RMS’ SMC contract management includes most elements of good practice, including governance and dispute resolution mechanisms. However, key elements are missing which reduces its effectiveness.

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:

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

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.  

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. 

1. 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.

Appendix One - Response from Roads and Maritime Services

Appendix Two - Better practice contract management framework

Appendix Three - About the audit

NorthConnex is a nine-kilometre tolled motorway tunnel between the M1 Pacific motorway at Wahroonga and the M2 Hills motorway at West Pennant Hills. The total cost for the project is $3.1 billion. NorthConnex will be funded through toll charges, and contributions from the NSW and Australian Governments of up to $405 million each. In January 2015, the NSW Roads Minister signed the final contracts for NorthConnex.

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.

Appendix One - Response from Agency

Appendix Two - Governance Arrangements for NorthConnex

Appendix Three - About the Audit

• a high-value piece of equipment primarily used for diagnosing cancer - Positron Emission Tomography and Computed Tomography (PET-CT) scanners
• a small sample of lower value but critical medical equipment known as biomedical equipment.

Medical equipment needs to be properly managed over its lifecycle, from planning to acquisition, operation and disposal, to ensure patient safety and quality of care.

This audit assessed how well NSW hospitals managed medical equipment to meet the needs of patients. We examined the management of:

1. Positron Emission Tomography and Computed Tomography (PET-CT) scanners, a high-value piece of equipment commonly used for diagnosing cancer
2. a small sample of lower value but critical medical equipment known as biomedical equipment.  

We examined five hospitals for this audit: Lismore Base Hospital (in the Northern NSW Local Health District (LHD)), Liverpool Hospital (South Western Sydney LHD), Nepean Hospital (Nepean Blue Mountains LHD), Royal Prince Alfred Hospital (Sydney LHD) and Westmead Hospital (Western Sydney LHD).

Management of PET-CT scanners

PET-CT scanners were well utilised and reports were promptly sent to referring doctors

PET-CT scanners in Liverpool, Westmead and Royal Prince Alfred Hospitals were utilised to over 85 per cent of capacity. Utilisation at Nepean Hospital (around 60 per cent) was lower due to the age of the equipment and insufficient ‘uptake rooms’ for patients to receive radioactive injections. Lismore Base Hospital had a lower population to service and scheduled its PET-CT patients into three days a week to optimise efficiency.

PET-CT services were generally available to patients in a timely way and reports were promptly sent back to referring doctors. While clinicians we interviewed advised that there was generally no delay in patients accessing PET-CT scanners, only one hospital collected patient waiting time data to confirm this view.

Funding of PET-CT scans is complex

The funding of health services in NSW public hospitals involves a complex arrangement between the Australian and NSW Governments. In 2015–16, 10 per cent of PET-CT scans were inpatient services (funded mostly by NSW Health), 60 per cent were Medicare-funded outpatient services, and the remaining 30 per cent were privately referred outpatient services not funded by Medicare. Service costs for privately referred scans not funded by Medicare were met by a range of sources, including hospitals’ general purpose funds and patient out-of-pocket charges. Across the five hospitals, out-of-pocket charges varied and ranged from $250 to $950 per scan.

Better performance reporting could enable better planning of PET-CT scanners

NSW Health has delegated the planning functions for many pieces of high-value medical equipment, including PET-CT scanners, to Local Health Districts. This is intended to ensure local decision-making that is responsive to local community needs.

While local planning and service delivery is delegated to each Local Health District, under the Health Administration Act 1982, the Secretary of NSW Health is responsible for planning the provision of comprehensive, balanced and co-ordinated health services throughout New South Wales.

NSW Health could enable better service delivery and planning by collating and sharing performance information about PET-CT services across Local Health Districts.  

Equipment replacement planning was unclear 

Planning for future replacement of PET-CT scanners at the hospitals we examined was unclear, including when equipment would be replaced and what funding model might be applied. A better practice would be to have a clear equipment replacement plan for existing scanners that would ensure clarity about when equipment will be replaced, whether the replacement scanner should be leased, purchased or shared, and possible funding sources.

Management of biomedical equipment 

Equipment testing and maintenance did not always comply with intervals set under the Australian/New Zealand Standard All hospitals we examined adopted the Australian/New Zealand Standard 

All hospitals we examined adopted the Australian/New Zealand Standard 3551 ‘Management programs for medical equipment’ (the Standard) for managing medical equipment, the purpose of which is to ensure that equipment is safe and suitable for use. The Standard requires the regular testing and maintenance of biomedical equipment at predetermined intervals.  

Our review of three years of service records for 50 items of biomedical equipment found that:

• nineteen (38 per cent) items of equipment were tested and maintained within the intervals determined by hospitals under the Standard
• five (ten per cent) had at least one instance where they were tested and maintained less than 30 days later than when the work was due
• thirteen (26 per cent) had at least one instance where they were tested and maintained one to six months later than when the work was due
• six (12 per cent) had at least one instance where they were tested and maintained more than six months later than when the work was due
• seven (14 per cent) were lost, removed from clinical use or unable to be unidentified.

The Standard envisages that there may be circumstances when testing and maintenance does not occur according to schedule, and sets out a procedure that should be followed when testing and maintenance is overdue. This procedure was not followed in any of the hospitals we reviewed.  

