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Table of Contents
1.
Public Private Partnership Programme: The Public Sector Comparator and
1
Quantitative Assessment – A Guide for Public Sector Entities
2.
Public Private Partnership Programme: The New Zealand PPP Model and Policy:
38
Setting the Scene – A Guide for Public Sector Entities

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Public Private Partnership Programme

The Public Sector Comparator and
Quantitative Assessment

A Guide for Public Sector Entities

September 2015

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© Crown Copyright
This work is licensed under the Creative Commons Attribution 3.0 New Zealand licence. In

essence, you are free to copy, distribute and adapt the work, as long as you attribute the work
to the Crown and abide by the other licence terms.
To view a copy of this licence, visit http://creativecommons.org/licenses/by/3.0/nz/. Please note that no
departmental or governmental emblem, logo or Coat of Arms may be used in any way which infringes any
provision of the Flags, Emblems, and Names Protection Act 1981. Attribution to the Crown should be in written
form and not by reproduction of any such emblem, logo or Coat of Arms.
ISBN: 978-0-478-43684-6 (Online)
The Treasury URL at September 2015 for this document is
http://www.treasury.govt.nz/statesector/ppp/guidance/public-sector-comparator
The PURL for this document is http://purl.oclc.org/nzt/g-ppp-pscqa

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1  About this Guidance
How to use this guidance
1.1  This guidance has been written by the Treasury PPP Team. It must be read in conjunction
with other Public Private Partnership (PPP) guidance and applied in consultation with the
Treasury PPP Team. It assumes that the Treasury’s Standard Form PPP Project Agreement
wil  form the basis of the contract to be signed with the private sector partner.1
1.2  This document should be read by public sector entities (referred to as procuring entities
throughout this guidance document) that are considering or implementing PPP as a
procurement option for a major infrastructure project; specifically, those staff involved in the
development and internal approval of the project business case and procurement process.
1.3  A glossary of terms used throughout this document is available on the Treasury website.2
The New Zealand PPP model
1.4  In the New Zealand context, a PPP is a long-term contract for the delivery of a service,
where provision of the service requires the construction of a new asset, or enhancement of
an existing asset, that is financed from external (private) sources on a non-recourse basis,
and full legal ownership of the asset is retained by the Crown.
1.5  PPP procurement has been implemented in New Zealand for the primary purpose of
improving the focus on, and delivery of, required service outcomes from major infrastructure
assets.  Whole of life services are purchased under a single long-term contract with
payments to the contractor based on availability and performance of the asset. The
combination of assets and services required to be delivered by the private sector are referred
to in this document as the ‘project’.
1.6  The PPP model seeks to improve outcomes by capturing best practice and innovation from
the private sector.  Lessons learnt from PPP projects can be implemented across a broader
portfolio of public assets to significantly leverage the benefits of single PPP transactions.
The competitive procurement process, focus on outcomes (with minimal input specifications
and constraints), appropriate risk al ocation and performance based payment mechanisms
that put private sector capital at risk optimise the incentives and flexibility for private sector
participants to deliver innovative and effective solutions.
1.7  PPP procurement is only used where it offers value for money over the life of the project,
relative to conventional procurement methods. This means achieving better outcomes from
a project than if it were procured using conventional methods, for the same, or lower, net
present cost.
Questions and further information
1.8  General enquiries about the information contained in this guidance can be sent to
[email address].  Other guidance documents and useful information can be found at
www.treasury.govt.nz/statesector/ppp.

1
http://www.treasury.govt.nz/statesector/ppp/standard-form-ppp-project-agreement
2     http://www.treasury.govt.nz/statesector/ppp/guidance/glossary
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2  Introduction
2.1  This document provides guidance on developing the Public Sector Comparator (PSC) and
undertaking quantitative value for money assessment for a PPP project. It is structured in
two parts:
•  Part one contains an explanation of the PSC and guidance for how to assess the value
for money of delivering a project as a PPP compared with conventional public sector
delivery.
•  Part two contains more detailed guidance for agencies and their advisors, including how
to develop the PSC and Proxy Bid Model.
2.2  This guidance document is intended to provide an overview of the PSC development
process. It is expected that procuring agencies wil  recruit specialist staff and advisors, and
engage with the Treasury PPP Team, when applying the guidance.
Core Definitions
2.3  There are three core terms used in this guidance: the Public Sector Comparator (PSC), the
affordability threshold and the Proxy Bid Model (PBM).
Public Sector Comparator
2.4  The PSC is an estimate of the risk adjusted whole of life cost of a project if it were to be
delivered by the procuring entity using conventional procurement methods. It is primarily
used as a benchmark against which to assess the net present cost of procuring the project
as a PPP.  The PSC is comprised of the capital, operating and risk management costs of the
procuring entity’s reference project and a tax adjustment to enable fair comparison with
private sector PPP proposals.
2.5  The PSC should be a realistic estimate of the costs incurred by the procuring entity if it were
to deliver the project using conventional public sector delivery methods. These costs should
enable the procuring entity to deliver the same scope and quality of service outcomes that
are required of the contractor under the PPP contract over the same time period. It should
take account of the risk allocation between the procuring entity and the private sector
consortium contracted to deliver the project as reflected in the commercial principles
developed for the project and included in the PPP contract.
2.6  It is important to note that the PSC may not represent the ful  costs of the project because it
is intended to match the scope of the proposed PPP contract. For example, the PSC for a
PPP to design, build, finance and maintain a set of schools would not include salary costs for
teachers because the PPP contractor is not responsible for teaching services. Procuring
agencies should develop whole of life cost estimates for retained costs to inform investment
decisions and budgeting. However, for the purposes of this guidance the term PSC refers
only to the costs for those services that are within the scope of the proposed PPP contract,
unless otherwise specified.
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Reference Project
2.7  The reference project is the whole of life asset and service delivery solution that would be
procured using conventional methods if the project was not procured as a PPP. It is
primarily used as an input to the PSC and PBM.  The reference project should be designed
and its costs estimated such that it is capable of achieving the same outcomes and
performance requirements that are expected of the private sector under the PPP contract.
Affordability Threshold
2.8  The affordability threshold is disclosed to parties participating in a procurement process for a
PPP project (the respondents) as the maximum ‘price’ that the procuring entity is prepared to
pay a contractor for delivery of the project. It is expressed as a single point estimate net
present cost. Any proposal with a net present cost in excess of the affordability threshold wil
be considered non-compliant.
2.9  The affordability threshold should be equal to the PSC less any additional costs that the
procuring entity wil  incur over the life of the contract as a result of procuring the project as a
PPP. This may include additional transaction and contract management costs over and
above the costs borne through conventional procurement.  Accordingly, the net present cost
of the PPP project wil  be no more than the cost of the project if it were procured using
conventional procurement methods.
Proxy Bid Model
2.10  The Proxy Bid Model (PBM) calculates the estimated periodic service charge (the unitary
charge) that a contractor would require to finance and deliver the project to the level of
performance specified in the PPP contract.  The procuring entity does not begin paying the
unitary charge until the asset is operational and the contractor is delivering the required
services.
2.11  The PBM is comprised of the risk adjusted reference project costs with additional private
sector financing, tax and PPP specific cost assumptions. It uses the same underlying
capital, operating, risk management and tax assumptions as the PSC.
Link with Better Business Cases Guidelines
2.12  The PSC is an important analytical tool for considering the appropriateness of procuring a
project as a PPP. It is important for agencies to consider this guidance document carefully
during the development of a business case where PPP procurement is one of the
procurement options being considered.
2.13  Depending on the type of project being considered it may be appropriate to develop an initial
PSC as part of the Indicative Business Case. However, in most instances, the PSC should
be fully developed as part of the development of the Detailed Business Case. Procuring
entities should contact the Treasury PPP Team for specific advice for their project.
2.14  Guidance on applying the Better Business Cases framework is available on the Treasury
website.3  Specific guidance on how to consider PPP procurement in the context of the
Better Business Cases framework is included in other Treasury PPP guidance.4


3
http://www.treasury.govt.nz/statesector/investmentmanagement/plan/bbc
4
http://www.treasury.govt.nz/statesector/ppp/guidance/model-and-policy
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Part One:
The PSC and its Application

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3  Overview of the Public Sector Comparator
Introduction
3.1  The PSC is based on the procuring entity delivering the same scope of service and accepting
the same risks as those allocated to the private sector under the PPP contract.  The PSC
comprises the capital and operating costs for a reference project, transferred risk and a tax
adjustment.  Figure 1 il ustrates how the series of cash flows for the PSC are presented as a
net present cost.
3.2  The PSC is used in setting the affordability threshold for PPP procurement, which sets the
maximum price the procuring entity wil  pay for the project and directly influences decisions
made by respondents in preparing their proposals. Therefore, inputs to the PSC must be
robustly estimated.
Figure 1:  Components of the PSC
Tax
Adjustment
Transferred
Risks
Year
Reference
Public
1-5
6
7
8
9+
Project
Sector
Comparator
Construction
($NPC)
and operating
costs if
Net
undertaken by
Present
sset
the procuring
Cost ($)
entity
the A
osts
osts
osts
osts
tion of
C
C
C
C
ing
ing
ing
ing
truc
at
at
at
at
ons
per
per
per
per
C
O
O
O
O

Purpose of the PSC
3.3  The PSC is one of the tools used to assess the appropriateness of procuring the project as a
PPP and is an important benchmark and evaluation tool used during the PPP procurement
process. Additionally, having a detailed understanding of the cost for different scope and risk
items wil  enable the procuring entity to make informed judgements about any trade-offs that
may be required during contract negotiations.

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The Reference Project
3.4  Defining the reference project is a critical first step in developing the PSC. The reference
project should reflect the most likely and efficient form of conventional procurement and
service delivery that the procuring entity would use to deliver its whole of life solution for the
project.
3.5  The procuring entity should first determine the outcomes and performance specifications it
requires from the project. The reference project should be designed and its costs estimated
such that it is capable of achieving the same outcomes and performance requirements that
are expected of the private sector under the PPP contract.
3.6  Developing credible cost estimates for the reference project wil  usually require the procuring
entity to invest in a level of design documentation, although this may not be required for
projects where alternative methodologies can provide an equivalent level of robustness (for
example, detailed unit cost benchmarks).
3.7  The reference project should:
•  Reflect a best practice conventional procurement and service delivery approach.
•  Deliver the same level and quality of service that wil  be required from the contractor and
include all capital and operating costs associated with designing, building and operating
/maintaining the asset or facilities.
•  Recognise the need to coordinate design, construction, operations and maintenance to
optimise whole of life costs.
Transferred Risk
3.8  Examples of transferred risks that the contractor will typically be expected to manage under a
PPP include the risk of not completing the construction of the asset within the cost estimate
or the required timeframes, or not achieving the required operational performance.
3.9  Respondents wil  price their proposals taking into account their assessment of the financial
impact of the risks they are required to bear under the PPP contract. Given that many of the
risks to be transferred to the contractor under the PPP wil  be borne by the procuring entity in
the reference project, the value of transferred risks must be included in the PSC to ensure a
fair comparison with respondents’ proposals.
Tax Adjustment
3.10  The tax adjustment is designed to remove net competitive advantages that accrue to the
procuring entity by virtue of its public ownership and its exemption from paying income tax. This
allows a fair and equitable assessment between the PSC and proposals received for the project.
Presentation of the PSC
3.11  Robust input data and processing of that data in accordance with this guidance should
produce forecast cash flows and a net present cost that represents the PSC. The forecasts
should be prepared on a monthly or quarterly basis, depending on the phase of the contract
life cycle. For example, monthly forecasting might be appropriate during the construction
and contract start up phases. Quarterly forecasting might be appropriate for the operating
term of the contract.  The periods chosen should align with the periodicity of the PBM.
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Process
3.12  PPP procurement is a relatively long process. In this regard the PSC is not a ‘one-time’
calculation and wil  need to be monitored during the procurement process and updated at
appropriate milestones if inputs change.  Typical milestones include:
•  Business case:  as part of the assessment of whether the project can be procured as a
PPP and deliver value for money.
•  Issue of the Request for Proposals (RFP):  the PSC should be reviewed and, if
required, updated to assist in setting the affordability threshold to be included in the RFP.
•  During the proposal preparation:  The PSC and the affordability threshold should not be
changed once the RFP has been issued to respondents. However, there may be rare
situations where new information comes to light during the proposal preparation process
that is material to the cost assumptions in the PSC.5  In these circumstances it would be
appropriate to update the PSC to reflect the new information and issue a revised
affordability threshold to respondents. If an update is necessary then it should be
communicated to respondents in a timely manner.
Timing and Economic Assumptions
3.13  The PSC should estimate the cash outflows associated with constructing and operating the
asset over a time period that matches the proposed PPP contract. The key timing and
economic assumptions wil  include:
•  Discount date6
•  Construction period
•  Operating period
•  Construction costs
•  Operating costs
•  Construction escalation
•  Operating cost escalation
•  Labour cost escalation
•  Operational commencement
•  Operational commissioning period

3.14  Guidance on the discount rate to be used is included in Section 8. The timing of cash flows
should reflect the estimated timing of when payments are made (not accrued) and
discounting conventions should reflect the timing of cash flows within each period (for
example, end of period or mid period).

