Part 2: Introducing public private partnerships

Managing the implications of public private partnerships.

In this Part, we consider the worldwide use of PPPs, where they sit on the partnering spectrum, and what general features are apparent in all PPPs. We summarise the environment, outline the history of the current PPP approach, and describe the Government's recent focus. We then compare the approach's advantages and disadvantages and discuss the implications for achieving value for money.

The spectrum and general features of public private partnerships

PPPs are a type of partnering arrangement between the public and private sectors but there is no overarching definition or common approach.

Across the world, different PPP models exist. These include the British "contractual" model, which prioritises the contract over the partnership, and the continental European "relational" or "institutional" model, which prioritises the partnership over the contract. Names used to describe the partnering approach include Public-Private Interaction, Public-Private Co-operation, Private Finance Initiative, and Private Sector Participation. There is even a variant used by the Scottish Government called the Non-Profit Distributing Public Private Partnership, where no dividend-bearing private sector equity is used.

One reason for this diversity is that few common features distinguish PPPs from general procurement. A recent international review3 of 19 definitions of PPPs listed five common elements:

  • a contract or an arrangement;
  • the provision of public infrastructure or services;
  • the transfer of risk from the public sector to the private sector;
  • a reward system based on performance or output; and
  • a focus on service delivery.

Governments that have moved towards a more centrally co-ordinated PPP programme recognise the diversity but usually tailor their approach to a particular context, adopting formal and standardised definitions.

The United Kingdom's Treasury describes PPPs generally but recognises a common form involving private sector investment in infrastructure:

Public private partnerships (PPPs) are arrangements typified by joint working between the public and private sector. In the broadest sense, PPPs can cover all types of collaboration across the interface between the public and private sectors to deliver policies, services and infrastructure. Where delivery of public services involves private sector investment in infrastructure, the most common form of PPP is the Private Finance Initiative (PFI).4

The New Zealand Treasury's National Infrastructure Unit (NIU) notes that the term PPP can refer to many different kinds of relationship between the Government and the private sector but that generally it refers to:

… a long term contract for the delivery of a service, where the provision of the service requires the construction of a new asset, or the enhancement of an existing asset, that is financed from external sources on a non-recourse basis.5

Figure 1 shows a core set of PPP examples, including those supported by the NIU, within the spectrum of possible partnering approaches.

The core PPPs are not all new. Many involve large, new, capital investment and use conventional contracts with private financing.6

Looking across the spectrum and considering other PPP literature and practice, there are three general and common features of these core PPPs:

  • a focus on providing and performing a public service through a particular project or programme – a PPP's ultimate objective is delivering a project or programme that performs a public service;
  • a material transfer and acceptance of risk by the parties – each partner taking responsibility for some of the future uncertainty in performing the service; and
  • an expectation of mutually beneficial and mutually dependent organisational or project/programme change – a common responsibility helps each partner to deliver services more creatively, effectively, and efficiently.

These features allow PPPs to create a platform that brings together the public and private sectors in a way that if successful, encourages both partners to be more creative and innovative in meeting the evolving needs of public sector stakeholders.

The enabling function is sometimes expressed as PPPs providing a "catalyst for change" and the expectation of innovation has become a fundamental feature of the PPP approach.

Figure 1
The partnering spectrum

Figure 1: The partnering spectrum.

Adapted from World Bank and the Public-Private Infrastructure Advisory Facility (2007) Public-private partnership units.

The following case study shows how Whānau Ora, an inclusive approach to providing integrated services and opportunities to families, sits on the edge of the PPP boundary.

Case Study: Whānau Ora
Whānau Ora is a new approach to working with whānau to provide services and opportunities to help them define and achieve their goals and objectives. In May 2010, the Government at first allocated $134.3 million for Whānau Ora. In May 2011, it allocated a further $30 million. Whānau Ora's focus is to invest in whānau capacity and capability. It helps providers change their business models, trains Whānau Ora practitioners, and improves their systems.

