Government to investigate feasibility of a public private partnership (PPP) for Waterview Connection

EMBARGOED UNTIL 1:15PM ON 7 FEBRUARY 2008

The Government will investigate the feasibility of progressing the Waterview Connection section of Auckland's Western Ring Route as a public private partnership (PPP), Finance Minister Michael Cullen and Transport Minister Annette King announced today.

Dr Cullen and Ms King said considering a PPP business case alongside conventional procurement options for the Waterview Connection would help ensure the option chosen delivered New Zealanders the best value for money.

"The Waterview Connection will be the largest roading project ever built in New Zealand and is a key part of the Western Ring Route. The government is committed to completing the route to help address the increasing pressures on Auckland's already congested road network. It is important that a range of viable procurement options are considered in order to deliver value for money," the Ministers said.

The Government has appointed Sir Brian Elwood as independent chair of a joint public sector-private sector Steering Group that will conduct the investigation and report directly to the two Ministers. Other members of the Steering Group will be Michael Barnett (Auckland Chamber of Commerce), Phil O'Reilly (Business New Zealand) and Stephen Selwood (New Zealand Council for Infrastructure Development). The Group will also include representatives from the Treasury and the Ministry of Transport.

"It makes sense for the public sector and private sector to work together from an early stage and use their collective knowledge. The mix of representatives on the Steering Group and the expertise they can contribute will help ensure that any PPP process meets the needs of both the public and private sectors."

The Steering Group is expected to deliver a business case that assesses whether procuring the Waterview Connection as a PPP is viable and could deliver value for money. It will also develop a benchmark Public Sector Comparator, against which the PPP business case will be assessed.

The Steering Group's findings will be reported to the Ministers of Finance and Transport in June 2008. The report will be considered along with other factors and input before Cabinet decides on the preferred means of progressing the Waterview Connection.

"Deciding which option provides the best value for money will not simply be a matter of choosing the cheapest procurement method for building the Waterview Connection. Value for money also includes achieving optimal risk sharing and developing the innovative solutions necessary for the effective delivery of complex projects like Waterview," the Ministers said.

The Ministers anticipate strong interest in the Steering Group's work from companies, local government and members of the public.

"There will be consultation with central government departments, Auckland local authorities and other interested parties to ensure their views are taken into account. As consultation may necessarily include potential tenderers for the Waterview Connection, any such engagement will be managed openly and even-handedly.

"One matter we can assure the public about is that no PPP for the Waterview Connection would entail privatisation of this section of state highway. The Land Transport Management Act 2003 enables the leasing of land to a private party, but ownership remains with the public sector," the Ministers said.

While procurement methods are being investigated, Transit New Zealand will be consulting on its preferred design option and alignment for the Waterview Connection. The two processes are quite separate. Transit will be talking with stakeholders and the public from 18 February about what might be built and its impact on the community.

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Terms of reference

On 17 December 2007, Cabinet agreed to 'investigate progressing the Waterview Connection as a Public Private Partnership.' Cabinet also 'agreed to establish a joint public sector-private sector Steering Group to lead this investigation, reporting directly to the Ministers of Finance and Transport.'

These Terms of Reference give effect to Cabinet's decisions.

The process being undertaken to consider progressing the Waterview Connection as a Public Private Partnership (PPP) would normally be undertaken by the public agency sponsoring the development of the project. Given the lack of a tested framework for the consideration of PPPs in New Zealand, however, private sector engagement is being sought to help ensure that any future PPP process, including one for the Waterview Connection, meets the needs of both the public and private sector.

Objective

The objective of the investigation is to determine whether there is a viable business case for delivering the Waterview Connection as a PPP. This entails:
• determining the characteristics of the most efficient conventional procurement method for the Waterview Connection (this would be established as the "Public Sector Comparator");
• identifying the most suitable form of PPP for Waterview; and
• analysing how the two procurement methods compare in terms of value for money.
• providing a generic description of the most effective process for developing and assessing the Waterview Connection as a PPP;

Steering Group

The investigation will be overseen by a joint Public Sector / Private Sector Steering Group, which will report to the Ministers of Finance and Transport. The role of the Steering Group is to direct the investigation, to test and approve the deliverables outlined below; to resolve any escalated issues; to ensure that all key parties are appropriately engaged; to oversee external communications; and to report to Ministers as appropriate/required. The Steering Group will be led by an independent Chairperson, appointed by the Ministers of Finance and Transport. Officials will attend meetings of the Steering Group, and the Steering Group may also invite other parties to attend meetings where appropriate. It is anticipated that the Steering Group will need to be available for approximately three to four days per month throughout the investigation.

