Technical Articles

International Journal of Auditing – October 2006

Achieving Public Sector Outcomes with Private Sector Partners – a New Zealand Perspective

In New Zealand, the use of partnering contracts to build new public sector infrastructure
and deliver public services is a fairly recent phenomenon.1 There are, however,
signs of increasing interest in this approach, especially in the local government and
transport sectors.

Because partnering contracts carry special risks, the Auditor-General of New Zealand
decided to act—while this form of contracting was still at an early stage of development—
by publishing guidance for public sector leaders and decisionmakers. The guidance
does not promote or oppose the use of partnering. Its principal aim is to set out
the main issues that government as a whole and individual public organizations need
to consider.2

In developing its guidance, the Office of the Controller and Auditor-General (OAG)
looked at projects in New Zealand and the experience of countries such as the United
Kingdom and Australia, where the partnering approach to public sector contracts is
well established.

The OAG initially planned to focus on public-private partnerships (PPP)—that is,
arrangements involving private financing from a private-sector party (usually a consortium)
to build and own facilities that deliver services, often for more than 30 years.
However, in New Zealand it found different types of arrangements, from franchises
and joint ventures to PPPs, that require public sector organizations to consider similar
issues. Therefore, the OAG widened the scope of its guidance to include all these arrangements.

The first part of the OAG guidance looks at the issues to be considered from a governmentwide
perspective. In countries where the use of partnering under long-term
contracts and private financing is well established, there is evidence of firm commitment
from governments, with cross-party political support, to providing direction
and guidance. Three important issues relevant to national governments are leadership,
expertise, and market development.

Partnering arrangements require significant investment (in monetary and nonmonetary
terms) by both public and private sector parties. The private sector is unlikely
to be attracted to investing in major, long-term public sector projects when it sees
significant risks from political uncertainty. In the United Kingdom, there is evidence services that are not suitable for PPPs or PFI and should remain with the state. These include core public services, such as clinical services in hospitals and teaching in state schools.

Other public interest issues that need to be considered are requirements for accountability
and transparency balanced against the need for commercial confidentiality
and the ability to ensure that essential services are continuously provided despite any
breaches by the private sector party.

In the early days of PPPs in Australia and PFI in the United Kingdom, the main reason
for adopting the approach was to promote the construction of new public infrastructure
and achieve “off-balance-sheet” financing. However, the governments of both
these countries now stress that the main reason is to achieve better value compared
to other contracting choices. A value-for-money assessment considers the benefits of
adopting a partnering arrangement against the costs. Value for money does not necessarily
mean lowest cost, since several benefits may justify higher costs.

As part of the value-for-money assessment, it is important to consider risk sharing
between the parties. Adopting a partnering approach forces the parties to explicitly
identify risks and their costs. Risks are likely to be associated with design and construction,
operation and maintenance, user demand and income generation, technology
and obsolescence, and legislative and political change.

The Australian and United Kingdom governments agree that the party best able to
manage risks should bear them. Seeking to transfer inappropriate risks to the private
sector party will likely add to the cost of the arrangement.

A value-for-money assessment should also address the scale of the project relative
to transaction costs. Many partnering arrangements are complex, and the need for
lengthy tendering processes and complex contract documentation can significantly affect
costs. These costs need to be assessed against the total value of the project and the
benefits that will be derived from a partnering approach. The Australian and United
Kingdom governments have provided advice on the monetary value of projects suitable
for this contracting approach.

Public organizations also need to consider whole-of-life costs, the potential to release
public sector staff to concentrate on key service delivery, greater asset utilization, and
the scope for innovation (such as business practice and technology application).

Assessing value for money can be difficult, especially for long-term projects where
assumptions must be made. Partnering arrangements in other jurisdictions have been
criticized for a tendency to overestimate benefits and underestimate costs.

The public organization needs to be aware that its responsibilities do not end once
the contract is awarded. Rather, the public and private sector parties must set up and
maintain effective contract management throughout the term of a partnering arrangement.
The public organization will have to consider the need for experienced personnel to manage relationships with the private sector party, service users, and other stakeholders and arrangements for managing performance, risks, assets, payments, and changes to the contract.

Inadequate contract management can increase costs for the public sector party, affecting
the financial viability of the project and the value-for-money outcome.

Finally, the public organization will likely need to make a conscious effort to change its
culture if it has favored an arm’s-length and possibly adversarial approach to contracting.
Working in partnership requires the parties to build a long-term relationship of
mutual benefit. They need to understand each other’s aims and objectives and how to
achieve them. They must share problems and work through them together rather than
resorting to legal remedies.

For additional information, contact the author at:

1Partnering contracts include any mutually beneficial contractual relationships between public and private sector
parties that involve a collaborative approach to achieving public sector outcomes.
2The guidance, Achieving Public Sector Outcomes with Private Sector Partners, is available on our Web site, www.