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Reports

12 December 2018

Published

Newcastle Urban Transformation and Transport Program

Transport

Planning

Compliance

Infrastructure

Management and administration

Procurement

Project management

The urban renewal projects on former railway land in the Newcastle city centre are well targeted to support the objectives of the Newcastle Urban Transformation and Transport Program (the Program), according to a report released today by the Auditor-General for New South Wales, Margaret Crawford. The planned uses of the former railway land achieve a balance between the economic and social objectives of the Program at a reasonable cost to the government. However, the evidence that the cost of the light rail will be justified by its contribution to the Program is not convincing.

The Newcastle Urban Transformation and Transport Program (the Program) is an urban renewal and transport program in the Newcastle city centre. The Hunter and Central Coast Development Corporation (HCCDC) has led the Program since 2017. UrbanGrowth NSW led the Program from 2014 until 2017. Transport for NSW has been responsible for delivering the transport parts of the Program since the Program commenced. All references to HCCDC in this report relate to both HCCDC and its predecessor, the Hunter Development Corporation. All references to UrbanGrowth NSW in this report relate only to its Newcastle office from 2014 to 2017.

This audit had two objectives:

To assess the economy of the approach chosen to achieve the objectives of the Program.
To assess the effectiveness of the consultation and oversight of the Program.

We addressed the audit objectives by answering the following questions:

a) Was the decision to build light rail an economical option for achieving Program objectives?
b) Has the best value been obtained for the use of the former railway land?
c) Was good practice used in consultation on key Program decisions?
d) Did governance arrangements support delivery of the program?

Conclusion
1. The urban renewal projects on the former railway land are well targeted to support the objectives of the Program. However, there is insufficient evidence that the cost of the light rail will be justified by its contribution to Program objectives.

The planned uses of the former railway land achieve a balance between the economic and social objectives of the Program at a reasonable cost to the Government. HCCDC, and previously UrbanGrowth NSW, identified and considered options for land use that would best meet Program objectives. Required probity processes were followed for developments that involved financial transactions. Our audit did not assess the achievement of these objectives because none of the projects have been completed yet.

Analysis presented in the Program business case and other planning documents showed that the light rail would have small transport benefits and was expected to make a modest contribution to broader Program objectives. Analysis in the Program business case argued that despite this, the light rail was justified because it would attract investment and promote economic development around the route. The Program business case referred to several international examples to support this argument, but did not make a convincing case that these examples were comparable to the proposed light rail in Newcastle.

The audited agencies argue that the contribution of light rail cannot be assessed separately because it is a part of a broader Program. The cost of the light rail makes up around 53 per cent of the total Program funding. Given the cost of the light rail, agencies need to be able to demonstrate that this investment provides value for money by making a measurable contribution to the Program objectives.

2. Consultation and oversight were mostly effective during the implementation stages of the Program. There were weaknesses in both areas in the planning stages.

Consultations about the urban renewal activities from around 2015 onward followed good practice standards. These consultations were based on an internationally accepted framework and met their stated objectives. Community consultations on the decision to close the train line were held in 2006 and 2009. However, the final decision in 2012 was made without a specific community consultation. There was no community consultation on the decision to build a light rail.

The governance arrangements that were in place during the planning stages of the Program did not provide effective oversight. This meant there was not a single agreed set of Program objectives until 2016 and roles and responsibilities for the Program were not clear. Leadership and oversight improved during the implementation phase of the Program. Roles and responsibilities were clarified and a multi-agency steering committee was established to resolve issues that needed multi-agency coordination.

The light rail is not justified by conventional cost-benefit analysis and there is insufficient evidence that the indirect contribution of light rail to achieving the economic development objectives of the Program will justify the cost.

Analysis presented in Program business cases and other planning documents showed that the light rail would have small transport benefits and was expected to make a modest contribution to broader Program objectives. Analysis in the Program business case argued that despite this, the light rail was justified because it would attract investment and promote economic development around the route. The Program business case referred to several international examples to support this argument, but did not make a convincing case that these examples were comparable to the proposed light rail in Newcastle.

