CONS6817_S10'16

Procurement (CONS6817) Lara Tookey
PROCUREMENT – SESSION #10
PPPs – Public Private Partnering

Public Procurement
Engineer / Architect
D
Contractor
B
Bank / Financier
F
Operator
O
Public Authority
Investors Users
Shareholders
Agreement
Consultancy
Agreement
Construction
Contract
Loan
Employment /
O&M Contract
Tax/Rates/Tolls/Le
ase

PPP Procurement
Engineer / Architect
D
Contractor
B
Bank / Financier
F
Operator
O
Special Purpose
Vehicle
Investors Users
Shareholders
Agreement
Consultancy
Agreement
Construction
Contract
Loan
Employment /
O&M Contract
Tax/Rates/Tolls/Le
ase
Public Authority
Concession
Agreement

WHAT DOES A PPP LOOK LIKE?

Wi
Wiri Prison – Full Service PPP
DBFOM

ACTIVITY (15 MIN) Working with your peers
What are the benefits to
the government of a PPP
arrangement?

$
Time
Indicative payment profile
comparison
Traditional
PPP

Risk in practice
$
Time
Government exposed to time and cost overruns
Government exposed to asset performance over time
Series of maintenance contracts tendered over time

PPP Risk in practice
$
Time
Construction Service delivery
Payments are reduced if service doesn’t
meet the contracted performance
standards

Special Purpose Vehicle (SPV)
• A company incorporated solely for the
implementation / management of the
project.
• Enters into contracts with the Government
and sub-contractors.
• Finances, develops, builds, maintains and
operates the project (or any other
combination).
• Guarantee and secure cash flows.

Concession Agreements
• P3 contracts are generally long-term
contracts
• Contractor’s obligations
• D,B,F, O,M – or other combinations
• 15 – 25 year concessions
• duration increases relative to the level of
financial involvement of the private sector in the
provision of investments.

Concession Agreements
• Authority provides a concession (in return
for performance of obligations) allowing
Contractor to:
• Generate revenue from Project (e.g. toll); and
• Do things normally precluded by law (e.g. toll)
or reserved to Public Authority (e.g. control
roads, operate prisons).
• Various legislations have been updated to allow
for PPPs

Roads – LTMA 2003
• For PPP/DBFO/BOOT – Concession
Agreement required for a Toll
• Needed legislative authority to grant Road
Controlling Authority entitlements to private
sector

Water & Wastewater
• Pre LGA 2002 – no restriction on PPPs
• Local Government Act 2002:
136. Contracts relating to provision of water
services-
(1) Despite section 130(2), a local government organisation may enter
into contracts for any aspect of the operation of all or part of a water
service for a term not longer than 15 years.

Water & Wastewater cont…
(2) If a local government organisation enters
into a contract under subsection (1), it must
retain control over all matters relating to –
• The pricing of water services; and
• The management of water services; and
• The development of policy related to the
delivery of water services.

Prisons
• Penal Institutions Amendment Act 1954
(amended 1995):
4A Management of Penal Institutions under
contract-
(1) Subject to this Act, the Secretary may from time to time, in the name
and on behalf of the Crown, enter into any contract with any other
person for the management by that person, of any penal institution.

Underlying Philosophy
• Government does not have funds to do all projects
the public can benefit from whereas the private
sector has a surplus of investment money.
• The private sector executes projects and delivers
services more efficiently and manages the risks
better.
• If the private sector bears both the initial capital and
operating costs it will make better “whole of life” cost
judgements.
• The Government see public good in ensuring projects
are undertaken which are not core government
business e.g. Auckland Convention Centre.

What may PPPs be used to
deliver
Anything which looks like this

Typical motivators of public
sector
• Obtaining services or infrastructure without
deployment of public funds
• Transfer of maintenance cost risks to private
sector
• Transfer of operating cost risks to private sector
• Transfer of volume of use costs to private sector
• Roads, stadiums etc
• Avoidance of activities which are not the core
business of the public sector

Service
Partnerships
Integrated
Partnerships
Finance
Partnerships
Development
Partnerships

Finance partnerships
• Private partner provides capital funding for
government activity
• Lease of plant or equipment
• Lease of building

Service partnership
• Private partner provides management
expertise for public asset
• Example Auckland trains
• Track owned by central government through Ontrack
• Stations and rolling stock owned by regional government
through ARTA (Auckland Regional Transport Authority
• Service operated by Veolia, a French company with
expertise in operating railways.

Development partnerships
• Typically government owns land it wishes to
have developed and combines with a private
sector developer to do the development.
• Government may be a partner in the development
(and share the risk and reward) or simply sell the
development rights to the developer often with
restrictions on the type and scale of development.
• Example: Britomart area. ACC sold above
ground development rights to private
developers and used funds received to develop
a station below ground.

