Collaboration on Road Transport Service Delivery Gisborne District Council and NZTA Napier Business Case

Transcription

1 Collaboration on Road Transport Service Delivery Gisborne District Council and NZTA Napier Prepared for: Gisborne District Council and the New Zealand Transport Agency

2 Quality Assurance Statement Rationale Limited 57 Buckingham St PO Box 226 Arrowtown 9302 New Zealand Phone/Fax: Project Manager: Edward Guy Prepared by: Peter Groves / Edward Guy / Vaughn Crowther Reviewed by: Shaun Perrin, Dave Hadfield Approved for issue by: Vaughn Crowther Document Control G:\4 - NZ Government\NZTA\Clustering and Collaboration\Gisborne\\GDC-NZTA Indicative v7.0.docx Rev No. Date Revision Prepared by Reviewed by Approved by Details 1 21/02/13 Draft PG/EG/VC EG EG 2 27/02/13 For Approval PG/EG/VC SP/DH VC 3 28/02/13 For Approval PG /VC SP/DH VC 4 04/04/13 For Approval PG /VC SP/DH 5 05/04/13 For Approval PG /VC SP/DH 6 22/04/13 For Approval PG/VC SP/DH 7 24/04/13 For Approval PC/VC 8 15/05/13 For Approval CD 15 MAY 2013 REV 8 PAGE 2

3 Table of Contents 1 Executive Summary Introduction Strategic Case National Level Regional Level Background Regional strategic issues and opportunities Regional geography Regional roading industry NZTA Initiatives Output Maintenance Contract (OMC) Procurement Model NZTA Transport Asset Management Group (TAMG) Economic Case Critical Success Factors Collaboration Options Operating Entity Options Governance Structure Options Management Options Physical Works Contract Options Option Analysis The Preferred Option Governance Contractual Joint Venture Termination or Dispute Resolution Management Human Resources Business Unit Functions Contract Form Procurement Communication Strategy and Branding Preferred Option Advantages/Disadvantages Proposed Road Transport Organisation Chart Estimated Split of Business Unit Time Indicative Net Present Value Possible inclusion of other road networks Wairoa or Opotiki State Highway Network Wairoa District Council or Opotiki District Council Local Roads Commercial Case MAY 2013 REV 8 PAGE 3

4 5.1 Procurement Strategy Existing Supply Contacts Professional Services Physical Works Supplier Consultation Shared Service Arrangements Financial Case Management Case Approvals Process Project Risk Management Key Project Milestones Success Measurement The Better framework Works Cited Appendix A - Proposed Physical Works Appendix B - Operating Data and Ratios MAY 2013 REV 8 PAGE 4

5 1 Executive Summary This document sets out the business case for the proposed collaboration between the Gisborne District Council (GDC) and the New Zealand Transport Agency (NZTA) for the provision of road maintenance, operations and renewal works. The spirit of collaboration is driven by a mutual desire to improve the way roading services are managed and delivered in the Gisborne region. It is driven by the national strategic context of the Government Policy Statement (GPS 2012) and the findings of the NZTA M&O Review and the Road Maintenance Task Force (RMTF). These identified the efficiencies in road maintenance and renewal that can be delivered through improved procurement models, collaboration and asset management. Locally the GDC operations review provided an opportunity to explore new ways of working, driven by financial imperatives, the wish to adopt a one network approach and the challenges of servicing remote roads of the region. The proposed collaboration brings asset management and decision making for the region s roads together in a co-managed Gisborne-based business unit close to the assets, customers and suppliers. It will provide smarter asset management, better decision making, regional efficiencies, cost savings at the professional services level and will generate significant savings through: aggregating state highway and local road maintenance contracts, bundling of works contracts, and the inclusion of renewal & resurfacing works, insourcing the professional services functions of GDC and NZTA with additional support from the NZTA Transport Asset Management Group, utilising the NZTA Output Maintenance Contract (OMC) performance based model. Financial modelling of the preferred option indicates savings over the status quo will have a net present value of between $17m and $43m over a ten year term. Approval is sought to develop of a Memorandum of Understanding between GDC and NZTA. This will provide the foundation for the establishment of the Joint Governance Group and the Partners Agreement. 15 MAY 2013 REV 8 PAGE 5

