AGENDA NO.
3.4
Investment and Operations Board Committee Paper
Paper no:
12/09/088
Meeting date:
6 September 2012
Prepared by:
Colin Crampton, Group Manager (Highways and Network Operations)
Recommended by:
Geoff Dangerfield
Board function:
Significant planning, investment and operational matters
Subject:
Public Private Partnerships (PPPs) – Update on the development of the stage 2
business case
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Purpose
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To inform the Board on the progress of developing a stage 2 business case using a PPP model for
Huntly By-Pass and Transmission Gully RoNS projects.
Background
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At the 26th July Board Meeting the Board supported “the use of long-term structured debt,
underpinned by NZTA’s Value for Money focus and prudential financial management practices, to
enable the timely delivery of nationally strategic transport projects”. One option discussed in the
paper was the use of a PPP procurement model to deliver some of our large infrastructure projects.
This paper provides the Board with background information on how we are developing the business
case that will demonstrate whether there is a value for money proposition in procuring Huntly ByPass and or Transmission Gully under a PPP.
Process
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The National Infrastructure Unit (NIU) of the Treasury has prepared a document entitled “Guidance
for Public Private Partnerships in New Zealand”. This document provides the general direction and
principles to be adopted as well as a framework for assessing whether a PPP provides value for
money over other forms of procurement. The guidance sets down an eight step process taking you
from the service need to contract management. As we are looking at two RoNS projects that have
already undertaken a significant amount of development work it has been agreed with NIU that we
can enter the process at the 5th stage, which is the production of the Business Case (Stage 2). The
business cases are being developed as a one Agency project with Treasury NIU members embedded
in the team and in the governance structure.
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We have been keen to partner with NIU and use their approved process because an NZTA PPP should
not be considered as a standalone project but as part of the NZ pipeline of projects. The Treasury
are overseeing this pipeline and are looking for all projects to take a consistent approach to
development and delivery so the market are confident in the product and lessons can be learnt and
transferred as the pipeline develops.
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To date there have been two projects, Hobsonville Point School and Wiri Prison, developed under
this model. At present there is no third project ready to go in the pipeline so there is an opportunity
for NZTA to use this gap to encourage quality bids from a ready market.
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A following one agency project management and governance structure has been set up that
includes members of the NIU.
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Outcomes and the Payment Model
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There are numerous different PPP models in the market and it is important to select a model that
meets a client’s needs, allocates the risks to the appropriate parties and is seen by the market as
offering an acceptable commercial proposition. We have selected an availability payment model with
and outcomes focus approach as the most appropriate for the following reasons:

It does not transfer the patronage or traffic demand risk to the proponents.

It penalises proponents for the unavailability of lanes and for reductions in required levels of
service.

Performance measures are set around outcomes and are used to drive the behaviours during
design and operation in our key results areas.

Specifying outcomes rather that detailed technical requirements opens the opportunities for
innovation in design and operation that will bring a true whole of life focus to the project.
The PPP payment mechanism will allow payments and abatements to be made in three categories:
availability, performance and innovation. The performance payments are related to the outcomes we
set and are the key to ensuring we achieve an enduring product that delivers on our strategic goals.
The aim of the model is to achieve a better outcome for the same price rather than the same
outcome for less. There are four main key result areas under the performance payment schedule:

Safety – Drive a safe system approach in design and by benchmarking against future trends to
ensure continual improvement.

Zero Harm – Everyone involved in construction and operations work returns home unharmed at
the end of every working day.

Throughput (travel time) – Focus design and operation on achieving and maintaining an optimal
average speed throughout the concession period.
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
Reliability – A focus on pinch points, eg on ramp merges, to ensure the design is optimised over
time to minimise the effects of peak time traffic flows.
The Value for Money Proposition
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The NZ approach to value for money in PPPs is to encourage “better outcomes for the same cost”.
The first two PPP’s through the NIU model have actually achieved better outcome for less, which
should be viewed as a bonus. The performance measures will be set at a better than business as
usual to drive this behaviour.
10 The business cases under production are developing the value for money propositions for Huntly
and Transmission Gully. This requires the calculation of the Public Sector Comparator (PSC), the PPP
proxy bid model and the value themes that will drive efficiencies in the PPP model.
11 We expect the efficiency saving from the PPP model to be driven by the following:

The competitive tension in the RFP process due to involvement of parties beyond the normal
D&C consortia.