The business case analysis of the benefits and costs of light rail was prepared after the decision to build light rail had been made and announced. Our previous reports, and recent reports by others, have emphasised the importance of completing thorough analysis before announcing infrastructure projects. Some advice provided after the initial light rail decision was announced was overly optimistic. It included benefits that cannot reasonably be attributed to light rail and underestimated the scope and cost of the project.

The audited agencies argue that the contribution of light rail cannot be assessed separately because it is part of a broader Program. The cost of the light rail makes up around 53 per cent of the total Program funding. Given the high cost of the light rail, we believe agencies need to be able to demonstrate that this investment provides value for money by making a measurable contribution to the Program objectives.

Recommendations
For future infrastructure programs, NSW Government agencies should support economical decision-making on infrastructure projects by:

providing balanced advice to decision makers on the benefits and risks of large infrastructure investments at all stages of the decision-making process
providing scope and cost estimates that are as accurate and complete as possible when initial funding decisions are being made
making business cases available to the public.

The planned uses of the former railway land achieve a balance between the economic and social objectives of the Program at a reasonable cost to the government.

The planned uses of the former railway land align with the objectives of encouraging people to visit and live in the city centre, creating attractive public spaces, and supporting growth in employment in the city. The transport benefits of the activities are less clear, because the light rail is the major transport project and this will not make significant improvements to transport in Newcastle.

The processes used for selling and leasing parts of the former railway land followed industry standards. Options for the former railway land were identified and assessed systematically. Competitive processes were used for most transactions and the required assessment and approval processes were followed. The sale of land to the University of Newcastle did not use a competitive process, but required processes for direct negotiations were followed.

Recommendation
By March 2019, the Hunter and Central Coast Development Corporation should:

work with relevant stakeholders to explore options for increasing the focus on the heritage objective of the Program in projects on the former railway land. This could include projects that recognise the cultural and industrial heritage of Newcastle.

Consultations about the urban renewal activities followed good practice standards, but consultation on transport decisions for the Program did not.

Consultations focusing on urban renewal options for the Program included a range of stakeholders and provided opportunities for input into decisions about the use of the former railway land. These consultations received mostly positive feedback from participants. Changes and additions were made to the objectives of the Program and specific projects in response to feedback received.

There had been several decades of debate about the potential closure of the train line, including community consultations in 2006 and 2009. However, the final decision to close the train line was made and announced in 2012 without a specific community consultation. HCCDC states that consultation with industry and business representatives constitutes community consultation because industry representatives are also members of the community. This does not meet good practice standards because it is not a representative sample of the community.

There was no community consultation on the decision to build a light rail. There were subsequent opportunities for members of the community to comment on the implementation options, but the decision to build it had already been made. A community and industry consultation was held on which route the light rail should use, but the results of this were not made public.

Recommendation
For future infrastructure programs, NSW Government agencies should consult with a wide range of stakeholders before major decisions are made and announced, and report publicly on the results and outcomes of consultations.

The governance arrangements that were in place during the planning stages of the Program did not provide effective oversight. Project leadership and oversight improved during the implementation phase of the Program.

Multi-agency coordination and oversight were ineffective during the planning stages of the Program. Examples include: multiple versions of Program objectives being in circulation; unclear reporting lines for project management groups; and poor role definition for the initial advisory board. Program ownership was clarified in mid-2016 with the appointment of a new Program Director with clear accountability for the delivery of the Program. This was supported by the creation of a multi-agency steering committee that was more effective than previous oversight bodies.

The limitations that existed in multi-agency coordination and oversight had some negative consequences in important aspects of project management for the Program. This included whole-of-government benefits management and the coordination of work to mitigate impacts of the Program on small businesses.

Recommendations
For future infrastructure programs, NSW Government agencies should:

develop and implement a benefits management approach from the beginning of a program to ensure responsibility for defining benefits and measuring their achievement is clear
establish whole-of-government oversight early in the program to guide major decisions. This should include:
- agreeing on objectives and ensuring all agencies understand these
- clearly defining roles and responsibilities for all agencies
- establishing whole-of-government coordination for the assessment and mitigation of the impact of major construction projects on businesses and the community.