As well as the new funding, existing provider contracts can be integrated. This means combining complex, multiple contracts into a single, simple contract that focuses on results for whānau and families, allowing providers to focus more on the whānau they work with.

In 2011, 350 external providers (most working in collectives of up to 17 providers) submitted 130 expressions of interest to deliver Whānau Ora projects, programmes, and initiatives.

Whānau Ora has characteristics of a PPP:
  • it generates and delivers innovation and change in the way public services are delivered, using arrangements with organisations outside the public sector; and
  • there is material acceptance and transfer of risk between the parties some provider collectives have made significant investments using their own resources in, for example, leasing/buying new buildings in which to work.
However, the process of generating this innovation and change is co-operative rather than competitive. Whānau Ora is an umbrella concept that guides and co-ordinates a new way of thinking about service delivery, rather than being focused on any one project or programme.

This umbrella concept resembles two British initiatives: the Local Improvements Finance Trust (or LIFT) and the Building Schools for the Future programme. The latter has been described as a "super structure PPP" and the LIFT initiative as a "long term, strategic PPP partnership".

The main lessons learned so far from this innovative Whānau Ora process include:
  • the importance of a strong public accountability and decision-making framework to support trust and encourage working with the community and other stakeholders; and
  • the importance of community involvement and perspectives in encouraging innovation.

The environment for public private partnerships

PPPs bring together many participants and activities in an inter-related and mutually dependent way.

Figure 2 provides a general overview of the public and private sector participants and activities that can surround a PPP project or programme. It shows each sector's inputs into the process from policy development to service delivery.

Figure 2 is based on a contemporary New Zealand form of PPP. This involves a consortium of private sector participants contracting with a public sector body, and where there is a clear separation of ownership and financing. Professional consultants are used as needed throughout the process.

Figure 2
The public private partnership environment

Figure 2: The public private partnership environment.

Figure 2 shows that although some form of contractual arrangement will be central to organising the process and the parties, the ultimate success or value of these partnerships will depend on whether each sector has the capability, capacity, and institutional structures to support and sustain the project/programme, the participants, and the process.

A brief history of the policy environment

The public sector has always contracted with the private sector. The idea of encouraging and using partnering arrangements with the private sector to deliver services began to emerge in New Zealand in the late 1980s.

In 1989, although the then Government's focus was on privatisation and corporatisation, the Local Government Act 1974 was amended to allow councils to establish standalone entities as partnerships that could carry out certain council-related activities. A number of these partnerships (an early form of PPPs) were set up to carry out roading and other maintenance contracts.

The new Local Government Act of 2002 provided new possibilities for local authorities to work in partnership with other institutions, including central government, other councils, the private sector, and communities. The 2002 Act allowed the greater use of PPPs and required a PPP policy to be prepared and adopted as part of the long-term council community plan (now called long-term plan).

One year later, the Land Transport Management Act 2003 allowed public road controlling authorities to enter PPP-style concession agreements (see Figure 1) with third parties to build or operate roads. The term of the concession could not exceed 35 years and the responsible Minister had to approve any such agreement.

Large infrastructure PPPs were entered into during the last two decades, with most involving local authorities or transport projects. Apart from the transport projects, there was little central government involvement and no centralised policy or guidance.

The Mangawhai EcoCare case study summarises a PPP carried out by a local authority.

Case study: Mangawhai EcoCare Wastewater Treatment Scheme Project
In the early 1990s, the Mangawhai EcoCare Wastewater Treatment Scheme Project began when the water quality in the Mangawhai estuary, north of Auckland, became noticeably degraded because of the cumulative effect of sewage disposal, geographic features, the number of people in the area during peak seasonal periods, and the use of septic tanks and long drops.

After the 1998 local government elections, Kaipara District Council engaged project managers who had Australian expertise in PPPs. The initial plan envisioned a "Build Own Operate Transfer" PPP model, with the assets being transferred to the Council in 25 years.

