Debt-funding and PPPs

Waka Kotahi has borrowed funds from both public and private sources as follows:

• a revolving credit facility that Waka Kotahi uses to smooth payments out over the year, so expenditure better matches income enabling full use of the National Land Transport Fund in a year
• an interest bearing loan from the Debt Management Office for the reinstatement of transport infrastructure as a result of the Christchurch earthquake, to enable investment through the National Land Transport Programme to continue at planned levels
• an interest free loan from the government to Waka Kotahi to accelerate key transport projects in Auckland.

PPPs will only be suitable for certain projects where:

• the value of the project is large enough to absorb the transaction costs involved
• the project is sufficiently complex so that scope exists for innovation in design and delivery of services
• material risks in the project can be adequately identified, defined and appropriately allocated between Waka Kotahi and the private sector contractor
• it is feasible to express and quantify the outcomes Waka Kotahi requires from the project, which are incorporated into a mechanism for measuring the performance of the private sector contractor and setting the amount it is paid for delivering the services
• it is feasible to bundle the on-going management and maintenance of the project with the construction and financing into a longer term contract
• a real market opportunity exists that will attract a number of competent bidders
• it can be demonstrated that a PPP offers greater value for money for the public sector compared with other forms of procurement.

Procurement processes are guided by:

• section 25 of the Land Transport Management Act(external link)
• Waka Kotahi's Procurement manual for activities funded through the National Land Transport Programme (including the infrastructure procurement procedure(external link)) and the rules(external link), and Waka Kotahi’s State Highway Procurement Strategy
• New Zealand Treasury PPP documents (including Guidance for Public Private Partnerships(external link) (PPPs) in New Zealand, Draft Public Private Partnership (PPP) Standard Contract and Better Business Case Approach(external link)).

Although the structure of each PPP will be tailored to suit the context, the model adopted by Waka Kotahi will involve:

• Waka Kotahi specifying the service (asset) it requires in terms of outcomes or performance standards, for example safer roads, travel time, reliability and zero harm
• the job of producing designs, finding the finance, organizing the construction and on-going operation and maintenance of the asset being tendered to the private sector by way of a competitive bidding process
• the private sector consortium providing the necessary investment and taking responsibility for supplying the full technical package of inputs including design, construction, and maintenance
• Waka Kotahi retaining demand risk, that is the number of vehicles that use a road
• once the asset is commissioned and operating, periodic payments being  made to the consortium over the operating term of the contract
• if performance levels or standards fall short of what is specified, penalties being paid by the consortium to incentivise the private partner so that it provides required levels of service to the users of the road
• a long term contract, for example 25 years
• ownership remaining in the public sector throughout the life of the PPP contract
• at the end of the contract, control of the asset being transferred to Waka Kotahi.

PPP procurement may  be considered as a procurement approach for state highway improvement projects where:

• the delivery of benefits from a high priority project is constrained by the revenue inflow to the National Land Transport Fund and PPP procurement can be used as a tool to advance funding so that a project and its resultant benefits can be delivered as efficiently as possible at the optimal time
• there is potential to facilitate the acceleration of lasting innovation into the sector resulting in sustainable efficiencies.

The value for money assessment will form part of a comprehensive business case, where the main problem to be addressed is identified and each potential procurement method assessed to determine the best solution. At this stage, the PPP is one option among many procurement methods.

In assessing value for money, Waka Kotahi is required to undertake quantitative and a qualitative analyses of procurement options, to consider the monetary and non-monetary costs and benefits of each option.  In common with Waka Kotahi’s policy for evaluating the economic costs and benefits of projects, all future costs that have yet to be incurred must be included at each decision point.

The main test of best value for money is the comparison of a public sector comparator (PSC) to a proxy bid model (PBM).

The key aspects are:

• the PSC, based on Waka Kotahi’s current best practice delivery method, is the risk-adjusted cost of Waka Kotahi constructing, financing and operating the proposed project (asset)
• the PBM, representing the proposed PPP option, is the cost of the project it if was designed, built, financed and operated by a private sector consortium, that is it is an estimate of the final bid price
• value for money will be achieved if the PBM is less than the PSC in present value terms
• an ‘affordability threshold’ is determined, which is directly based on the PSC but also incorporates other factors, for example a margin by which the private sector must beat the PSC
• if bidders are unable to beat the affordability threshold during the bidding process, Waka Kotahi will not proceed with a PPP
• if the winning bid is less than the affordability threshold, it is likely that the project has best value for money, so negotiations with the private sector bidders will proceed
• ultimately, it is the result of both the winning bid received and the negotiating process that will finally confirm that a PPP provides best value for money when compared with the PSC.

The general idea is that if the value for money from the PPP is better than that of the next best procurement method, the PPP should proceed.

The bid process:

• will begin as an open competition and may include one or more subsequent ‘short listing’ processes
• will use a structured approach that is consistent with guidelines for PPPs published by the NZ Treasury
• is focused on assessing the best quality proposal for the delivery of outcomes at a price that does not exceed the affordability threshold. Only once a bid has met this value for money criterion will technical aspects of the bid be considered
• requires judgement to compare the technical aspects of the bids, noting that there is a qualitative aspect in evaluating and comparing each of the bids to determine their value for money.

A bid will only be accepted by Waka Kotahi if it is the  best value for money that Waka Kotahi can obtain.