6.3  Other Matters

During the IR we identified the following matters that we believe Te Waihanga should consider as part of either future TGP reviews or as PPP policy matters.

Benchmarking of services during the operational phase of TGP

We note that availability PPP contracts usually contain a five-year benchmarking provision so that the procuring agency has the flexibility and opportunity to test the value for money for services at regular defined intervals during the services period.

We note such benchmarking clauses were in version 3.0 of the New Zealand Standard Form PPP Agreement (i.e. Clause 50) that was adapted by the TG Project Team in early 2013. We were advised that these benchmarking provisions were removed from the model contract at the pre-TG review. We were also advised that benchmarking of O&M costs is now just covered by indexation within the payment mechanism, with a couple of specific areas for review (e.g., there is an uplift for pavement costs if heavy vehicles exceed a modelled amount, which is set out in clause 7 of Schedule 14 of the TG contract documentation).

From the review documents, we identified a presentation from the TGP legal adviser to the DMT in March 2013 that discussed how reviewable services could be treated in the TGP contract. This paper provides the following advice:

•  Approach on (New Zealand PPP) projects to date has been to minimise the use of this structure;

•  Indexation should provide an appropriate proxy if the packages were correctly priced at the outset; and

•  International experience is that prices only go up on reviews.

The following recommendations are then provided to the March 2013 DMT meeting:

•  specify in the RFP which services Respondents can treat as reviewable;

•  retain the New Zealand market approach of minimising works packages to which this applies; and

•  Give further consideration to what packages should be included (e.g. utilities - electricity supply and any other non-core services).

On the advice above, we are not sure we agree with the logic in the latter two points. Indexation movements are only one part of changes in reviewable services. An indexation measure is only comprehensive if it covers specific labour, price and volume changes. Also, we note our review findings regarding the pricing impact on the RFP bids from setting the AT too low. On the point of international experience, the experience of this review team is different - at the very least, we would have expected to see such a statement supported by concrete examples.

Importantly, including a five-year benchmarking provision is about building in the option for government to test the market value of services, particularly given the 25-year term of a PPP. Having that option available is about providing government with the flexibility to choose - this is similar to the request for refinancing provisions that are now a standard feature in availability PPP contracts.

Our other observation is from a governance perspective - this major change seems to have been approved by the DMT. We believe removing the five-year benchmarking provisions from a PPP contract is a major policy change, particularly given the very nature of an availability PPP is about the quality and level of services.

Our recommendation is that the Waka Kotahi Board should seek a briefing on benchmarking of TGP-contract services in the lead-up to the delivery of the project in September 2021 - this advice should include how the benchmarking provisions in the current TGP contract will provide assurance to the Board that value-for money is being demonstrated during the services phase of the TGP. We also recommend Te Waihanga consider if PPP benchmarking provisions should be included in PPP guidance material available for government agencies, and that agencies developing PPP contacts clearly explain the reasons for not using model clauses relating to five-year benchmarking clauses.

Preparation for the contract management phase and benefits realisation

With a revised construction delivery date of September 2021, we note that, in less than 12 months' time, Waka Kotahi will be moving into one of the most important phases when using an availability PPP contract -long-term contract management focussed on benefits realisation.

All jurisdictions that are using availability PPPs have found a need to work through change management processes to get PPP contract management working effectively. With a PPP services phase of 25 years (and sometimes longer), having the right focus on PPP contract management ensures that the procuring agency, Government, and the community can all be confident that expected benefits have a good chance of being realised.

We believe the importance of effective PPP contract management and benefits realisation cannot be underestimated - this is a view also echoed by the Global Infrastructure Hub (GIH).

Structuring, procurement and negotiation of quality PPPs are important to the success of those projects, but without effective management of a contract after financial close, there is significant risk that even the best projects can end badly."

Chris Heathcote, Chief Executive Officer, Global Infrastructure Hub

For Waka Kotahi there is the opportunity to leverage off the experience of others, and also access existing tools and frameworks. Such experience is not only from local PPP projects but also from regional resources such as recently commissioned road availability projects (e.g. the Queensland Government's Toowoomba Bypass PPP); and (ii) the GIH's recently released PPP contract management framework.

If not already commenced, our recommendation is that Waka Kotahi prepare for the Board's consideration an implementation plan for establishing a PPP contract management framework and function to manage and monitor the services-phase of TGP. Further, the scope of this implementation plan should include both the TGP-specific contract obligations but also integration/dependencies with network operations and management.

Use of the AT as a "hard-price" compliance test in the PPP value-for-money evaluation

While value-for-money matters are outside of the scope of our Review, we noted during our analysis of the setting of the AT for the TGP that the current New Zealand PPP policy states any proposal with a net present cost in excess of the AT will be considered non-compliant. Our reading of this policy is that for any PPP bid to be capable of detailed evaluation, it must first meet a "hard-price" threshold which is the AT. Only after meeting that hard-price threshold will a bid be accepted for detailed evaluation.

We also noted that the AT represents the maximum 'price' that the procuring entity is prepared to pay a contractor for delivery of the project. However, we also saw a risk-adjusted PSC being set as the funding limit for a project which, in our mind, we thought was effectively the same thing (less some adjustments, such as agency procurement costs).

We noted from the review documents that for the TGP, the RFP evaluation approach appeared to essentially involve: (i) determine if a submitted RFP bid meets the AT test; and (ii) evaluate AT-compliant bids by risk-adjusting them to reflect bid-specific responses against the RFP, to be eventually compared against a higher benchmark by way of the risk-adjusted PSC. We note this explanation appears to accord with the Evaluation Methodology set out Volume 2 of the RFP document (i.e. specifically clause 11.2.1) issued to the two RFP respondents. These RFP conditions formed the basis for the two RFP Respondents agreeing to submit proposals.

We also noted the RFP conditions allowed Waka Kotahi to take into consideration significant price differences between RFP Proposals, and possible value-for-money outcomes proposed over and above those specified in the RFP. 

We appreciate the AT policy is a New Zealand-specific requirement for PPPs. Based on international experience, two questions in our mind are:

•  Usually in a PPP evaluation, all RFP bids are accepted for evaluation if they meet minimum information, capability, and the Service Need Specification requirements. A process of risk-adjustments (both upwards and downward, as applicable) is then made to the face-value of submitted price offers to reflect the specific aspects of each bid, including contract departures and delivery risks. Risk-adjusted bids are then compared against the procuring agency's risk-adjusted PSC to determine if value-for money is possible; and

•  If the actual bid evaluation process sees a bid risk-adjusted and eventually being compared to the risk-adjusted PSC, then what exactly is the AT being used for in the PPP bidding process and is using the AT adding value to the PPP procurement process?

We have raised the above points in the context that we believe it is a matter that should be considered in more detail if future reviews of the TGP include lessons learnt in the value-for-money area.