For appreciation of inherent and contingent risks, we firstly would like to clarify these risk definitions and how they compare/contrast with Waka Kotahi's usual contingency costing approach (as set out in Waka Kotahi's SM014 Cost Estimation Manual for developing project cost estimates) and transferred/retained risks used in a risk-adjusted PSC:
• SM014 has two main cost lines: (i) a Base Estimate of construction costs; (ii) and two "below-the-line" contingency adjustments. The first contingency adjustment is for uncertainty in pricing and quantity estimates (e.g. inherent risk), and the second contingency adjustment is a "funding contingency" to calculate a total cost with a P95 level of certainty (in essence, to reflect other project-specific or contingent risks).
As an explanation, a "P-level" of confidence is a mathematical/statistical calculation of the likelihood of actual project costs meeting or coming under a cost estimate. Put simply, a P95 cost estimate assumes a project's actual costs will have a 95 percent chance or meeting or coming under the expected cost estimate (or conversely, have a 5 percent chance of exceeding the expected cost estimate).
• In contrast, the PSC takes a different approach - that is, the PSC's equivalent of a Base Estimate of construction cost includes a contingency for uncertainty in pricing and quantity estimates. Contingent risks in the PSC for project-specific risks are categorised separately as either Transferred Risks (to the PPP consortium) or Retained Risks (by the Crown).
Given the public release of the detailed project costings can potentially compromise the Government's current and future negotiating positions on major infrastructure procurement, the publicly available version of the 2012 Detailed Business Case does not contain detailed information on the risk adjustments contained in the 2011 Scheme Estimate (i.e. Appendix C) and the 2012 estimate of the PSC (i.e. Appendix N).
However, for our review we were provided with an unredacted version of the DBC that provided us with full costing details and assumptions. We also were provided with project-related documents consisting of advisers' reviews of the PSC (as already mentioned above). From the review documents, we confirmed the following facts:
• Equivalent provisions for inherent and contingent risks were reflected in the cost estimates used in the DBC, for both the 2011 Scheme Estimate and the PSC;
• Risk workshops were conducted during the development of the business case to discuss potential project risks, with this workshop information used to quantify the proposed risk contingency adjustments;
• These risk workshops used the project risk information used to develop the 2011 Scheme Estimate, and added/removed risks to develop a revised risk profile;
• Statistical calculations were done of possible P-values of the cost estimates, with specific risk distributions assigned to individual project risk lines. P85 values of the risk adjustments were calculated and used in the PSC;
• Reconciliations were done between the 2011 Scheme Estimate and the 2012 PSC; and
• No specific mention is made in the reviewed project documents that the Transferred Risk allocations used in the PSC were benchmarked against comparable, international availability PPP road projects.