4. Project scope, costs and benefits

Key Findings

Chapter 2. Project scope, costs and benefits

In November 2013, the CSELR business case estimated the project would cost $1.6 billion. The budget rose $549 million to $2.1 billion by the time TfNSW signed the main works PPP contract in December 2014.

While part of this increase was due to scope changes and planning modifications, $517 of the $549 million increase was caused by mispricing and omissions in the business case.

At the same time, the project benefits had decreased from the 2013 business case estimate of $4.0 billion to an estimated $3.0 billion in December 2014. This was mainly due to increases in travel time assumptions.

These changes reduced the project’s benefit-to-cost ratio from 2.4 to 1.4, excluding wider economic benefits. The project still went ahead because the ratio remained positive. However, TfNSW should have updated the business case and conducted an independent gateway review to maximise transparency and confirm value for money.

Recommendations

1. For the CSELR project, Transport for NSW should, by December 2016:

c) update and consolidate information about project costs and benefits and ensure that it is readily accessible to the public.

2. For all capital projects, Transport for NSW should comply with the Infrastructure Investor Assurance Framework.

 

Our audit reviewed what generated changes in the project scope, costs and benefits, and whether the changes were justified and reasonably foreseeable. We also looked at whether TfNSW reassessed the economic appraisal to justify proceeding with the project.

2.1      Changes to the project scope, cost and benefits

The tender process led to changes in project scope

Some of the cost increases for the CSELR project were caused by changes in project scope that emerged from the tender process.

In February 2014, the Minister for Transport announced a shortlist of three bidders would be invited to tender for the PPP contract. In line with normal practice for major construction projects, TfNSW issued the RFP based on a reference design and scope of works. However, bidders were encouraged to innovate and improve on this design.

Two bids met the assessment criteria, and the successful bidder proposed a different design and scope from the reference design. TfNSW concluded that these changes aligned with project requirements and provided a better technical solution.

The design changes announced in December 2014 included:

  • revising platform lengths to support longer vehicles (67 metres instead of 45 metres)
  • redesigning several stops
  • switching technologies for the wire-free section
  • removing a proposed stop at World Square.

Design changes were also made to the location of the Randwick Racecourse stop and the alignment along Alison Road to address proposals from third party agreement negotiations.

TfNSW assessed the impact of these design and scope changes on the project costs and benefits. In December 2014, it released a CSELR Modifications Report to seek planning approval for the changes. After public consultation, the Minister for Planning approved the planning modifications in February 2015.

The business case underestimated project costs

In November 2013, the CSELR project business case summary estimated costs at $1.6 billion. As Exhibit 4 shows, the budget increased by $549 million to $2.1 billion when TfNSW announced the main works PPP contract had been signed in December 2014.

Exhibit 4: Timeline of CSELR capital cost budget updates up to PPP contract award

Image of timeline of CSELR capital cost budget updates up to PPP contract award

Note: BCR = benefit-to-cost ratio (excluding wider economic benefit(s).

*    The BCR was updated only for costs, not benefits.

Source: Audit Office research 2016.

The scope and costs were uncertain when the business case was approved, and this became more evident during procurement. By October 2014, TfNSW reported that mispricing and omissions in the business case had caused $517 million of the $549 million capital cost increase. The remaining increase was due to scope changes and planning modifications, some of which TfNSW knew about before submitting the business case for approval.

TfNSW should have addressed these issues when preparing the business case, and certainly well before procurement began for the two major contracts.

For example, in June 2013, the CSELR project team identified significant design issues. Yet TfNSW did not recognise or resolve them in the business case. While TfNSW included most design changes in the RFP documents, it did not accurately estimate the related costs.

By August 2013, TfNSW commissioned an independent peer review of the business case’s capital cost estimate. This found the cost estimate to be low in several areas, including some of those outlined in Exhibit 5. At the same time, the review noted the risk allowance and client cost allowance should compensate for this.

The review recognised the contractors’ indirect costs needed to be revised to reflect the complexity of constructing a road-based light rail system in a dense urban environment. However, TfNSW did not update these estimates in the business case.

In September 2014, TfNSW addressed the issues from the review, which increased the budget to $2.0 billion. The Advisory Board noted the business case capital cost estimate had mispriced and omitted several items, and that market condition assumptions had changed.

In October 2014, TfNSW further increased the budget to $2.1 billion. This increase was mainly due to approved variations in the main works PPP package, such as the change in alignment to Alison Road and changes to stops.

Exhibit 5: Changes to capital costs due to mispricing and omissions October 2014

table of changes to capital costs due to mispricing and omissions October 2014

Source: Transport for NSW 2014.

Project benefits are lower than the business case estimate

By December 2014, CSELR project benefits were valued at $3.0 billion. This reduced the $4.0 billion benefit reported in the November 2013 business case summary by 25 per cent.