6 1 Introduction What does this document aim to achieve? This document sets out the business case for the proposed collaboration of Gisborne District Council (GDC) and New Zealand Transport Agency (NZTA) in the provision of road maintenance, operations and renewal works. It seeks the approval of GDC and NZTA to develop of a Memorandum of Understanding between GDC and NZTA. This will provide the foundation for the establishment of the Joint Governance Group and the Partners Agreement. Note: The structure of this business case follows the Better framework recommended by the Infrastructure Unit within the New Zealand Treasury. See Section 8 for more information. 2 Strategic Case What is driving the case for change? 2.1 National Level A strategic shift is taking place in the way we must deliver land transport in New Zealand. The effects of the global financial crisis of 2008 have endured to the point where it is the new norm. The need to deliver efficient, effective, safe, secure and accessible land transport remains unchanged. It must now be delivered within a lasting environment of constrained ratepayer and government funding. The government has acknowledged this strategic shift within the recent amendments to the Local Government Act 2002 and in the Government Policy Statement on Land Transport Funding of 2012 (GPS). Both target a sharper focus on providing value for money in land transport investment. Specifically, the GPS has flat-lined expenditure on maintenance and renewal of local roads and state highways. The government established the Road Maintenance Task Force (RMTF) to identify opportunities for improving management, reducing expenditure and enhancing outcomes in road maintenance and renewals. The findings of the RMTF paralleled those of the NZTA M&O Review, i.e. Procurement, Collaboration and Asset Management. The Roading Efficiency Group has been created to ensure the momentum and direction for improving land transport efficiency continues. The following figure summarises the strategic drivers for change: 15 MAY 2013 REV 8 PAGE 6

7 2.2 Regional Level Background NZTA Napier Office and GDC have for some time enjoyed a relationship of trust, built on existing collaboration in operational activities. The M&O review coinciding with GDC operational reviews provided an ideal opportunity to explore more formal collaborative activity that could provide substantial cost and operational efficiencies. Accordingly, in late 2012 discussions commenced between NZTA Napier and GDC staff over opportunities along the collaborative spectrum. Both parties rapidly agreed that they were happy to be bold both in the level and timeline for developing a partnership for managing both networks. After three months of supported discussions, a preferred solution has been developed into this business case Regional strategic issues and opportunities a) GDC Operations Review. 15 MAY 2013 REV 8 PAGE 7

8 b) GDC s need for financial sustainability of roading balancing levels of service with the desire to maintain rates rises at or below the rate of inflation, capped Land Transport funding, reduced Financial Assistance Rate, and the drive to conform to the GPS. c) GDC s need to meet changes in land transport demand and assist economic development e.g. heavy commercial vehicles (HCV), high productivity motor vehicles (HPMV), agriculture, forestry, fishing, port access etc. d) Opportunity for a one network approach with integrated transport planning between NZTA and the unitary local authority and to build on the existing collaborative relationship (AWPT s, HPMV, regional transport planning, etc.). e) Opportunity for NZTA to improve customer consultation and relationships in the Gisborne region, and for a one-stop shop interface with the public. f) Take advantage of the NZTA performance and asset management framework Regional geography a) The coastal nature of the region does not have a large volume of flow-through traffic. b) It has a Fish-Bone Network, i.e. State Highway key arterial road with few roads running parallel. c) High amount of duplicate engineering and operational time spent travelling on the SH to local roads. d) Requires a satellite depot along the upper east coast to meet contract requirements. e) Major storm and emergency work requirements which impact on the co-ordination of resources Regional roading industry a) Few external contractors moving between regions and are typically focused on work within the region. b) The industry is working with one unitary authority and not multiple territorial agencies. c) Centred on one primary population base. d) Difficult to recruit quality engineering staff for vacant positions. This is a current issue with four maintenance contracts in the region e) Need to import specialist skills, which will continue to be sourced from outside of the region. 15 MAY 2013 REV 8 PAGE 8