Development Partnership
examples
Hobsonville Development
• Government and Council own land through
Hobsonville Land Co and have produced a
strategic plan and done the sub-division
work.
• Development and sale of houses by private
sector housing companies.

Development Partnership
examples
Wynyard Quarter
• Auckland Council own land through
Waterfront Auckland Ltd and have produced
a strategic plan.
• Land is released to developers on long term
leases with controls on the developments they
can do:
• Kiwi Income Property Trust: ASB headquarters
• Goodman Property: Fonterra headquarters
• Precinct Properties: Commercial developments
• Willis Bond: Apartment developments

Development Partnership to
provide public asset
Hobsonville Schools:
• Land owned by government.
• Private sector developer has concession to
build and maintain the school for a period of
30 years and is paid an annual payment.
• School is operated by public sector in normal
way.
• At end of concession period building
transfers to government.

Development Partnership to
provide public asset
Paremoremo Prison
• Land owned by government.
• Private sector developer has concession to
build and maintain the prison for a period of
30 years and is paid an annual payment.
• Prison is operated by public sector in normal
way.
• At end of concession period building
transfers to government.

Integrated partnerships
• Private sector provides a combination of
finance, development expertise and service
expertise to:
• Develop
• Fund
• Operate
a facility.

Example 1 - Clearwater Project
Wellington (waste water treatment plant for Wellington City)
• Client - Wellington City Council
• Contractor - Anglian Water International Ltd
• DBO (design build operate) 25 year period
• Single lump sum payment for plant constructed
on WCC land once commissioning complete
• Annual fee to operate the plant

Example 2 - Vector stadium
Auckland
Auckland City Council – project initiator
Motivation:
• Modern cities need stadiums (amongst other
things) to enrich the life of the city and make it
an attractive place to work for the well
educated and skilled who provide the key
element to develop a high value economy.
Sports, rock concerts etc. (based on work by Richard Florida
“The Rise of the Creative Class”)
• Stadiums are an important element of the
major conference business

Vector stadium
Auckland City Council Perspective
(cont)
But ACC:
• Has limited capital and many other demands
on its money
• Has no expertise in operating stadiums
• Has learnt from its experience of owning the
Edge (Aotea centre, Civic theatre, Town hall)
that ownership can lead to taking event
promotion risks (and resultant losses)

Vector stadium
Auckland City Council Perspective
(cont)
• It therefore wished to see the city acquire a
stadium but avoid the commercial risks
associated with owning and operating the
stadium.
• It accepted that private enterprise would not
provide such a stadium without public input as
the capital involved and commercial risks were
too high.
• It could provide the land, was prepared to put in
some significant money, was prepared to take
most of the planning (resource consent) risks.

The Partnership
Auckland City
Council
Jacobsen Venue
Management
(Sydney) 75%
Worldwide
Entertainment
(Miami) 25%
Quay Park Arena
Management
Quay Park
Stadium
$68.2m $11m
Right to operate the
stadium for 40years
Stadium
returned to
Council at
the end of
40years

Creation of the Stadium 1
Design Phase
Quay Park Stadium
Auckland
City Council
Quay Park Arena
Management
Crawford Architects (USA)

Creation of the Stadium 2
Detailed Design and Construction
Phase
Quay Park Stadium
Auckland
City Council
Quay Park Arena
Management
Crawford Architects (USA)
Mainzeal Construction
Engineers (NZ)
Note: this information is deducted from press reports and may not be correct in detail

Problems
• Stadium completion delays causes
cancellation of Cold Play Concert
• Crawford Architects takes legal action against
Mainzeal for non-payment of fees. Mainzeal
counter-claims re non-performance
• “Roof problem delays arena” Herald 8th April 06
• “Auckland arena investor charged with
$470m United States fraud” Herald 20th April 06–
company in liquidation – shares passed to a Court in Florida

Wiri Prison
• BOOT scheme
• Government owned land
• Private sector has a concession to build and
operate the prison for 30 years.
• Agreement includes incentive payments
around KPIs such as prisoner rehabilitation
and penalties for matters such as prisoner
escapes

Puhoi to Warkworth
Motorway
http://www.nzta.govt.nz/about/media/releas
es/4178/news.html
• What will the private sector be required to
do?
• What is the length of the concession?
• Is this a demand risk or availability risk PPP?

