Part 2: Role of government

2.1
In jurisdictions where the use of partnering arrangements involving long-term contracts and private financing is well established, there is evidence of a firm commitment from government, including cross-party political support, to providing direction and guidance.⁵ Comparable levels of government commitment and support may be needed if partnering arrangements are to be used more commonly in New Zealand.

2.2
The key issues that our research identified as likely to affect the use of partnering in any jurisdiction are leadership, expertise, and market development.

Leadership

2.3
Partnering arrangements require significant investment (in monetary and non-monetary terms) on the part of both public and private sector parties. The private sector is unlikely to be attracted into investing in major, long-term public sector projects when it sees that there are significant risks arising from political uncertainty.

2.4
In the United Kingdom, both major political parties support the PFI, and there has been strong central control in its establishment. Evidence suggests that more PFI contracts in the United Kingdom have been entered into when the Treasury has had responsibility for providing direction. When this responsibility has been handed to quasi-government agencies, such as the Office for Government Commerce, fewer PFI arrangements have been made.⁶

2.5
In Australia, mainly state governments have adopted PPPs. Again, there is evidence of cross-party political support. PPPs were pioneered by the State of Victoria, which has drawn up a clear written policy⁷ that other state governments have adapted for use.

2.6
These governments also have a clear view about certain services – in particular, front-line services – that are not suitable for PPPs or the PFI. The States of Victoria and New South Wales have specified that responsibility for the direct delivery of “core” public services – such as clinical services in hospitals and correctional services in prisons – should remain with the state.

Expertise

2.7
Public entities need a high level of expertise to implement partnering arrangements successfully. Without this expertise, the entity faces significant risks. The United Kingdom central government and Australian state governments have taken a lead in providing central resources to be used by public entities considering entering into partnering arrangements involving private financing.

2.8
In the United Kingdom, Partnerships UK supports public entities wishing to undertake a PFI project by providing specialist procurement expertise. Another agency, 4ps (Public Private Partnerships Programme), provides advice and guidance to local government on PPPs and PFIs.

2.9
The United Kingdom Office of Government Commerce (OGC) has introduced the “OGC Gateway Process”, which provides the framework for a rigorous assessment of the deliverability of projects, including PFI schemes, throughout the procurement process.

2.10
The Melbourne City Link project⁸ is an example of an early PPP implemented by the Victorian state government. Because the project was seen as pioneering and high profile, a special Cabinet Committee, including the Premier, Treasurer, and Minister of Transport, was set up to oversee it. A strategy was then implemented to pull together an “A team” of government employees and advisers, and a single-purpose statutory authority was established to set up and manage the project, backed by high-quality legal and accountancy advice.

2.11
Since then, the Victorian state government has established Partnerships Victoria to provide guidance and support to government agencies in setting up PPPs. Partnerships Victoria has produced extensive guidance (partly based on United Kingdom guidance) on all aspects of the process, from preparing an initial business case to managing the PPP contract after it is awarded.⁹

2.12
The New South Wales government has produced guidelines¹⁰ (based on Partnerships Victoria guidance) and established a specialist Private Projects Branch within its Treasury to lead its Privately Financed Projects (PFP) programme, which can draw on expertise across the public sector. The Branch steers the economic and financial assessment of each project, ensures application of the guidelines, provides advice, and promotes best practice.

2.13
In New Zealand, Auckland City Council recognised the need for external expertise when it started its indoor arena project. The Council appointed an experienced project manager to represent it at an early stage of the project, and a large number of internal and external peer reviews were undertaken at each stage of the tendering process, including financial and legal reviews.

2.14
A number of the people we interviewed expressed the view that establishing a central resource of expertise and guidance in New Zealand would be desirable. In creating a pool of expertise it is likely that, initially, New Zealand would have to call on existing expertise in other jurisdictions (as was the case in Australia), and it would be important to retain local expertise from projects undertaken in New Zealand.

Market development

2.15
To ensure a competitive process, it is important that enough independent private sector companies wish to participate. There are examples of projects in other countries where it has been asserted that a competitive outcome was not achieved because there were only one or 2 private sector companies in the market.

2.16
One such example is the Royal Armouries contract in the United Kingdom (a PFI between Royal Armouries and Royal Armouries (International) plc for the establishment of a new museum at Leeds). The private sector party was originally allocated the operating costs and revenue risks, but when it ran into difficulties Royal Armouries effectively came to carry those risks since it could not allow the museum project to fail.¹¹

2.17
In a project requiring private sector capital investment, it will be important to assess the likely interest from major national and international financial institutions in providing the capital investment. In Australia, the government sees PPPs as a way of providing investment opportunities for funds (for example, for superannuation) on-shore, as a rival attraction to off-shore opportunities.