5
For example, where additional geotechnical investigations being undertaken for, or by, respondents as part of
their due diligence reveals new information that would materially impact on construction costs for the reference
project.
6
The default discount date wil  be the anticipated date of Financial Close.
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4  Quantitative Assessment
Introduction
4.1  PPP procurement is only used where it offers value for money over the life of the project,
relative to conventional procurement methods.  For the New Zealand PPP model, this means
maximising the service benefits and outcomes of an investment at no greater cost than if it
were delivered using conventional procurement and service delivery methods.
4.2  Quantitative assessment involves comparing the net present whole of life cost of a PPP
procurement option against the PSC. The assessment is made during the following stages
of a PPP project:
•  During the development of the business case by comparing the net present cost of the
PSC against the net present cost of the unitary charge calculated by the PBM. Confidence
that any gap between the PBM and PSC can be offset by the private sector delivering
efficiencies in underlying capital, operating and risk management costs is a prerequisite to
a project being procured as a PPP.
•  When proposals are received from respondents in a PPP procurement process by
comparing the affordability threshold to the net present cost of respondents’ proposed
unitary charge payments.
•  As a condition to reaching Financial Close by comparing the net present cost of the final
unitary charge to be contractualised against the maximum transaction limit approved by
Cabinet.
4.3  The quantitative assessment is only part of the analysis needed to determine whether a
project should be delivered conventional y or through a PPP. A qualitative assessment
should also be undertaken to consider:
•  Viability:  For example, can the service volume and quality required by the procuring
entity be adequately and unambiguously captured in a performance based contract?
•  Desirability:  For example, will the incentives and risk transfer incorporated in the PPP
contract produce benefits for the procuring entity that it could not achieve through
conventional procurement?
•  Achievability:  For example, does the private sector have the capacity and capability to
deliver the project?
4.4  Further guidance regarding qualitative analysis of PPP procurement is contained in other
guidance published by the Treasury PPP Team.7
Procuring Entity’s Internal Costs
4.5  The procuring entity wil  incur costs procuring the project using its conventional approach and
subsequently managing the contract(s) for the design, build and operation /maintenance of
the project. Similarly, it wil  incur costs in undertaking the PPP procurement and managing
the PPP contract.

7
Refer note 4 above
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4.6  If the procuring entity’s internal transaction and contract management costs are forecast to
be higher for PPP procurement than conventional procurement then this cost differential
must be deducted from the PSC for the purpose of setting the affordability threshold and
undertaking the quantitative assessment outlined below.  Treating the procuring entity’s
internal costs in this way is necessary to ensure that the total cost of the PPP is no more
than if the procurement and delivery were undertaken using a conventional approach.
Assessment Framework
4.7  PPP projects incur additional costs over and above the costs of conventionally delivered
projects. These additional costs relate to private sector financing and Special Purpose
Vehicle (SPV) costs, and the procuring entity’s additional internal costs that are specific to
PPP procurement.  In order to provide a value for money solution to the procuring entity, the
contractor delivering the project through a PPP wil  need to offset these additional costs
through construction, operating, or risk management efficiencies. These efficiencies need to
be achieved while delivering the project outcomes to the required standard.
4.8  Figure 2 summarises the framework for assessing value for money.  It shows how the
maximum net present cost that the Crown would be wil ing to pay for a PPP project is equal
to the PSC less any additional internal transaction and contract management costs.  In order
to recommend PPP as a procurement option, the procuring entity must have confidence that
the private sector can, and wil , deliver the minimum efficiencies required to offset the
additional internal costs of PPP procurement.
Business case analysis
4.9  Quantitative assessment of a PPP is undertaken by comparing the net present cost of the
PSC cash flows against the net present cost of the unitary charge produced by the PBM. For
most projects, the net present cost of the PSC cash flows wil  be less than the net present
cost of the unitary charge calculated by the PBM, as the PBM includes private sector
financing and SPV administration costs.
Figure 2:  Efficiency gains required
Minimum
private sector
Additional
efficiencies
Maximum
procuring entity
required
Transaction
PPP costs
Limit
Affordability
Threshold
Public Sector
Proxy Bid
Comparator
Model
($NPC)
($NPC)

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4.10  It is difficult to estimate what level of efficiencies the private sector could achieve for a given
project before receiving proposals from respondents.  However, using subject matter experts,
it is possible to assess whether the private sector can produce the minimum efficiency gains
required for PPP procurement to deliver value for money.  Confidence that the private sector
can deliver these efficiencies is a prerequisite for recommending that a project should be
procured as a PPP.
Approvals
4.11  The recommendation to procure a project as a PPP, together with the net present cost of the
PSC, needs to be formally approved by Cabinet.  The recommendation wil  be taken to
Cabinet by the relevant responsible Minster for the procuring entity and the Minister of
Finance.
Internal approvals
4.12  The framework and process for internally approving the PSC may differ between procuring
entities. However, it is common for the project governance group, key business lines and the
Chief Executive to all have a role in reviewing and approving the PSC internally.
Cabinet approvals
4.13  PPP projects are typically large and complex projects that create long-term fiscal liabilities for
the Government. Therefore, Cabinet has specific approval rights over the project.
4.14  Procuring entities must seek Cabinet approval of the recommendation to procure the project
as a PPP, together with the PSC. As part of this approval, Cabinet must also approve a
maximum transaction limit, which is the PSC less the net present cost of any additional
procuring entity costs specific to PPP procurement. Cabinet must also approve any change
in the maximum transaction limit after the business case has been approved.
4.15  When approving the business case recommending PPP procurement for the project, Cabinet
may delegate authority to make adjustments to the PSC to joint Ministers (the relevant
responsible Minister for the procuring entity and the Minister of Finance).
4.16  The discount rate used to value the PSC may change over the course of a project (see
Section 6). Therefore, the net present cost of the PSC can change without any of the
underlying nominal costs changing. Discount rate driven changes in the value of the PSC do
not need prior approval from Ministers provided that:
•  Treasury is consulted and agrees with changes to the discount rate.
•  There are no changes in the underlying nominal costs of the PSC.
•  A PPP procurement is stil  demonstrated to be value for money in accordance with the
guidance above.
4.17  Given the potential for the present value of the PSC to vary solely due to changes in the
discount rate, all references to net present cost in approval documents should also state the
discount rate used to two decimal places (e.g., $100 mil ion net present cost using a nominal
discount rate of 8.25 percent).
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Setting the Affordability Threshold
4.18  The affordability threshold is the maximum price that the procuring entity is prepared to pay
for the project. It is equal to the PSC less any PPP-specific costs the procuring entity wil
incur over the life of the project. The net present cost of respondents’ proposals must not be
greater than the affordability threshold or the proposal wil  be considered non-compliant.
4.19  A robust development process should produce a PSC that the procuring entity can be
confident it could deliver the project within using conventional procurement and delivery
methods. Following the quantitative assessment outlined above, the procuring entity should
also be confident that the private sector could overcome any additional costs incurred as a
result of procuring the project as a PPP and be able to deliver the outcomes required from
the project within the affordability threshold.
Financial Close
4.20  The final quantitative assessment occurs immediately prior to Financial Close.  Authority to
bring the project to Financial Close is vested in a nominated official from the procuring entity.
4.21  One of the conditions that must be met before the nominated official can exercise their
authority is that the final unitary charge (incorporating then current interest rates) has a net
present cost no greater than the maximum transaction limit that was approved by Cabinet
prior to commencing the procurement. Advisors should be available to undertake
appropriate analysis and confirm that the condition is met.

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Part Two:
Detailed Guidance

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5  Risk Quantification
Introduction
5.1  Respondents to a PPP procurement process wil  price the risks they are expected to bear
under the PPP contract. That is, the price of their proposals wil  include allowances for their
estimate of the costs they expect to incur in managing and dealing with risks transferred to
them.
5.2  The PSC must include comprehensive and realistic estimates of the financial impact of all
quantifiable and material risks that the procuring entity would be exposed to under
conventional procurement and delivery methods. This is consistent with the PSC
representing the full cost of the procuring entity delivering the proposed scope of work to be
included in the PPP contract.
5.3  In addition to specific risk events, the PSC must also take into account the risk that volume or
unit cost (rate) inputs used to forecast the total cost of the reference project are materially
inaccurate relative to actual outturn costs. The extent of forecasting inaccuracy will vary
between projects. For example, it might be possible to forecast prices and quantities for
some less complex building projects with a high degree of accuracy. More complex projects,
or projects where certain physical parameters are inherently difficult to forecast, such as
projects with large earthworks and uncertain ground conditions, may have higher levels of
forecasting inaccuracy.
Types of Risk
Systematic and  unsystematic risk
5.4  There are two broad categories of risk that need to be considered and accounted for in the
PSC and the PBM:
•  Unsystematic risks (also called unique, specific or diversifiable risks) which are specific
events associated with an individual project (e.g., the risk that ground conditions are
materially worse than thought).
•  Systematic risks (also called market risk or non-diversifiable risk) which result from
economy-wide events that affect all businesses (e.g., the risk that a general economic
downturn renders key sub-contractors insolvent).
5.5  In project risk quantification, unsystematic risks should be quantified in the cash flow
projections through quantitative modelling techniques (for example, sensitivity analysis,
scenario analysis, simulation modelling, Monte Carlo modelling).  Systematic risks are
factored into the discount rate and should not be included in the cash flows.
5.6  The remainder of this section discusses how unsystematic risks should be quantified and
included in the PSC cash flows. Section 6 discusses how the discount rate for PPP projects
should be estimated to incorporate the systematic risks that are transferred to the private
sector in a PPP project.
Transferred versus retained risk
5.7  Under a PPP contract, unsystematic risks are transferred to the private sector, retained by
the public sector or shared between both. The procuring entity should transfer all
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unsystematic risks to the contractor unless a better value for money outcome can be
achieved by the procuring entity retaining specific risks. This reflects the principle that each
risk should be allocated to the party best able to manage it for the least cost.
5.8  Risk allocation should be based on the scope of services for the PPP, an assessment of the
ability of each party to reduce the probability and impact of a risk occurring, and the risk
allocation incorporated in the Treasury’s Standard Form PPP Project Agreement.
5.9  Retained risks are those risks that the procuring entity proposes to bear itself under the PPP.
Examples of retained risks include law changes with material capital or operating cost
impacts applying specifically to the project and the risk of obtaining a designation for the
project under the Resource Management Act 1991.
5.10  The procuring entity should identify and quantify all material retained and transferred risks.
However, only transferred risks should be included in the PSC. This is because respondents
to the RFP wil  only price the risks that have been transferred to them, so in order for the
PSC to act as a comparable benchmark it must exclude retained risks.  Estimates of retained
risks wil  be useful for internal project budgeting and for adjusting the PSC if a decision is
made during the procurement process to transfer additional risks to the PPP contractor.
Identifying Risks
5.11  Initially risks should be identified through consideration of precedent projects and in
consultation with the Treasury PPP Team.  The list of initial risks should be refined by subject
matter experts, typically through a workshop process attended by relevant procuring entity
staff, advisors and a representative from the Treasury PPP Team. The output of the
workshop is a PSC risk register that should contain as a minimum:
•  A description of each risk.
•  The timeframe over which the risk may eventuate and whether it is a ‘one off’ or recurring
risk.
•  The likelihood of the risk occurring (expressed as a probability percentage).
•  The cost if the risk does occur and whether it is a ‘one off’ or recurring cost.
•  The basis on which the cost impacts have been established.
•  How each risk wil  be al ocated under the PPP contract (retained, transferred or shared).
5.12  The workshop process to identify risks requires careful management to ensure that all
relevant risks are identified and described. The workshop wil  need to be guided to ensure:
•  It focuses on identifying and quantifying risks to the reference project assuming
conventional procurement and delivery methods (risk management benefits available to a
PPP contractor and not the procuring entity should not be included).
•  The risk register excludes systematic risks, which are accounted for through the
specification of the discount rate.
•  Expert, but subjective, judgements of probability and impact do not suffer from ‘optimism
bias’.
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•  Care is taken to not ‘double count’ risks that may already be captured in contingencies
within the underlying cost estimates (it is preferable for these contingencies to be removed
and the risks that they are intending to cover be modelled specifically).
5.13  Appendix A contains high level guidance on the categories of risks that would typically be
included in a risk register for a design, build, finance and maintain PPP (which excludes core
operations from scope) and the allocation of risks between the procuring entity and the
contractor.
Quantifying Risks
Cost impact of individual  risks
5.14  The value of transferred risk should reflect the current level of knowledge about the project
and the cost of potential future events occurring during the term of the PPP contract. The
probability and cost impact of a risk occurring wil  depend significantly on the nature of the
project.  Probabilities and costs for some risks might be lower where the reference project
has been specified to a higher degree.
5.15  The cost impact assessment must be completed from the procuring entity’s perspective.
Only those risks that would have a cost impact on the procuring entity under conventional
procurement and delivery methods (if they were to occur) should be included. Likewise, the
cost impacts should reflect the likely costs that the procuring agency would incur to manage
the risk.
5.16  Events that are considered uninsurable (for example, an act of terrorism or certain force
majeure events) are generally excluded from the analysis as they are almost always retained
risks and are also either unquantifiable or have a very low probability of occurrence and
therefore wil  not have any material impact on modelled outcomes.
5.17  Risks that do have a cost impact should be expressed as a distribution.  A common
distribution for quantifying risks is a symmetrical triangular distribution which requires
workshop participants to estimate the minimum, most likely and maximum cost impact of the
risk if it were to occur.8  For example:
•  The minimum impact may represent a 10% probability that the cost wil  be less than or
equal to this amount.
•  The most likely impact may represent a 50% probability that the cost wil  be less than or
equal to this amount.
•  The maximum impact may represent a 90% probability that the cost wil  be less than or
equal to this amount.
5.18  The distribution of cost impact for some risks may have a different ‘skew’. These should be
identified and justified during the risk workshops and the probability estimates adjusted
accordingly.

