Is it better to combine several sites to achieve scale efficiencies, or instead limit project scope and respond to local needs? New Zealand’s government recently discovered that “right sizing” an education PPP transaction involves complex trade-offs that are critical to a project’s success.
In April 2012, New Zealand’s government contracted a private consortium to design, build, finance, operate, and maintain two new schools. This is the first public-private partnership (PPP) for schools in New Zealand, which until now have been financed and maintained by the Ministry of Education.
The government put considerable effort into building a strong framework for school infrastructure PPPs, providing useful lessons for other countries considering PPPs in the education sector. This article explores the challenge of “right-sizing” school procurements to maximize the benefits delivered by the project.
The bell rings in 2013
The two new schools developed under the PPP model are located at Hobsonville Point, Auckland, and have an expected construction cost of around $57 million. The school bell will ring in January 2013 to begin primary school classes, and the secondary school is due to open at the start of 2014.
The PPP contract focuses on school infrastructure only, so the government will still be responsible for employing principals, teaching staff, and school administrators. However, one of the benefits of the PPP transaction is that school staff will have more time to focus on providing high quality education, with less time spent on managing the ongoing maintenance of school property.
Model not necessarily to scale
New Zealand’s government recognized that preparing and tendering a PPP transaction would likely increase upfront transaction costs of procurement to more than 10 percent of the transaction value. These costs are not only borne by the government, but also by consortia putting together complex bids with risks carried over 25 years. These transaction costs include legal advice, proposal preparation costs, initial design, evaluation, and contract negotiation costs.
As a result, if the PPP transaction was too small, the project would be unlikely to provide enough benefits to exceed the total costs. For example, it would make little sense to spend a fixed $5 million to prepare a $15 million transaction.
This means that scale was required. The Ministry of Education analyzed more than 10 proposed “bundles” of new schools to be procured under the first PPP contract. These bundles included one, two, or five schools and were assessed against criteria that included:
- Sufficient project size;
- Risk to government (i.e., complexity of managing the contract);
- Potential for competitive tender process;
- Potential to bundle contracts; and
- Scope for innovation.
The winning option—to bundle the Hobsonville Primary and Secondary schools together—achieved some scale while attracting a sufficient number of bidders to maintain competitive tension throughout the procurement process.
While the option of bundling more schools together took advantage of scale, this option was considered to have the highest risk to the government. This option may also have discouraged potential bidders worried about servicing contracts in very different locations.
Local communities have substantial involvement in New Zealand schools. Each school is governed by a board of trustees (BoT) that includes five parent representatives, the principal, a staff representative, and a student representative. This decentralized governance structure helps individual schools interact with their communities, and this responsiveness needed to be preserved as part of the shift to PPPs.
What does local community input mean for right-sizing a PPP school? On the one hand, the contractor can take advantage of scale by building and operating multiple schools under a single procurement and contracting process. On the other hand, this risks reducing the accountability for good contractual performance, as distinct issues at the school level may not be understood by either of the contracting parties (the ministry or the private contractor).
To operate effectively, the PPP contractor needs to have individual partnerships with the BoT, staff, and principal at each school. These parties monitor the day-to-day operations and maintenance of the school property, even though the contract is held by the Ministry of Education.
Smaller-sized contracts can help ensure that the PPP contractor has a strong relationship with school staff and the local community (through the BoT), and is held accountable for day-to-day operations and maintenance.
Good lines of communication also ensure that serious issues identified at the school level (by staff, principals, and BoTs) can be escalated to the ministry and effectively resolved through contractual mechanisms if required.
The final exam
One of the contracting options considered in New Zealand was a single transaction covering three geographical regions, which included a total of five schools. This structure would take advantage of scale, but would limit opportunities for the private contractor to reduce the costs of operating and maintaining the facilities.
Coordinators of the project compromised by including two schools in the same suburb under one contract to achieve some scale. Both these schools have similar community concerns and the contractor can lower its operational costs by effectively servicing the nearby facilities. This “right sizing” signals a new direction for schools that need to map out the best possible future for their students.