Archive | Public-private partnerships

Propbd on Q Th28May15 – Subdivision tick, highway PPP, north-west transport review, parking strategy, Metro Glass result

Council withdraws opposition to Rosedale subdivision
NZTA to seek PPP proposals for Puhoi highway stage
Auckland Transport to review north-west needs
Auckland Transport adopts parking strategy
Metro Glass just ahead of forecast

8.40am:
Today’s roundup of items in Propbd on Q includes some which will be expanded and a couple which tell you enough.

Council withdraws opposition to Rosedale subdivision

The Environment Court has granted consent for the 50-unit Grove Estate residential development at 269 Rosedale Rd, Albany, after the council resolutions team withdrew its opposition 2 days before the court hearing.

Development consultant Peter Chevin said the result came after 2 years of application processing and $450,000 of costs to the applicant for what was intended to be an affordable housing project.

After his third win in the Environment Court after subdivision proposals were turned down at council hearings, Mr Chevin asked: “Clearly we are bringing developments together that Auckland needs and the court believes are legal. Why then should it take $450,000 and 2 years to be granted consent?”
Earlier story, 29 September 2013: Estate agent buys into intensive development company ahead of consent rejection

NZTA to seek PPP proposals for Puhoi highway stage

Transport Minister Simon Bridges said yesterday Cabinet had approved using a public-private partnership for the next stage of the Puhoi-Warkworth Highway.

The NZ Transport Agency will invite private sector companies to put forward proposals for financing, designing & constructing the highway, with a view to awarding a public-private partnership contract in October 2016.

“The private sector will have the opportunity to bring innovative design, operation & risk management to deliver the project more effectively than traditional procurement methods.

“If, however, the private sector can’t offer value for money, NZTA would instead revert to a more traditional procurement model. Construction without a public-private partnership would likely begin around 2 years later than under a PPP.”

The Puhoi-Warkworth project is the first section of the Ara Tuhono – Puhoi-Wellsford road of national significance.

Auckland Transport to review north-west needs

Auckland Transport said yesterday it was undertaking a review into medium- to long-term public transport connections in north-west Auckland, including rail from Swanson to Huapai.

AT Metro general manager Mark Lambert said the review would take into account population growth & development, including special housing areas, and the resulting demand on transport infrastructure.

Auckland Transport adopts parking strategy

Auckland Transport adopted a parking strategy yesterday, which it says will mean a consistent approach for the first time for parking around the whole region.

The document allows for a case-by-case approach to parking, taking into account local issues and the views of local boards & the community. The council-controlled organisation said consultation with the community would continue as parking measures are introduced.

Auckland Transport released its parking discussion document for consultation in May last year, held 22 workshops and received 5500 submissions – half from central Auckland or from cbd fringe suburbs such as Parnell, Ponsonby & Newton, a quarter about the overall management of demand parking, 18% about parking on residential streets and on park-&-rides and 11% about parking on arterial roads.

The final strategy, dozen policies and submissions document are on the Auckland transport website.

Link: Parking strategy & submissions document

Metro Glass just ahead of forecast

Metro Performance Glass Ltd has made slightly more profit than forecast in its first 8 months since listing on the NZX, on sales that were slightly lower.

The company said yesterday it earned $9.6 million (forecast $9.4 million) net after tax on $115 million of sales (forecast $117.8 million). It said construction industry capacity constraints led to delays in the conversion of consents to revenue.

One achievement for future performance is that the company completed the consolidation of its 5 separate Auckland sites into one purpose-built site at Highbrook.

Attribution: Company, ministerial, Auckland Transport releases, court decision.

Continue Reading

Infrastructure position paper thorough on PPPs, short on key issues, offers no comparisons

After having representatives of numerous sovereign funds troop through the mayoral door over the last 3 years looking for major investment opportunities, Auckland mayor Len Brown went to accountancy firm Ernst & Young for a position paper on public-private partnership models.