By March 2019, the Hunter and Central Coast Development Corporation should update and implement the Program Benefits Realisation Plan. This should include:

setting measurable targets for the desired benefits
clearly allocating ownership for achieving the desired benefits
monitoring progress toward achieving the desired benefits and reporting publicly on the results.

Appendix one - Response from agencies

Appendix two - About the audit

Appendix three - Performance auditing

Parliamentary reference - Report number #310 - released 12 December 2018

15 June 2017

Published

Sydney Road Maintenance Contracts

Transport

Infrastructure

Internal controls and governance

Management and administration

Procurement

Project management

In November 2013, Roads and Maritime Services (RMS) outsourced the maintenance of State roads in the Sydney region south and west zones using an innovative contracting approach called the Stewardship Maintenance Contract (SMC). The SMC links risk to reward, and uses a performance framework where outcomes should drive improved performance over time.

Roads and Maritime Services (RMS) is responsible for the Sydney region State roads network This includes over 2,800 kilometres of roads and associated road corridor infrastructure such as bridges, tunnels and drainage structures. RMS divides the network into three geographical areas: south, west and north zones.

In 1995, RMS first outsourced road corridor infrastructure maintenance for the north zone through a Performance Specified Maintenance Contract (PSMC). The current 10-year PSMC for the north zone will expire in October 2018. Prior to November 2013, RMS maintained roads in the south and west zones through its Road and Fleet Services unit.

In November 2013, RMS outsourced road maintenance services for the south and west zones using Stewardship Maintenance Contracts (SMC). The contracts run for seven years with an option for a further three years at RMS’ discretion. RMS estimated that the annual cost of these contracts was around $240 million in total. In March 2018, the contract prices are due to be reset by negotiation to reflect the contractors’ experience with, and better information about, the road networks and routine maintenance requirements.

The SMC model adopted stewardship principles to improve value for money. RMS defined stewardship principles as a broad set of values, attitudes and behaviours, required of the contractor to effectively manage the assets on behalf of RMS. The SMC also includes commercial principles, such as linking risk to reward, and a performance framework where outcomes drive performance.

This audit assessed whether RMS had effectively managed the outsourcing of road maintenance in the Sydney region south and west zones. In making this assessment, we answered the following questions:

Did RMS justify the decision to adopt the SMC model?
Do SMCs include key performance indicators (KPIs) and incentives which promote efficiency and effectiveness?
Does RMS collect high quality information on contractor performance and take action to correct performance deficiencies?
Are the expected benefits being achieved?

Conclusion

RMS developed an innovative contracting approach with the SMC. RMS has realised some benefits in the first year, including savings, from outsourcing road maintenance in the Sydney region south and west zones using the SMC. However, RMS’ management of the SMC has key elements missing which reduces its effectiveness.

The SMC includes performance measures and incentives to drive efficiency and effectiveness improvements over time.

RMS has established a contract management framework which includes most elements of good practice, including governance and dispute resolution mechanisms. However, it does not have procedures to guide its contract managers in managing specific provisions of the SMC. Consequently, RMS has not exercised several significant SMC requirements, such as having the contractor account for an efficiency dividend in its pricing at the start of each three-year works period. It also has not done enough to assure itself that the contractor provided performance and financial data are correct. This is important because the data is used to measure performance and calculate contractor payments.

RMS assessed that it had achieved around 80 per cent of the expected cost benefit in the initial year of the SMC. However, it has not tracked its achievement of benefits since then.

The Stewardship Maintenance Contract

RMS justified adopting the SMC model and included KPIs to drive efficiency and effectiveness

The SMC model includes features that RMS had not previously used for road maintenance contracts. These included adopting stewardship principles and transferring price risk to the contractor over time as the contractor becomes familiar with the assets being maintained.

The SMC model meets RMS’ requirements for flexibility in pricing models, the need for collaboration in asset maintenance planning, promoting innovation and effective performance management.