9 2.3 NZTA Initiatives Output Maintenance Contract (OMC) Procurement Model A key finding of the M&O Review was the opportunity to generate efficiencies and savings by improving the procurement model. NZTA have responded by developing the Output Maintenance Contract (OMC) for use across all state highway network areas. The OMC model is based on a primary supplier, performance based contract. A further description of the OMC model is contained in Section 3.5 Management Options NZTA Transport Asset Management Group (TAMG) In response to the M&O Review s call for improved asset management, NZTA are developing the TAMG to provide guidance on professional services with a goal of achieving higher and consistent standards of asset management across the state highway network. The asset management standards and systems designed by TAMG may be adapted for use across local road networks. 3 Economic Case The purpose of the economic case is to identify the option that optimises value for money. 3.1 Critical Success Factors 1. Save money. 2. Maintain levels of service appropriate for state highway and local road networks. 3. Meet the NZTA s key characteristics as determined by the M&O Review: a) A greater level of asset management ownership b) A high level of client ownership in decision making and strategic direction c) Use of a performance/outcome based contract model with KRA s and KPI s d) A direct relationship with the lead supplier (contractor or consultant) e) A consistent level of service across the state highway network f) Consistency to enable benchmarking across the network, including consistent risk profile and payment mechanism 4. Meet GDC s principal land transport objectives specified in the 2012 LTP: a) Provide a quality service economically and in an environmentally, socially and culturally appropriate way b) Supply a network of roads with roading standards to reflect economic costs and benefits to the public c) Ensure suitable maintenance of the transport network, so that service capacity is not reduced 5. Achieve other local success factors: 15 MAY 2013 REV 8 PAGE 9

10 a) Enhance planning, coordination and response to transport demand changes b) Improved asset management systems and procedures c) Retain and enhance management and technical skills in Gisborne d) Retain and grow local sense of ownership and control e) Retain emergency response capability f) Retain competitive market for road maintenance services g) Be seen as a high performing RCA providing sound financial and asset management 3.2 Collaboration Options The spectrum of collaboration options involve permutations of: a) Operating either independent or integrated GDC/NZTA approved organisation(s) b) Operating separate or combined GDC/NZTA principal contracts c) Operating either aggregated or non-aggregated contracts d) GDC operating either bundled or unbundled contract form (NZTA will be operating in bundled form under the OMC model) The following diagram shows the broad continuum of collaboration identified by the RMTF: The preferred option described below is to form an integrated GDC/NZTA approved business unit which will operate combined principal contracts for aggregated roading assets with bundled works 15 MAY 2013 REV 8 PAGE 10

11 contracts including renewals and resurfacing work. This will position the organisations in the central area of the collaboration spectrum. 3.3 Operating Entity Options In the case of forming an integrated GDC/NZTA business unit, the options considered for the operating entity are: a) Internal GDC Business Unit where the unit is housed and operated by GDC and provides integrated services, with NZTA largely positioned as a client b) Contractual Joint Venture where the parties form a contractual agreement which specifies the terms of the joint arrangement between the parties, including governance, management, budgeting and operational aspects. c) Separate non-profit making legal entity in the form of a Council Controlled Organisation (CCO) which at a minimum must be 50% controlled by one or more councils. This must meet the requirements of the Local Government Act regarding establishment following Special Consultative Procedure, governance policy and appointment of directors, financial management and reporting. d) Separate profit making legal entity in the form of a Council Controlled Trading Organisation (CCTO) which at a minimum must be 50% controlled by one or more councils and must satisfy the same governance and operating criteria as a CCO. The preferred option is to form a Contractual Joint Venture. Compared to operating under a GDC Internal Business Unit model, this provides: a) A higher level of shared governance. b) Better ability for co-management. c) The ability for both parties to work together towards a common goal while maintaining their separate assets, employees within the joint venture entity, and legal identities. d) The ability to enter into contracts on behalf of both parties. e) The ability to be seen as a new collaborative entity, operating independently from GDC. The Contractual Joint Venture is also preferable over a separate legal entity as it: a) Will deliver similar levels of shared responsibility, control and outcomes (and effectively can stipulate the same details as a shareholders agreement under a CCO or CCTO) b) Does not require the creation of a new legal entity or the need to meet the governance, administration and reporting requirements specified for a CCO under the Local Govt. Act. c) Allows for expansion if other RCA(s) joins the collaboration in future, without having to reconstitute the separate legal entity. 15 MAY 2013 REV 8 PAGE 11