Auckland Council still needs to find half the $3.8 billion-odd to build the city rail loop, assuming the Government doesn’t first get so many roads completed that the gain in commutes on the existing rail network doesn’t reach the Government’s required figure.

If that happens and the Government pulls out of the rail project, the council would have to find even more money to make it work.

The 67-page position paper, by Grant Hodges, Libby Proctor & Ben King and released selectively over the last 2 days, concludes public-private partnerships are an option for Auckland.

Mr Brown said one of the benefits of the Auckland amalgamation was creating the scale to make PPPs at a civic level possible for the first time.

Ernst & Young said the key decision for Auckland Council to make for individual projects or programmes in a construction collaboration model was whether speed/uncertainty outweighed the risk transfer benefits of long-term service models.

The paper refers to Hawkins Construction Ltd’s disastrous entry into a public-private partnership to build the $A400 million Ararat prison in Victoria, where “the consequences are yet to play out”. The PPP collapsed last year when the 2 builders, Hawkins & St Hilliers, struggled to meet their obligations under a construction joint venture.

Ernst & Young said this experience might constrain the field of construction companies able or willing to bid for PPPs in Australia in the short term, but didn’t appear to have reduced market interest for the Transmission Gully project in New Zealand.

The paper gives examples of PPPs for streetlighting, water infrastructure & leisure facilities, and said the council’s lengthening of concessions for transport projects could make PPPs for them more viable.

“The DBFO / DBFM model (DBFO = design, build, finance & operate; DBFM = design, build, finance & maintain) is a long-term contractual arrangement that makes the private sector responsible for, and bear the risks of, designing, building, financing, maintaining &/or operating a public-sector asset to output specifications set by the public sector. Under the availability-based model, the public sector commits to make a unitary payment to the private sector for use of the maintained asset once it is operational, over the life of the contract (typically 20-30 years).

“DBFO/DBFM structures are usually highly geared, with around 80-90% of the finance coming from debt and the remainder coming from equity.”

The paper doesn’t suggest what an expected rise in interest rates might do to this model.

And it says whole-of-life insurance – including reinstatement for earthquake damage, for example – might not be value for money, given New Zealand’s current seismic activity. The answer, the paper said, was to mitigate this risk “through early engagement with insurance advisors to assess the scale of any issue and to develop a value-for-money risk-sharing approach acceptable to Auckland Council, Treasury & bidders”.

Public-private partnerships are primarily a construction & management mechanism, at high cost for a theoretically better return, enabling the manipulation of the timing of council funds. They don’t replace the need for finance from rates.

In essence, while the paper presents a thorough examination of many aspects of PPPs, it offers the council a one-dimensional view of the future. It doesn’t weigh up PPPs against alternatives and it doesn’t offer other ideas on how to fund major infrastructure.

Mr Brown said he aimed to kickstart a process of looking at options that might work for Auckland, that would clearly define PPP models and what they can – and can’t – deliver: “I wanted a realistic, warts-&-all assessment of PPP models. I wanted to know exactly what value PPPs can deliver – both so we don’t miss opportunities, but also so we don’t trip up.

“PPPs will seldom if ever deliver lower capital costs. We can borrow money at least as cheaply as the private sector. For a PPP to make sense, the prerequisite equation is the value that it delivers – whether it be through applied expertise, commercial synergy, improved service delivery or risk allocation – is greater than any additional cost of finance.

“If Auckland is to be ambitious & prudent, we need to be smart too. While our balance sheet is strong, it cannot sustain the pressure of the magnitude of investment Auckland needs. And the same is true of the Government.”

Mr Brown said he would ask council staff to use the framework presented in this position paper to create a work programme through which the council & wider community “can have a good hard look at all the options and apply the ones that will deliver real benefits for Aucklanders”.

Link: Position paper

Attribution: Mayoral release, position paper.

