existing NZ PPPs to date.  

The updated Framework seeks to balance the whole-of-life performance incentives that are at the heart of the PPP Model with flexibility to address unique project needs and market conditions. It gives some much-anticipated clarity on developments we can expect to see reflected in the procurement processes and PPP contract terms in the upcoming project pipeline set to kick off next year. 

1. Policy Updates

The key policy updates are:

1. Availability-based PPPs (as opposed to revenue generation PPPs) will remain the primary model, as most of the proposed PPPs will be unlikely to derive sufficient third-party revenue streams. However, alternative revenue streams could be considered (i) as potential delivery cost contributors during the business case process; and (ii) by agencies as bid variants. 
2. Future PPPs may not be fully project financed and various forms of Crown capital contributions could be available to procuring agencies on a project specific basis (and provided there remains sufficiently material levels of private debt and equity). Forms may include (i) by way of milestone or progress payments through construction; (ii) at construction completion as a “bullet payment”; and (iii) through the operating phase of a project, through mechanisms such as conditional debt paydowns. Consideration will also be given to the impact of financing-related liquidated damages resulting from delays to service commencement. 
3. DBFMO (design, build, finance, maintain and operate) models are preferred (as compared to DBFM models which will likely mean greater specification by the public sector agency of the parameters necessary to support their selected operating models). 
4. Making a PPP ‘value for money’ assessment requires an assessment of whether the investment delivers better outcomes when delivered as a PPP as compared to delivering under an alternative delivery model, which includes an assessment of (i) the Public Sector Comparator (PSC) (an estimate of the project costs, including construction and ~25 years of operations and maintenance, if delivered under the most likely non-PPP counterfactual); (ii) whether the bundling of services will result in design innovations, construction and operating cost optimisation, improved risk management, and overall performance efficiencies; and (iii) whether this is sufficient to overcome associated delivery costs (eg SPV resourcing, procurement costs, contract management, and incremental costs of project finance relative to Crown borrowing). 

2. PPP Model and contract updates

The bulk of the updates are to the PPP Model and related contract which, at their core, seek to address a number of the issues seen on the NZ PPPs to date. The key areas of development are:

1. Optimal risk allocation and targeted risk sharing - reallocation of certain project specific risks to the public entity, including use of arrangements to cap or share exposure. 
2. Incentivising and allowing innovation - reconsideration of areas where strong risk allocation can perversely stifle innovation. 
3. Design Development - enhanced strategies and demonstrated bid requirements for ensuring quality design as a function of outcome-based specifications. 
4. Performance Regime v Evaluation Incentives - reconsideration of the use of the performance regime versus other short-term incentives to drive ultimate contract performance. 
5. Consequences of construction delay and risk allocation for late delivery - enhanced mitigation for disproportionate risk created by liquidated damages on large-scale projects which may perversely incentivise construction delivery decisions and behaviours, or significantly reduce the no. of construction parties willing to participate.
6. Major expansions and augmentations - enhancements to the procurement process, the PPP Model and the model contract to allow for augmentation such that, where expansion is required following the construction of an asset, existing partnerships can be leveraged for the augmentation stage (rather than requiring an entirely new tender and procurement process).  
7. The role of SPVs and Equity - emphasis on the importance of independent equity and strong management oversight at the SPV level, with a view to discourage reliance on major sub-contractors to provide day-to-day project management.
8. Dispute resolution procedures - updates to strengthen and streamline the disputes resolution framework (including consideration of alternative dispute resolution processes like those used under the FIDIC suite of contracts). 
9. Extension and Compensation Events - review and enhancement of the Extension and Compensation Events regime.

3. Process Updates

The process updates included in the Framework are largely focused on (a) improving the deliverability of the project outcomes of projects procured using the PPP model; (b) improving competition in the bid process; and (c) increasing collaboration and improving the partnership relationship between the public and private sector parties. In summary:

1. Affordability Threshold validation - to avoid the risk of delivery failure on account of the Affordability Threshold being set too low, the update directs that the deliverability of the project outcomes within the estimated PSC should be monitored during procurement, periodically validated and, where necessary, updated at pre-determined milestones (ie not on an ad hoc basis, and not too late in the procurement process to react to the updated price envelope).
2. Interactive Tender Process (ITP) - the update provides for improvements to the ITP aimed at ensuring bidders and procuring agencies collaborate at early stages of the tender process, allowing (within the bounds of probity and fairness) for consortia to test their developing proposal with the relevant agency, the agency to identify topics within a bid for discussion, and for the parties to define requirements, design, pricing and risk before contracts are finalised. 
3. Progressive procurement - the existing procurement framework will be revised to allow for a spectrum of PPP procurement processes to be adopted, where it would be appropriate for a particular project or where the use of the traditional NZ PPP model and process (eg fully formed consortia and committed finance) would not suit a given project. The update includes allowing for the deferral of procurement of certain consortia members (such as debt financiers or facilities management contractors).
4. Bid Cost Underwrite - the update recognises the significant costs incurred by private sector parties in bidding for PPP projects. To that end, the Framework introduces three options the Crown is considering to mitigate those costs (i) undertaking technical investigations ahead of bidding, which may be shared with, and relied on, by bidders; (ii) reducing the level of “at risk” activities, including design, required in a proposal; and (iii) reimbursing a portion or verifiable costs for unsuccessful bidders. 
5. Client resourcing and preparation - the updates to the Framework also indicate the Government will look to ensure procuring agencies are able to invest in sufficient resourcing and expertise to work effectively alongside private sector partners during the entirety of a PPP project. 

4. PPP vs other procurement

Finally, the updated Framework acknowledges PPPs will not be appropriate for all projects. In summary, it confirms:

1. Any PPP proposal must be expected and able to outperform the counterfactual of non-PPP infrastructure delivery for a commensurate net present cost.  
2. The tender evaluation process will remain focussed on exclusive evaluation of non-price attributes, provided the Affordability Threshold is met. Other levers will instead be used to deliver infrastructure cost savings (including sophisticated investment options analysis at the business case phase - such as greater investigation of non-built solutions and demand management).
3. Alternative models (eg alliance contracts, strategic leasing, ‘PPP-Lite” or long-term strategic asset management partnerships) may be more appropriate. For example, where there is a need for more complex risk-sharing arrangements (eg global incentivised target cost pricing mechanisms) or where a fixed price PPP cannot be delivered without the public sector agency taking back significant elements of cost and performance. 

Get in touch

If you would like to discuss anything in this article, please contact one of our experts.