Part 4: A comparative analysis and review: 2006-2011
4.1
In this Part, we summarise the findings and observations from an analysis of the market for PPPs.
The maturity analysis
4.2
In 2006, Deloitte published Closing the Infrastructure Gap: The Role of Public-Private Partnerships. This paper included a worldwide "maturity" analysis of PPP programmes. It compared the maturity of countries' PPP markets using typical success factors based on levels of sophistication and activity.
4.3
We asked Deloitte to review and update its maturity analysis. This was done through discussions with PPP market participants in New Zealand and other selected countries.
4.4
The maturity analysis groups PPP markets into three stages:
- Stage One: the developing PPP market;
- Stage Two: the active PPP market; and
- Stage Three: the well-functioning and mature PPP market.
4.5
The market's maturity was assessed using nine success factor themes:
- awareness of risk transfer principles;
- public sector PPP experience;
- private sector PPP experience;
- community and stakeholder support;
- market size;
- stable and supportive public sector environment;
- available funding;
- recognising and achieving outcomes and innovation; and
- legal framework and commercial structures.
4.6
Figure 5 shows Deloitte's current assessment of New Zealand's PPP market maturity and its potential movement compared with other countries with similar partnership programmes.
Figure 5
Comparing the market maturity of public private partnerships in different countries
4.7
In 2006, New Zealand's PPP market was assessed as "developing", with pockets of Stage 1 and early Stage 2 activity in, for example, the transport sector.
4.8
Deloitte considers that New Zealand has moved firmly into Stage 2 of the maturity framework. The NIU, set up as a dedicated central agency, has published a draft standard form contract and draft guidelines to support public agencies with transactions. Two pilot projects are testing innovative approaches, such as contracting for outcomes, and are helping to improve structuring arrangements more suited to this country. However, there remains relatively little PPP activity.
4.9
The international landscape has changed because the global financial crisis has affected the investment potential of PPPs and the ability of the public sector to afford them.
4.10
Britain's PPP market is the most mature, with sector-specific agencies and contracts. The market has a well-diversified capital base with financial instruments to fund projects for their entire term and to price specialised risks.
4.11
Canada's PPP market has moved into Stage 3, with high market activity and sophistication. Canadian innovations include the use of federal grants to subsidise project financing, obtaining Cabinet pre-approval for projects up to an agreed level, and engagement with the resource consent approving agency during the bid process.
4.12
Ireland, which has many parallels with New Zealand in terms of population and being near a much larger market, has a well-established PPP market. Around 2000, Ireland's National Development Finance Agency helped set up the programme by running the procurement process on behalf of government agencies. There have been about two to three projects each year. This has been enough to support the market, although activity has slowed because of Ireland's economic crisis.
Observations and findings
4.13
New Zealand is pioneering two innovations that, if successful, will further raise the country's position on the PPP maturity curve.
4.14
The Wiri prison PPP includes providing custodial services in its performance specification. The contract transfers risk and responsibility to the private sector, not just for design and building, but for delivering services with performance-specified outcomes. The project's most innovative feature is to partly link the output specifications and associated payment mechanisms to social outcomes such as reduced reoffending.
4.15
The current standard contract includes generic "front end" contract provisions designed to be applied consistently in PPPs, with more detailed and specific "back end" schedules as appendices. Deloitte considers that if this approach can be streamlined (into, for instance, a smaller-scale, or "PPP lite", variant) requiring a fraction of the bid costs and time frames of traditional PPP transactions, its use could extend the benefits of PPP procurement into projects that have been considered too small to procure using the PPP approach.
4.16
Deloitte believes that achieving this streamlining will be challenging but, if successful, will demonstrate world-class innovation. In particular, achieving a working outcomes-based payment mechanism is ambitious for a first PPP project. Further, adopting a procuring approach supported by a more streamlined contract requires a change in mindset from a traditional "contract-focused" approach to a "partnership approach".
4.17
Paragraphs 4.18 to 4.59 provide a summary of Deloitte's commentary and observations about each of the success factors grouped under the nine themes. At the end of each section, a table summarises Deloitte's assessment of New Zealand's maturity using the success factors that contribute to the stage of maturity.
Awareness of risk transfer principles
4.18
There is a broad understanding of risk-sharing principles in the context of value for money, and, in particular, the principle that the party best placed to manage a specific risk should be allocated that risk. Because of the country's lack of experience with PPPs, participants have found it challenging to identify which risks should be transferred. Work on modelling these risks continues.