Working Group

A Working Group will be established to generate the analysis required to achieve the investigation's objectives, for the Steering Group's and ultimately the government's consideration. The Working Group will include a Project Manager, representatives from the Treasury, Ministry of Transport, and, as necessary, Land Transport NZ, and Transit NZ. It may be appropriate for the private sector organisations represented on the Steering Group to contribute to the Working Group. This will be determined during the course of the investigation. The Working Group will also be able to engage consultants to provide expert advice as required.

Context

The route: The Waterview Connection is a proposed State Highway extension in Auckland that runs from Mt Roskill to the Northwestern Motorway. The route effectively completes the Western Ring Route by connecting State Highway 20 to State Highway 16.

Work to date: Work already undertaken by Transit New Zealand has narrowed down the range of possible alignments and design options for the Waterview Connection. Transit will be undertaking public consultation on its preferred design option and alignment whilst the business case for delivering the Waterview Connection by way of a PPP is developed. It is not anticipated that this consultation will impact on the development of the business case.

Deliverables

The primary deliverable will be a business case that assesses whether procuring the Waterview Connection through a PPP could deliver value for money. The report will make this assessment by undertaking the broad components listed below. It is expected that the Steering Group will consider existing frameworks used overseas for developing PPPs and the lessons learnt from their application.

Preliminary Public Sector Comparator

A detailed understanding of the conventional public sector procurement method for the Waterview Connection will be essential, as this will be used as the benchmark (the Public Sector Comparator (PSC)) against which any PPP will be assessed. The PSC should include, inter alia:
• The projected cost of the project (provided by Transit New Zealand)
• An analysis of the risks associated with the standard public procurement of the project
• Adjustments to ensure competitive neutrality between public and private sector procurement

Waterview as a PPP

The business case for progressing the Waterview Connection as a PPP should include the following:
• Definition of the services to be delivered by the PPP (for example, project planning, construction and ongoing maintenance, etc)
• The likely PPP project structure
• The optimal allocation of all risks between the Crown and the private party
• Possible performance measurement and payment mechanisms
• Market capability and appetite
• Project timetable and resourcing
• Design and form of a PPP procurement process
• Opportunities for innovation
• An assessment of how a PPP would compare with conventional procurement in terms of value for money

In addition to the broad components listed above, the Steering Group may consider any other matters related to the progression of the Waterview Connection through a PPP as the Steering Group sees fit.

Timeframe

The investigation is to be completed by the end of June 2008 with the delivery of a report to the Ministers of Finance and Transport. A final decision on the most appropriate way to progress the Waterview Connection will be determined by Cabinet on the recommendation of the Ministers of Finance and Transport. Ministers may take into consideration any other advice and material in making their recommendation. In addition to the completed report, the Steering Group will provide Ministers with progress reports at appropriate times during the project.

Assumptions

Legislation: The business case for a PPP for the Waterview Connection should be developed and assessed under existing legislation, including the Land Transport Management Act Amendment Bill currently before the House.

Funding: Decisions on funding for the Waterview Connection will be made outside of this investigation.

Work undertaken to date: Transit New Zealand has already undertaken a significant amount of work to bring the Waterview Connection to its current point of development. The outputs of this work will be provided to the Steering Group and the Working Group as inputs to the consideration of the procurement of the Waterview Connection as a PPP. The two main inputs are:
• The preferred design options and alignment for the Waterview Connection
• The economic assessment, including Benefit / Cost Analysis

External engagement

During the investigation, interested central government departments, Auckland local authorities and external parties as appropriate will be consulted so that their views may be taken into account. Some engagement between the Steering Group and the Working Group and firms that may be potential tenderers for the Waterview Connection may be necessary to ascertain market capability and appetite for a PPP. However, for probity reasons any such engagement will need to be managed openly and even-handedly.