However, the initial plan was changed when the Local Government Act 2002 came into effect. In late 2005, from a short list of three companies, tenderer Earthtech Engineering Limited (now Water Infrastructure Group) won the contract to provide wastewater services to Mangawhai for up to 15 years, including providing a wastewater collection, treatment, and disposal system.

In January 2007, work on the $65 million EcoCare Scheme began. In July 2009, the first house was connected. The scheme includes 21 kilometres of sewers, 15 pumping stations, six kilometres of rising mains, a small water-reclamation plant, an 11-kilometre reclaimed-water transfer pipeline and a 180 megalitre reclaimed-water storage facility and irrigation system. Today, more than 2000 properties are connected to the scheme, which has the capacity to service 4500 properties.

The Council sought innovation from the market, long-term certainty in wastewater treatment, affordability, and improved water quality in the Mangawhai estuary. A major achievement of the project was the ability to change the scope of the works during the project development and construction stages.

Some of the lessons learned from the project include:
  • there is a clear need for expertise and experience with PPP projects to ensure success;
  • flexibility is important, particularly where changes in demand are expected;
  • frequent and effective communication with the community and other stakeholders is essential; and
  • a PPP education programme throughout the Council's organisation was needed.
The project has attracted much local comment. The last two lessons could have helped mitigate some public concerns that the Council faces.

The Government's recent focus

In 2008, the then opposition party's pre-election policy on infrastructure expressed the need for more investment in infrastructure through more private sector involvement and "greater use of public private partnerships for the development and management of infrastructure assets".7

Since then, government initiatives have encouraged private sector involvement in infrastructure. These initiatives include:

  • appointing a Minister for Infrastructure to reshape, co-ordinate, and oversee infrastructure objectives;
  • setting up the NIU within the Treasury;
  • establishing a National Infrastructure Advisory Board to advise the NIU and the Minister for Infrastructure;
  • releasing a National Infrastructure Plan (NIP) and guide to PPPs;
  • drawing up a draft standardised PPP contract; and
  • instigating two PPP "pilot" projects, which are still in progress.

The Treasury's National Infrastructure Unit

In 2009, the NIU was established. Among other things, the unit was tasked with providing support and guidance to government agencies when preparing PPPs. This includes supporting the growth of a market for PPPs, establishing the expertise needed, and encouraging local authorities to use PPPs.

The NIU is working on further guidance publications.8 Entities exploring partnering arrangements are encouraged to refer to such guidance for help with developing and assessing their projects.

National Infrastructure Plan

The NIP is designed to reduce uncertainty for businesses by outlining how the Government intends to develop infrastructure during a 20-year period. The NIP provides a framework for developing infrastructure, rather than a detailed list of prospective activities.

The NIP is updated every three years. Two plans have been published, the newer in July 2011.

The public private partnership guide

The purpose of Guidance for Public Private Partnerships in New Zealand is to outline for government agencies, potential bidders and the public the general direction and principles that will be adopted for PPPs, the processes that are to be followed, and the rationale for them.9 This guide provides a framework for assessing whether a PPP is to be preferred over other forms of procurement. The NIU's Better Business Cases for Capital Proposals has further guidance.10

The public private partnership contract

The Draft PPP Standard Contract is meant to streamline and improve the consistency of the public sector's approach to PPPs. Its objectives include "achieving value-for-money, optimal risk transfer and standardisation".11 The draft includes "model terms" and does not deal with matters that are specific to individual projects/programmes or sectors.

Two pilot public private partnership projects

The NIU supports two active pilot projects. These are Wiri prison (begun in 2010) and two schools at Hobsonville Point (begun in 2011). The Wiri prison PPP is an "all services" project where the private sector designs, builds, funds, maintains, and operates the prison. The Hobsonville Point Schools project is a much simpler asset-based PPP in which the private sector designs, builds, funds, and maintains the school facilities but does not provide any educational services.