Continue Reading

Propbd on Q Thurs28Nov13 – Council OK for SH1 extension, highway-plus-Penlink PPP possible, 5 apartments sold, blogger wins council ear, FMA gets new chief

Council supports Puhoi-Warkworth extension, reveals PPP with Penlink possible
Albany centre private plan changed to be notified, 4 plan changes to be made operative
5 apartments sold, but 2 leasehold units passed in
Blogger presents to council, and council listens
Ex-Merrill Lynch senior executive to head FMA

4.20pm:
Council supports Warkworth-Puhoi extension, reveals PPP with Penlink possible

Route map from the Northern Gateway tunnels at Puhoi to Warkworth.

Route map from the Northern Gateway tunnels at Puhoi to Warkworth.

Auckland Council’s new Auckland development committee voted today to support the Government’s proposal for the road of national significance extending the upgraded northern section of State Highway 1 from Puhoi to Warkworth, with appropriate conditions to mitigate effects.

The committee appointed 9 people – 7 councillors plus representatives of the Maori Independent Stautory Board and the Rodney Local Board – to oversee the council submission to the board of inquiry on the road.

The council’s chief planning officer, Roger Blakeley, also said the extension could be the second major infrastructure project to be done as a public-private partnership, assuming Transmission Gully in Wellington is the first.

He said it could also be the first combining a state highway and a local road – Penlink, crossing from Weiti Station to the Whangaparaoa Peninsula.

Albany centre private plan changed to be notified, 4 plan changes to be made operative

The council development committee accepted, for notification, private plan change 42 from Albany City Development Corp Ltd, amending Albany centre business 11 zoning to enable ground-floor residential development.

The committee also approved 4 plan changes to be made operative:

  • North Shore plan change 33, business built heritage areas
  • Franklin plan change 14, in all but one part following Environment Court consent order for Runciman countryside living zone
  • Manukau plan change 37, additions to notable tree schedule 6B, and
  • Rodney private plan change 159, rezoning the Peninsula golfcourse.

5 apartments sold, but 2 leasehold units passed in

Robust bidding at Ray White City Apartments’ auction today saw 5 apartments sold under the hammer, but 2 leasehold units in the Hudson Brown block at Quay Park were passed in. Auction results:

Quadrant, 10 Waterloo Quadrant, unit 1320, sold for $178,500, sales agent Sam Huang
Quadrant, 10 Waterloo Quadrant, unit 617, sold for $171,000, Sam Huang
Amora, 100 Greys Avenue, unit 3G, sold for $227,000, Damian Piggin & Daniel Horrobin
Forte, 37 Symonds St, unit 1105, sold for $170,000, Marcus Fava & James Mairs
Metro, 83 Wakefield St, unit 13F, sold for $166,000, Victor Liu
Hudson Brown, 57 Mahuhu Crescent, unit 214, leasehold, passed in at $170,000, Marcus Fava & James Mairs
Hudson Brown, 57 Mahuhu Crescent, unit 215, leasehold, passed in at $150,000, Marcus Fava & James Mairs

Blogger presents to council, and council listens

Sometimes submitters to Auckland Council do get noticed for attention to detail and suggestions on how to improve the region.

After Talking Auckland blog writer Ben Ross gave a presentation to the council’s new Auckland development committee this morning on developing a 21st-century Auckland, Committee members not only asked questions but started basing thoughts on change preferences on his ideas.

And when Cllr George Wood suggested a committee workshop for politicians & relevant senior staff, deputy mayor & committee chairwoman Penny Hulse started looking at how to make the most of it.

That was after Mr Ross presented a number of ideas proposing quite different plans for central Manukau and mocked the council’s performance so far on one of mayor Len Brown’s favourite projects, the Southern Initiative – a multi-pronged project to lift South Auckland in all ways.

That criticism was effectively supported soon after in an annual implementation update for the Auckland Plan which had, as one of the areas to improve in 2014, ensuring resources are allocated to priority areas – such as the Southern Initiative.