12 The next step will require GDC and NZTA to seek legal advice to further develop the contractual joint venture approach. NZTA s preliminary internal legal advice is that the contractual joint venture is the best model to establish the new organisation. A contractual joint venture does not create a separate legal entity. The terms and constraints it operates under are covered in a contract between the parties. Each party maintains separate interests in its assets. Staff within the contractual joint venture can continue to be employed by their parent organisation while working towards a common goal. The structure and form of the business unit will be determined through the contractual joint venture agreement. Delegations are likely to be required to enable staff in the business unit to make financial and operational decisions (within the confines of the contractual joint venture agreement) on behalf of the other organisation. The Minister of Transport s approval may be required to enable NZTA to delegate certain powers to Gisborne District Council employees. The delegation issues have been considered before when the Joint Traffic Operations Centre between Auckland Transport and NZTA was set up. JTOC is managed by an Auckland Transport employee. 3.4 Governance Structure Options The options for the governance group controlling the business unit are either: a) 50:50 Joint Governance GDC and NZTA share equal governance of the business unit with the participation and voting rights split 50:50, regardless of the asset value or expenditure levels being brought to the collaboration by either party. b) Proportional Governance where the ratio of GDC and NZTA members and voting is established in proportion to the asset values or expenditure levels being brought into the collaboration. The preferred option is for 50:50 Joint Governance as this: a) Best reflects the co-management principles and the underlying spirit of collaboration. b) Avoids the need to adjust proportional governance levels as workloads or asset values vary. Future discussions regarding the inclusion of other RCA s in the collaboration will include how the 50:50 governance ratios could be rearranged to accommodate more than two organisations. This may include a simple spilt based on the number of parties, or could be based on funding levels, impacts to customers or network characteristics. These details would be determined as part of a separate business case. 15 MAY 2013 REV 8 PAGE 12

13 3.5 Management Options Alternative approaches to the relationship between RCA s, professional services and physical works functions are also illustrated below. The traditional model is currently employed by the GDC. The new contract model reflects the Output Maintenance Contract (OMC) model which is being developed by NZTA and will be adopted for the Gisborne SH network. The preferred option is to operate the OMC model across the proposed collaboration. Traditional Model New Contract Model Source: Review of Delivery Models for Works and Services Opus International Consultants, Jan 2012 RCA delegates the management of physical works to consultants who control a number of supply contracts. Relies on the consultant maintaining a successful contractual relationship with RCA and the contractors. Contracts normally awarded for maximum terms of 5 years (3+1+1). Scope of work is limited to well defined activities. Makes use of performance based clauses to drive the appropriate outcome RCA retains direct management of the assets through insourcing of professional services. Specialist professional services are outsourced but work in a partnering arrangement to deliver the services. Consolidates contracts and includes all activities required to manage the network fence to fence. Contract awarded for long term 5-7 years. Contract provides for the allocation of risks, e.g. resource consumption, location (site selection) design, quality and delivery. Operational performance measures drive the day to day serviceability issues and the maintenance of the prescribed levels of service. Requires a high level of self-compliance by the contractor. Contractor is required to establish systems to monitor performance measures and to report on the condition of the assets. 3.6 Physical Works Contract Options The NZTA State Highway Maintenance and Operations Review consultation document identified specific opportunities for efficiencies through changes to contract terms, contract form and 15 MAY 2013 REV 8 PAGE 13