8
Partnerships British Columbia (2014) Methodology for Quantitative Procurement Options Analysis Discussion
Paper
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Price (rate) and quantity forecasting
5.19  Forecasting the cost of constructing and operating the reference project wil  require
assumptions about the quantity and price of materials and inputs. These quantities and
prices will inevitably be subject to inaccuracies when compared with final outturn costs, with
the level of inaccuracy varying depending on the nature of the project and the quality of the
forecasting.
5.20  Where there is a relatively high level of uncertainty, prices and quantities should be
expressed as a range. This might be expressed as an uncertainty range around a point
estimate. For example, $x +/- 10%. This approach enables price and quantity uncertainties
to be modelled and expressed as a distribution and combined with the cost impact
distribution of the specific risks identified in the risk workshop.
Risk modelling
5.21  The approach of identifying cost impacts at different levels of probability means there wil  not
be a single estimate of the total risk attributable to the project.  The likelihood and cost
impact estimates in the risk register should be used as inputs to a risk model that simulates
potential outcomes.  The application of Monte-Carlo simulation, for example, will generate
numerous potential outcome values, which wil  allow the risks to be expressed as a
distribution.  The following matters should be considered when constructing the risk curves:
•  The distribution for each risk.
•  The relationship or correlation between individual risks or categories of risks (including
any diversification benefits).
•  Whether potential cost impacts are expressed in nominal or real terms.
•  How the outputs wil  interface with the PSC and PBM models.
•  Diversification impacts on the total risk value.
5.22  Adding the risk distribution into the PSC wil  convert the PSC into a probability distribution.
For example, the PSC at the P60 level can be interpreted as a 60 percent probability that
actual costs would be less than or equal to the P60 number.  The same approach can also
be used to express the PBM as a probability distribution (Figure 3).  Expressing both the
PSC and PBM as distributions rather than as point estimates provides further information
about the potential impact of risks on the total cost of the project and the level of efficiencies
the private sector wil  need to generate in order to at least match the PSC and provide value
for money.

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Figure 3:  Il ustrative PSC and PBM probability distributions
Net Present Cost

Review of Risk Quantification Outputs for Reasonableness
5.23  Risk modelling results must be reviewed for reasonableness. This might involve:
•  Comparing the initial views on risk occurrence and impact with the modelled cash flow
impact on the PSC.
•  Testing model outcomes using different distributions to ensure that the profile is consistent
with expectations.
•  Comparing the percentage increase in the net present cost of various components of the
reference project as a result of the risk quantification exercise against comparable
precedent projects.
Selecting a Point Estimate for the PSC
5.24  Ultimately, a single point on the distribution curve must be chosen in order to determine a
single point estimate of the PSC.  Selecting a point estimate requires an assessment of,
among other things, the level of risk that the procuring entity is prepared to take that the PSC
is above (or below) what the actual outturn cost would be if the project was procured using
conventional methods.  The expectation is that the forecasted costs wil  always be the result
of a robust analytical process and that, all other things being equal, point estimates should
be within the P50 to P75 range.
5.25  Selecting a point estimate with a higher P-value wil  provide greater certainty that the actual
outturn cost would be less than or equal to the PSC. However, given that the New Zealand
PPP model encourages respondents to the RFP to maximise the quality of outcomes within
the affordability threshold (based on the PSC), selecting a higher P-value upon which to base
the point estimate of the PSC wil  mean that the cost of the project to the procuring entity is
likely to be higher (but also that the quality of outcomes should increase accordingly).
Selecting a point estimate with a lower P-value wil  reduce the costs to the procuring entity,
but increase the risk that the affordability threshold wil  be set too low for respondents to
deliver the desired outcomes.
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5.26  Consideration should also be given to the shape (standard deviation) of the PSC distribution.
Cost in a ‘wide’ distribution wil  be more sensitive to changes in the P-value than cost in a
‘narrow’ distribution. Figure 4 il ustrates that the net present cost at P50 is the same
regardless of the shape of the distribution but that the net present cost of the P75 point
estimate is lower in a narrow distribution than in a wide distribution.
Figure 4:  Net present cost sensitivity to changes in probability (P-value)
Location of P75 value on point estimate distribution curve                    P-Value vs Net Present Cost of two distributions
Density
lue
Probability
P-Va
Net Present Cost
Net Present Cost

5.27  Factors that influence the shape of the distribution include the level of inaccuracy assumed in
the procuring entity’s price and quantity forecasts (with greater inaccuracies widening the
distribution) and the level of knowledge about the treatment for specific risks. Procuring
entities can reduce the variability of forecast point estimates by developing the design detail
of the reference project, thereby increasing the accuracy of price and quantity forecasts, and
treatments for specific risks.
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6  Proxy Bid Model
Introduction
6.1  The PBM represents the cost of the risk adjusted reference project with the addition of
private sector financing, tax and PPP specific costs.9  The PBM calculates the estimated
periodic amount (the unitary charge) that a contractor would require as payment for
delivering all of the services and providing the financing required for the project.
Figure 5: Components of the Proxy Bid Model
Proxy Bid Model
Financing
Costs
SPV Admin
Tax Costs
Transferred
Risks
Reference
Uses the
Project
same inputs
as the PSC
Construction
Unitary Charge
and lifecycle
Net
Year
capital and
Present
1      5      10      15      20      25      30
operating costs
Cost ($)

6.2  As a result of additional private sector costs, the net present cost of the PBM will be higher
than the PSC. This difference between the PSC and the PBM provides an indication of the
efficiencies that the contractor would have to find in order to deliver the project at a net
present cost equal to or less than the PSC. The contractor will also need to find further
additional efficiencies to in order to offset the procuring entity’s additional internal PPP
procurement costs in order to deliver the project within the affordability threshold (refer
Figure 2).
6.3  The key outputs from the PBM are:
•  The periodic unitary charge over the term of the PPP project agreement.
•  The present value of the unitary charge in order to undertake the quantitative assessment
described in Section 4.

9    For example, SPV administration costs and the costs of developing proposals.
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•  Information needed to model the impact of the PPP on the procuring agency’s financial
statements and funding requirements.  The PBM can be ‘solved’ such that its net present
cost equals that of the PSC. The unitary charge of the ‘solved’ PBM can be used to
provide guidance to the procuring entity on the potential annual costs of the PPP that it
wil  have to fund.
Methodology
6.4  The PBM takes all of the input costs from the PSC, including capital and operating costs and
quantified risks, and uses current financial market interest rates, observable interest margins,
equity returns and gearing levels to derive an appropriate financing structure for the project.
6.5  The critical inputs in the PBM not included in the PSC are the financing assumptions. The
PBM is typically modelled assuming funding is provided on a non-recourse basis to a SPV.10
6.6  The PBM should be developed in line with the following steps:
•  Project operating revenues (if any), operating expenses and capital expenditure are used
to generate operating cash flows for the project.
•  PPP specific costs such as SPV administration costs are added to the PSC costs.
•  Debt, equity and taxation cash flows that broadly reflect current market conditions are
added to the operating cash flows.
•  The unitary charge is calculated to meet all of the costs of the project, including taxation
and the required return on, and return of, debt and equity capital.
Cost, Timing and Economic Assumptions
6.7  The PBM uses the same cost, timing and economic inputs as used in the PSC. That is, the
same base capital and operating costs, risk adjustments and escalation profiles apply to the
PBM as to the PSC.
Forecasting periods
6.8  Monthly forecasting wil  generally be appropriate during the construction period. The period
convention during the operating term of the contract wil  be determined by a number of
factors but primarily the financing structure, particularly the debt facilities, and the anticipated
frequency of unitary charge payments. For example, if the interest rate for one or more of
the contractor’s debt facilities is referenced to the 90 day bank bil  rate then modelling wil  be
required on a quarterly basis (strictly 90 day periods) to provide accurate calculations of
interest rate costs.

10    The SPV wil  most likely be a limited liability company or limited partnership. In a typical structure the SPV wil
contract with a construction sub-contractor to build the asset and an operator to operate and maintain the asset.
It will borrow in its own right to pay the construction sub-contractor for building the asset.  The debt and equity
funding wil  be advanced to the SPV by investors on the strength of the payments that the SPV wil  expect to
receive under its contract with the procuring entity.
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Financing Assumptions
6.9  Overall structural assumptions need to be made for the financing approach adopted in the
PBM. For example:
•  Financing cash flows during the construction period: A reasonable assumption, consistent
with recent PPP projects, is that the cash outflows during construction are financed firstly
with debt, with equity to be contributed after all debt is drawn down.  However, equity is
committed from commencement of the PPP contract with consequential fees being paid to
the equity providers.
•  Construction debt interest: Capitalised through to the end of construction when it is
incorporated into a term debt facility.
•  The term facility refinancing: Refinanced with a bullet repayment that pays down the
balance of the outstanding debt with a new term facility on nominated refinancing dates.
6.10  The Treasury PPP Team maintains a record of financing terms observed in all PPP
procurement processes to date and should be consulted on appropriate assumptions to be
applied to individual projects.
Gearing levels
6.11  PPP projects are typically highly geared.  A high level of debt in the financing structure for a
PPP wil  be cost effective (the return on debt is lower than the return on equity). A debt to
equity ratio of 85:15 would not be unusual for a PPP.
6.12  The maximum level of debt wil  be a function of debt sizing criteria agreed between the
contractor and its lenders. Debt sizing criteria wil  typically include a maximum gearing ratio
(debt as a percentage of debt plus equity) and a maximum Debt Service Coverage Ratio
(DSCR). The DSCR is the ratio of cash available for debt servicing to debt service costs,
inclusive of interest and fees.  The maximum gearing ratio and DSCR constrain debt to a
level that can be serviced with an acceptable cash flow buffer.
Debt tenor
6.13  The debt facility during construction will typically be in place for the entire construction period
and wil  convert into a term facility at, or near, the end of construction (it may include the lock
in period).11  Re-financing of the term facility will occur periodically where the tenor of the
underlying debt is shorter than the contract term.
6.14  The available tenor of debt facilities in New Zealand is relatively short by international
standards. This means that multiple re-financings of the term debt might be required.
6.15  The debt tenor is important because fees wil  be charged at each refinancing.  These fees
need to be accounted for in the unitary charge calculation, as the unitary charge needs to
provide sufficient cash to cover fees as well as interest payments and principal repayments.

11   Equity investors are restricted from selling their equity stake in the project during the lock-in period, typically
ending 12 months following Service Commencement.
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The cost of debt financing
The cost of debt can be specified according to the following formula:
𝑅𝑑 = 𝑏 + 𝑚 + 𝑓
Where:
𝑏 = base interest rates.
𝑚 = interest rate margin.
𝑓 = debt issuance costs and other financing fees.
Base interest rates
6.16  The default approach to debt financing expected in all PPP projects is:
•  The contractor wil  be required to provide the procuring entity with a fixed base interest
rate for the duration of the construction period and the lock-in period (initial hedge period).
•  After the initial hedge period, the contractor wil  not be required to provide a fixed interest
rate unless it can do so for the entire term of the senior debt (noting that debt is typically
fully repaid before the expiry of the PPP contract). In the absence of the private sector
providing a long-term fixed interest rate solution, the contractor wil  be paid on the basis of
floating interest rates (typically the 90 day bank bil  rate). Hedging requirements for the
term of the contract after the end of the lock-in period wil  be subject to separate
arrangements between the Treasury and the procuring entity and wil  not involve the
contractor.
6.17  The base interest rates to apply will be:
•  A base swap rate matching the duration of the initial hedge period.
•  The base interest rate forecast to apply after the initial hedge period wil  be provided by
the Treasury PPP Team.  These forecasts may change over the course of a PPP
procurement process in response to changes in market conditions, including leading up to
Financial Close.
Interest  rate  margins
6.18  Interest rate margins (credit margin over the base interest rates) can be estimated by
reference to margins applied in recent PPP projects and taking into account current market
conditions.  The margins should be assumed to reduce following completion of construction,
to reflect a reduction in exposure to design and construction related risks.
Financing Fees
6.19  Fees wil  be payable in relation to equity and debt finance.  Consistent with recent market
trends, the following types of financing fees should be included in the calculation of the
unitary charge:
•  Arrangement fees paid at Financial Close, expressed as a percentage of the total debt
facility size.
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•  Commitment fees, which are a percentage to be paid quarterly on undrawn debt facility
balances. The fee rate wil  be expressed annually but paid quarterly.
•  Refinance fees, which are assumed to be ‘one off’ fees paid after the committed facility
matures at each refinancing event.
Repayment profile
6.20  The term facility debt can be amortised using a credit foncier repayment profile ‘sculpted’ to
take into account the project’s DSCR requirements. This method of amortisation provides
flexibility around repayments so they can vary in accordance with lumpy expenditure such as
lifecycle maintenance expenditure. The sculpted debt approach is common to projects of
this nature.
6.21  Depending on the nature of the project, it may be appropriate to incorporate a Debt Service
Reserve Account (DSRA). This wil  typically hold a balance equivalent to a number of
months of future debt service obligations. The initial balance of the DSRA would be funded
through the construction facility.
6.22  The alternative is to establish a debt service reserve facility. This wil  incur fees, similar to
the other debt facilities incorporated into the capital structure, as opposed to interest costs
associated with establishing a funded DSRA.
Target equity return
6.23  The target post-tax equity IRR underpins the calculated level of the unitary charge. The PBM
calculates a unitary charge that provides sufficient cash to meet the post-tax equity IRR after
operating costs, debt service costs and any SPV taxation.  The target post-tax equity IRR
should be set taking into account general market conditions, by reference to appropriate
evidence of investor returns and in consultation with the Treasury PPP Team.
Taxation Calculations
6.24  If the SPV is a limited liability company then it wil  pay tax on assessable income. If the SPV
is a limited liability partnership then assessable income wil  be taxed in the hands of the SPV
investors.  The unitary charge needs to deliver sufficient cash to cover the tax costs, whether
they are incurred at the SPV or investor level.
6.25  A tax calculation wil  be required as part of the unitary charge calculations.  A tax calculation
wil  also be required to produce the tax adjustment discussed in Section 7.
6.26  The tax calculations should take into account the contractual structure incorporated into the
Treasury Standard Form PPP Project Agreement and be consistent with the IRD’s Public
Rulings on the PPP contractual framework and any subsequent future rulings.12
Goods and Services Tax
6.27  The inputs to the PBM should be exclusive of Goods and Services Tax (GST). This will
produce a unitary charge exclusive of GST.