Two out of five audited hospitals used risk rating to oversee equipment maintenance

Only two out of five hospitals we examined used risk rating, under which equipment is classified according to clinical risk, to prioritise equipment maintenance and to determine appropriate frequencies for equipment testing and maintenance.  

Some hospitals had inadequate oversight of work performed by external contractors

There was variable oversight of outsourced service contracts for high-risk biomedical equipment. In some cases, hospitals did not maintain complete histories of testing and maintenance work performed by contractors. Some contractors had incorrectly recorded items they had tested, or had refused to provide details of testing and maintenance performed.

New peer review process may improve assurance over testing and maintenance

NSW Health has started a peer review process in a small number of hospitals. This process covers a range of performance indicators relating to equipment management practices, including the auditing of test and maintenance records for two pieces of equipment per hospital. There is opportunity to build upon this effort by including all hospitals in the peer review process, and by expanding the sample of equipment subject to records audit.  

Hospitals’ record keeping of testing and maintenance service histories was inefficient and inadequate

The Standard requires that adequate and traceable equipment maintenance histories be kept. We found that hospitals’ record keeping of equipment service histories was inefficient and inadequate. None of the hospitals used an information system that provided the full three-levels of capability outlined below:

• storing equipment information electronically, allowing easy retrieval
• managing service requests and holding full service histories and test results
• automatically generating reports to allow risk based prioritisation of equipment maintenance, repairs and replacements.

There is an urgent need to implement the state-wide asset management system for biomedical equipment

Hospitals advised that the current outdated systems will be replaced by a state-wide asset management system, Asset and Facilities Management Online, though this implementation has experienced delays.

There was good governance over equipment acquisition, replacement and disposal

All hospitals had formal processes for acquiring and replacing biomedical equipment, including management committees to oversee equipment needs. Equipment disposal processes were aligned with relevant standards and policies.

All hospitals purchased the majority of their biomedical equipment through HealthShare, the central procurement agency of NSW Health. This contributed to cost savings across the health system.

Management of medical equipment in the NSW public health system

In New South Wales, responsibility for the management of public hospitals is devolved from the NSW Ministry of Health to 15 Local Health Districts and two Speciality Health Networks.The Secretary of NSW Health retains a function under the Health Administration Act 1982 to plan the provision of comprehensive, balanced and co-ordinated health services throughout the State.

Every year, the Ministry of Health and Local Health Districts sign a service agreement that sets out the expected performance from Local Health Districts and the funding they will receive to provide their services. Under these arrangements, responsibility for managing medical equipment is delegated to Local Health Districts.  

Medical equipment is used to diagnose, treat and manage patients. It includes items as diverse as patient beds, dialysis machines, operating tables and heart monitors. The good management of medical equipment contributes to ensuring patient care and safety, as well as keeping the cost burden on the public health system low.

The New South Wales public health system uses a wide range of medical equipment. Most of this equipment is used in hospital settings, however, some is also used in community health centres and patients’ homes. The cost of individual items ranges from less than $100 to several million dollars. In total, about $1.2 billion, or six per cent of NSW Health’s total asset value, was for medical equipment.

The approach used to manage medical equipment varies between hospitals, and between expensive and less-expensive items. Different service models are also used, for example, some items may be purchased in one hospital, but leased in another.  

About the audit

This audit assessed how well NSW public hospitals managed medical equipment to meet the needs of patients. We looked at the lifecycle of biomedical equipment, which comprises planning, acquisition, operation and maintenance, and then replacement and disposal. The audit questions in relation to each stage of the lifecycle are summarised in Exhibit 1. 

By June 2018 

1. NSW Health should review all services provided by Local Health Districts which use high-value medical equipment (with establishment cost that exceeds $3 million), to determine whether state-level coordination, service benchmarking and equipment usage reporting is warranted.

2. NSW public hospitals offering PET-CT services should collect and use patient waiting time data (the difference between the date of referral and the actual date of the scan) as part of improving service efficiency and meeting patient needs.

3. Local Health Districts should ensure that there is a formal equipment replacement plan at the time of procuring high-value equipment, for both new and existing services. The plan should include an estimated time of replacement. The Ministry of Health should regularly review capital funding implications from these planned equipment replacements.

By June 2019

4. NSW public hospitals should review internal business rules and processes for biomedical equipment management to ensure that:  

a) equipment is accessible by service technicians for testing and maintenance work, including establishing internal processes to assist service technicians in gaining access to equipment that has missed previous testing and maintenance attempts in accordance with the Australian/New Zealand Standard 3551

b) adequate maintenance records are kept, including descriptions of testing and maintenance work carried out in accordance with the Australian/New Zealand Standard 3551

c) there is regular reporting to Local Health District Chief Executives on the compliance of equipment testing and maintenance, including equipment that is tested or maintained later than scheduled intervals

d) there is specified statement of risk tolerance for late equipment testing and maintenance and mechanisms to appropriately prioritise equipment testing and maintenance.

5. Ministry of Health should encourage that all NSW public hospitals have their biomedical equipment management practices reviewed under the new peer review process, and that the review sample from each hospital be increased to more than two pieces of equipment per hospital.

6. Ministry of Health should complete the implementation of AFM Online for biomedical equipment management.

Appendix One - Response from NSW Health

Appendix Two - About the Audit