RMS used many good practices to develop the SMC model, including:

preparing a robust business case comparing the SMC model to RMS maintaining the road network itself, as well as assessing whether two other contracting models
(traditional and alliance) would meet its requirements
assessing experiences with similar arrangements in other jurisdictions and identifying elements that worked to get the best outcomes
developing a robust performance framework, which included a mix of efficiency and effectiveness KPIs that reflected NSW Government policy and RMS priorities
incorporating risk and reward incentives delivered through cost sharing arrangements which change as the contract matures
using a contract duration that supports RMS priorities and provides an incentive for better quality outcomes.

RMS uses data provided by the contractor to measure performance and calculate payments to the contractor. The SMC includes a specific sanction if RMS finds that the contractor provided incorrect performance data, but no specific sanction if the contractor provides incorrect financial data. If RMS finds that the contactor provided incorrect performance or financial data, RMS can only recover over-payments which may have been made using the incorrect data.

To provide a stronger incentive for the contractor to ensure data it provides is accurate, RMS should consider whether to incorporate stronger sanctions when negotiating the commercial reset due in mid-2018 for south and west zones. RMS should also consider this for the new contract for the north zone when the current PSMC contract expires in October 2018.

RMS' contract management approach and benefits realization

RMS can improve the effectiveness of its oversight and management of the SMC

RMS does not have SMC specific contract procedures to guide its contract managers. Consequently, RMS has not exercised several significant SMC requirements, such as having the contractors account for an efficiency dividend in their pricing at the start of each three-year works period. Effective contract management should be supported by contract specific procedures, with explanations of, and allocation of responsibility for, the various interventions that RMS may be required to exercise in the SMC.

Performance and financial reporting under the SMC is based on a mix of RMS and contractor provided data. While there are a range of audits of contractor provided performance and financial data that RMS can conduct each year under the SMC, it does not have a schedule of audits it will conduct and when.
During the first year of the SMC, RMS commissioned some limited audits of financial data. In the first three years of the SMC, RMS did not conduct any audits of performance data. Had there been SMC specific procedures in place, this would have reduced the risk of RMS not implementing a systematic audit program to give it reasonable assurance on the quality of the data that the contractor has provided. This is important because the data is used to measure performance and calculate contractor payments.

RMS has been aware of data quality issues since 2015. While RMS advised that it commenced addressing some data quality issues in response to a series of reviews conducted in 2015, a recent internal audit report indicates that RMS has not resolved the data quality issues.

RMS achieved benefits in the first year, but has not tracked benefits since

As part of the business case, RMS agreed to implement a benefits realisation strategy, including a benefits tracking tool. RMS commenced tracking benefits, but did not establish a comparative baseline pre-SMC on non-financial benefits, and has not tracked benefits past year one.

In 2015, a benchmarking study commissioned by RMS found that it had achieved 80 per cent of the expected recurrent cost savings and other benefits, such as improved workplace safety, in the first full year of the SMC. However, there was no clear baseline to measure
non-financial performance. The study was qualified due to gaps in available data. The study also did not reconcile the actual one-off transition costs to the business case estimate.

During the course of the audit, RMS advised that it intends to repeat this type of study to determine whether it has achieved all expected benefits (and their value), and that it would use the results to inform its negotiation with the SMC contractors as part of the commercial reset due in mid-2018.

Roads and Maritime Services is responsible for the State Roads network in the Sydney region

Roads and Maritime Services (RMS) is responsible for the Sydney region State roads network. This includes over 2,800 kilometres of roads and associated road corridor infrastructure such as bridges, tunnels and drainage structures. The network is divided into three geographical areas: south, west and north zones. Prior to November 2013, RMS maintained roads in the Sydney region south and west zones through its Road and Fleet Services unit.

In 1995, RMS first outsourced road corridor infrastructure maintenance for the north zone through a Performance Specified Maintenance Contract (PSMC). The current 10-year PSMC for the north zone will expire in October 2018. This contract is worth around $35 million per annum.

NSW Government priorities and road maintenance

Efficient and effective road maintenance contributes to the following NSW Government priorities:

improving road travel reliability
ensuring on-time running of public transport
reducing road fatalities
improving government services
keeping our environment clean.