Ex-Merrill Lynch senior executive to head FMA

The Financial Markets Authority has appointed a 45-year-old Englishman married to a New Zealander as its next chief executive.

Rob Everett, a director of global regulatory consulting group Promontory Financial Group LLC, will start at the New Zealand agency on 3 February. Present chief executive Sean Hughes leaves on 17 December and the authority’s head of legal, Liam Mason, will be acting chief in the interim.

Before joining Promontory, Mr Everett spent 17 years at Bank of America Merrill Lynch in Europe, Asia & North America. He had 3 senior roles covering Europe, the Middle East & Africa – as chief operating officer, general counsel & head of legal & compliance, and head of legal for investment banking – and before that for investment banking for the Asia Pacific region.

Background

A new page introduced to The Bob Dey Property Report last year, Propbd on Q has resumed appearing daily, hence fresh cut. It will, in essence, be a running commentary on the day’s news – focusing on property & business around Auckland, NZ securities and emanating from Auckland Council.

Items will be brief, with links to outside sources where quickly available, and with links to previous stories on this site. Many of the items will take the place of stories (which have frequently ended up uncompleted); some will link to stories the same day and some, such as auctions & court liquidations, will be expanded into more detailed stories.

Attribution: Council committee, auction, FMA release.

Continue Reading

Treasury paper finds PPPs not needed

Published 6 April 2006


A Treasury policy perspectives paper issued last Friday has found public-private partnerships (PPPs) may offer the Government nothing that it can’t get in other ways.



Treasury analyst Dieter Katz drew up lists of pluses & minuses in employing PPPs, but weighed in with unresolved problems attached to every plus.


The outcome is a Treasury document telling the Government PPPs would have limited worth for it.


One of the key reasons the private sector has given for employing PPPs is that major projects can be brought forward. Mr Katz said the Government still had to recognise the debt on its books and stay within prudent debt levels, although he could see ways of dealing with the higher debt to overcome public perceptions of a debt increase.


A common refrain from the private sector is that the private sector does it better. Mr Katz acknowledged that, of 61 PPP projects in the UK, 89% were delivered on time or early and all were delivered within public-sector budgets. But he also said only a few were more than one-third the way through their lives.


He also acknowledged changes which occur in purely public sector projects that reduce their efficiency or value, such as budgetary considerations or “other objectives”.


Perhaps most importantly, Mr Katz found “the cost of both successful & unsuccessful bids is, in effect, built into total project costs.” Having several bidders tender for a PPP project “involves a cost which can add up in total to 10s of millions. It has been estimated that total tendering costs equal around 3% of total project costs as opposed to around 1% for conventional procurement.


“The Australian Council for Infrastructure Development has expressed the view that ‘unless tendering processes are well run it is possible that the benefits of using a PPP for delivering the project may be outweighed by the tendering costs’. Under conventional procurement, the sunk costs of private contractors are much smaller and contracts (eg, for operations) often do not exceed 5 years. The risks to be covered off in the contract are therefore significantly less.”


NZ Council for Infrastructure Development chief executive Stephen Selwood criticised Mr Katz’s paper for “largely ignoring international experience that shows public-private partnerships can & do provide better value for money than conventional procurement methods.”


Said Mr Selwood: “The key advantage of PPPs is that by having a vested interest in the performance of an asset over time, the private sector is highly incentivised to innovate and keep costs down over the whole life of the project. The private sector also shares & manages the risks.


“But the Treasury paper argues that most of the advantages of private sector construction & management that PPPs provide can also be obtained from conventional procurement methods. This is in stark contrast to overseas experience.”


Mr Selwood cited a series of UK Treasury reports which concluded: “An increasing body of evidence has shown that the better risk management of private finance initiatives results in a greater proportion of assets being delivered on time & to budget. Research into completed PFI (the UK version of PPP) projects showed 88% coming in on time or early, and with no cost overruns on construction borne by the public sector. Previous research has shown that 70% of non-PFI projects were delivered late and 73% ran over budget.