Wellington Gateway
Partnership (WGP)
Go to http://www.tg.co.nz/
• What will this PPP provide?
• What is the concession period
• Who are the equity partners in WGP
• How is WGP procuring the design and
construction of the project
• Who are providing services to the PPP
• What performance criteria will there be during
the operation of the road

PROBITY

Transparency in Public
Procurement
• For Public Procurement in general, where
governance, and in particular corruption
problems are still widespread, stringent
disclosure requirements are seen as a
potentially powerful remedy…

Probity
• Queensland Premier Anna Bligh enjoyed a free holiday at
the Sydney mansion of Thiess director Ros Kelly just before
the contract was awarded.
• Patrick Lion and Steven Wardill, "Anna Bligh fails to declare free
holiday in Sydney mansion", Courier-Mail, 17 July 2008
• Former Labour ministers Terry Mackenroth and Con Sciacca
were paid a "success fee", (as government relations
advisors) believed to be about $500,000, by BrisConnections
after the consortium won the tender.
• Steven Wardill, "Terry Mackenroth, Con Sciacca share fee on airport
link contract", Courier-Mail, 23 January 2009

Probity issues
• Difficulty of proving a PPP is a better deal
from the government than traditional
government investment and ownership.
• Issue is dealt with by requiring public sector
entity to produce a “public sector
comparator” which estimates the cost of
carry out the project in the normal way over
the life cycle of the project, taking account of
the risks.

PPP Contracts
• Public and Private Sector each retain their
own identity
• They collaborate on the basis of a clear division
of tasks and risks
• Activities performed by those most capable

PPP Contracts – Private side
• Private sector finances, builds, owns and
operates a public asset
• Designed to maximize the use of Private Sectors
Skills
• Used elsewhere for:
• Economic infrastructure: roads, railways, ports
• Social infrastructure: schools, hospitals, housing,
prisons.
• Transfer of risk to the private sector

PPP Contracts – Public Sector
side
• P3 offers to the Public Sector greater Value
for Money:
• P3 transaction facilitates technology transfer
• Private Sector shares its experience with Public Sector
• P3 delivers high quality of infrastructure in the shortest
possible time

PPP Contracts
• Emphasis on ‘outputs’ not ‘inputs’
• IE output specification approach
• public-sector party defines the basic standards
of service
• private-sector party chooses how to meet and
possibly improve upon these basic standards.

Wiri Prison example – output
specification
• The use of the facility;
• The number of people to be accommodated;
• The type of equipment that would be used in
the facility and the operational environment
that it requires;
• The nature of the customer services that the
facility must support;
• Performance criteria in terms of components
and outputs; and
• Any constraints in the design or specification of
the facility.

PPP Contracts
• This approach incentivises innovative
solutions,
• allowing for private sector's skills and
knowledge to feed into public service provision,
• but comes at the cost of greater risk of contract
misspecifications for the public sector.

PPP Contracts
• The bundling of project phases into a single
contract is the main characteristics of P3
contracts.
• Various options of bundling exist:
• the design (D),
• the building (B),
• the finance (F) and
• the operation and management (O) (M)

PPP Contracts... Payment
Mechanism
• P3 arrangements aim at maximizing
incentives for the private-sector party to take
into account
• whole-life costing and to
• undertake innovative approaches leading to cost
reduction and quality improvement.

PPP Contracts... Payment
Mechanism
• Therefore the payment scheme under P3s
must be output oriented & in the spirit of
fixed price arrangements:
• the payment must depend on output (and thus
on the service being provided)
• rather than on input (the cost of the service)
and
• payments should only occur once the service is
provided (and not before the infrastructure is
built).

PPP Contracts
• Upon contract expiry, the public-sector party
regains possession of the assets
• and can re-tender aspects of the service
provision to other providers or take provision in-
house.

RISK AND REWARD

Risks and Rewards
• Project risks are allocated to the party that is
the best equipped to manage them.
• Usually the contracts include incentives that
reward private partners for mitigating risk
factors.

Risk issues when contracting
with government
• Private sector views government as having
special powers which unbalance the
commercial relationship
• General perception that the private sector
partner is ‘contracting with the umpire’

Risk issues when contracting
with government
• Govt’s role in law making is perceived as
giving it the opportunity to ‘change the rules’
• Risk transfer should be fair and offer the
private sector incentives to perform.
• This may be achieved through ‘optimum’ risk
transfer

Risk - Private Partner
Perspective
• Would take on risks if appropriately priced,
managed, and mitigated.
• This may involve transferring the risks to third
party- by sub-contract or insurance.
• Accepts the financial consequences of the
risk, provided a premium is there for taking
on that risk.
• Would be unwilling to take on a particular
risk, when the risk is not within its control.

Risk - Private Partner
Perspective
• Generally, private sector (and lenders) view
the project as a whole - willing to accept
higher risks in certain areas if balanced by
lesser risks in others.