14 geographical size (NZTA, 2012). Rationale Ltd was involved in quantifying these benefits by analysing existing state highway contract forms and size across New Zealand: Contract Form - Moving from a traditional model to a single fence to fence model will potentially deliver up to 7.7% saving in overall expenditure (Rationale Ltd, 2012). Contract Aggregation Through engagement with suppliers and asset managers the M&O Review revealed that an optimum length per state highway contract of km would maximise efficiency and effectiveness (NZTA, 2012). This supports the findings of the Rationale Ltd. Financial Analysis of M&O Procurement Options report which shows an optimum network length between 600 and 800km (1,200 and 1,600 lane-km). Contract aggregation can deliver savings of up to 20% in $/lane-km costs, depending on the work category and previous network length. Contract Term The M&O Review highlighted the benefits from longer term contracts as being associated with reduced administrative costs and increased supplier confidence which leads to better allocation of resources and investment in learning and innovation. Examples of potential geographic aggregation and the bundling of contract form are shown on the following chart: GDC EASTERN 295km GDC NORTHERN 732km GDC WESTERN 867km NZTA GISBORNE NETWORK 330km ROAD MAINTENANCE Fulton Hogan TRAFFIC SERVICES Fulton Hogan HEB Construction Downer EDI Sealcoat Central PAVEMENT MARKING Osborne Roadmakers Bundling Contract Form VEGETATION CONTROL Roadspray HB Eastland Trimmers CRTS Ltd Geographic Aggregation LIGHTING Electrinet Nathan Pope Electrical RENEWALS & REHABILATION Annual Annual 3.7 Option Analysis The following table shows the options on a Service Delivery Continuum, ranging from the status quo to the preferred option: 1. The status quo shows GDC and NZTA continuing to operate independently, with NZTA operating under the existing Napier-based structure and moving to the OMC model operating (which will occur regardless of the collaboration with GDC). As NZTA will move to the OMC model anyway, the benefits of the new contract form (estimated as $0.4-$1.0m p.a.) have not been included in the financial option analysis. 2. Option A an intermediate option where the contract areas would be aggregated but managed independently and operated under separate contracts, i.e. one contractor would be 15 MAY 2013 REV 8 PAGE 14

15 appointed to serve the combined contract area and would provide services for NZTA assets under the OMC model and for the GDC assets under a traditional model. 3. Option B as for Option B but with the contracts managed by an integrated business unit While Options A and B provide some benefits, they fail to deliver the full financial savings, asset management benefits or operational efficiencies of the preferred option. The analysis shows that the full financial benefits are only realised when GDC and NZTA shift to a common principal OMC contract. The preferred option also meets all of the key outcomes laid down by the M&O Review. Service Delivery Continuum Status Quo Option A Option B Preferred Option Organisation Structure Independent GDC NZTA Independent GDC NZTA Integrated Business Unit Integrated Business Unit NZTA Contracts * OMC OMC OMC OMC Aggregated without GDC Bundling Aggregated without GDC Bundling Aggregated and GDC Bundling GDC Contracts Traditional Traditional Traditional OMC NPV $(million) 10 8% $ to to to Key Outcome Test Clear and efficient management structure Greater ownership of asset management Higher local input in strategic direction & decision making Uses performance based contract incorporating KPI/KRA's Direct relationship with principal supplier(s) Consistent level of service across network No No Partial Yes No Partial Partial Yes No Partial Partial Yes No Partial Partial Yes No Partial Partial Yes No Partial Partial Yes Consistent network management No Partial Partial Yes * Note: NZTA will move to the OMC model regardless of the collaboration with GDC, so this has been assumed as the status quo. The bundling benefits of this (saving $0.4-$1.0m pa, NPV $2.7m-6.7m) have not been shown in any of the NPV calculations 15 MAY 2013 REV 8 PAGE 15

16 3.8 The Preferred Option The preferred option is to establish a Gisborne-based business unit with the following characteristics: Governance The business unit will be jointly governed by GDC and NZTA through a Joint Governance Group (JGG) comprising at least two representatives from each party (i.e. GDC Chief Executive, Group Manager Engineering & Works, and NZTA senior HNO staff and State Highway Manager). 1. The JGG will be responsible for determining strategic plans, annual budgets and staffing levels and performance monitoring, taking into account the specific levels of service and workload requirements of each client. The JGG will also provide for direction regarding joint procurement initiatives. 2. The NZTA OMC model will provide a governance framework for performance monitoring. This will include key asset management factors which will be provided by TAMG and used to benchmark performance and report to the Governance team. 3. The JGG will initially convene bi-monthly (or more frequently as required) during the establishment phase, and subsequently on a quarterly basis Contractual Joint Venture The business unit shall be formed by a contractual agreement to be developed by the parties which will set out the terms of the arrangement including: 1. That the participants will continue to own their respective road networks and related assets and remain responsible for their funding. 2. The business unit acts as the principal for employment and procurement of professional services and physical works contracts. 15 MAY 2013 REV 8 PAGE 16