Innovation in design and operation.

Synergies between design and operation, whole of life approach.

Risk transfer mechanism.

Performance management regime.
The Programme
12 The final business cases will come to the Board at the 28th September 2012 special meeting. The
paper will detail the findings of the business and confirm whether or not each project has an
acceptable value for money proposition.
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13 Should both projects demonstrate a good value proposition the will be a requirement to agree our
preferred project for recommendation to the Ministers and Cabinet. Our view at present is that we
would be more likely to recommend Huntly By-Pass than Transmission Gully because this project
has a better economic case, it is a higher NZTA priority and our initial market sounding identifies
this as being more favoured by the supply chain.
14 Once the board agree our recommendations we will be looking to get Cabinet approval in late
October or early November. There are two options for getting a paper to cabinet, either as part of
the NLTP cabinet paper due early November or as a separate PPP paper. Our strategy will be to
develop both papers to ensure we are in a position to go to cabinet as required.
15 If Cabinet approval is given we would look to commence the expression of interest process,
followed by the tender phase looking for financial close in mid 2014.
Communication and engagement
16 There has been significant interest in the media around potential transport PPPs and there have
been expectations built around Transmission Gully being the preferred project. This is not our
current position and it is important to remember we are going through a robust process to evaluate
if there is a value proposition and to determine the most appropriate project to take forward.
17 The follow are the key message we produced for our recent market sounding exercise and put the
process we are going through in to context:

The New Zealand Transport Agency’s State Highway business is a $1.6 billion per annum
business with roughly $1 billion of capital works undertaken each year. The Agency uses a
mixture of Alliances and Design Construct for its large infrastructure projects. The Agency’s
largest project to date is the $1.4 billion Waterview Connection project currently in
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construction. Should a Public Private Partnership progress, the Agency will assemble a
standalone project team including a Project Director to lead the work

In 2009 the Government announced seven Roads of National Significance which will help
stimulate economic growth and productivity by reducing travel times on national State Highway
routes. The Government set a target of substantial completion of Roads of National Significance
within 10 years. Great progress has been made in the first three years and the Government has
restated this commitment over the period 2012-15.

Maintaining progress on the Roads of National Significance presents a number of challenges
because revenues are less than forecast, and the National Land Transport Programme has
encountered an unforeseen event in the Christchurch earthquakes. The Government is
exploring alternative mechanisms to keep the Roads of National Significance on programme and
this includes Public Private Partnerships.

The Government is committed to using Public Private Partnerships where they can add value.
They have progressed the new Wiri Prison under a PPP model where the private sector designs,
builds, finances, maintains and operates the prison. In a move to extract more value, the Wiri
Prison Public Private Partnership looks to develop a more outcomes orientated approach which
increases the flexibility and the ability of the private sector to innovate. The New Zealand
Transport Agency will use this approach for any proposed Public Private Partnership.

The New Zealand Transport Agency is currently compiling business cases for the Transmission
Gully and the Huntly Bypass elements of the Wellington Corridor and Waikato Expressway Roads
of National Significance. As part of the business case work, market testing will be undertaken to
test private sector capacity and appetite for a roading PPP, on the basis of a high-level
commercial structure.
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
The New Zealand Transport Agency Board will receive the business cases at its September
meeting and should it decide a Public Private Partnership has merit it will present a proposal to
Government in October/November. If the New Zealand Transport Agency is to proceed it would
expect to release an Invitation for Expressions of Interest in early 2013 with a view to reaching
contractual close by Quarter 3 in 2014. As soon as the Agency receives approval from
Government to pursue a PPP model, it will immediately make an announcement to the market.

The current Government’s support for PPPs is strong. There are a number of potential PPPs
working their way through the two-stage business case process at present, with two in the last
business case phase and expecting a Cabinet decision by the end of 2012. In relation to
roading PPPs going forward, NZTA is committed to considering PPP as a procurement option
and will pursue this option where it adds value to a project.
Attachments
18 There are no attachments.
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