12   http://www.ird.govt.nz/technical-tax/public-rulings/2013/public-ruling-13005-13006.html
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6.28  GST cash flow timings may have a working capital impact. RFP respondents wil  model GST
flows and incorporate the financing cost of any timing issues into the unitary charge.
However, the impact on the unitary charge is unlikely to be material so GST modelling will
not usually be undertaken for the PBM.
Unitary Charge Profile
Indexation
6.29  The unitary charge can be modelled on the basis it wil  be escalated in line with forecast
escalation of the underlying costs. However, different costs are likely to escalate at different
rates which means the escalation rate applied to the unitary charge wil  need to represent a
weighted average of the underlying cost escalation rates.
6.30  Typical indices that escalation rates are derived from are:
•  Consumer price index (CPI), to reflect general inflation in operating costs.
•  Labour cost index (LCI), to reflect inflation in personnel costs.
6.31  Not all of the unitary charge wil  be adjusted for cost escalation. A component wil  be fixed
and not escalated. The fixed component wil  usually represent the proportion of the unitary
charge to be applied to servicing the capital used to construct or deliver the project.
6.32  Some financing structures incorporate indexed equity. For example, where a component (or
all) of the outstanding equity at the end of each period is indexed to CPI with a consequential
impact on the unitary charge.
Maintenance  Reserve Account
6.33  Operating expenditure wil  be comprised of both costs that wil  not change significantly from
period to period and costs that wil  be volatile or ‘lumpy’. Lifecycle maintenance expenditure
wil  typically be the primary cause of significant spikes in the unitary charge.
6.34  The variability in expenditure caused by lifecycle maintenance and other lumpy expenditure
can be incorporated unadjusted from the PSC into the unitary charge. This wil  result in a
lumpy unitary charge profile.
6.35  Alternatively, the unitary charge can be smoothed to remove the variability caused by the
lumpy expenditure. This is achieved by assuming that the SPV will deposit cash into a
designated reserve account over time and draw on this to fund subsequent lumpy lifecycle
maintenance expenditure. Senior debt repayments wil  be sculpted around movements in the
reserve account balances.
6.36  There wil  be a financing cost to the procuring entity of using a reserve account to smooth the
impact of lumpy operating expenditure on the unitary charge. In comparison, there wil  not
be any financing cost within the PBM if the lumpy expenditure is passed through to the
unitary charge with no smoothing. Therefore smoothing is unlikely to provide value for
money and is not recommended unless stability of cash flow is important for the procuring
entity.
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7  Tax Adjustment
Introduction
7.1  Private sector respondents for a PPP contract wil  be taxpayers, whereas public sector
entities do not usually pay tax. A tax adjustment is included in the PSC to minimise the
impact of differences in tax status to ensure a fair comparison between the PSC and private
sector PPP proposals.
Impact of Taxation
7.2  The unitary charge wil  be calculated to provide the PPP contractor with sufficient cash to:
•  Pay interest at pre-tax rates.
•  Pay any tax incurred by the SPV.
•  Make distributions to equity providers that wil  allow them to pay any tax they incur on
those distributions and provide them with their required post-tax return.
7.3  Consequently, the unitary charge wil  be sufficient to pay all tax on the returns on the capital
(debt and equity) provided to finance the construction of the asset and any other investment
needed during the contract term, and provide the debt and equity investors with their
required post-tax rates of return.13
7.4  In contrast, public entities are generally not taxpayers. Therefore, the PSC cash flows do not
include any explicit tax outflow for returns on the capital provided to finance the construction
of assets.  This difference in tax status is one of the reasons why the PSC cash flows wil  be
different to the cash flows that drive the unitary charge calculation in the PBM.
Rationale for Adjustment
7.5  The difference in tax status between the procuring entity and the private sector participants in
a PPP provides the PSC cash flows with a cost advantage compared to the unitary charge.
However, the tax status difference is a function of policy and legislation. It is not something
that private sector entities can change or influence in the context of pricing a proposal for a
PPP contract.  Furthermore, because the component of the unitary charge attributable to tax
to be paid by the debt and equity investors wil  eventually be returned to the Crown when the
tax is paid, it should not be a factor that influences the choice of procurement.
7.6  Taxes other than income tax on investment returns (for example, tax on construction
company profits) are likely to be the same under either a conventional procurement or a PPP
so their impacts do not need to be neutralised.

13    It wil  also provide sufficient cash to pay for the operating costs, lifecycle maintenance and the return of capital to
the investors.
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Adjustment Process
7.7  The impact of the difference in tax status needs to be neutralised to enable a fair comparison
between the PSC and the PBM (and the price of private sector proposals). This could be
achieved by calculating the present value of the PSC and the unitary charge using a pre-tax
discount rate, reflecting that the PSC cash flows and the unitary charge are, in effect, pre-tax
cash flows.
7.8  However, the discount rate used to calculate the present value of the unitary charge and the
PSC cash flows is specified, in the first instance, as a post-tax weighted average cost of
capital (WACC).
7.9  WACC is specified on a post-tax basis because, among other reasons, some of its key
parameters can only be observed on a post-tax basis. Furthermore, it is not appropriate to
simply gross-up the post-tax discount rate using the corporate tax rate (28%), as forecast
cash tax in each year is unlikely to be 28% of the pre-tax cash flows (because of timing and
permanent tax differences) and the forecast period is finite.
7.10  Therefore, the following process needs to be followed to correctly estimate the present value
of the tax adjustment:
•  Calculate the present value of the PSC cash flows using the post-tax discount rate (post-
tax WACC).
•  Calculate the tax payable on SPV pre-financing earnings (cash flows available to the
providers of debt and equity) in the PBM.
•  Calculate the present value of the tax payable (calculated in 2) using the post-tax discount
rate.
•  Adding the present value of the tax payable (calculated in 3) to the present value of the
PSC cash flows (calculated in 1).

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8  Discount Rates
Introduction
8.1  The discount rate is used to calculate the present value of the:
•  Forecast capital and operating costs (both inclusive of quantified transferred risks) in the
PSC.
•  Unitary charge in the PBM.
•  Tax adjustment to the PSC.
•  Unitary charge proposed by respondents.
8.2  The present values are used for a number of purposes and at various times during the
procurement process. In particular:
•  The present values of the PSC forecast costs and the PBM unitary charge are used as
inputs into the assessment of the appropriateness of procuring the asset or service
through a PPP.
•  The present value of the PSC is used to set the affordability threshold for disclosure in the
RFP.
•  The present value of each respondent’s proposed unitary charge is used to test that they
are less than or equal to the affordability threshold.
•  Monitoring the present value of the preferred bidder’s unitary charge during the preferred
bidder stage to ensure that the present value of the unitary charge remains below the
approved transaction limit leading up to, and at, Financial Close.
8.3  A consistent discount rate specification must be used for all present value calculations to
ensure that the analyses, assessments and decisions being made on the basis of the
present values are robust and have integrity.  The discount rate should reflect the cost of
capital for the project, adjusted for the systematic risks that the private sector is expected to
bear under the PPP contract.
The Discount Rate Model
8.4  A procuring entity considering investment in an asset to deliver services faces two important
decisions:
•  Investment decision:  Whether it is sensible to invest in the asset in the first instance.
This wil  require consideration of, among other things, whether society is better off
foregoing current consumption and reallocating resources to investment in the asset. The
assessment required for this decision is focused on the relationship between economic
benefits and economic costs.
•  Procurement decision:  If the cost benefit analysis concludes that investment is
appropriate, the next decision is how to procure the asset and the associated services. In
the context of this document the decision is between conventional procurement or PPP
procurement.
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8.5  The analysis at both of these decision points requires present values of benefits and costs or
revenues and expenditure to be calculated using appropriate discount rates.  The
appropriate discount rate to use for the investment decision should be developed in
consultation with the Treasury PPP Team and in accordance with published guidance.14
8.6  The procurement decision can be characterised as the procuring entity determining what
delivery approach wil  provide the best combination of quality of service, management of
project risk and cost effectiveness. Value for money is an important component of the
procurement decision. The discount rate is used to calculate and compare the present day
cost of procuring a project as a PPP and procuring the project using conventional methods.
Risk adjusted cost of capital
8.7  A fundamental principle underpinning the calculation of the discount rate for the procurement
decision is that it should reflect the marginal cost of capital for the project. That is, a cost of
capital that is based on the returns of alternative investment opportunities with similar risk
profiles to the project.15
8.8  The rate at which the government can borrow from financial markets (the risk free rate) is not
an appropriate discount rate for the procurement decision. The risk free rate reflects that
lenders to the government are not exposed to risks relating to the performance of public sector
investments and have their rate of return underpinned by the government’s power to tax.
8.9  The risk free rate does not adequately reflect risk that wil  be borne by investors in a project,
regardless of whether it is the procuring entity or the private sector through a PPP.  In
contrast, respondents to an RFP wil  be pricing their required rates of return on investment
capital to reflect the risk of their investment in the project. Using the risk free rate to discount
the PSC would be inconsistent with the true cost of capital for the project and the cost of
financing the project as a PPP.  Consequently, the quantitative assessment would be biased
against procuring a project as a PPP.

14   http://www.treasury.govt.nz/publications/guidance/planning/costbenefitanalysis/
15   For a more extensive discussion of this principle see Discussion Paper: Methodology for Quantitative
Procurement Options Analysis available at http://www.partnershipsbc.ca/files-4/guidance.php
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Specification of the Discount Rate
8.10  A single discount rate specification is to be used in all present value calculations. This is to
be calculated as a post-tax, nominal WACC using Equation 1.  This is a standard
specification of the cost of capital used widely in New Zealand.
Equation 1:  Weighted average cost of capital
𝐷
𝐸
𝑊𝐴𝐶𝐶 = 𝑅𝑑 × (1 − 𝑇𝑐) × 𝑉 + 𝑅𝑒 × 𝑉
Where the variables are:
𝑅𝑑
The pre-tax cost of debt  (comprised of base interest, credit risk
margin and other debt issuance costs).
𝑇𝑐
The prevailing corporate tax rate.
D, E and V
The market values of debt and equity respectively. V is the sum of
D  and  E. Therefore, 𝐷  and  𝐸  represent the relative weighting of
𝑉
𝑉
debt and equity used to finance the project.
𝑅𝑒
The cost of equity capital and represents the return required by
equity investors to compensate them for the variability of the return
on their investment (dividends and capital gains). The variability is
a function of the:
o  Variability in operating profit before interest.
o  Influence of debt servicing on cash flows. As debt investors
take priority over equity investors in terms of receiving
compensation out of cash flow,  the returns to equity investors
are influenced by the level of prior fixed obligations payable to
debt investors (ie, financing risk).

8.11  The cost of equity is estimated using the Brennan-Lally specification of the capital asset
pricing model (CAPM). This is presented in Equation 2.
Equation 2:  CAPM
𝑅𝑒 = 𝑅𝑓 × (1 − 𝑇𝑖) + 𝛽𝑒 × 𝑇𝐴𝑀𝑅𝑃
Where:
𝑅𝑓
Risk free rate – the return on a risk free asset.
𝑇𝑖
Investor tax rate.
𝛽𝑒
Equity beta, which is calculated as:
𝐷
𝛽𝑎 �1 + �
𝐸
Where:
𝛽𝑎= asset beta
𝑇𝐴𝑀𝑅𝑃
Tax adjusted market risk premium.

