From the review documents we identified the following facts regarding how the AT was set and approved:
• The 2009 New Zealand Treasury PPP Guidelines (available to the Project Team during the TGP procurement phase) does not define the AT;
• In contrast, the 2015 New Zealand Treasury PPP Guidelines (at paragraph 4.18) issued after the TGP procurement phase define the AT as, ".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 will 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 will be considered non-compliant.".
• The March 2013 Board meeting papers include a PowerPoint presentation for a Board workshop that mentions how the AT is to be set, with the following specific statement, ".currently anticipate the AT will be set at the same level as the PSC".
• In contrast, an internal Waka Kotahi memo in February 2013 to the Project Advisory Group (PAG) states, ".setting the AT with reference to the PSC does not necessarily mean it must equate to the PSC. The NZTA [New Zealand Transport Agency] could decide to set the AT at a level different to the PSC.".
• In February and March 2013, both the PAG and the Decision Making Team (DMT) considered papers canvassing approaches to how the AT could be set. These papers discuss several matters to be considered when setting the AT (e.g. such as what was done in the two previous PPP projects, and how an AT could work best for economic infrastructure such as a road) but do not include a specific recommendation or conclusion on how it should be set. Also included in these papers were views about how previous experience with project costs could inform how the AT was set (i.e. using a P-value) and the possible risk of "gold plating" by the market.
• The August 2013 Board Papers related to the mid-RFP update of the PSC and include a P75 value of the PSC that corresponds with the revised/updated AT target given to the two RFP respondents. However, no specific recommendation is made in this Board Paper as to setting the AT based on using a P-value of the PSC, with the Board meeting minutes only noting the revised P95 estimate of the PSC (as the approved funding limit for the TGP).
• The November 2013 Board briefing paper dealing with the RFP evaluation results has the following specific reference to how the AT was set, ".As identified in previous Board papers the Affordability Threshold was set at a level lower than the Public Sector Comparator (PSC) to drive the Respondents behaviour in the achievement of innovation and efficient whole of life solutions...".
• The TGP delegation matrix shows responsibility for the AT sits with the PAG and DMT.
• The PAG meeting minutes provided show the PAG considered the setting of the AT In March and April 2013:
- March 2013: ".The PAG resolved to:
1. Receive a recommendation on Affordability Threshold at its 18th April meeting reflecting:
a. NZTA ordinary estimates process
b. Size of Project (i.e. tender box and contract estimates comparison projects are generally much smaller)
c. Extraordinary items as part of risk quantification - not baseline costs.".
April 2013: ".The PAG resolved to agree that the Project Team make the final decision on where the AT is set.".
• The DMT meeting papers of April 2013 include an internal Waka Kotahi memo to the PAG on setting the AT value. Supporting PwC advice is also provided. These papers discuss a range of P values of the PSC that could be used to set the AT. Three key points mentioned in this Waka Kotahi paper are:
- ".Further, we have the opportunity to use the Affordability Threshold to drive best value. We consider that
this level lies somewhere in the desired value range of P65 and P85. This range will be determined once all the variables affecting the PSC are understood by the project team.
- Should the private sector feedback on their inability to meet the Affordability Threshold then we would reserve the right to increase the Affordability Threshold within the value range.
- With increased understanding on how risks have transpired it would still be possible to lift the Affordability Threshold to the P95 without referral to the Board and the value proposition would still be confirmed.".
• An independent assurance report in May 2014 made several observations about the setting of the AT (that it was too low) and potential adverse consequences, and that there did not appear to be a common understanding of why it was being used and the behaviours it was expected to drive.
• A Lessons Learnt Report commissioned by Waka Kotahi in September 2014 has several references to the challenging nature of the AT, essentially around whether the AT was correct and required changes. We note this theme is identical to views expressed to us in several interviews conducted for this Review (see Section 4.3 starting on page 26).
• A second Lessons Learnt Report prepared by KPMG in December 2014 (and publicly available) also has specific feedback references to the AT:
- ".some respondents from the public sector expressed a view that the value for money methodology is heavily reliant on quality technical advice and a reasonably high level of road design at business case stage. They felt that roads were different to social infrastructure in that generally the design and price are developed over a period of time and need to respond to issues that arise e.g. geotechnical information and consenting requirements, over the course of the detailed design. This makes it difficult to set an AT that is challenging for bidders but still realistic."
- ".(the AT) was tight and this had a direct impact on commercial and technical aspects of bids. There was a strong indication that bidders struggled in determining the optimum trade-off between achieving the AT (quantitative criteria) and delivering a solution which met the NZTA's service specifications."
- ".bidders decided early on that they would not be able to deliver to the consented design within the AT and would need to sacrifice parts of the requirements to be affordable. Bidders felt this was a difficult decision because NZTA staff were firm during the interactive tender process (ITP) that bids must comply with the specifications.".
• At its December 2014 Board meeting, a Waka Kotahi paper provides a summary/briefing on the December 2014 Lessons Learnt Report, with the following statement, ".Some interviewees felt that the tight affordability threshold had a direct impact on both commercial and technical aspects of bids. In our view a tight affordability threshold is part of driving a good value solution, and these impacts are part of the process.".