Debt Funding and Public Private Partnership Policy

Introduction

Debt funding may be used by the Transport Agency to provide additional financing to bring forward infrastructure expenditure or for liquidity reasons.

A Public Private Partnership is a procurement method that usually involves debt funding.  It is a long-term contractual collaboration between the public and private sectors to procure transport infrastructure and services. It requires the construction or enhancement of an asset, which is financed, designed, built, operated and maintained by the private sector partner, until its transfer to the public sector at the end of the contract.

Examples of debt funding

The Transport Agency has borrowed funds from both public and private sources as follows:

• a revolving credit facility that the Transport Agency 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 Interrelated and complementary combination of activities that, when delivered in a coordinated manner, produce synergies – can span more than one work category and more than one activity class, e.g. a programme could include a road improvement and public transport improvement activities. to continue at planned levels, and;
• an interest free loan from the Government to the Transport Agency to accelerate key transport projects in Auckland.

As a Crown Entity, the Transport Agency requires approval under section 160 of the Crown Entities Act from both the Minister of Transport and the Minister of Finance to use debt funding.

Public Private Partnerships (PPPs)

This section sets out the guidance on the Transport Agency’s current PPP model including when it should be used to procure projects and how value for money Selecting the right things to do, implementing them in the right way, at the right time and for the right price. is determined.

When the Transport Agency might use PPPs

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 the Transport Agency and the private sector contractor;
• it is feasible to express and quantify the outcomes the Transport Agency 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, and;
• it can be demonstrated that a PPP offers greater value for money Selecting the right things to do, implementing them in the right way, at the right time and for the right price. for the public sector compared with other forms of procurement.

In general, this form of delivery model is suited for larger projects, with significant or complex operational or maintenance requirements, and where there is substantial scope for innovation.

The Transport Agency PPP Model

Under the Transport Agency’s Procurement The purchase of works, goods or services. Manual, all PPPs are classified as customized procurement procedures (see section 2.8) and, as such, require approval under section 25 of the Land Transport Management Act.

Procurement The purchase of works, goods or services. processes are guided by:

• section 25 of the Land Transport Management Act;
• the Transport Agency's Procurement manual for activities funded through the National Land Transport Programme Interrelated and complementary combination of activities that, when delivered in a coordinated manner, produce synergies – can span more than one work category and more than one activity class, e.g. a programme could include a road improvement and public transport improvement activities. (including the infrastructure procurement procedure) and the rules,  and the Transport Agency’s State Highway Procurement Strategy, and
• New Zealand Treasury PPP documents (including Guidance for Public Private Partnerships (PPPs) in New Zealand, Draft Public Private Partnership (PPP) Standard Contract and Better Business Case Approach).

The Transport Agency has adopted a design, build, finance, operate and maintain PPP model.

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

• the Transport Agency 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;
• The Transport Agency 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, and;
• at the end of the contract, control of the asset being transferred to the Transport Agency.

PPP Assessment

Under the Transport Agency’s  policy on PPPs:

• obtaining best value for money Selecting the right things to do, implementing them in the right way, at the right time and for the right price. is the ultimate goal of the PPP approach and is the key measure of success;
• 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, and;
  • where there is potential to facilitate the acceleration of lasting innovation into the sector resulting in sustainable efficiencies.

The value for money Selecting the right things to do, implementing them in the right way, at the right time and for the right price. 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 Selecting the right things to do, implementing them in the right way, at the right time and for the right price. , the Transport Agency 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 the Transport Agency’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 Selecting the right things to do, implementing them in the right way, at the right time and for the right price. is the comparison of a Public Sector Comparator (PSC) to a Proxy Bid Model (PBM),  the key aspects being:

• the PSC, based on the Transport Agency’s current best practice delivery method, is the risk-adjusted cost of the Transport Agency 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 Selecting the right things to do, implementing them in the right way, at the right time and for the right price. 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, the Transport Agency  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 Selecting the right things to do, implementing them in the right way, at the right time and for the right price. , so negotiations with the private sector bidders will proceed, and
• 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 Selecting the right things to do, implementing them in the right way, at the right time and for the right price. when compared with the PSC

The general idea is that if the value for money Selecting the right things to do, implementing them in the right way, at the right time and for the right price. from the PPP is better than that of the next best procurement method, the PPP should proceed.

The supplier selection process

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 Selecting the right things to do, implementing them in the right way, at the right time and for the right price. criterion will technical aspects of the bid be considered;
• there are judgements required 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 Selecting the right things to do, implementing them in the right way, at the right time and for the right price. , and;
• a bid will only be accepted by the Transport Agency if it is the  best value for money Selecting the right things to do, implementing them in the right way, at the right time and for the right price. that the Transport Agency can obtain.