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8.12  The specification of the WACC model in Equation 1 and the CAPM in Equation 2 is
consistent with the specification of the cost of capital used by the Commerce Commission for
setting price paths for regulated businesses. It is also used by most private sector
companies and corporate finance analysts in New Zealand when evaluating investment
projects. It takes account of the specific features of the imputation of dividends in New
Zealand. The CAPM specification is also generally consistent with the model used to
determine the Treasury’s public sector discount rate.
Inputs
8.13  The key discount rate inputs should reflect the nature, risks and structure of the project being
evaluated. The individual inputs to the model are presented in Table 1. The values of some
of the inputs wil  vary between projects while others wil  be consistent between projects but
may vary over time. As a consequence the discount rate for each PPP project is likely to be
different.
8.14  In line with broader Treasury guidance on developing discount rates for a project, if a cost of
capital in its entirety or inputs to the cost of capital calculation can be observed from closely
comparable projects then these should be used in the first instance. For PPP projects, cost
of capital inputs can be observed in the financial models that respondents provide as part of
their proposals. The cost of capital for each proposal is developed under competitive tension
(both as between capital providers to different consortia, and as between capital providers
and other members of a given consortium) and can be assumed to be efficiently priced.
Therefore, previous projects wil  be an important source of information on cost of capital
inputs when deriving the cost of capital for a specific project.
Table 1:  WACC Component Descriptions
Component
Description
Comments
D/V and E/V  Relative proportions of debt and
PPP projects are typical y highly geared (high levels of
equity in the capital structure.  This is  debt and relatively low levels of equity) at
referred to as gearing.
commencement of the operating period.  The actual
level of gearing wil  depend on the nature of the project
but an accommodation or roading PPP could have
gearing in excess of 80% (but unlikely to be in excess
of 90%).  PPP projects with significant service
components and greater degrees of risk transfer may
have gearing lower than 80%.
Rd
The project’s cost of debt.
The total return to the providers of debt capital
comprising the interest rate on debt plus debt issuance
costs or fees.16  The cost of debt in the WACC should
be consistent with the cost of debt used in the cash
flows to derive the unitary charge in the PBM.
Tc
The corporate tax rate.
The prevailing corporate tax rate.
Rf
The risk free rate of interest (long-
Government stock yields are appropriate indicators of
term government stock yields).
risk free rates.  Risk free rates can be derived by
observing forward longer term rates from the then
current government stock yield curve. For example, the
ten year rate that wil  apply in ten years time.

16    Costs charged by the debt providers to establish the debt facility, maintain the commitment of undrawn amounts
and refinance the debt.
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Component
Description
Comments
Ti
Investor tax rate.
Assumed to be equal to the prevailing corporate tax
rate.
Be
Equity beta = Ba*(1 + D/E).  Ba is the  Asset betas reflect the contribution to portfolio risk of an
asset beta.
investment, independent of financing (ie, the riskiness
of the business itself).  It is expected that most assets
or services being delivered through PPP procurement
are likely to be exposed to relatively low levels of
systematic risk and that asset betas for most PPP
projects will fall within a similar range.  The Treasury
PPP Team should be consulted in relation to setting an
asset beta for WACC calculations.
TAMRP
Tax adjusted market risk premium
To be consistent with the prevailing tax adjusted market
risk premium used by the Commerce Commission.
Updates
8.15  The discount rate for a given PPP project may need to be updated prior to Financial Close.
This is to take account of any material changes in underlying base interest rates as advised
by the Treasury PPP Team.

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Appendix A:  Risk Allocation Example
The following table provides example risk allocations between the procuring entity (Crown risk) and
the contractor.
Risk
Crown Risk
Contractor Risk
General Risks

Specific change in law
Yes
No
General change in law
Shared
Shared
Force majeure events
Shared
Shared
Uninsurable risks
Shared
Shared
Insurance costs: construction
No
Yes
                           operation
Shared
Shared
Financial Risks

Base interest rate movements
Yes
No
Credit margin and fee increases
No
Yes
Exchange rate movements
No
Yes
Site Risks

Unforeseeable contamination
Shared
Shared
Ground conditions
No
Yes
Archaeological artefacts
Yes
No
Obtaining a planning designation (under the Resource
Yes
No
Management Act 1991)
Compliance with designation and obtaining all other
No
Yes
regulatory approvals
Treaty of Waitangi risks (risk that the land becomes the
Yes
No
subject of a claim under the Treaty)
Design Risks

Inappropriate specification of requirements
Yes
No
Design Delayed
No
Yes
Fitness for purpose
No
Yes
Construction  Risks

Inaccurate cost estimates
No
Yes
Interruption and delay
No
Yes
Prime contractor financial distress
No
Yes
Industrial action
No
Yes
Commissioning (Operational Readiness)
No
Yes
Operational Risks

Cost escalation above CPI/LCI
No
Yes
Costs or capability inadequate to achieve contracted
No
Yes
performance levels

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Risk
Crown Risk
Contractor Risk
Change in specific operating standards, legislation,
Yes
No
regulations or specification
Failure of electricity, water or other utility service:

                             Upstream
Yes
No
                             Downstream
No
Yes
Utilities costs and volumes
Yes
No
Lifecycle Risks

Availability of asset
No
Yes
Asset management / facilities maintenance provider financial
No
Yes
distress
Significant and deliberate user damage to facility
Yes
No

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Public Private Partnership Programme

The New Zealand PPP Model and
Policy: Setting the Scene

A Guide for Public Sector Entities

September 2015

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© Crown Copyright

This work is licensed under the Creative Commons Attribution 4.0 International licence.
In essence, you are free to copy, distribute and adapt the work, as long as you attribute
the work to the Crown and abide by the other licence terms.
To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/. Please note that no
departmental or governmental emblem, logo or Coat of Arms may be used in any way which infringes
any provision of the Flags, Emblems, and Names Protection Act 1981. Attribution to the Crown should be
in written form and not by reproduction of any such emblem, logo or Coat of Arms.
ISBN: 978-0-478-43687-7 (Online)
The Treasury URL at September 2015 for this document is
http://www.treasury.govt.nz/publications/statesector/ppp/guidance/model-and-policy
The PURL for this document is http://purl.oclc.org/nzt/g-pppp-mp

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1  About this Guidance
How to use this guidance
1.1  This guidance has been written by the Treasury PPP Team.  It must be read in conjunction
with other Public Private Partnership (PPP) guidance and applied in consultation with the
Treasury PPP Team.  It assumes that the Treasury’s Standard Form PPP Project
Agreement wil  form the basis of the contract to be signed with the private sector partner.1
1.2  This document should be read by public sector entities (referred to as procuring entities
throughout this guidance document) that are considering or implementing PPP as a
procurement option for a major infrastructure project; specifically, those staff involved in the
development and internal approval of the project business case and procurement process.
1.3  A glossary of terms used throughout this document is available on the Treasury website.2
The New Zealand PPP model
1.4  In the New Zealand context, a PPP is a long-term contract for the delivery of a service,
where provision of the service requires the construction of a new asset, or enhancement of
an existing asset, that is financed from external (private) sources on a non-recourse basis,
and full legal ownership of the asset is retained by the Crown.
1.5  PPP procurement has been implemented in New Zealand for the primary purpose of
improving the focus on, and delivery of, required service outcomes from major
infrastructure assets. Whole of life services are purchased under a single long-term
contract with payments to the contractor based on availability and performance of the
asset.  The combination of assets and services required to be delivered by the private
sector are referred to in this document as the ‘project’.
1.6  The PPP model seeks to improve outcomes by capturing best practice and innovation from
the private sector. Lessons learnt from PPP projects can be implemented across a
broader portfolio of public assets to significantly leverage the benefits of single PPP
transactions. The competitive procurement process, focus on outcomes (with minimal
input specifications and constraints), appropriate risk allocation and performance based
payment mechanisms that put private sector capital at risk optimise the incentives and
flexibility for private sector participants to deliver innovative and effective solutions.
1.7  PPP procurement is only used where it offers value for money over the life of the project,
relative to conventional procurement methods.  This means achieving better outcomes
from a project than if it were procured using conventional methods, for the same, or lower,
net present cost.
Questions and further information
1.8  General enquiries about the information contained in this guidance can be sent to
[email address]. Other guidance documents and useful information can be found
at www.treasury.govt.nz/ppp.

1
http://www.treasury.govt.nz/statesector/ppp/standard-form-ppp-project-agreement
2
http://www.treasury.govt.nz/statesector/ppp/guidance/glossary
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2  Overview
Introduction
2.1  This document provides an overview of the New Zealand Public Private Partnership
(PPP) model and policy and is intended to set the scene for procuring entities, potential
bidders and the public, by outlining:
•  what PPP procurement is and, in particular, the key policy and contractual features
that shape the New Zealand PPP model
•  the rationale for choosing PPP procurement to deliver major infrastructure assets
and their related service outcomes
•  when a procuring entity should select PPP procurement over other conventional
methods of asset delivery, and the process for this assessment (including
integration with the Better Business Cases framework)
•  the role of the Treasury PPP Team in assisting the procuring entity with PPP
procurement, and
•  a brief overview of the procurement process.
2.2  This document incorporates developments in New Zealand PPP policy and valuable
lessons learnt from the practical implementation of PPP procurement in New Zealand
to date.
2.3  This document is intended to provide an overview of the New Zealand PPP programme
only.  It is not intended to provide detailed advice and procuring entities should consult
with the Treasury PPP Team for assistance in relation to a specific project.
Background
2.4  Increasing productivity in the public sector, including through the implementation of
improved procurement and management of major assets, is important for New Zealand’s
long-run fiscal and economic performance. Government agencies should consider using
private sector expertise in asset procurement and management where it delivers better
value for taxpayers, either through enhanced services or lower overall costs.
2.5  The Government has stated that it wil  consider PPP procurement where it offers
superior value for money over conventional procurement approaches.  The evaluation of
PPP procurement for al  significant infrastructure investments has subsequently been
mandated through a Cabinet Office Circular and the Government’s Rules of Sourcing. 3 4
2.6  The New Zealand PPP Programme was established in 2009 with the creation of a PPP
Centre of Expertise within the Treasury. Since this time the Treasury PPP Team has
published PPP guidance and developed a standardised set of ‘model terms’ for PPP
procurement (the Standard Form PPP Project Agreement).5  Each clause has been
developed on the basis of its international validity and its relevance to the New Zealand
market.

3
http://www.dpmc.govt.nz/cabinet/circulars/co15/5
4
http://www.business.govt.nz/procurement/for-agencies/key-guidance-for-agencies/the-new-government-
rules-of-sourcing
5
Refer note 1 above
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3  What is PPP Procurement?
3.1  Internationally, the history of PPP procurement spans more than two decades with
early Private Finance Initiative projects in the United Kingdom generally considered to
be the genesis of the PPP model.
3.2  While PPP procurement has been adopted in a number of jurisdictions (in both
developed and developing economies) no clear and consistent definition has emerged
as to what constitutes a PPP. This is largely due to the varying policy drivers which
influence the design and implementation of PPP procurement between jurisdictions.
3.3  A number of international government bodies and non-government organisations have
sought to provide greater clarity through published definitions of PPP procurement.
These share a number of common characteristics which have informed the
development of the New Zealand PPP model and definition, such as:
•  involvement by both Public and Private sector parties
•  a long-term contract
•  construction of new infrastructure assets that enable delivery of services to the
public
•  provision of at least some of those services by the private sector
•  risk transfer, and
•  private finance.
The New Zealand PPP model
Key characteristics
3.4  The key policy characteristics of the New Zealand PPP model include:
•  the specification of outcomes required to be delivered to the public (the service
outcomes)
•  the construction of a new infrastructure asset, or substantial enhancement of an
existing asset, (the asset) to facilitate the delivery of the service outcomes
•  the delivery of service outcomes by a private sector partner for a defined period
(often between 20-30 years)
•  the efficient allocation of risk to the party best able to manage that risk
•  the separation of ownership (retained by the public sector) and financing (provided
by the private sector partner) to provide meaningful risk transfer and management,
and
•  the application of a payment for performance regime to incentivise the delivery of
specified service outcomes and penalise non-performance.
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3.5  PPP procurement places a greater focus on whole of life performance to optimise
decisions and activities that may otherwise occur in isolation, or with other short-term
drivers. For example, the trade-off between the choice of construction materials and
ongoing maintenance requirements is optimised for the duration of the PPP (including
any required hand back period), rather than being unduly influenced by the up-front
capital cost.
3.6  The integration of service and asset design is equally important to ensure that the
asset is fit for purpose and enables efficient and effective delivery of operational
services.
3.7  The application of private finance is an important component of PPP procurement as
placing significant capital ‘at risk’ ensures that the performance incentives and risk
transfer within the model are meaningful.
3.8  The New Zealand PPP model adopts a ‘more for the same’ approach to value for
money. This recognises that a project procured under more conventional forms of
procurement wil  incur a certain level of expenditure and seeks to maximise the
quantum and quality of outcomes that can be achieved for that cost. This can be
contrasted with a ‘same for less’ approach adopted in some other jurisdictions. This
reinforces that PPP procurement is intended to improve the delivery of asset and
service outcomes and act as a catalyst for change in the public sector.
Definition
3.9  The definition adopted by the New Zealand PPP Programme and the Standard Form
PPP Project Agreement is:
A long term contract for the delivery of a service, where the provision of the service
requires the construction of a new asset, or the enhancement of an existing asset, that
is financed from external (private) sources on a non-recourse basis, and where full
legal ownership of the asset is retained by the Crown.
Standard Form PPP Project Agreement
3.10  Following the commencement of the New Zealand Government’s PPP programme in
2009 the Treasury established the Standard Form PPP Project Agreement which is the
basis for the project agreement for all PPP projects in New Zealand.6
3.11  The standardisation of commercial and contractual terms and their application provides
clarity, consistency and certainty of the PPP model for both procuring entities and the
wider PPP market.  This creates confidence in the model and results in more efficient
procurement processes.