The key contributor to this decrease was the estimated journey time, which grew because of changes in traffic priority assumptions. Put simply, longer CSELR vehicles would not receive the expected priority at traffic lights. This increased the estimated average peak journey times from Circular Quay to both Randwick and to Kingsford from up to 34 minutes to up to 38 minutes.

TfNSW’s CSELR Project Benefits Realisation Plan (April 2015) states the original business case scope remains the aspiration for the project. It also states:

…the realisation of customer and operating benefits is paramount to the success of the project, and that any further erosion of these benefits could erode the project’s net present value and benefit cost ratio, rendering the project unviable.

Journey times and service capacity, which are largely governed to [sic] green times and traffic signal priority, are central to realising customer benefits. This analysis (and the patronage analysis) shows that customers are unlikely to accept the slowness in trips, even with the substantially higher capacity available, so there will be pressure to improve this. TfNSW needs to work hard with Roads and Maritime Services and other stakeholders to maximise outcomes.

TfNSW advised that, although the estimated benefits fell during procurement, the CSELR project may still realise higher benefits during the delivery and operations phases.

Unfinished traffic priority arrangements may further reduce benefits

The final benefits the CSELR project will realise remain uncertain.

CSELR journey times may change when TfNSW finalises traffic priority arrangements with Roads and Maritime Services (RMS). Despite RMS’ participation on all CSELR project governance committees since 2011, TfNSW and RMS are still finalising the modelling of traffic and signalised intersections for the operational phase of the project.

TfNSW advised it expected to release an update of the modelling in October 2016. This will then be subject to ongoing updates due to design finalisation and other dependencies, such as development proposals and bus plan changes.

The PPP project deed currently specifies journey times up to 38 minutes from Circular Quay to both Randwick and to Kingsford. Journey times may be revised to reflect operational performance once full services start. Any reductions in traffic priorities that RMS deems necessary will limit TfNSW’s ability to achieve service frequencies.

Some information about the project was inaccurate or delayed

Timely and accurate information is vital when managing a project of this size and complexity. Yet some of the information released by TfNSW to the public has not been correct or timely.

For example, in December 2014, TfNSW announced the increase in the capital cost of the project to $2.1 billion. It explained that costs had increased because of the ‘huge wins’ offered by the preferred bidder of the PPP. These included 50 per cent more capacity than the 9,000 passengers per hour previously planned.

However, this was not correct. As noted above, 94 per cent of the $549 million increase was due to incorrect estimates in the business case.

Further, in January 2015, TfNSW incorrectly responded to community and stakeholder concerns about the project’s cost and value for money. In the CSELR Submissions Report to Project Modifications, it stated that the benefits of the project remained at $4.0 billion. They had fallen to $3.0 billion in December 2014.

In November 2015, TfNSW published the main works PPP contract award notice, showing that the benefit-to-cost ratio had reduced from 2.4 to 1.4. Under NSW PPP guidelines, TfNSW should have disclosed that information within 60 days of contract execution. It awarded the contract in December 2014. TfNSW acknowledges this was an oversight.

To maximise transparency and accountability, TfNSW should maintain high standards when releasing information, particularly when there are major changes to project outcomes.

2.2      Reassessment of the economic appraisal

TfNSW conducted a rapid economic appraisal for PPP contract approval

In December 2014, TfNSW completed a rapid economic appraisal and informed NSW Treasury and the NSW Government that the project’s benefit-to-cost ratio had reduced from 2.4 to 1.4 (see Exhibit 6). It justified proceeding with the project in part because the ratio remained positive.

The Advisory Board endorsed TfNSW’s recommendation to award the main works PPP contract.

However, TfNSW should have also updated the business case and arranged an independent gateway review of the project. These steps would have:

  • maximised transparency
  • helped to confirm value for money
  • complied with relevant policy frameworks.

Given the substantial changes in costs and benefits, revising the business case would have been in line with TfNSW’s Investment Gating and Assurance Framework.

An independent assurance (gateway) review would have helped to confirm whether its decision to proceed would still provide value for money. The NSW Government’s Major Projects Assurance Framework also requires this.

TfNSW’s own guidelines explain that reviews are important as they check if a project has:

  • assessed whether the options the market has proposed benefit the project, remain within scope, and will deliver the objectives of the business case and the tender documents
  • reassessed the updated business case, including strategic, economic, financial, commercial and project management factors
  • incorporated changes from the recommended proposal into a revised economic evaluation and benefits realisation plan
  • quantified, documented and considered the social, economic development and environmental costs.

Exhibit 6: Changes reflected in the December 2014 updated economic appraisal

table of changes reflected in the December 2014 updated economic appraisal

Source: Transport for NSW 2014.