Reporting

The Working Group will provide progress reports approximately fortnightly to the Steering Group, identifying progress and any key issues or risks arising in the course of the project. The reports and minutes generated during the investigation will be kept confidential to enable a free and frank discussion of the issues. The Steering Group's investigation will be completed with the delivery of a report to the Ministers of Finance and Transport. The Steering Group will provide periodic updates on progress for Ministers as required. The Ministry of Transport and the Treasury may also independently report to their respective ministers where appropriate.

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Questions and answers

What is the Waterview Connection?

The Waterview Connection is a proposed State Highway extension in Auckland that runs from Mt Roskill to the Northwestern Motorway. The route effectively completes the Western Ring Route by connecting State Highway 20 to State Highway 16. Once finished, the Western Ring Route will be a single 48 kilometre motorway that bypasses the city and links Manukau, Auckland, Waitakere, and North Shore cities. Details about the construction of the Waterview Connection (http://www.sh20.co.nz/default.htm) and the Western Ring Route (http://www.transit.govt.nz/projects/wrrconsultation/) are available from Transit New Zealand.

When is it likely to be built?

The intended completion date is 2015.

What decisions has the Government made about progressing the Waterview Connection?

The Government has decided to investigate the feasibility of progressing the Waterview Connection as a public private partnership (PPP). A PPP will be evaluated alongside conventional public sector procurement methods to determine the best-value means of advancing the project. Transit has announced that a tunnel is its preferred option for the Waterview Connection.

What is a public private partnership (PPP)? What does it entail?

PPPs are long-term contracts between the public sector and the private sector covering planning, construction, operation and/or financing of public infrastructure and services. At the end of the contract, the facility is usually returned to the government or a local authority. The Land Transport Management Act 2003 enables a concession agreement whereby land is leased to the private sector for a period of up to 35 years.

Would a PPP mean that the Waterview Connection will be privately owned?

No, the Waterview Connection will not be privately owned. One option under the Land Transport Management Act 2003 is to lease land to a private sector party, but the ownership remains with the public sector.

What are some of the potential advantages of PPPs?

Among the advantages sometimes attributed to PPPs are the following:
• better whole-of-life project evaluation and optimisation to minimise the overall costs of a project
• allocating risk to the party best able to manage it, which can significantly improve the proportion of projects which are delivered on time
• innovative approaches which enhance the quality of service delivered and/or reduce the cost to the public sector.

These advantages may or may not be achieved in individual PPP projects.

What are some of the potential disadvantages of PPPs?

Among the disadvantages sometimes attributed to PPPs are the following:
• the potential for large tendering and contracting costs
• the difficulties of ensuring good performance especially with respect to "soft" performance dimensions – for example, ensuring that all the performance specifications of a roading project can be clearly specified in a contract;
• the long-term nature of PPP contracts can be inflexible
• lack of experience and/or expertise in both the public and private sectors
• the risk that the government will have to step in if the PPP experiences financial difficulty.

These disadvantages may or may not be encountered in individual PPP projects.

Why is the feasibility of a PPP for the Waterview Connection being investigated?

The Waterview Connection will be the largest roading project ever built in New Zealand. It is important that a range of viable procurement options are considered in order to deliver value for money. It has been suggested that the Waterview Connection is an ideal project for a PPP. If this procurement method is ultimately chosen as the best-value means of progressing the project, the Waterview Connection would be New Zealand's largest PPP.

Why not just consider conventional procurement methods for the Waterview Connection?

The Waterview Connection will be the largest roading project ever built in New Zealand. It is important that a range of viable procurement options are considered. Any PPP will be evaluated and assessed against a conventional procurement benchmark to determine which procurement method for the Waterview Connection would deliver New Zealanders the best value for money.

Who will investigate the feasibility of a PPP for the Waterview Connection?

A joint public sector-private sector Steering Group will conduct the investigation and report directly to the Ministers of Finance and Transport. The Steering Group has Sir Brian Elwood as an independent chairperson and also includes representatives from the Auckland Chamber of Commerce (Michael Barnett), Business New Zealand (Phil O'Reilly) and the New Zealand Council for Infrastructure Development (Stephen Selwood). The Treasury and the Ministry of Transport will also be represented on the Steering Group.

Why will both the public sector and private sector be represented on the Steering Group?

