From the review documents and interviews, our conclusion is that the setting of the AT was done using a lower (P75) value of the PSC to drive the RFP Respondents' behaviour to achieve innovation and efficient whole of life solutions.
This "innovation and efficiency" principle may be double counting insofar as a definition of the PSC should represent the "efficient" method of government delivering the PPP project to the same specification and performance expected from the private sector. Consequently, the TG Project Team may not have fully appreciated that using the risk- adjusted PSC would have served their intended purpose of setting an "innovation and efficiency" target. As a result, the Project Team effectively set two "efficiency" targets (i.e. a risk-adjusted AT and a risk adjusted PSC) when only one was needed (i.e. a risk adjusted PSC).
The definition of the PSC available at the time (i.e. in the New Zealand Treasury 2009 PPP Guidelines) does not state the PSC is the "most efficient likely method of providing the defined output currently available to the public sector". This definition is in the Australian PPP guidelines definition of the PSC (which was included, however, as a reference in the 2009 version of the New Zealand PPP Guidelines).
Note, our reading of the 2015 New Zealand Treasury PSC/PPP Guidelines is that the current definition of the PSC also could be clearer so that Crown representatives and the market understand that the PSC is the "most efficient likely" method that government would use to deliver the PPP project/specification.
Our view from the review facts regarding the setting of the AT is that perhaps the Project Team were placed in a position where they had to establish a definition of the AT. Given this situation, the Project Team relied on previous PPP Projects where the AT had been set at a level below the funding-approval PSC, as well as placing an agency-specific definition of the AT as a means of driving value in the tender phase. All of this could have been potentially avoided if a definition of the AT were available at the time.
However, we also note that some of the review documents and interviewees indicate a view that some parties in Waka Kotahi were concerned about the risk of "gold plating" - that is, PPP bids potentially may be too high/expensive. This thought process (possibly based on traditional delivery experience) seems to have led the Project Team to set a low AT as a strategy to manage any gold-plating risk.
Our recommendation regarding the setting of the AT is for Te Waihanga to consider reviewing the current New Zealand definition of the PSC to provide clearer guidance that it represents the most efficient likely method of providing the defined output currently available to the public sector. This would be a very straightforward amendment to the current PPP Guidelines, and would also then ensure the revised PSC definition works better with the current definition of the AT.
In terms of how the AT was approved, the review documents record that the Project Team made the final decision on where the AT was set. However, we saw no review documents confirming which member of the Project Team made this decision. There were also no review documents confirming that the setting of the AT using a P75 value of the PSC was recommended to/endorsed by the PAG, DMT, or the Governance Group as key governance bodies that sit above the Project Team - this means the final decision on where the AT was set was not consistent with the TGP delegation matrix that was also provided in the review documents. The Board appears only to have been advised that the AT was set using a (lower) P-value of the PSC to drive additional value.
There was market feedback in the two lessons learnt reports that the AT was not set at the correct level, and this would have an adverse impact on how the RFP respondents structured and priced their RFP response. We agree with this view and our opinion is that in the RFP Respondents appeared to have either:
• Priced their bid aggressively to reach the AT target by "value-managing" aspects of their bid (e.g. design, performance and delivery timelines, as some examples); or
• Priced their bid based on all the RFP information based on scope, design, and performance requirements knowing full well this might result in an RFP price offer that was above the AT.
We believe these two scenarios are what transpired with TG. For the first scenario, the result has been reflected in the cost and design changes since the contract was signed in July 2014, Note, the review documents record that the Board were advised of the lesson learnt feedback that the tight AT had a direct impact on both commercial and technical aspects of bids, but that a tight AT was viewed as required in driving a good value solution and these impacts are part of the process.
One of our key concerns regarding the setting and approval of the AT is that we could find no specific review documents confirming which member of the Project Team made the decision to set the AT. We also saw no review documents confirming which TGP governance group (above the Project Team) endorsed the Project Team's decision. These are fundamental governance issues concerning recording of key decisions and separation of decision-making roles and responsibilities.
Accordingly, our recommendation regarding AT decision making is that whole-of-government PPP project governance and delegations should clearly define responsibility for the setting and the approval of the AT. Specifically, this should be a decision made above the Project Team level to ensure governance checks and balances are in place, but also so that transparency of decision making can be demonstrated. It is clear to us that if rigour and transparency around the decision making of the AT for the TGP had been improved, then the Board and Government would have been more clearly informed as to the financial implications of setting the AT too low.
Note, under Identified Areas of Best Practice & Other Matters, we have raised an issue outside of the scope of this Review regarding how the AT was used in the RFP and value-for-money evaluation.