“The NZ Treasury paper concludes that using private-sector finance to build & operate new infrastructure may be a good way of procuring services, provided service levels can be specified, performance can be measured objectively and performance objectives are durable. These benefits need to be weighed up against the contractual complexities & rigidities PPPs can entail. The Council for Infrastructure Development agrees with this but considers that these preconditions can readily be addressed.”


Mr Selwood said most countries were taking advantage of the public-private approach and significantly advancing construction of infrastructure projects that would otherwise have taken years to build through traditional public sector financing: “The reality in New Zealand is that while the Government could borrow to speed up the construction of roads & other essential infrastructure it seems very reluctant to do so, at least at a level that will advance critical projects. Instead we see a continual deferral of economic projects.”


Key points in the Treasury document:


The main benefits usually attributed to PPPs are accelerated provision of infrastructure projects as a result of using private sector finance and better value for money, due to private-sector innovation & whole-of-life cost minimisation, than can be obtained under conventional private-sector procurement.


This paper argues that:

here are other ways of obtaining private-sector finance without having to enter into a PPP
most of the advantages of private-sector construction & management can also be obtained from conventional procurement methods (under which the project is financed by the Government and construction & operation are contracted out separately)
the advantages of PPPs must be weighed against the contractual complexities & rigidities they entail. These are avoided by the periodic competitive re-tendering that is possible under conventional procurement.

The paper concludes that PPPs are worthwhile only if all 3 of the following conditions are met:

The public agency is able to specify outcomes in service level terms, thereby leaving scope for the PPP consortium to innovate & optimize
The public agency is able to specify outcomes in a way that performance can be measured objectively and rewards & sanctions applied, and
The public agency’s desired outcomes are likely to be durable, given the length of the contract.

Advantages of PPPs


Better whole-of-life project evaluation: Under conventional procurement, individual private-sector companies don’t evaluate the whole-of-life viability of a project because they are only invited to tender for portions of the project. The whole-of-life assessment is carried out by a public agency which doesn’t normally bear the financial consequences of getting it wrong to the same extent as a consortium in a PPP would.


Public-sector assessments often suffer from an optimism bias: While the same is also true for many private-sector projects, it is probably difficult to establish empirically whether, or the extent to which, public-sector projects suffer more from optimism bias than private-sector projects). Under a PPP the private sector has arguably a stronger incentive than a government agency to be realistic about the prospects of a project. This is because of the considerable financial investment the consortium has put at risk. One would expect the private sector not to submit a tender if the business case doesn’t stack up. It seems clear that there are stronger incentives to correctly identify the whole-of-life costs of construction & operation, and the likely revenue stream, under a PPP if project risk is transferred to the private sector.


Optimisation of design & operation in order to minimise whole-of-life costs: Under a PPP, if the designers & builders have a financial stake in the project over its whole life, they will have an incentive to design features & construction standards so they are optimised against the long-term cost of maintenance & operational requirements. The incentives to do so are likely to be stronger than under conventional procurement.


Access to additional capital: The Government does not have to provide capital in the case of PPPs. This can be an advantage where the Government has a poor credit rating and is not able to raise finance, and where financial markets cannot readily distinguish between general government borrowing & government borrowing for a specific revenue-earning infrastructure project. This is not at present an issue in New Zealand.


Off-balance sheet financing: When people say PPPs will give access to more capital, ie, will bring forward projects and free up public funds for other projects, they usually mean PPPs are a way of financing projects without breaching the Government’s self-imposed borrowing limit. This appears to have been the motivation for PPPs in the UK & in Australia, at least in the early days.


Financing public projects without breaching the Government’s sovereign-issued debt limit (referred to here as off-balance sheet financing) is feasible where projects are financed from third-party revenue, such as toll roads. This is more difficult in the case of infrastructure that does not earn revenue from third parties, such as prisons, and roads financed from “shadow tolls” In such situations the Crown typically bears the demand risk.