6
Refer note 1 above
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3.12  Key aspects covered by the Standard Form PPP Project Agreement include:
•  A fixed price for the design, construction and ongoing maintenance (and operation)
of the asset
•  Legal ownership of the asset is retained by the procuring entity at all times
•  A performance regime which ensures that payment is only made once the asset is
complete and service delivery commences, and only in relation to those service
outcomes actually delivered
•  Contractual certainty on risk allocation
•  A clear process for agreeing any changes to the required service outcomes, and
•  Provision for control of the asset to be handed back to the procuring agency in a
pre-defined condition at no cost at the conclusion of the operating period.
3.13  The Standard Form PPP Project Agreement must be used by all procuring entities
undertaking PPP procurement and is only to be adapted in consultation with the
Treasury PPP Team to the extent required to accommodate any unique characteristics
of a specific project.
New Zealand PPP  procurement models
3.14  The New Zealand PPP programme utilises two models (distinguished by the scope of
services required) to allocate the roles and responsibilities for a PPP project based on
its specific characteristics and requirements.
3.15  The Design, Build, Finance, Maintain and Operate (DBFMO) model transfers the
responsibility for delivery of the design, build, financing, maintenance and operation
(service provision) of an asset to the private sector partner.
3.16  In comparison, the Design, Build, Finance and Maintain (DBFM) model transfers similar
responsibility except in relation to the operational services, for which the procuring
entity retains responsibility for delivery.
3.17  The DBFMO model has the potential to deliver greater benefits to the public sector
because it provides greater opportunity for innovation and risk transfer.
Design, Build, Finance, Maintain and Operate
3.18  The DBFMO model offers maximum scope for innovation in asset and service design
as it incorporates service provision.  The key benefit lies in the ability for the private
operator’s service methodology to inform and influence the design of the asset to
ensure the asset and service mix is optimised.
3.19  The DBFMO model allows the procuring entity to focus primarily on the service
outcomes sought and incentivise these through the performance regime (upon which
payment is based).  This aligns closely with the government’s focus on achieving better
public services rather than solely focusing on the procurement of ‘bricks and mortar’
assets.
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3.20  This model has been adopted for the delivery of a new prison facility and custodial
services where the Department of Corrections specified the service outcomes to be
delivered by the private sector. The service outcomes include custodial services that
provide a safe, secure and humane environment and rehabilitation services that reduce
rates of reoffending. To drive innovation, the Department minimised constraints where
possible to allow the private sector flexibility in the design and operation of the prison to
achieve the desired service outcomes.
Design, Build, Finance and Maintain
3.21  The DBFM model incentivises the consideration of the whole of life cost of asset and
service provision through the inclusion of facilities maintenance, asset management,
fitout and lifecycle refurbishment within the procurement. This ‘bundling’ creates a
focus on optimising the cost of the facility and its operations over its entire life.
3.22  In comparison with the DBFMO model, as responsibility for the provision of operational
services is retained by the procuring entity, the DBFM model requires a greater level of
integration between the procuring entity and the private sector partner through the
procurement phase to ensure that opportunities for innovation in asset and service
design are realised.
3.23  The procuring entity is also likely to be exposed to a greater level of interface risk
where it retains responsibility for the provision of operational services, particularly
where the asset is complex and directly impacts the operating model such as a prison
or hospital. This method is therefore best suited to projects where there is a strong
policy or operational rationale for not including service provision within the PPP
contract.
3.24  This model has been successful y used to deliver new school property where the
Ministry of Education retains responsibility for the provision of teaching services within
the facilities that have been designed and constructed by a private sector partner. The
Ministry benefits through the up-front agreement of long-term performance standards
for the assets at a fixed price, while school management teams are not burdened by
property maintenance responsibilities. This enables them to focus on educational
outcomes.
PPP performance regime and payment mechanism
3.25  PPP procurement is predicated on the concept of payment for performance.  Together, the
performance regime and payment mechanism incentivise enhanced asset performance
and service provision (to the extent included within the PPP contract) throughout the
operating period.
3.26  The required level of asset performance and service delivery is prescribed in terms of
service outcomes by the procuring entity at the outset of the procurement phase. The
contractualisation of these performance standards then ensures that the specified
outcomes remain central throughout the life of the project.
3.27  The level of analysis required to identify these outcomes and an indicative performance
regime is typically more substantial than for conventional forms of procurement. This
analysis is also completed earlier in the procurement process (with project outcomes
and indicative performance standards often identified during the development of the
Detailed Business Case (DBC)).
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3.28  The performance regime is both availability and service driven, with payments made by
the procuring entity on a periodic (typically quarterly) basis commencing only once the
asset is operational and calculated based on the actual performance of the asset and
required service outcomes.
3.29  In the event that the asset (and/or service) does not perform as agreed, payments
made by the procuring entity will be reduced through abatement to the extent that they
may not cover the private sector partner’s operating cost or, ultimately, the full capital
cost of the asset.  The application of private finance provides a direct link between
asset and service performance and payment for the asset, ensuring that investors have
a strong incentive to manage the performance of their service providers.
How does PPP procurement differ from conventional procurement?
3.30  The key features that distinguish PPP procurement from more conventional public
sector procurement include:
•  Specification of the service outcomes required from an asset rather than prescriptive
input specifications that relate to the asset itself
•  Bundling of ‘whole of life’ services, that are otherwise procured independently at
different stages of an asset’s lifecycle, under a single long-term contract
•  The transfer of risk to the private sector partner where they are best placed to
manage that risk, and
•  A periodic (typically quarterly) payment profile which commences only once the
asset is operational and is calculated based on the actual performance of the asset
and required service outcomes.
Forms of procurement excluded from the New Zealand definition of PPP
3.31  A range of alternative, or non-traditional, procurement models have emerged which
may be appropriate for procuring entities to consider when determining the appropriate
procurement model for a specific project. While these models may be valid
alternatives to consider alongside PPP procurement, they do not address, to the same
extent, the underlying policy concerns that led to the development of the New Zealand
PPP model and are therefore excluded from the New Zealand definition of a PPP (as
set out at paragraph 3.9).
3.32  Examples of models and processes that do not constitute a PPP include:
•  joint venture arrangements
•  long-term leases
•  alliance models
•  early contractor involvement, and
•  outsourced service contracts.
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4  Why has PPP Procurement been
introduced in New Zealand?
Adoption in New Zealand
4.1  It is important for participants in the New Zealand PPP programme to understand the
rationale for the adoption of PPP procurement in New Zealand and, in particular, how
this may differ from other jurisdictions.
4.2  PPP procurement has been implemented in New Zealand for the primary purpose of
improving the focus on, and delivery of, service outcomes from major infrastructure
assets.  This focus is two-fold:
•  improving capital asset management and procurement through the implementation
of whole of life asset costing and management, and
•  facilitating the provision of better public services through recognition that
infrastructure assets exist primarily to enable the effective and efficient provision of
public services.
4.3  PPP procurement has not been adopted in New Zealand to address problems in the
procurement process (such as failure to deliver to time or budget, which could be
satisfactorily achieved through appropriate provisions within conventional procurement
contracts) or a lack of public funding for major infrastructure projects.
4.4  The PPP model utilises a performance-based contract that incentivises high quality
performance by placing private sector capital at risk for non-performance. Through its
focus on service outcomes the PPP model provides flexibility for private sector
participants to apply their expertise and experience to deliver innovative and effective
solutions for the benefit of the procuring entity.
Key advantages of PPP procurement
4.5  The key advantages that distinguish PPP procurement from conventional procurement
methods in New Zealand include:
•  an increased focus on the specification and the performance of service outcomes
•  an integrated service and asset design solution
•  a ‘whole of life’ perspective that provides greater cost certainty and optimisation
•  payment for good performance and abatement for poor performance
•  active management and optimal allocation of risk
•  wider benefits to New Zealand’s infrastructure sector as a result of private sector
expertise and experience, and
•  enhanced procurement discipline.
4.6  These are discussed in detail below.
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An increased focus on service outcomes
4.7  Conventional forms of procurement focus on asset input specifications, which
traditionally dictate how the asset is constructed. This approach results in heavily
prescribed tender documents focused on the infrastructure asset itself as an end result,
rather than as an enabler of the desired service outcomes.
4.8  In contrast, PPP procurement requires the procuring entity’s identification of specific
performance outcomes relating to the desired service outcomes for the project, with
detail of the design and construction of the asset used to deliver those services
determined by the private sector partner. As payment to the private sector partner is
linked to the performance of the services throughout the contract, PPP procurement
incentivises the delivery of the highest quality service provision within the project
budget.
4.9  Importantly, specification of the scope of the project on the basis of the quality of
service provision allows the private sector partner to introduce and implement
international best practice and innovation. It also enables the exploration of alternative
asset and service models that may provide the same or higher quality service
outcomes.
4.10  By attracting international service, construction, and equity providers to the New
Zealand market PPP procurement offers procuring entities access to a wide variety of
sources of best practice and innovation which may not otherwise be readily accessible.
These parties compete on the basis of their experience and ability to deliver those
outcomes sought by the procuring entity, resulting in focused and well developed
proposals.
Integrated service and asset design solution
4.11  Projects using conventional procurement models are often limited to a ‘design and
construct’ brief without expressing the functionality or operational delivery outcomes
required from the asset. This often results in the asset being influenced by the cost
and ease of construction rather than the outcomes required from the particular
infrastructure.
4.12  A significant benefit of PPP procurement is the integrated consideration of the design
and services with the asset’s operational functionality. Ongoing operational,
maintenance and refurbishment requirements become the private sector provider’s
responsibility for the length of the contract period.
4.13  This not only achieves a higher level of long-term service delivery but is also likely to
improve the quality of the design and usability of the asset. This benefit is driven
through the structure of the PPP payment mechanism whereby the private sector
provider wil  only receive full payment if the asset is available and fit for purpose for the
duration of the operating period.
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A whole of life perspective
4.14  The PPP model focuses on whole of life performance of an asset through full
integration of up-front design and construction costs with ongoing service delivery,
operational, maintenance and refurbishment costs.  This is intended to deliver
improved efficiency, greater cost optimisation and improved cost certainty over the life
of the asset.
4.15  Conventional methods fail to incentivise the consideration of the long-term operating
and lifecycle costs of new capital assets at the time approval for new capital investment
is sought.  By establishing an investment period that incorporates a substantial
operating period (usually 20-30 years post service commencement), PPP procurement
ensures the whole of life cost of infrastructure is well understood and sufficient capital
and operating appropriations are sought at the outset.
4.16  The requirement for a higher degree of pre-procurement analysis under PPP
procurement results in better quality information for the procuring entity and more
robust, and defensible, decision making. This is a win-win; the procuring entity enjoys
a greater level of certainty that the whole of life cost of the project is affordable while
the government gains assurance that the future cost of today’s investment is well
understood.
4.17  Further benefit is gained through the transfer of whole of life risk; that is, the risk that
the asset performs as intended for the duration of the operating period (which includes
the risk, and cost, associated with facilities maintenance, lifecycle, fit out and specified
equipment). This ensures the private sector partner is highly incentivised to explore
innovative opportunities to ensure reliable service while managing the long-term cost of
both the asset and service delivery, rather than solely focusing on minimising the up-
front capital appropriation.
4.18  To date, this has led to design concepts, operating models and approaches to capital
investment that had not previously been considered by the respective procuring entity.
This increased understanding and optimisation of the whole of life cost of the project is
beneficial to the procuring entity’s wider asset portfolio as wel  as the immediate
project.
Payment for performance
4.19  Globally, fiscal constraints have increased governments’ focus on the efficient and
prioritised appropriation of taxpayer funds. This has resulted in greater emphasis on
agencies to account for the ways in which they apply public funds.
4.20  PPP procurement creates a direct relationship between the performance of an
investment and the reimbursement of the associated capital cost associated with the
asset over an extended period.  Having private sector capital at risk for non-
performance provides a strong incentive for the private sector partner to ensure the
asset is always available and fit for purpose.
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4.21  The performance regime ensures that the procuring entity only pays for the asset and
service provision where those outcomes are achieved. If the asset does not perform as
required and the service outcomes specified by the procuring entity are not met to the
required standard, payment is abated in proportion to the level of underperformance.
This incentivises the private sector partner to lift its performance to ensure future
payments are received.
4.22  Abatements for non-performance (or penalties) should be appropriately sized to ensure
that the contractor is incentivised to avoid or remedy performance failures.
Optimal allocation and active management of risk
4.23  While conventional forms of procurement may address procurement specific risk (such
as ‘on time’ or ‘within budget’ delivery) they can fail to address a number of project
related risks (such as lifecycle or operating cost implications). If these risks are not
well managed, then an otherwise apparently successful procurement can be greatly
undermined during the operating phase of the project.
4.24  A unique aspect of PPP procurement is the more rigorous up-front identification of risk
inherent throughout the life of the project and the cost of that risk to the procuring
entity. Once these risks have been identified and valued, the procuring entity is able to
test which risks a private sector partner may be prepared to bear and whether they can
manage these risks more efficiently than the public sector.
4.25  The critical principle applied to New Zealand PPP procurement is that individually
identified risks should be allocated to the party best able to manage and mitigate that
risk (in the sense of either reducing the likelihood of it occurring or reducing the cost of
rectification or reinstatement). It is only where the private sector partner is better
placed to manage a particular risk that it should be transferred. This principle
recognises that value is not achieved through indiscriminate transfer of project risks
that the private sector cannot manage better than the public sector.
4.26  The structure of the private sector partner ensures that procurement decisions and risk
transfer are thoroughly tested. This is achieved as each member of the respondent
consortium wil  consider directly the risk that they are taking under the PPP project
agreement. Specifically, the financiers’ interests are well aligned with those of the
procuring entity which ensures decisions are rigorously analysed, thereby improving
the overall robustness of the final project.
4.27  Even where it may not be value for money to transfer a risk to the private sector
partner, the risk identification and quantification process has tangible benefits for the
procuring entity through a greater understanding of those risks it wil  retain and how
these should be managed.
Wider benefits to New Zealand’s infrastructure sector
4.28  Utilising the expertise and experience of the private sector through PPP procurement
offers several benefits beyond those realised in a specific project, as fol ows:
•  PPP procurement challenges the way in which the public sector considers service
delivery and provides opportunity to learn first-hand from others who have
demonstrated experience and competency in providing similar services
internationally.
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•  The PPP model allows the procuring entity to adopt innovation, whether in asset
design or service performance improvements, brought by the private sector partner.
This provides real scope for a single PPP project to lift the performance of an entire
portfolio, as innovation and efficiencies can be replicated across the entity’s wider
procurement and asset management programmes.
•  PPP procurement drives continuous improvement through the implementation of
performance regimes that allow a procuring entity to expect more from its private
sector partner as it improves its own performance across the rest of its portfolio.
•  PPP procurement can provide contestability in certain sectors for infrastructure and
services that have previously been solely provided by a public sector entity, without
losing public sector control over the standard to which those services are provided.
4.29  PPP procurement may also be considered in situations where the savings in relation to
a single project may not be significant. Instead, there may be greater value to the
procuring entity through utilising the PPP project to effect institutional change.
Enhanced procurement  discipline
4.30  The Government is focused on ensuring taxpayers’ funds are applied prudently
including through the delivery of high quality procurement and management of capital
assets.
4.31  The PPP procurement methodology encourages a disciplined approach to procurement
through detailed consideration of project requirements, desired outcomes and the rigor
of analysis in compiling a Public Sector Comparator (PSC), which establishes a
comparative cost if the project were to be procured using a more conventional form of
procurement.  As such, PPP procurement is less prone to cost escalation.
4.32  The additional clarity gained through this process is beneficial to all procurement
decisions, even where PPP procurement may ultimately not be implemented.  In
particular, greater cost certainty provides better quality information to support more
robust decision making.
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5  When and how to consider PPP
5.1  It is important to note that:
•  As with all forms of procurement, PPP procurement does not alter the investment
case or objectives of a project and should therefore only be considered once a clear
service (and corresponding asset) need has been identified and agreed.
•  PPP procurement should only be used where it offers value for money over the life
of the project relative to conventional procurement methods. This means obtaining
improved outcomes from a project for the same, or lower, net present cost as if it
were procured using conventional methods.
Cabinet mandated consideration of PPP procurement
5.2  Procuring entities that are planning any ‘significant investment’ (including any
arrangements with Local Government Authorities seeking Crown funding or support)
must evaluate all procurement options, including PPP procurement.7
5.3  The Government Rules of Sourcing require agencies that are considering PPP
procurement to:
•  consult with the Treasury PPP Team early in the development of the project’s
business case
•  follow relevant Treasury guidance and instructions
•  involve the Treasury PPP Team in the economic and financial assessment and
advice to Ministers
•  invite the Treasury PPP Team to participate in relevant project steering and working
groups, and in the selection panels for al  key PPP advisor appointments, and
•  use the Treasury’s Standard Form PPP Project Agreement as the basis for any
contract and consult with the Treasury PPP Team over any proposed
modifications.8
Integration with the Better Business Case Framework
5.4  Procuring entities should engage with the Treasury PPP Team to consider the potential
suitability of PPP procurement for proposed projects at an early stage. For procuring
entities applying the Better Business Case framework, formal consideration of PPP
procurement is required through the development of an IBC and has implications for
the process of developing both the IBC and DBC.