4.19
Many participants are small and lack the financial capacity to absorb losses and penalties linked to exposure to inappropriate levels of risk. Although larger private sector participants have invested resources to understand and price risk transfer in PPP opportunities, many smaller participants lack the same understanding. Therefore, smaller participants must rely on advisors or co-bidders to gain this understanding.
4.20
There is a general consensus that the private sector would generally manage well the design, building, and labour risks. However, transferring to the private sector those risks linked with demand for services, insurance, refinancing or resource consents was seen as unlikely to be good value for money.
4.21
Government entities, such as the New Zealand Transport Agency, have built up knowledge of PPPs independently of the NIU, but knowledge remains patchy throughout the public sector.
Figure 6
Awareness of risk transfer principles
| Stage 1 Maturity | Expectations of risk transfer are appropriate and ensure that only risks that can be better managed in the private sector are transferred. | achieved |
| Risks that may not represent good value for money to transfer because of the immaturity of the PPP environment have been identified. | partly achieved | |
| Stage 3 Maturity | Advanced approaches to understanding and modelling project risks are employed. | partly achieved |
| There are standardised sector-specific risk allocation processes as a starting point for negotiations. | not achieved |
The public sector's experience of partnering with the private sector
4.22
The NIU has a central role in expanding public sector agencies' knowledge of PPP principles and practice. It helps government agencies prepare for, evaluate, and carry out PPP transactions by providing access to knowledgeable and experienced professionals.
4.23
How much public sector agencies know about PPP principles and practices varies. Agencies preparing for or participating in PPPs know the most and have appointed teams to manage the process.
4.24
Public sector participants and their advisors play an important role in developing parts of the private sector market. Participants interviewed appreciated the NIU's efforts to consult widely to understand issues relevant to setting up a PPP market and to regularly engage with the market.
4.25
Much of the focus of the public sector procurement teams has had to be on negotiating successful transactions. When these transactions close, monitoring outcomes and benefit realisation will become a priority. Maintaining a continuity of knowledge during the transition from negotiation to monitoring will become more important.
Figure 7
Public sector experience of public private partnerships
| Stage 1 Maturity | Public sector agencies have the necessary knowledge of PPP commercial principles. | achieved |
| A Public Sector Comparator model has been established. | achieved | |
| A central agency has been established to support government departments responsible for procuring projects. | achieved | |
| A central agency has been established to support local authorities responsible for procuring projects. | not achieved | |
| Stage 2 Maturity | Processes are in place to monitor the project outcomes and realisation of expected benefits. | partly achieved |
| Public sector agencies have experience in PPP transactions. | partly achieved | |
| Dedicated PPP units have been established in public sector agencies. | partly achieved | |
| Stage 3 Maturity | Public sector agencies understand the skill sets that are needed to execute PPPs and have access to an appropriately experienced team (including advisors). | partly achieved |
| Processes are in place to ensure knowledge transfer from advisors to government agencies. | not achieved |
The private sector's experience of partnering with the public sector
4.26
Private sector participants do not all have the same knowledge and experience of PPP concepts. Some participants, especially the larger ones, have invested heavily in capability and have used international networks to participate effectively. However, some smaller organisations lack the resources to access PPP knowledge or experience.
4.27
Although the domestic market capabilities may increase, in the short term, most PPPs will need foreign participants, especially to obtain equity funding or to deliver specialised operational services. Participants reported a lack of depth in the market for facility managers.
4.28
Some foreign participants do not fully understand New Zealand's commercial environment and unique aspects of its PPP programme. They must invest time and resources to compete effectively.
4.29
There are enough accounting and technical advisors in the market. Many have drawn on their international networks and recruited resources with experience in overseas PPP markets. However, relatively few firms can provide full financial advisory services and support, such as taxation and audit advice, which international market participants are used to.
4.30
The legal services market does not have enough experienced PPP advisors to support multiple bidders and the procuring agency without overlap.
Figure 8
Private sector experience of public private partnerships
| Stage 1 Maturity | Private sector participants know PPP commercial principles. | achieved |
| Private sector participants have experience in PPP transactions. | partly achieved | |
| Stage 2 Maturity | There are enough market participants with the appetite, financial capacity, knowledge, and experience to take part in and sustain a competitive PPP market. | partly achieved |
| Stage 3 Maturity | The PPP environment has innovative features. | partly achieved |
Support from the community and stakeholders
4.31
Many people, the media, communities, and stakeholder organisations do not understand PPPs. This situation is slowly improving. For instance, the Social Policy Unit of the Salvation Army recently published a well-informed policy perspective on PPPs, using Australian social housing PPPs as examples.