The following case study summarises the Hobsonville Point schools PPP, which has used the NIU's standard project agreement as the basis for structuring a PPP on a smaller, less complex, scale compared with the Wiri prison PPP.

Case study: Hobsonville Point schools
In early 2011, the Government announced that it intended to commission two new schools under a PPP framework. The schools at Hobsonville Point, in north-west Auckland, are a primary school for 690 students and a secondary school for 1500 students. The schools will be built on separate sites owned by the Ministry of Education (the Ministry).

The Ministry intends to engage a private sector partner to design, build, finance, and maintain the two school properties. The contract is for 25 years after completing the secondary school. An Establishment Board of Trustees has been appointed to prepare the education vision for both schools. This helps to define the output specifications for the project.

In March 2011, the tender process began. The primary school is expected to be built by January 2013 and the secondary school by January 2014. Because the focus of this PPP was on the property aspects, the procuring process was shorter and faster, saving bid costs for the private consortia, compared with the Wiri prison PPP. The Request for Proposal (RFP) time frame was 12 weeks, whereas the Wiri prison RFP time frame was 20 weeks.

This project has benefited from learnings from the Wiri prison PPP documents and process. This sharing of knowledge between projects is a core objective of the PPP programme because it helps streamline the procurement processes.

A Ministry project team that includes staff from throughout the Ministry manages the PPP. External consultants support the project team. Every month, the team reports progress to a steering group chaired by a Deputy Secretary of the Ministry and made up of representatives from the Ministry and the Treasury.

The PPP is expected to be marginally better value for money than traditional procuring, but new design, financing, and maintenance techniques are expected to provide large qualitative benefits. Further, the project aims to reduce the amount of time spent by school principals and boards of trustees on property issues, allowing them to concentrate on improving educational outcomes for students. This should flow through to the wider education property portfolio and public sector.

The main lessons learned so far from the process include the importance of:
  • considering carefully the PPP's objective and the particular service needs it seeks to address;
  • an engagement strategy that reflects the private sector's ability to manage risks and costs effectively;
  • expertise to lead and manage the project; and
  • getting the contract documents right for the objectives and specifications of the projects.

The advantages and disadvantages of public private partnerships

Many publications and reviews list potential advantages and/or disadvantages of PPPs. These lists are usually based on long-term infrastructure contracts, which include a large element of private financing. In many cases, these are used to debate the perceived value-for-money differences between the PPP approach and traditional ways of procuring. However, working out which factors are most important to the value-for-money outcome is difficult and open to interpretation.

In 2010, reflecting on the polarised debate, Graeme Hodge and Colin Duffield noted:

Internationally, much has been written on PPPs, although this has often amounted … to little more than blatant policy salesmanship and stinging critical rhetoric. International studies show widely varying results, with some studies claiming high VfM [value for money] compared to traditional infrastructure delivery approaches and others claiming just the opposite.12

Much of this variation arises from the diversity of the PPP approach, but there is often little recognition that an advantage can have related disadvantages. Figure 3 lists the advantages commonly used by commentators to promote PPPs and shows how many have related and sometimes significant disadvantages for the public sector.

Figure 3
Advantages and disadvantages of public private partnerships

Stated advantages for the public sector Related disadvantages for the public sector
Greater risk transfer to those parties best able to manage that risk Difficulties in specifying, pricing, and the ownership of risk

A monetary cost to the public sector in transferring that risk

Ultimately, the public sector is responsible for delivering core or essential services
Related to the greater risk transfer, there can be more certainty in costing and timing of projects or programmes Longer, more detailed, and more costly procuring
Not having to find the money to pay for the project or programme immediately Need to pay for the project or programme cost over the operational stages
Being able to spread the cost of services over the lifetime, meaning greater intergenerational equity Less flexibility through a long-term contract to manage the overall business in response to agreed or changing needs and policies

Future users could be disadvantaged if the level of service quality changes over time
Greater third-party scrutiny and accountability through funders, sponsors, and stakeholders More complex contract, higher procurement costs