17 3. No partnership that the parties are not jointly liable for each other s liabilities and neither party can bind the other. 4. That the costs of the business unit will be borne by each party based on the services delivered, and that any shared costs will be apportioned fairly and transparently. 5. The time span for the term of the agreement (set term, roll over provision or evergreen) Termination or Dispute Resolution The development of the contractual agreement will provide for the risk of either or both parties wishing to terminate their participation or to resolve disputes. 1. Factors relating to the termination of the agreement will be specified in the agreement to mitigate the risk for each party of the others withdrawal. The agreement will specify any possible grounds for justified termination (e.g. default by the other party), a fair notice period, a process for setting termination date and terms and possible compensation arrangements. It will also specify the referral of any unsettled issues to mediation, legal process or arbitration under the Arbitration Act Factors relating to dispute resolution will be specified in the agreement including possible options of mediation, legal process or arbitration Management The business unit will comprise a staff of 11 FTE s as shown in Section , Proposed Road Transport Organisation Chart. 1. The integrated business unit will be hosted in the GDC offices and utilise their support services to deliver a high level of customer service and save on overhead costs. 2. The business unit will be led by a Business Unit General Manager. A KPM for the General Manager and other senior staff will be the delivery of fair and transparent levels of services and costs to each party, in line with the requirements specified by the client s annual plans. 3. The General Manager and other key staff will meet monthly with the relevant GDC and NZTA Managers to review performance review and ensure a sound understanding of each client s operational requirements and issues Human Resources The preferred option requires the business unit staff to have the high level of skills and ability to insource the majority of the existing professional services function and to manage the larger physical works contracts. This represents a significant change from the roles, responsibilities and skill base of the existing GDC roading unit. 1. The business unit staff will be employed by the contractual joint venture entity. HR/payroll support will be provided by GDC. 15 MAY 2013 REV 8 PAGE 17

18 2. The Joint Governance Group will be responsible for defining the position description and the recruitment of the Business Unit General Manager. 3. The General Manager will be responsible for defining the position descriptions and the recruitment of the business unit staff to meet the appropriate competency requirements, supported by both GDC and NZTA senior regional staff. 4. To ensure recruitment of the best team, all positions in the new business unit will be advertised with incumbent staff of the existing GDC roading unit encouraged to apply. Other applicants for the positions will include staff from NZTA, Opus and external candidates. Selection of applicants will consider: a) Individual merit. b) The benefits of retaining existing knowledge of the state highway or/and local road networks. c) The benefits of innovation and cultural change that may result from employing staff from outside the existing GDC roading unit. d) The balance needed to ensure the fair delivery of services on behalf of both client organisations. 5. The JGG may choose to appoint specific GDC or NZTA staff to roles where the organisations feel the need for a greater level of input, feedback or control Business Unit Functions The business unit will operate as an integrated entity, responsible for maintenance of all GDC roads and NZTA state highways throughout the region. This will include: 1. Establishing and managing performance based contracts using the Output Maintenance Contract (OMC) model. 2. Operating a timesheet system to enable cross-charging to each client based on hourly inputs from staff. Costs will be clearly and separately apportioned between state highway and local roading (as required by P&I) to meet funding requirements. 3. Engaging external service providers for specific one-off projects or specialist services which are not provided in-house by the business unit. The fees for these services will be charged through the business unit to the respective party. 4. Obtaining support from TAMG and other NZTA key functional areas, such as TOC, Regional Maintenance and Planning staff with Reviews and Audits on the State Highway network; such as RAPT, safety, TAMG, Contract Management reviews. 5. Preparation of Asset Management Plans for GDC assets and the execution of plans delivered by TAMG for NZTA assets. In future this may see the development of joint elements of the AMP s. 15 MAY 2013 REV 8 PAGE 18