2.18
The Victorian state government is endeavouring to promote a consistent, Australia-wide approach to PPPs, to encourage potential private sector participants to see Australian jurisdictions as one PPP market. A National PPP Forum comprising ministers and government officials has recently been established. Aims of the Forum include:

• setting up a national database of future projects (“the project pipeline”) to enable private sector companies to assess projects in relation to the depth of the market and range of opportunities; and
• facilitating greater interaction between government, key industry groups, and other players, and greater information sharing across jurisdictions.

2.19
New Zealand is a small partnering market compared to Australia and the United Kingdom, and participants in our research raised concerns that projects here are unlikely to be large enough in size or number to attract enough private sector interest, either from New Zealand-based or international companies. However, there is evidence of a reasonable level of interest from the private sector in entering into a partnering arrangement involving private financing for roading and water projects.

2.20
During the course of our research, interviewees proposed several possible approaches to attracting private sector interest in New Zealand. These included co-operating with Australian governments to establish one Australia/New Zealand market for PPPs, and “bundling” small contracts (such as contracts to build a number of roads) into a larger package to make them more commercially attractive. The State of Victoria has adopted the latter approach for schools contracts, for example. Interviewees also proposed that small-scale versions of PPPs (“PPP-lite”) might be adopted in New Zealand.

2.21
Bidding costs for both public and private sector parties are usually high, which is also likely to narrow the bidding field.¹² The United Kingdom government and the Victorian state government have taken several steps to reduce bidding costs, including improving the quality and clarity of tender documents and drawing up standard contracts with broad market acceptance (though this takes time). The adoption of small-scale versions of PPPs might also reduce the cost and complexity of the procurement process.

2.22
Time will be needed in New Zealand to build a local market with clients, contractors, and financiers who are experienced in the use of partnering, especially arrangements that have the characteristics of PPPs. Establishing a market for long-term partnering arrangements, especially those that involve private financing, needs significant involvement from experienced companies, which are likely to be based overseas.¹³ However, the international partnering market is competitive, and international bidders and funders will invest their time and money in New Zealand only if they have the confidence that there is a real opportunity.¹⁴

Legislative framework in New Zealand

2.23
Generally speaking, in New Zealand the Crown has executive power to enter into partnering arrangements. Statutory bodies (including Crown entities) and local authorities can enter partnering arrangements to the extent that their enabling legislation permits. Crown-owned companies (including Crown entity companies and State-owned enterprises) are limited only by their constitutions and any restrictions lawfully imposed by their shareholding Ministers.

2.24
In each case, the power of a public entity to enter a partnering arrangement is subject to any procedural or substantive limits imposed by statute.

2.25
Three examples of procedural limits are:

• the duty of a Crown entity to give written notice to its responsible Minister of its intention to acquire an interest in a partnership or joint venture, and to act consistently with its statement of intent (see section 100 of the Crown Entities Act 2004);
• the need for a local authority to adopt, and act in accordance with, a policy on partnerships with the private sector (see section 107 of the Local Government Act 2002);¹⁵ and
• the need for Ministerial approval of any concession agreement for roading activities or for tolling roads, and for Land Transport New Zealand’s approval of the procurement procedure for any transport project which it is to fund (see sections 25, 46, and 56 of the Land Transport Management Act 2003).

2.26
There are currently only 2 substantive limits on partnering arrangements. They concern water and wastewater services, and prisons management:

• A local authority or council-controlled organisation cannot use assets of its water services as security, and cannot vest ownership in, or lose control of, water services assets. Contracts and partnerships are permitted for any aspect of the operation of a water service, for a term of up to 15 years, but the local authority must keep control of all matters relating to pricing, managing, and setting policy on the delivery of water services (see sections 130 and 136 of the Local Government Act 2002).
• The Corrections Act 2004 prohibits the Crown from entering into any contract to manage any prison. Even if the ongoing service provision aspect of a partnering arrangement were for other services, the Crown’s retention of control over management may make this difficult in practice.

5: This observation is not relevant to project alliances, which have been established in New Zealand and in other jurisdictions without the need for a high level of central government direction or support.

6: Laughlin and Broadbent, Australian Accounting Review, Vol. 14, No. 2.

7: Partnerships Victoria policy, June 2000.

8: A contract to build, own, operate, and maintain western and southern bypasses that would connect 3 of the 4 highways surrounding the business district.

9: See Appendix 8 for a list of Partnerships Victoria guidance documents.

10: Working with Government, Guidelines for Privately Financed Projects (November 2001), New South Wales Government.

11: The Re-negotiation of the PFI-type deal for the Royal Armouries Museum in Leeds (2001), Report by the Comptroller and Auditor General, HC 103, Session 2000-2001, National Audit Office, London.

12: Maguire and Malinovitch, Australian Accounting Review, Vol. 14, No. 2.

13: In the case of project alliances, expertise exists within some public entities in New Zealand, such as Transit New Zealand.

14: Margaret Mabbett, KPMG, Public and Private Sector Partnerships, Conferenz, Auckland, August 2002.

15: The term “partnership” is not defined in the Act.