Achieving public sector outcomes with private sector partners.

Build, own, operate, and transfer (BOOT) – A contract under which the private sector party is responsible for building and operating a facility, and owns it for the life of the contract. The private sector party transfers ownership of the facility to the public sector party when the contract ends.

Concession – An arrangement where a public sector party (the grantor) grants rights to a private sector party (the operator) to provide public services.

The rights of the operator may include having use of specified assets from which to provide the services, and the right to generate revenue, such as through tolling. The operator will also incur obligations to the grantor, such as to provide the services under specified terms and conditions, and to transfer the rights back to the grantor at the end of the concession period.

Consortium – A group of entities, generally unrelated, that combine, often through a special purpose vehicle such as a limited liability company.

These entities take part as either equity investors or financiers. Some of these entities may be contractors to the central consortium company to carry out construction, design, or facilities management for a fee.

Design, build, finance, maintain, and operate (DBFMO) – A contract to design, build, maintain, and operate a facility, involving financing by the private sector party in whole or part.

The public sector party grants a concession to the private sector party to provide services.

These contracts often involve the private sector party owning the facility, and transferring ownership back to the public sector party when the contract ends.

The public sector party may reimburse the capital cost borne by the private sector party through periodically paying for services provided during the contract period, and/or the private sector party may have the right to charge users.

Design, build, and maintain (DBM) – A contract for the private sector party to design and build a facility, and to maintain the facility for an agreed term.

The issues we refer to in this report are relevant principally to long-term DBM contracts.

Design, build, maintain, and operate (DBO or DBMO) – A contract to design, build, maintain, and operate a facility.

The public sector party grants a concession to operate the facility to the private sector party, which may receive payments directly from the public sector party and/or income through charges to users.

Franchise – An exclusive right granted by a public sector party (the franchisor) to a private sector party (the franchisee) to occupy or use facilities owned by the franchisor for the franchisee to deliver services. The franchisee pays a fee to the franchisor in return for being awarded the franchise.

The franchisee may be responsible for maintaining and improving the facilities.

Joint venture – A collaborative arrangement between 2 or more public and/or private sector parties to undertake a long-term project or enterprise for the mutual benefit of the parties involved.

The parties may commit funds, facilities, and services, and could include construction firms, operators, and suppliers.

Joint ventures generally operate through a special purpose vehicle such as a limited liability company.

Output-based specification – A document describing the scope of the contract, created by the public sector party as part of the tendering process, which describes what is required as outputs rather than inputs.

Outputs are measured by quality and quantity, whereas inputs are measured by processes and technical specifications.

Partnering – A generic term we have adopted for the purposes of this report to encompass any mutually beneficial commercial procurement relationship between public and private sector parties that involves a collaborative approach to achieving public sector outcomes.

The 2 main variables in a partnering arrangement are:

  • the type of relationship between the public and private sector parties; and
  • the nature of the outcome and how it is to be achieved.

We note that “partnering” has an existing meaning in the New Zealand construction sector. It refers to a process used in traditional design and construction contracts where the contracting parties agree to use their best endeavours to collaborate and resolve issues through discussion and negotiation rather than litigation.

Private Finance Initiative (PFI) – A policy introduced by the United Kingdom government in 1992. PFI contracts are long-term arrangements where the public sector party contracts to purchase services and associated assets. Contracts involve private financing, and in most cases the private sector party (usually a consortium) designs, builds, and maintains new or replacement assets.

The private sector party receives payments directly from the public sector party for services provided, and/or income through charges to users.

Project alliance – The public and private sector parties (often referred to as “participants”) work together as an integrated team to deliver a specific project where their commercial interests are aligned with actual project outcomes. The team is selected on a “best-for-project” basis, and may include designers, constructors, and suppliers. The team is provided with incentives to achieve high performance, and all members commit to working through collaboration, innovation, and mutual support.

The arrangement requires:

  • performance obligations to be stated as collective as opposed to individual, with an equitable sharing of risk and reward, and adoption of a “no blame, no dispute” culture;
  • governance of the project by a Project Alliance Board (or equivalent), including representatives from all parties, with agreement that all decisions must be unanimous;
  • day-to-day management of the project by a project team that operates as a separate entity from each of the public and private sector parties involved in the alliance agreement; and
  • a transparent and “open-book” approach towards all financial matters, including cost and profit.

The selection process for choosing alliance participants is normally based on quality criteria alone. (Recently, some project alliances in Australia have introduced price competition, though there is considerable debate as to whether this runs counter to the philosophy of selecting the best participants and working with them to agree a target price.)

Public private partnership (PPP) – A term used in other countries to describe a partnering arrangement where the parties work together for mutual benefit, usually involving private financing.

The United Kingdom uses the term to describe various arrangements, including, for example, joint ventures and franchises.

In Australia, the term mainly applies to projects where the private sector partner (usually a consortium) makes a financial investment to create or improve an asset, and is responsible for designing, building, maintaining, and operating a facility. The private sector partner receives payments directly from the public sector partner for services provided, and/or income through charges to users.

Public sector comparator – An estimate of what it would cost to undertake the project using traditional procurement methods. Public entities use the comparator as a benchmark to help decide whether an alternative procurement method using private finance would offer better value for money.

Special purpose vehicle – An entity, usually a limited liability company, created to act as the legal form of a project consortium.

Target cost (often referred to as target outturn cost) – The estimated total cost of undertaking a project, which includes direct costs (for example, investigations, consents, land purchase, design, construction, and commissioning), overheads, and profit margins.

Value for money – The best combination of whole-life cost and quality of outcome that meets the customer’s desired needs.

Whole-life cost – The total cost of constructing, operating, and maintaining a project over its whole life.

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