In general….
• Choose the Private sector partner well
• Get the Briefing right
• Get the Banks on side
• Use the FM Partner to assist in design and
definition
• Use long term relationships, not single
project partnerships

ACTIVITY (20 MIN) Working with your peers
1. What are the
benefits to the SPV?
2. What are the risks to
the SPV?

WHEN THINGS GO WRONG.…..

Channel Tunnel (BOOT with Concession)
• 50.5KM rail link (Folkestone & Calais)
• 37.9km – longest undersea portion of any
tunnel in the world
• 75m deep - lowest point
• Ideas began 1802!
• Began 1988 – opened 1994
• 80% over budget

Funding
• The British and French governments gave
Eurotunnel a 55- (later 65-) year operating
concession to repay loans and pay dividends.

• Initial equity of £45 million was raised
• Increased by £206 million private
institutional placement,
• £770 million was raised in a public share
offer that included press and television
advertisements,
• A syndicated bank loan and letter of credit
arranged £5 billion.

• Privately financed, the total investment costs
at 1985 prices were £2600 million.
• At the 1994 completion actual costs were, in
1985 prices, £4650 million: an 80% cost
overrun.
• The cost overrun was partly due to enhanced
safety, security, and environmental demands.
• Financing costs were 140% higher than
forecast.

Problems….
• Fires
• Illegal immigrants
• Asylum seekers…..
• Operating revenue less than anticipated

Technical difficulties
• Special machines had to be built to bore
through the rock under the Channel.
• Required working in two languages, and
using two sets of national construction,
safety and legal codes.
• It involved ten contractors and 220 syndicate
banks.

Inflation…..
• The Channel Tunnel costs became inflated
due to several reasons mostly unrelated to
the actual construction.
• Included in these reasons was the inefficiency of
a complex organisation for procuring the project
with five French Contractors and five British
contractors working for a newly created
company called Eurotunnel that had no
experience managing a project of this
magnitude.

• Further, the fact that the tunnel connected
two countries that had a history of
disagreeing created arduous decision
processes.
• These were particularly demonstrated within
the vehicle procurement when the shuttle
railcars were redesigned many times, greatly
increasing their cost and complexity and
delaying the operation date for the facility.

WHEN THINGS GO RIGHT.…..

Department of Corrections & SecureFuture
FULL SERVICE PARTNERSHIP

• SecureFuture were able to better the public sector
comparator by 17%. This was achieved by:
• They commenced design pre-award.
• They were on site the day of financial close.
• To mitigate missing design milestones, Fletchers conducted risk
workshops to ensure that there was no single supply source or
person who could delay the construction programme. Multiple
options were always available.
• Continuous peer review. All key elements (from financial
models to the construction method and everything in between)
were peer reviewed.
• Fletchers built mock-ups so everyone could have a clear
understanding of what a prison cell module looked like.
• Pre-cast concrete was used to overcome the problem of pouring
concrete over two winters.
• Revit modelling software was used.

WHAT IS HAPPENING IN INDIA?

GMR Hyderabad International
Airport Limited
• GMR Hyderabad International Airport
Limited (GHIAL) is a joint venture company
• The Company was incorporated to design,
finance, build, operate and maintain a world
class greenfield airport at Shamshabad,
Hyderabad.

• Consultants from Norway and India for
design / engineering input
• MC#1 (airside and landside works)
• (US$115m)
• MC#2 from HongKong (construction of the
passenger terminal)
• (US$153) – came in under budget.

Innovation!!
• Open Access Fuel farm
• Reliance Industries (RIL) was given the contract
to operate and maintain India's first unique
open access model inside the airport (seven-
year contract).
• Means any oil company can supply fuel to
airlines as per their agreements.
• Developed in consultation with internationally
reputed companies: Red Mallee, an Australia-based
consultant, and Hong Kong Airport Services, Hong
Kong.

Kakinada Deep Water Port
• The procurement process for KDWP was
based on international competitive bidding
for development of the port on the
OMST/BOMST format.
• Operate Maintain Share and Transfer / Build Operate
Maintain Share and Transfer
• It was a two stage process with a
prequalification stage and an RFP stage

• The concession agreement was signed on the
19th March 1999
• with M/s International Seaports Pte Ltd (ISPL), a
joint venture company registered in Singapore,
promoted by Larsen & Toubro Ltd, India,
Stevedoring Services of America (SSA), USA and
Precious Shipping Company, Thailand. ISPL
subsequently inducted Konsortium Perkaplan
Berhard (KPB), Malaysia
• and floated a Special Purpose Company in the name
of Cocanada Port Company Ltd (CPCL) for managing
the port operations.

CONS6817_S10'16

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