Different parties with differing motivations and incentives (greater overall governance needs)
Brings together (bundling of) various activities (such as design, construction, maintenance, and operations) to allow a whole-of-life perspective Reduces the options available to manage the project or programme in discrete steps over time

Can create difficulties when the service quality (or outcome) requirements cannot be defined clearly

Can encourage upfront choices that reduce future costs at the expense of future service quality
Less project or programme management required Greater contract and performance management required
Potential innovation and change in the way the project, programme, or service is planned, structured, and delivered (from private sector involvement) The potential risks in achieving innovation and change will depend on the maturity of the sectors and the relationship between the parties

The net effect of these trade-offs means that, in most cases, it should be expected that the main value for money difference compared with traditional procurement arises from the potential of the private sector to deliver innovation and change in the PPP's service delivery objective. The public sector uses the private sector to help achieve this innovation and change but must also support the relationship and the process by clearly specifying these innovative benefits, how they are rewarded, and then by monitoring their progress in a transparent and accountable way.

This potential for innovation is a major benefit and point of difference between PPPs and many traditional or conventional procurement practices. In most traditional procurement, the main aim is to achieve the most competitive price for a fixed or known product or service. The PPP model developing in New Zealand is aimed at achieving the most competitive or innovative product or service for a fixed or known price.

The following case study summarises the NIU-supported Wiri prison PPP, which shows some innovative ideas for planning, structuring, and delivering services.

Case study: Wiri prison
In early 2010, the Government announced that it intended to commission a new prison at Wiri (in South Auckland) to be designed, built, paid for, and operated by a private sector consortium. The proposed men's prison at Wiri in Manukau will have the capability to hold up to 1060 prisoners. It will be built on land owned by the Department of Corrections (the Department). The project is still being procured. The full custodial contract will run for 25 years from the time the prison becomes operational, which is expected to be in 2015.

The Department is seeking to make use of international experience and to drive innovation in addressing the higher rates of reconviction and re-imprisonment, particularly for Māori offenders.

At the heart of the Wiri prison PPP is a requirement for the private sector partner to consistently deliver better performance than the Department over the long term. To do this requires contracting with the private sector to deliver certain social outcomes (for example, ensuring sentence compliance and reduced reoffending) and linking these outcomes to an incentive payment mechanism. The Department places minimal constraints on how outcomes are delivered but, if outcomes are not achieved, then the payments to the private partner will be reduced accordingly.

This contracting-for-outcomes approach is highly innovative and means that private sector performance can be used as a yardstick for the Department's own performance, driving further changes across the wider prison network.

A PPP project team within the Department includes staff who bring PPP expertise gained from other jurisdictions as well as staff from the Department who bring the required areas of expertise about the custodial element of the project. The NIU has been directly involved in providing resource into the project.

Lessons learned so far from the process include:
  • the need for clear project outcomes;
  • the importance of PPP expertise in leading and managing the project;
  • the need for senior managers to support and invest their time in the project; and
  • the need for clear communication about the outcomes being sought.

3: Credit Rating and Information Services of India Limited Infrastructure Advisory (January 2010), Defining PPPs: A cross country review, which is available at

4: See the United Kingdom Treasury's website,

5: NIU (2010), Draft Public Private Partnership (PPP) Standard Contract – Version 2.

6: See our 2006 report, Achieving public sector outcomes with private sector partners, for more details about some of these projects.

7: National Party (2008), Infrastructure: Building for a brighter future

8: These will be available at

9: National Infrastructure Unit (2009), Guidance for Public Private Partnerships in New Zealand, available at

10: National Infrastructure Unit (2011), Better Business Cases for Capital Proposals, available at

11: National Infrastructure Unit (2010) Draft PPP Standard Contract Version 2, available at

12: Hodge, G, Greve, C, and Boardman, A (eds) (2010) International Handbook on Public-Private Partnerships, Edward Elgar, Cheltenham UK, page 420.

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