While accounting rules are in a state of flux on this point, it appears that where the demand risk is not transferred, financial liabilities arising from obligations under a PPP contract would need to be recorded on the Crown’s balance sheet irrespective of who raised the capital.


An example of SOEs illustrates the point that there are other ways of managing concerns about the effect on gross debt than by entering into a PPP. These should be considered alongside any proposal to enter into a PPP, if the motivation for the PPP is to finance income-earning infrastructure without putting pressure on the Government’s gross debt target (ie, off-balance sheet).


Assurance of good maintenance: The whole-of-life approach and the contractual obligations around maintenance ensure that it is fully maintained throughout its life. This is not always the case under the direct management of a public agency, where maintenance needs are sometimes subordinated to other priorities.


Disadvantages of PPPs


Tendering and negotiation: PPP contracts are typically much more complicated than conventional procurement contracts. This is principally because of the need to anticipate all possible contingencies that could arise in such long-term contractual relationships. Each party bidding for a project spends considerable resources in designing & evaluating the project before submitting a tender. In addition, there are typically very significant legal costs in contract negotiation. Having several bidders do this involves a cost which can add up in total to tens of millions.


Contract renegotiation: Given the length of the relationships created by PPPs and the difficulty in anticipating all contingencies, it is not unusual for aspects of the contracts to be renegotiated at some stage. Wherever possible, provisions are included in the contract that spell out how variations are to be priced. But, given the length of time spanned by the contract, it is almost inevitable that circumstances will arise which cannot be foreseen. Where the need for renegotiation comes from the public agency (which, it appears, is often the case, perhaps as a result of a change in government policy) and no pricing rule is contained in the contract, the Crown can end up paying a heavy price, since the price is not determined in a competitive bidding context. The cost of such changes is difficult to factor into the original project evaluation, since by definition it is unanticipated.


Performance enforcement: One of the difficulties with performance specification in the area of service delivery is that performance sometimes has dimensions which are hard to formulate in a way that is suitable for an arms-length contract.


Political acceptability: Given the difficulty in estimating financial outcomes over such long periods, there is a risk that the private-sector party will either go bankrupt, or make very large profits. Both outcomes can create political problems for the Government, causing it to intervene. Both kinds of risk are often reduced by including in the contract loss-sharing or profit-sharing provisions. But such provisions reduce the extent of risk transfer, and therefore the advantages of PPPs.


Value for money test


Some jurisdictions, such as Victoria & the UK, require the establishment of a “public-sector comparator” against which a PPP is evaluated. This “value for money” test is, however, problematic. In particular, it is difficult to factor in the cost of things going wrong over the total life of the project. More generally, the public-sector comparator is necessarily hypothetical, so its credibility is difficult to test.


It should not be surprising that there has been much debate about whether PPPs offer value for money. The limited available empirical evidence favours PPPs.


Conclusion


There is little reliable empirical evidence about the costs & benefits of PPPs. This paper has therefore made a qualitative assessment. It concludes that the more complete transfer of risk that is possible under a PPP results in better project evaluation & stronger incentives to innovate & minimise whole-of-life costs. But these advantages must be balanced against the large contract negotiation costs, the inflexibilities of a long-term contract and the reduced competitive pressures on performance after the contract has been entered into (compared with a situation where the contract is re-tendered periodically over the life of the infrastructure).


Websites: NZ Treasury, Financing infrastructure projects: Public private partnerships


UK Treasury, PFI: Meeting the investment challenge


NZ Council for Infrastructure Development


 


Want to comment? Click on The new BD Central Forum or email [email protected].


 


Attribution: Treasury document, NZCID statement, story written by Bob Dey for this website.

Continue Reading
WordPress Appliance - Powered by TurnKey Linux