7
In terms of financial or risk thresholds, ‘significant’ generally means investments that require Cabinet or
Ministerial approval as per Cabinet Office Circular (15) 5, that is, high risk proposals, or proposals with
whole of life costs in excess of $15 mil ion, however funded.  For further information, refer
http://www.dpmc.govt.nz/cabinet/circulars/co15/5
8
Refer note 1 above
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Indicative Business Case
5.5  The first and most critical step in the lifecycle of any procurement project is the
definition of the service need. The clearer the definition and understanding within the
procuring entity, the lower the risk that problems wil  arise later in the procurement
process.
5.6  The service need must be defined by the procuring entity in consultation with users and
stakeholders and be expressed in terms of needs, functions and operational
performance requirements. The service need should reflect the desired outcomes (and
outputs where appropriate) and wherever possible avoid prescribing design features or
input requirements.  This is to maximise the opportunity for innovation in meeting the
service need.
5.7  The consideration of procurement options is carried out at Action 7 of the IBC where
evaluation of a wide range of realistic options for meeting the identified service needs
is required. The suggested approach is to consider possible options against five
dimensions: scale, service solution, service delivery, implementation and funding. The
resulting options for implementing the preferred solution may range from the procuring
agency self-performing the delivery of all required assets and services to the provision
of all services by a private sector provider through assets developed and owned by that
provider.
5.8  An initial qualitative assessment of PPP procurement is required. This should consider
the characteristics of the project and assess whether PPP procurement is likely to be
suitable and offer greater value for money. Further detail of those characteristics which
should be considered at a minimum are set out below.
5.9  If PPP procurement is to be included as a short list option, additional consideration is
required as part of the IBC before PPP procurement is presented to Cabinet.  This
additional consideration includes consultation with joint Ministers (being the Minister of
Finance and Minister responsible for the procuring entity) and engagement with
potential interested parties through market sounding.
5.10  Two additional components (Actions 8a and 8b) are required to be added to Action 8 to
provide for this additional analysis.
Action 8a: Market Sounding
5.11  Engaging with a representative sample of potential private sector partners (the market)
early in the planning process for a project can provide real value to a procuring entity
as it can help inform the opportunity for all parties – both in terms of readying the
market for the project as well as helping the procuring entity resolve the optimal scope
and scale of the project.
5.12  While care must be taken to ensure that appropriate probity processes are observed,
market sounding provides the procuring entity an opportunity to gain a better
understanding of the appetite of the market for the project as well as any preferences
or challenges the market may have with certain scope and scale permutations.
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5.13  The procuring entity must ensure that it is well prepared for the market sounding
process and that it presents a coherent and considered opportunity to the market. If
the procuring entity is not well prepared and has not considered a range of options or
attempts to use the market sounding process to ‘crowdsource’ innovation or intellectual
property then it is likely to damage the market’s appetite for the project.
Action 8b: Endorsement by joint Ministers
5.14  If, on the basis of the initial qualitative assessment and market sounding, PPP
procurement is considered a short list option then joint Ministers should be consulted
prior to submission of the IBC to Cabinet.  This provides Ministers with full visibility of
the analysis and assumptions which underpin the project and allow them to consider
whether there are any programme or external factors which may also impact the likely
success of PPP procurement.  For example, if the timing of another project, for which a
different agency is considering PPP procurement, may clash then Ministers may
consider intervening.
5.15  If joint Ministers agree that PPP procurement is an appropriate option, then further
analysis wil  be required as part of the preparation of the DBC. The IBC should short
list two procurement options for further evaluation in the DBC which include PPP
procurement and the preferred form of conventional procurement.  This is important as
the preferred form of conventional procurement wil  form the basis for the calculation of
the PSC and wil  ensure a second option is available if further analysis as part of the
DBC results in PPP procurement being discarded.
Detailed Business Case
5.16  Where PPP procurement is endorsed by Cabinet, the DBC wil  build on the analysis
completed as part of the IBC and Cabinet directive. Further qualitative analysis will be
required as well as quantitative analysis in the form of compiling a PSC. Ideally, the
scope of service provision to be included within the PPP wil  be confirmed at this time
together with finalisation of the project’s key outcomes and an indicative performance
regime and risk allocation.
5.17  A number of actions required to complete a DBC require additional analysis where PPP
procurement is a short list option.  These include:
•  Action 12: Risk and Uncertainty – a detailed understanding of project risks is
required to ensure that the PSC is accurate and risk allocation is appropriate
•  Action 14: The Procurement Strategy – consideration of the procurement process
specific to PPP transactions is required together with a market sounding of the
proposed solution
•  Action 15: Specify Requirements – further consideration of the project scope and
bundling options (particularly in relation to service provision) is required
•  Action 16: Risk Al ocation – a detailed risk allocation schedule wil  be required to be
completed to ensure that those risks which wil  be transferred to the private sector
partner are well understood and valued for the PSC
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•  Action 17: Payment Mechanism – the performance regime is central to the
development of a PPP specific payment mechanism and this is discussed further
below
•  Action 18: Contractual and Other Issues – consideration is required in relation to the
PPP project agreement and any project specific matters which may require
amendment to the Standard Form PPP Project Agreement, and
•  Action 19: The Financial Costing Model – the development of a PSC wil  be required
to confirm that PPP procurement offers value for money over more conventional
procurement approaches. This action is discussed further below.
5.18  While all of the above actions require a degree of additional analysis for PPP
procurement, three (Actions 14, 17 and 19) specifically require additional components
to consider PPP procurement.
Action 14a: A second market sounding
5.19  A second market sounding is required during the preparation of the DBC (often late in
the process) and serves two key purposes:
•  It provides the procuring entity a final opportunity to test its proposed solution with
the market. This is important as private sector parties wil  not respond positively to a
project which it considers is underdeveloped or likely to change, and
•  It allows private sector parties to understand the objectives and outcomes sought by
the procuring entity and form credible consortiums and teams to respond to a
possible procurement process. It is important that procuring entities al ow the
market sufficient time prior to the release of an EOI to ensure complete and
competitive responses.
Action 17a: Development of a performance regime
5.20  Additional analysis is required to consider the specific performance standards and
penalties which may be applied in the PPP project agreement. This requires the
procuring entity to determine how the asset and service wil  be funded (on either an
availability or user charge model) as well as how payment wil  be linked to the specific
performance of the service outcomes required.
5.21  The procuring entity wil  need to consider how the performance regime can incentivise
the delivery of those outcomes through performance payments and abatements as well
as penalties for incidents which are simply unacceptable to the procuring entity.
5.22  The procuring entity should consult with the Treasury PPP Team regarding the
proposed performance regime.
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Action 19a: Development of a public sector comparator
5.23  Additional quantitative, or value for money, analysis is required for PPP procurement.
This analysis compares the cost of procuring a project as a PPP with a PSC that
represents the cost if the procuring entity were to deliver the asset and services itself
using conventional procurement. This assessment requires detailed consideration of
costs associated with:
•  the design and construction of the asset
•  the maintenance and management of the asset throughout a prescribed period of
operations
•  the delivery of services from the asset (where these are to be included under a
DBFMO model), and
•  those risks relating to the asset and service delivery that are proposed to be
transferred to the private sector under PPP procurement.
5.24  The PSC must then be compared with a Proxy Bid Model (PBM), which in addition to
those costs included within the PSC also seeks to replicate those additional costs
associated with PPP procurement (such as additional procurement costs and private
sector costs of financing the project). The DBC must satisfy decision makers that there
is sufficient scope for the private sector to introduce innovation and whole of life cost
savings (through asset design, maintenance and risk transfer) to offset any difference
between the PSC and PBM.
5.25  This analysis is important as PPP procurement wil  only be approved for a project
where it offers value for money over the life of the project; that is, a PPP must deliver
the outcomes sought from the project for the same or lower cost than the procuring
entity could have itself (as established by the PSC). This is safeguarded through the
requirement for Cabinet approval of the value for money case before a PPP project
agreement may be signed for any PPP project.
5.26  Further guidance on the development of a PSC and quantitative value for money
analysis has been published by the Treasury PPP Team (Public Sector Comparator
and Quantitative Assessment).9
Project characteristics and suitability of PPP
procurement
5.27  PPP procurement is most likely to be appropriate for projects of large scale and long
duration where:
•  the nature of the asset required is specific and can only be applied to the purpose
intended (such as a prison or hospital)
•  the service is durable and it is unlikely that the service requirements wil  vary
unpredictably over the life of the contract
•  outcomes or outputs can be well-specified, enabling clear specification and
monitoring of performance requirements and standards