The NSW Commission of Audit recommended outsourcing the maintenance of State roads

The NSW Commission of Audit in its Final Report on Government Expenditure (May 2012) recommended contestability as an appropriate strategy to consider for improving road maintenance service delivery for State roads.

The Commission benchmarked RMS’ road surface quality and cost per lane kilometre against those of Western Australia, Victoria, and Queensland. This showed that New South Wales lagged the other states on both these measures.

Exhibit 1: Interjurisdictional comparison of road maintenance outcomes 2009–10
	WA	VIC	QLD	NSW
Roads managed (lane kms)	52,659	50,510	71,353	80,348
Estimated spend ($/lane km)	5,000	4,500	6,000	7,000
Road quality measure (%)	99	99	94	91

Source: NSW Commission of Audit Final Report May 2012.

The Commission noted that RMS had conducted two independent reviews to examine the potential for extending road maintenance contestability. The Commission found that there was inadequate and inconclusive benchmarking to establish the efficiency of RMS’ Road and Fleet Services unit when compared to outsourcing. It recommended that RMS bring forward a proposal to conduct a competitive tender for the road maintenance of the Sydney region south zone road network to inform the feasibility of a progressive rollout of road maintenance contestability across other areas of the State. In August 2012, the NSW Government adopted the Commission’s recommendation.

The NSW Government introduced road maintenance contestability through Stewardship Maintenance Contracts

In April 2013, the NSW Government announced that it would introduce road maintenance contestability across the Sydney region, using a Stewardship Maintenance Contract (SMC) model to improve value for money. In doing so, it excluded RMS’ Road and Fleet Services unit from tendering.

The SMC model is based on the following key commercial and performance principles set by RMS:

performance driven by outcomes
flexible and adaptable
transparent and measurable
linking risk to reward
continuous improvement
criteria for selection of, and transition to, different payment models.

The following key stewardship principles underpin the SMC’s broad set of values, attitudes and behaviours, which are required of the contractor to effectively manage the assets on behalf of RMS:

putting RMS’ customers (road users and the general public) first and being responsive to them
being responsible and accountable for the outcomes resulting from the management of the assets
managing the assets diligently, efficiently and effectively with limited direction from RMS
working collaboratively with RMS to deliver services that are tailored to meet RMS’ evolving needs
acting with integrity and transparency in performing the services
performing the services in the best interests of RMS and asset users.

Other key features of the SMC include:

service requirements which describe the scope of the services, and the standards the contractor must meet
a commercial framework which defines how payments are structured, how performance assessment will impact on payments and outlines the key commercial principles. SMCs primarily divide payments into two main mechanisms, these being the priced component (or fixed price) and the target cost calculated as follows:
- fixed price – the contractor is paid a pre-agreed amount for specific services being provided, regardless of the actual costs incurred
- target cost – RMS and the contractor agree on a target cost for a project, and any cost overruns or underruns are shared between them
a performance framework which provides mechanisms for assessing contractor performance. This includes a comprehensive listing of the key result areas (KRAs) and key performance indicators (KPIs) against which RMS measures the contractor’s performance. The framework also outlines the scoring methodology that RMS uses to determine whether the contractor’s bid margin (profit and overheads) is reduced due to less than satisfactory performance or whether a bonus is paid if a threshold performance score is exceeded.

Road maintenance under SMCs for Sydney region south and west zones commenced in November 2013

In November 2013, RMS awarded SMCs to the Leighton Boral Amey consortium, now named Ventia Boral Amey (VBA), for the south zone and the DownerMouchel (DM) consortium for the west zone. The contracts run for seven years with an option for a further three years at RMS’ discretion. In April 2014, full services commenced following a four-month transition period. RMS estimated that the annual cost of these contracts was around $240 million in total. In March 2018, the contract prices are due to be reset by negotiation to reflect the contractors’ experience with, and better information about, the road networks and routine maintenance requirements.

Roads and Maritime Services should consider whether to incorporate stronger sanctions in the Stewardship Maintenance Contract if the contractor provides incorrect performance or financial data to RMS, when:
1. negotiating the commercial reset for the next works period with the Sydney region south and west zone contractors due in July 2018.
2. finalising a new SMC contract for the Sydney region north zone, due to commence in October 2018.