4.32
Some larger Māori organisations are well informed and have shown clear interest in participating in PPPs. However, they are aware of the high costs of participating effectively and, therefore, are taking time to better assess the opportunities and risks of investments.
4.33
Māori organisations could play a potentially important role in the PPP market as:
- potential equity sponsors, given their long-term investment horizon, experience in managing land and infrastructure-based assets, and intergenerational view of asset stewardship;
- potential service delivery providers, given existing iwi-led involvement in delivering some public services (such as education, social accommodation, and healthcare), especially where such services can potentially improve social outcomes for Māori and the wider community; and
- participants in meaningful public consultation.
4.34
Foreign participants can find it hard to understand Māori perspectives and issues.
Figure 9
Community and stakeholder support for public private partnerships
| Stage 1 Maturity | The community and stakeholders understand and support the PPP programme. | partly achieved |
| Stage 2 Maturity | Māori understand the PPP environment and how they might become involved in the project. | partly achieved |
| The role of Māori organisations in developing the PPP environment is understood. | partly achieved |
The size of the market
4.35
Maintaining an adequate number of projects or programmes is seen as an essential prerequisite to encouraging investment in bid teams that have the skills required to participate in PPPs.
4.36
It is important that the size and number of projects is balanced against market depth. The current balance is reasonable, but any reduction could result in a loss of private sector interest.
4.37
The international PPP community sees New Zealand as part of the Australasian market. The New Zealand PPP market appears to be developing unique characteristics. The further it diverges from Australian market norms, the more difficult it will be to attract market participants from overseas.
4.38
Within the main private sector participant groups of equity sponsors, contractors, facilities management operators, service providers, debt funders, and advisors, there are at least two to four leading players, providing a theoretical minimum base for a competitive PPP market. However, the lack of depth creates the risk that competition could be weakened if some participants leave the market.
4.39
PPPs vary greatly in size. Participants expressed concern that medium-sized projects might not generate enough interest from larger investors and contractors, while the relatively high costs and project complexity of such projects could be beyond the capabilities of smaller contractors.
Figure 10
The scale of the market for public private partnerships
| Stage 1 Maturity | There are enough market participants to form a robust, competitive environment. | achieved |
| The number of PPP projects is enough to sustain the market. | partly achieved | |
| The market has the scale to support multiple simultaneous projects. | partly achieved | |
| Stage 2 Maturity | There is enough opportunity to keep the private sector interested. | partly achieved |
| The market is deep enough for each of the main market participant roles: contractors, operators, facilities managers, equity sponsors, debt funders, and advisors. | partly achieved | |
| Stage 3 Maturity | There are innovative hybrid delivery models. | partly achieved |
A stable and supportive public sector environment
4.40
New Zealand's high standards of public sector governance and procurement are a good base for a successful PPP programme, and the country's credit quality is seen as high.
4.41
Since 2008, the Government has strongly supported PPPs. The two pilot projects signal its support for the wider use of PPPs. The Government has indicated that PPPs should be considered for projects or programmes with whole-of-life costs exceeding $25 million.
4.42
The NIU's evaluation criteria are transparent. Participants in the market clearly understood the need to demonstrate value for money. Some participants with international experience have concerns about the contracting-for-outcomes model.
4.43
Probity standards in this country are high. It is important that they remain high to maintain a fair, transparent market. Imposing excessive compliance costs or restrictive rules could discourage participation.
4.44
Market participants are confident in the Government's commitment to seeing current PPPs through to financial close, and in its financial capacity to afford contracted payments.
Figure 11
A stable and supportive public sector environment
| Stage 1 Maturity | Government support for the use of PPPs as a procurement option. | partly achieved |
| Departmental level support exists for PPPs. | achieved | |
| Evaluation and award criteria are transparent. | achieved | |
| The standards of probity applied by procuring agencies are appropriate. | partly achieved | |
| There is confidence in the Government's commitment to projects. | achieved | |
| Stage 2 Maturity | There is confidence in the Government's long-term financial capacity. | achieved |
| The credit quality of the procuring agency is enough to support long-term financial commitments. | achieved |
The availability of funding
4.45
The lack of sophistication and financial instruments in the domestic capital markets constrains the growth of PPPs. In particular, there are:
- limited lending indicators and poor liquidity in the long-term debt market, which makes it difficult to price the risk of refinancing debt;
- few lending institutions with a local deposit base to help support the risk of long-term lending in domestic currency; and
- no established financial instruments that could act as alternatives to bank debt.