9
http://www.treasury.govt.nz/statesector/ppp/guidance/public-sector-comparator
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•  the project is sufficiently complex that innovative design and service approaches
may be employed, and
•  there is sufficient market appetite and depth to ensure a competitive procurement
process.
Nature of the required asset
5.28  The nature and characteristics of the asset required to deliver the service outcomes of
the project are an important driver in considering procurement options. Where the
asset required is relatively generic and could have a range of applications, it is unlikely
that there will be a strong imperative for the Crown to retain ownership of the asset. In
such a case the best value for money option may be private provision such as through
a lease arrangement.
5.29  Where the required asset is highly specific to the proposed use (such as a prison or
hospital), it is more likely that public ownership wil  be favourable to private ownership.
The limited application of such an asset to other uses wil  mean that a private owner
wil  likely seek to recover the full cost of the asset over the duration of the lease which
is unlikely to be value for money for the Crown.
5.30  Once the appropriate ownership structure has been identified, those procurement
options relevant to the ownership structure can be identified and considered. PPP
procurement is only considered appropriate for assets for which long-term Crown
ownership is preferable.
Outcome specification
5.31  As a general rule, if the required asset or service can be well specified, then it is likely
that it can be measured and delivered by a third party under a contractual relationship.
5.32  Additionally, where the service can be clearly specified, clear performance
specifications can be formulated to ensure higher levels of service outcomes can be
contractualised and enforced. The PPP project agreement can include incentives to
deliver stronger performance, resulting in greater efficiency and higher quality service
outcomes.
5.33  Service outcomes which cannot be well specified, however, risk undermining the
performance regime and, ultimately, the procuring entity’s control over the asset and its
performance.
Durability of service specification
5.34  The durability of the service specification is also a crucial issue for a public sector
practitioner to assess as it wil  dictate the potential tenure of the contract. If a contract
is easily specified and the nature of that service is unlikely to change significantly over
time then it may suit a procurement model with a long contract term such as PPP
procurement.
5.35  A shorter duration may be preferred where the required scope of an outsourced service
is unpredictable otherwise the procuring entity may face a risk of costly contract
variations or a premium being charged by the service provider due to future
uncertainty.
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Project complexity
5.36  Complexity (both in terms of asset and service provision) is also an important
consideration in determining the suitability of PPP procurement for a specific project.
Greater opportunity exists for a private sector partner to introduce an innovative
solution where the project has a higher level of complexity. Innovation may include
approaches that provide improved service outcomes or reduce the overall cost of the
project.
5.37  Conversely, care should be taken to ensure that a project’s complexity and a private
sector partner’s response do not undermine the value of the overall project. This might
arise through the creation of difficult or costly interface issues with other services provided
by the procuring entity or increased contract management and enforcement costs.
Project scale
5.38  The size of the project (both in terms of asset and service provision) is an important
criterion when considering procurement options and the suitability of PPP procurement.
5.39  The larger a project is the greater ability it will likely have to absorb the transaction
costs associated with PPP procurement and attract market interest. A small project or
service contract may not be able to sustain those transaction costs associated with the
required market development, procurement and monitoring inherent in PPP
procurement, reducing the value for money proposition.
5.40  The scale of the project should also be considered in light of the cost to private sector
parties in responding to the EOI and RFP. Potential respondents are unlikely to
participate in a procurement process where they do not consider that the cost of
bidding is offset by the reward of winning the contract.
The  procuring  entity’s contract management competency
5.41  Effective management of outsourced service contracts is critical regardless of the form
of procurement. However, due to the level of complexity inherent within the
performance regime, PPP procurement requires a higher level of active contract
management than other forms of procurement.  Effective contract management is most
likely to occur where service performance can be readily measured and the procuring
entity has the requisite contract management resource and expertise.
5.42  Where the adoption of PPP procurement for a specific project requires a procuring
entity to establish a contract management function, consideration should be given to
the likelihood of further PPP projects or other opportunities to utilise this capability. If
such opportunities are not apparent, the additional cost of establishing and maintaining
this contract management functionality may diminish the value for money of procuring
the project as a PPP.
5.43  A procuring entity considering PPP procurement should consult the Treasury PPP
Team in developing its contract management plan. The Treasury PPP Team are able
to provide advice on best practice PPP contract management as well as the Treasury’s
ongoing contract monitoring framework.
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Competitive tension
5.44  The nature of the asset and service outcomes required wil  determine whether there are
sufficient suppliers in the New Zealand market to ensure a competitive process to deliver
value for money. Factors both internal and external to the project may have an impact
on the level of competition available and the procuring entity must ensure that the project
and potential procurement methods are robustly tested with interested parties.
5.45  The number and nature of interested parties wil  play an important role in delivering
value for money and innovation within the project. Early engagement with the market
is required to ensure that interested parties have sufficient opportunity to consider the
opportunity and form consortia. This is particularly important where the project is likely
to attract interest from new or international parties.
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6  The Role of the Treasury PPP Team
6.1  The Government has established a PPP Centre of Expertise within the Treasury. The
location of this Centre of Expertise within a central government agency is consistent
with international best practice and considered most efficient as individual agencies are
likely to undertake PPP procurement on a relatively infrequent basis.
6.2  Locating the PPP team within the Treasury has the benefit of providing a direct
relationship with the Minister of Finance (who also has responsibility for Infrastructure)
as well as close proximity to the National Infrastructure Unit,10 the Investment
Management and Asset Performance team11 and Treasury vote teams. This enables
the delivery of joint advice to Ministers on the procurement of significant capital
projects.
6.3  As a Centre of Expertise, the Treasury PPP team is responsible for:
•  developing PPP policy
•  advising agencies in respect of PPP procurement
•  developing and maintaining the PPP market in New Zealand, and
•  the PPP procurement model and Standard Form Project Agreement.
6.4  Since its inception in 2009, the Treasury PPP team has developed:
•  the Standard Form PPP Project Agreement, which forms the basis of al  PPP
procurement
•  an efficient and well understood procurement process for PPP projects
•  a growing market of parties interested in investing in, and being a part of a strong
New Zealand (and Australasian) PPP market
•  a wide range of lessons learnt both from projects which have achieved contractual
and financial close as well as those which have not proceeded as a PPP
•  a growing body of guidance material to support procuring agencies and the PPP
market generally, and
•  a deep understanding of international PPP procurement practice through the
establishment of relationships and regular engagement with PPP Centres of
Expertise in other jurisdictions.

10   http://www.infrastructure.govt.nz
11   http://www.treasury.govt.nz/statesector/investmentmanagement/team
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Engaging with the Treasury PPP team
6.5  The PPP team understands that the requirement to consider a new procurement model
can be daunting and encourages early engagement to discuss the PPP model and its
suitability for a specific project. Ownership of, and responsibility for, all PPP projects
remains with the respective procuring entity and seeking early engagement with the
Treasury PPP team on procurement options wil  provide opportunity to understand how
PPP procurement may suit project and agency requirements.
6.6  Early engagement allows scope for full consideration of alternative procurement
options on a best-for-project basis. It also provides maximum opportunity to leverage
lessons learnt from other projects and international best practice in the development of
procurement options for a project.
6.7  The Treasury PPP team is able to provide agencies valuable assistance through:
•  providing an understanding of the New Zealand PPP model and policy
•  the development of the economic, financial and commercial cases component of a
project’s business case (in particular, consideration of procurement options, market
sounding, risk analysis and the development of a PSC)
•  experience in planning the procurement process and engagement with potential
private sector partners
•  established relationships with market participants including advisors, investors,
contractors and service providers
•  providing insight from lessons learnt and experience from PPP projects in other
sectors, and
•  representation within the project’s governance group and project team to provide
support and direction throughout the procurement and negotiation phases.
6.8  Departments or agencies considering a significant investment must discuss the
potential for applying PPP procurement with their Treasury vote manager or contact
the Treasury PPP team directly.
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7  The PPP procurement process
An overview of the PPP procurement process
7.1  The PPP procurement process contains the following three core stages:
•  the Expression of Interest (EOI) stage, during which the procuring entity conducts an
open process to short list a set number of respondents to participate in the Request
for Proposals (RFP) stage
•  the RFP stage, during which the short listed respondents develop proposals for
delivering the facilities and service outcomes required by the procuring entity, through
an interactive tender process. The procuring entity then evaluates the proposals with
the objective of selecting one respondent as the preferred bidder, and
•  the Preferred Bidder stage, during which the procuring entity negotiates the Project
Agreement with the preferred bidder and its debt providers, and resolves any critical
issues identified in the proposal.
7.2  Detailed guidance on the PPP procurement process is provided in other Treasury
guidance (including detailed information and timeframes for each of the stages set out
above). 12
7.3  An overview of the process is set out at Figure 1 below.

12   http://www.treasury.govt.nz/statesector/ppp/guidance/procurement-process
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Figure 1: Overview of the PPP procurement process
Expressions of Interest
Invitation for
EOI Responses
EOI
EOI Developed
Prepared
Evaluation
Invitation for
EOI Responses
Respondents
EOI Released
Submitted
Short Listed
Market
Sounding
Request for Proposals
RFP and Project
RFP Responses Prepared
RFP
Agreement Developed
Evaluation
RFP
RFP Responses
Preferred Bidder
Released
Submitted
Selected
Interactive
Critical Issues
Tender Process
Clarification
KEY
Procuring entity process
Preferred Bidder
Market or interactive process
Negotiation Strategy
Project Agreement Negotiation
Milestones
Developed
Interactions within stage
Financial
Close
Design
Operative
Development
Documents
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Who is involved in PPP Procurement?
7.4  The whole of life approach to PPP procurement inherently results in a greater up-front
investment of time and resources.  It is therefore critical that procuring entities and
private sector parties resource their respective project teams adequately.
The procuring entity
7.5  A procuring entity wil  need to establish a dedicated project team to manage the
procurement led by a suitably qualified Project Director and governance group. This
team should be established as early as possible and, at the latest, soon after PPP
procurement is agreed by the respective agency and Cabinet.
7.6  An indicative organisational chart is set out below at Figure 2 below.
Figure 2: An indicative organisational chart for a PPP project
Cabinet
Project Sponsor
Project Governance
Group
Treasury PPP
Project Director
Advisor
Probity Auditor
Project Team
Technical/
Services Team
Commercial/
Project
Works Team
Legal Team
Management
& Support
• Team lead
• Team lead
• Team lead
Team
• Technical
• Technical
• Treasury
• Project
Advisors
Advisors
• Legal Advisor
Manager
• Financial
• Support
Advisor
personnel

7.7  The procuring entity wil  need to supplement this project team with specific advisory
assistance throughout the planning and implementation of the PPP procurement
process. This would typically include:
•  Commercial and financial advisors – including the provision of advice in relation to
the commercial terms, the performance regime and performing a due diligence
review of the financial model and financing proposal
•  Legal advisors – including the provision of advice in relation to contractual,
commercial, property, and resource management matters and performing a due
diligence review of the legal and commercial structure proposal
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•  Technical advisors – including the provision of advice in relation to the design and
construction outcomes and requirements and performing a due diligence review of
the design and construction programme, and
•  Service provision advisors (where included) – including the provision of advice in
relation to the development of service outcomes, integration of service provision with
the asset and performing a due diligence review of the service provision proposal.
7.8  The procuring entity may also require other specialist support such as property,
insurance or stakeholder engagement assistance depending on the nature of the
project and resourcing of the project team.
7.9  While advisors play an important role in PPP procurement, they do not replace
appropriate resourcing by the procuring entity. The complexity and long term nature of
PPP procurement means that the procurement process cannot be left to advisors
exclusively. It is particularly important that the procuring entity retain, and be seen to
retain, overall control of the process.
7.10  Equally it is important that procuring entities engage experienced and skil ed advisors
to ensure the successful delivery of the project and knowledge transfer.  The typical
relationship between the procuring entity and its advisors is set out at Figure 3 below.
The private sector partner
7.11  Given the breadth of capabilities required to participate in PPP procurement, the
private sector partner wil  typically require cooperation between multiple entities
through the formation of a consortium. This consortium wil  usually include:
•  Equity providers – who provide capital to the project through a shareholding in the
contracting entity (usually a special purpose vehicle)
•  Debt providers – who provide the balance of financing required through loan
facilities (which can range from short term facilities to those that match the full
duration of the operating period)
•  Design contractors – who develop the design for the required asset
•  Construction contractors – who provide input to the design and construction
planning and carry out the physical construction works
•  Asset management and facilities maintenance contractors - who provide input to the
design and construction planning and carry out the facilities maintenance works, and
•  Service providers – who, depending on the PPP method selected (being either
DBFMO or DBFM), wil  provide input to the design and construction planning and
carry out provision of core services throughout the operating period.
7.12  To participate in a procurement process, the private sector partner wil  also require a
full range of specialist advisors including commercial and financial advisors, legal
advisors and technical advisors.
7.13  The private sector partner wil  often require a greater number of advisors than the
procuring entity as separate advisors are usually engaged by the consortium and each
of the consortium members (for example, each debt and equity provider wil  likely have
their own financial and legal advisor).
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7.14  An indicative structure of a private sector partner, including its advisors is set out at
Figure 3 below.
Figure 3: Participants in the PPP Procurement Process
Public Sector Participants
Private Sector Participants
Advisors
Advisors
Ministerial
Approvals
Equity
Debt
Providers
Providers
Commercial
& Financial
Advisors
Commercial
& Financial
Advisors
Legal Advisors
Procuring
Special
Entity
Purpose
Legal Advisors
Technical
Vehicle
Advisors
Technical
Advisors
Probity Auditor
Design &
Facilities
Services
Construction
Maintenance
Subcontractor
Subcontractor
Subcontractor
(If Applicable)
Advisors
Advisors
Advisors

Unsolicited proposals
7.15  In the normal course of events, PPP procurement is initiated by a procuring entity as a
result of identifying a service need and deciding that a long term contract is appropriate
following an evaluation of different procurement options. However, there are
circumstances in which a private sector party may identify a suitable opportunity for the
delivery of a service to a procuring entity by way of a long term contract.
7.16  The Ministry of Business, Innovation and Employment has published guidance on
when unsolicited proposals should be given further consideration and how procuring
entities should respond.13
7.17  Where a procuring entity receives an unsolicited proposal for a long term contract,
further input should be sought from the Ministry of Business, Innovation and
Employment and the Treasury PPP Team.

13   http://www.business.govt.nz/procurement/pdf-library/agencies/guides-and-tools/Guide-to-Unsolicited-
Unique-Proposals.pdf
The New Zealand PPP Model and Policy: Setting the Scene  |  27

Document Outline

Table of Contents
- Public Private Partnership Programme: The Public Sector Comparator and Quantitative Assessment – A Guide for Public Sector Entities
- Public Private Partnership Programme: The New Zealand PPP Model and Policy: Setting the Scene – A Guide for Public Sector Entities