A PPP has to meet the needs of both the public sector and the private sector, so it makes sense for both sectors to work together from an early stage and use their collective knowledge in investigating whether or not a PPP is a feasible option for the Waterview Connection. The mix of skills and knowledge brought by all members of the Steering Group will be important. The Treasury has expertise in evaluating the efficient and effective use of public funds, and the Ministry of Transport has expertise in transport investment and development. The private sector Steering Group members will represent organisations with a strong interest in PPPs. The Chair, Sir Brian Elwood, has strong knowledge of the transport sector and public finance. He has chaired a number of public and private sector boards and served as Chief Ombudsman from 1992-2003.

What will the Steering Group actually do? What is it expected to deliver?

The Steering Group is expected to determine whether there is a viable business case for delivering the Waterview Connection as a PPP. This work includes development of a benchmark Public Sector Comparator, against which the PPP business case will be assessed. The Public Sector Comparator will include projected costs and risk analysis for the Waterview Connection if conventional public sector procurement is used.

More details can be found in the Steering Group's terms of reference.

The Steering Group is expected to assess value for money. Does this mean finding the cheapest way to build the Waterview Connection?

No. Best value for money is not simply a matter of choosing the cheapest procurement method but takes into consideration optimal risk sharing and developing the innovative solutions necessary for the effective delivery of complex projects like the Waterview Connection.

Will there be any consultation as part of the investigation?

Yes. As part of its work, the Steering Group will consult with central government departments, Auckland local authorities and other interested parties to ensure their views are taken into account. As consultation may necessarily include potential tenderers for the Waterview Connection, any such engagement will be managed openly and even-handedly. Further information about consultation will be provided in due course.

When is the investigation expected to finish?

The Steering Group's findings are expected to be reported to the Ministers of Finance and Transport in June 2008.

Who will make the final decision on the procurement method for the Waterview Connection?

After the investigation is complete, the Ministers of Finance and Transport will make a recommendation to Cabinet. Ministers may take into consideration any other advice or material in making their recommendation.

When will the final decision on the procurement method for the Waterview Connection be made?

After June 2008, the Cabinet will then take whatever time is necessary to consider thoroughly the recommendations of the Steering Group and any other relevant factors it needs to take into account before announcing its decision.

Would a PPP mean that motorists will be charged tolls to use the Waterview Connection?

Not necessarily. The Steering Group will consider whether it is appropriate to toll the Waterview Connection but a tolling application will still need to be made to the Minister of Transport, as required under the Land Transport Management Act 2003. While tolling road users is one way to pay for the project, there are other ways, such as a service fee or "shadow tolls" paid by the government out of general taxation.

Didn't Transit rule out tolling of the Western Ring Route after consultation?

Following public consultation, the Transit Board resolved not to progress its toll proposal for the entire Western Ring Route. The Steering Group will consider whether it is appropriate to toll the Waterview Connection but a tolling application will still need to be made to the Minister of Transport, as required under the Land Transport Management Act 2003.

Will Transit's current work on the Waterview Connection continue?

Yes. While procurement methods are being investigated, Transit New Zealand will be consulting on its preferred design option and alignment for the Waterview Connection. The two processes are quite separate. Transit will be consulting with stakeholders and the public from 18 February about what might be built and its impact on the community.

What is Transit's role?

Transit will have a key role in both progressing planning for the Waterview Connection and advising the Steering Group during the investigation. The Steering Group will need to determine whether Transit is best placed to progress consents for the project and to develop the Public Sector Comparator.

What does this mean for other projects like Transmission Gully?

Any projects such as Transmission Gully would have to be considered on a case-by-case basis. This investigation is focussed specifically on the Waterview Connection, but it will provide lessons for both the public and private sectors for futures projects which could be advanced as PPPs.

Is there legislation that enables PPPs?

Yes. The Land Transport Management Act 2003 (LTMA) enables a concession agreement whereby land is leased to the private sector for a period of up to 35 years.

Which parties voted for that legislation?

In the third reading of the Bill, Labour, the Greens, United Future and the Progressives supported the legislation. National and ACT New Zealand opposed it, as did New Zealand First.

Will the government make it easier for parties to enter into a concession agreement through the LTMA?

This investigation assumes existing legislation, including the Land Transport Management Amendment Bill currently with Select Committee.

Doesn't the Government oppose PPPs?

No. This Government introduced the LTMA legislation in 2003 to facilitate PPPs. Various Labour Ministers of Transport have frequently asked for examples of projects that could become PPPs. This Government is not opposed to PPPs, but is opposed to private ownership of public facilities.

ENDS

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