4.46
Few specialised domestic equity sponsors are in the market. New Zealand has no secondary market for PPP funds.
4.47
However, the four leading commercial banks – ANZ, ASB, BNZ, and Westpac – and international banks active in the PPP market have enough debt funding capability and lending appetite to support most transactions.
4.48
Australian banks' high share of the domestic banking market and the limited availability of long-term funding instruments to support local currency lending are seen as a possible constraint on the number of bidders that can take part in large transactions.
Figure 12
The availability of funding for public private partnerships
| Stage 1 Maturity | There are enough equity providers with the appropriate financial capacity and sophistication available. | not achieved |
| There are enough debt providers with the appropriate financial capacity and sophistication available. | partly achieved | |
| Stage 2 Maturity | Capital markets have the features needed to support the environment for PPPs. | partly achieved |
| Market participants have access to the relevant financial instruments to allow hedging of relevant risks. | partly achieved | |
| Stage 3 Maturity | Innovative debt funding instruments support the market. | not achieved |
Recognising and achieving outcomes and innovation
4.49
Public sector agencies have embraced a focus on whole-of-life project outcomes.
4.50
Output and service specifications and associated payment mechanisms have been drafted to reward innovation and encourage behaviour to improve outcomes. The extent of these innovative outcomes-based payments mechanisms could potentially push New Zealand up the PPP maturity curve. However, it is not yet possible to assess how effective these innovations are and whether they can be extended to the wider public sector.
4.51
Market participants suggested that more innovation and more efficient outcomes could be achieved by giving more feedback to bidders to ensure that they understand project requirements well. Continuing to clearly signal potential future PPP opportunities would help private sector organisations to prepare adequately.
Figure 13
Recognising and achieving outcomes and innovation for public private partnerships
| Stage 2 Maturity | Clear public sector expectations of project objectives and outcomes, including clearly defined output specifications and service specifications. | achieved |
| The main benefits of a successful PPP programme are well understood. | achieved | |
| Stage 3 Maturity | The approach to procurement focuses on the entire life of projects. | partly achieved |
| Processes are in place to use private sector innovation in the wider public sector. | partly achieved | |
| Delivering PPP projects has changed how organisations behave. | partly achieved |
Legal framework and commercial structures
4.52
This country's established common law tradition, based on respect for contracts, reputation for transparency, and good standards of governance, gives the international market confidence.
4.53
The NIU has drawn up a standard draft contract from first principles. It incorporates precedent from other countries with established PPP markets.
4.54
The NIU has issued preliminary guidance to help government agencies, to be applied at the agencies' discretion. The unit is drawing up more comprehensive guidance, incorporating experiences from pilot projects.
4.55
The market sees a standard contract as being essential for delivering PPPs efficiently. However, some private sector participants say that provisions for risk transfer are weighted in favour of the Government and differ from provisions in other markets.
4.56
The standard contract, designed specifically for New Zealand, is unique. This requires prospective bidders to invest time understanding the approach used. Some participants were concerned that the standard contract might require major project-specific amendments to meet the needs of more (and less) complex transactions and could threaten value for money, particularly on smaller projects or programmes.
4.57
Sector-specific standard contracts, which are common overseas, do not yet exist in New Zealand, given the market's size and lack of projects in specific sectors.
Figure 14
The legal framework and commercial structures for public private partnerships
| Stage 1 Maturity | Standard contracts have been developed. | achieved |
| Enabling legislation is in place. | achieved | |
| Required legislative and regulatory framework is in place to support the PPP programme. | partly achieved | |
| Stage 2 Maturity | Legal precedents show that commercial structures and contracts are enforceable. | partly achieved |
| There are agreed standard provisions within contracts. | partly achieved | |
| Standard contracts have a proven history of being fundable. | not achieved | |
| Stage 3 Maturity | There is sector-by-sector developing of standard contracts. | not achieved |
| Standard contracts have proven durable during operations. | not achieved |