What is PPP and how it works

What is PPP and how it works?

Public Private Partnerships (PPPs) have been a popular method of investing public projects in a number of countries around the world. Most of this activity began in the early 1990’s in England. A (PPP) is a combination between a government entity and a private party, where the Government pays the private sector to deliver infrastructure and related services over a long term contract, forcusing at the implementation of projects or provision of services traditionally provided by the public sector. Governments have used such colaboration of public and private ventures throughout the past. However, there has been a trend towards the governments worldwide making maximum use of various PPP arrangements towards the late 20th and early 21st century. Skills and assets of each sector are shared in delivering a service or facility for the use of the public through this agreement – e.g. when provisioning is required to construct a new or enhance an existing asset, which is financed from external sources on a non-recourse basis, and entire legal ownership of the asset is retained by the government. The Government pays the private sector to deliver infrastructure and related services over the long-term.

The PPP Programme in New Zealand was established in 2009 and is coordinated by the Treasury PPP Team. This team is the New Zealand Government’s PPP centre of expertise and is responsible for upgrading the PPP policy and processes, assisting agencies with PPP procurement, project agreement, engaging with potential private sector participants, and monitoring the implementation of PPP projects. In April 2012, the first modern PPP in New Zealand took place with the design, construction, finance and maintenance of Auckland’s Hobsonville Point Primary and Secondary Schools.
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What parties are involved in PPP’s?

PPP brings private sector investment and best practices in development, finance, design, engineering, construction, operations, maintenance safety and sustainability to deliver cost-efficient assets to government without necessarily raising taxes or public debt.

The main purpose of PPP procurement is to improve the delivery of service outcomes from major public infrastructure assets by:
• Allocating risks to the parties who are best able to manage them
• Only paying for services that meet pre-agreed performance standards
• Integrating asset and service design
• Incentivising whole of life design and asset management
The parties mostly involved in the Public Private Partnership are as mentioned below.
• Government or semi-governmental entities
• Private equity investors
• Construction companies
• Architects, designers, engineers
• Asset managers
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How PPP’s work in terms of cost

Financing is providing funds up front to meet the necessary costs of constructing. Financing is typically sourced by the government through surpluses or government borrowing (for traditional infrastructure procurement) or by the private sector raising debt and equity finance (for PPPs)
Funding is the source of funds required to meet payment obligations. It refers to the source of money over the long term to pay the PPP private partner for the investments, operating and maintenance costs of the project and costs. Funding is typically sourced from taxes (in government-pays PPPs) or from user charges (in user-pays PPPs). Governments may also utilize more clearly defined sources of funds, one of which is most relevant being land value capture.
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Advantages in PPP’s

There are many advantages from a PPP, however there is no need to bother about maintaining property as this is the responsibility of the private partner. This means they can focus on improving other outcomes.

• Dividing the risk of an investment among private entities and public bodies
• Improve work efficiency which results in smoother, faster and high quality project completions to deliver projects on time within budget
• Imposing budgetary certainty – Setting present and the future costs of infrastructure projects over time
• Extracting long term value for money through appropriate risk transfer to the private sector over the life of the project
• Gradually exposing state-owned enterprises and government to increasing levels of private sector participation
• Comprehensive problem solving – Having a comprehensive team from the beginning to end allows engineers and contractors to cooporate from the beginning to sort out project issues. This combination can give better infrastructure solutions.
• Ensure the necessary investments into public sector and more effective public resources management
• Mostly investment projects are performed in due terms and do not impose unforeseen public sectors extra expenditures
• A private entity is granted the opportunity to obtain a long-term earning
• Private sector skill and experience are utilized in implementation of PPP projects

