New public-private partnerships framework has Labour's backing

A new framework for doing more public-private partnerships (PPP) to build big infrastructure has been released by the government, with backing from the opposition.

It aims to win over reluctant contractors by stopping what the government says has been the "wholesale" shifting of risks on to private partners under the current PPP model.

It lowers the bar for a "more reasonable" comparison between doing a PPP versus sticking with a standard build - which is crucial, as the framework sticks with the key rule that only PPPs that outperform a standard approach would go ahead, the government said.

"Government will only use PPPs when they outperform the counterfactual procurement model," Infrastructure Minister Chris Bishop said on Wednesday.

In addition, the new framework sweetens the finance pot, with an opening for projects to call on Crown borrowing for the first time.

Amid cost blowouts at the likes of the new Dunedin hospital build, PPPs gave decision makers "greater time and cost certainty ... than leaving public sector asset owners to manage risks to budget, timetable, performance and asset condition", the new framework document released on Wednesday afternoon said.

The key objective remained using the model when it both met an affordability threshold and also outperformed non-PPP approaches on non-price grounds.

"This PPP framework outlines clearly how governments of all stripes should think about PPPs as a procurement method," Labour spokesperson for infrastructure Barbara Edmonds said in a foreword to the 19-page document put together by her political opponent, ACT's Simon Court.

PPPs are controversial but favoured by the government as one way to build increasingly unaffordable highways, prisons, hospitals and schools. The latter two were strictly off-limits under Labour from 2017.

The new government has also signalled its interest in using them to build new courthouses and Defence housing and infrastructure.

PPPs typically work where a construct-finance-maintain-and-operate alliance builds a facility then runs it for 25 years, paid regularly by the Crown. Those payments for the country's only two PPP highways, at Transmission Gully and Pūhoi to Warkworth, are about $100m a year each.

The overhaul can be traced back to the last government encountering contractor reluctance when it tried to expand some of the countries' handful of PPP schools, with companies telling it the framework was too risky and inflexible.

"The ... government has listened to market, agency and end-user feedback," the framework said.

Court spent months rejigging things to rekindle interest.

"PPPs, when done well, drive better performance because they have strong contractual incentives," he said in a statement on Wednesday afternoon.

The new framework aims to cut the risks to private contractors, for instance by being more flexible with just how good a facility had to be before it won sign-off.

This was in part because the risks extended for much longer around performance than they did when the Crown took over at the end of a typical build.

"Horizontal infrastructure projects [like water pipes] are likely to require more pragmatism in relation to minor divergences or defects that would otherwise prevent the issuing of a Works Completion Certificate," the framework document said.

Public agencies would get more guidance on how to lower the cost-and-time burden on bidders for a PPP contract, it said.

On the affordability front, Crown borrowing could be used to help finance a PPP, whereas previous ones had all been fully project financed, which entailed a higher cost of capital to price in "unique project risks".

"For this reason, various forms of Crown capital contributions could be available to procuring agencies."

This would be assessed case-by-case, and done carefully to retain sufficient performance incentives.

The model was not a financing tool, but a way to make private capital more beholden to perform.

"With 'skin in the game', they are motivated to prevent performance or availability failures" and be accountable for the entire lifecycle of, say, 25 years, the framework said.

Not every facility would suit a PPP, especially when the Crown had other options that might work, like long-term leases, it said.

Public hospitals taking a long-term lease on private buildings has been tried, and was being promoted by a major local industry player, Vital Healthcare.

The new PPP framework said they worked better if the deal included operating an asset, not just maintaining it, as this promoted innovation.

Another change was an "improved" process for managing disputes and trying to reduce them.

Transmission Gully was caught up in an ongoing dispute, with the construction joint venture locked in litigation with Waka Kotahi / New Zealand Transport Agency over what the transport agency has called "remaining works and obligations".

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