Roads and Maritime Services should, by September 2017:

2. Review its contract management framework for SMCs to ensure that all authorities and accountabilities of
contract managers are clearly defined, including:

a) accountability and procedures for exercising all operational clauses in the SMC where RMS may opt to, or be required to intervene, or make a decision

b) authority to approve or initiate the interventions RMS is required to, or may, exercise under the SMC

c) the audits that RMS will conduct to systematically validate the performance and financial data that the SMC contractors provide

d) the accountabilities of RMS contract managers to systematically review audits and quality reviews that the SMC contractors must conduct to demonstrate compliance with their service plans

e) the accountabilities of RMS contract managers to check that the monthly and annual reports provided by SMC contractors do not contain errors, omissions or inaccuracies.

3. Improve its management of benefits realisation by:

a) initiating a further benefits realisation review and record the benefits delivered against those
estimated following the tender process, including the one-off transition costs

b) identify any benefits, including savings, not yet attained and develop strategies to address any short-falls

c) establish a tool to track the ongoing realisation of benefits.

Parliamentary reference - Report number #288 - released 15 June 2017

8 June 2017

Published

NorthConnex

Premier and Cabinet

Treasury

Transport

Compliance

Infrastructure

Internal controls and governance

Management and administration

Procurement

The processes used to assess NorthConnex adequately considered value for money for taxpayers.This report also found that the impact of tolling concessions on road users and the motorway network was consistent with policy objectives described in the 2012 NSW Long Term Transport Master Plan.

By December 2017, the Department of Premier and Cabinet should:

1. publish an updated ‘Unsolicited Proposals – Guide for Submission and Assessment’ which clarifies obligations with requirements in other NSW Government policies such as the NSW PPP guideline and Infrastructure Investor Assurance Framework. The update should require:

a) a business case to be prepared, and a business case gateway review completed, as part of the assessment of the detailed proposal (currently stage 2)

b) probity reports must be completed and considered before the decision to proceed to the next stage.

The Department of Premier and Cabinet and NSW Treasury should immediately:

2. improve record keeping to ensure compliance with the State Records Act 1998 and the NSW Government Standard on Records Management.

Parliamentary reference - Report number #287 - released 8 June 2017

27 October 2009

Published

Handback of the M4 Tollway

Transport

Infrastructure

Internal controls and governance

Management and administration

Procurement

Project management

This audit focuses on the M4 handback. It looks at whether the road will be in good condition when the State gets it back, and whether it will cope with the extra traffic after the toll is removed. These are critical issues for taxpayers and motorists. Taxpayers don’t want to be responsible for a large repair bill and motorists don’t want to be stuck in traffic jams.

To ensure that future private sector partnerships (PPP) deal adequately with handback, we recommend that the Roads and Traffic Authority (RTA):

ensure deeds spell out an appropriate inspection and testing program to determine repairs required to bring roads up to a satisfactory condition at handback (p.11)
ensure deeds link condition standards and maintenance approaches to changing industry standards and approaches over the life of the PPP (p.11)
consider including in deeds a requirement that operators provide a performance bond or similar security over the cost of handback repairs (p.11)
review the lessons learnt from the M4 tollway handback and determine whether it should seek to negotiate changes to existing tollway deeds to better deal with handback, by June 2010 (p.11)

Parliamentary reference - Report number #193 - released 27 October 2009

6 June 2007

Published

Connecting with public transport

Transport

Information technology

Infrastructure

Internal controls and governance

Management and administration

Project management

Service delivery

Workforce and capability

We see considerable potential for the Ministry of Transport to plan and manage interchanges more effectively, so as to make better use of our public transport network. We believe that the Ministry now needs to focus more on multi-modal transport planning and interchange performance. It needs to assign responsibility for the coordination and oversight of inter-modal operations to an entity resourced for the purpose. Without this it will continue to be very difficult to identify and address unmet needs, seek and secure stakeholder funding, and monitor and evaluate system performance.

Parliamentary reference - Report number #168 - released 6 June 2007