Disadvantages in PPP’s

The process has few drawbacks as well
• Development phase – Environmental policies, geological conditions, permitting, political will, and financing can influence how successful the project start is
• Operational concerns – Impact concerns from lower than expected usage can result in a decrease of available revenue
• Development, bidding and ongoing costs are likely to be higher than for traditional government procurement processes – the government should therefore determine whether the highier costs involved are justified
• There is a cost attached to debt – While private sector can make it easier to get finance, finance will only be available where the operating cashflows of the project company are expected to provide a return on investment
• Some projects may be more politically or socially challenging to introduce and implement than others – particularly if there is an existing public sector workforce that fears being transferred to the private sector, if significant tariff increases are required to make the project, if there are significant land or resettlement issues, etc.
• There is no unlimited risk bearing – private firms (and their lenders) will be cautious about accepting major risks beyond their control, such as exchange rate risks/risk of existing assets. If they bear these risks then their price for the service will reflect this.
• Private sector will do what it is paid to do and no more than that – therefore incentives and performance requirements need to be clearly set out in the contract.
• The private sector is likely to have more expertise and after a short time have an advantage in the data relating to the project. It is important to ensure that there are clear and detailed reporting requirements imposed on the private operator to reduce this potential imbalance
• Infrastructure or services delivered could be more expensive
• Project public sector payments obligations postponed for the later periods can negatively reflect future public sector fiscal indicators
• Service procurement procedure is longer and costlier in comparison with traditional public procurement
• Agreements are long-term, complicated and comparatively inflexible because of impossibility to envisage and evaluate all events that could influence the future activity
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New Zealand PPP projects to date include projects in the education, corrections and transport sectors. New Zealand’s eighth PPP is currently in procurement.

Current PPP Projects

• Hobsonville Schools (primary and secondary schools at Hobsonville Point) – completed in 2013 and now in operating phase (education services provided by the Ministry of Education).
• Auckland South Correctional Facility (Wiri Prison – a 960 men’s prison) completed in 2015 and now operating (custodial services provided by the PPP contractor).
• Transmission Gully expressway (27km expressway, Wellington) due to be completed in 2020.
• Schools (a bundle of four schools in Canterbury, Auckland and Queenstown) completed in 2016 (opened in 2017) and (Queenstown – for opening term 1, 2018).
• Auckland Prison (new maximum security facility and refurbishment of existing facility at Paremoremo Prison) completed in 2017 (opening June 2018)
• Puhoi to Warkworth state highway (18 km expressway, Auckland) – contractual close achieved Nov 2016, due to be completed in 2022.
• Schools PPP3, an initial bundle of three primary schools in Auckland and Hamilton due to open in 2018 and two co-located secondary schools in Christchurch due to open in 2019. Additional schools are also intended to be added to the project.
Projects currently under procurement or consideration

• Waikeria Prison (a new 1,500 bed facility) commenced procurement in January 2017 and is due to reach contractual close mid-2018.
• The New Zealand Defence Force Accommodation Messing and Dining Modernisation Programme business case is being developed in 2017 and will consider PPP procurement. Subsequent project specific detailed business cases will confirm the procurement method.
• The Ministry of Health is considering PPP in an Indicative Business Case for Dunedin Hospital.

Case study

On 6th April 2011 the New Zealand Government had an intention to commission two new schools in Hobsonville, a primary and a secondary school, which would be designed, financed, built and maintained for 25 years under the PPP. These schools were to be New Zealand’s first PPP project.

An association of Hawkins Group, ASC Architects, Perumal Pedavoli Architects, Holmes Consulting Group, AECOM, Programmed Facility Management and the Public Infrastructure Partners Fund (PIP Fund), were awarded the contract. Project was financed by Westpac and the PIP Fund.

Hobsonville Primary school was opened in 2013 and can accommodate 690 students and Hobsonville Point secondary school in 2014 with 1500 students. Following a strong and healthy procurement process a company was awarded a contract to design, build, finance and maintain both schools for a period of 25 years.

The two schools are like no other in New Zealand. They serve for the growing population in the Hobsonville area and children are given access to a superior education in a modern learning environment.