19 3.8.7 Contract Form The business unit will tender performance based contracts using the OMC model. Each OMC will specify shared general conditions of contract and will contain separable portions relating to respective GDC and NZTA assets. The General Manager will work with GDC and NZTA/TAMG to define the performance measures and monitoring systems to be specified for the respective roads in the contracts. All national measure being developed within the M&O review will be used within the region. These road maintenance contracts will also include renewal and resurfacing works, to create high value, long term contracts providing a bundled fence to fence approach while aggregating contract regions into larger areas. The aggregation of contract areas will see the existing three GDC and one NZTA maintenance regions consolidated into two regions from October 2015 following the expiry of existing contracts. The division into two rather than three contract areas provides the optimum benefits: a) Ensures the network lengths of the contracts fall within the optimum range (for efficiencies and savings) as identified by the M&O Review. Current budgets are reducing, therefore making larger area contracts more beneficial. b) Streamlines management requirement and reduces duplications. c) Assists in consistent application of asset management standards. d) Minimises contract tendering and administration requirements and costs. e) Reflects supplier feedback which supported the move to two contract areas. Along with this aggregation, the bundling of works will rationalise the number of contracts in use from the current 23 across GDC and NZTA down to 7, as follows: Number of Contracts Status Quo GDC + NZTA Preferred Option GDC + NZTA From Oct Regions 4 Regions Network and Asset Management 4 0 (included in OMC contracts) Maintenance and Operations 10 2 Renewals and Rehabilitation 3 0 (included in OMC contracts) Bridge Maintenance 1 1 Minor works, Safety, PT or new infrastructure 5 4 Total 23 7 The option of operating a single contract area across the entire GDC/NZTA network was rejected as it would: 15 MAY 2013 REV 8 PAGE 19

20 1. Increase the network area beyond the optimum size (identified by the M&O review), to the point that it becomes inefficient from a management and operational viewpoint. 2. Reduce contractor competition in the region. 3. Reduce resources available for emergency events. 4. Not reflect supplier feedback which supported the move to two contract areas Procurement The business unit will manage the OMC procurement process with direction from the JGG and advice from the TAMG procurement team. The tendering process and the means of resolving any issues or disagreements over the acceptance or rejection of tenders needs to be identified. This will be resolved during the development of the procurement strategy for the business unit Communication Strategy and Branding The business unit will be established under a new joint operating name such as East Coast Roads in order to: 1. Reinforce the shared nature of the initiative to the staff of the business unit, other staff and representatives from the GDC and NZTA. 2. Create the sense of a new team operating environment for the business unit. 3. Overcome any external perception that the business unit is favouring GDC at the expense of NZTA or vice versa. Naming of the business unit will form part of the business set-up procedure and require approval from both organisations. The communications regarding the business unit need to focus on the facts, i.e. a shared unit providing smarter asset management, better decision making, regional efficiencies, cost savings at the professional services level and savings through the adoption of the new OMC procurement model. NZTA National Communications staff will assist the General Manager in the preparation and delivery of communications Preferred Option Advantages/Disadvantages Preferred Option Advantages a) Enables the best management, procurement and service efficiencies. b) Provides the best financial outcomes of all options. c) Ensures the sustainability of the network financially, operationally and environmentally d) Regain local sense of ownership of the road assets, by increasing the in-house function and through relocation of the NZTA function from Napier. 15 MAY 2013 REV 8 PAGE 20

21 Preferred Option Advantages e) NZTA will be represented in the Gisborne region (rather than Napier), providing better knowledge & information flow, and more timely and efficient management. f) Enables an integrated one-network approach (one-stop shop). g) Creates a management structure capable of future expansion (e.g. for possible inclusion of Wairoa &/or Eastern BOP). h) Asset management will be to higher and consistent standard through direction from the NZTA s TAMG. i) Operating and safety standards more easily communicated and consistently maintained. j) The Integrated GDC/NZTA Business Unit will attract high quality staff as it will be a large business with broader responsibilities and improved employment satisfaction. Preferred Option Disadvantages a) Possible reduction in emergency response capability following natural disasters etc., due to a reduced number of contractors and resources (however this may be mitigated by the OMC contractors providing improved emergency management plans, preparedness and enhanced coordination). b) Reduction in competition for future OMC contracts in the long term, when the incumbent contractors are well established and barriers to re-entry for new contenders are prohibitive (this may be mitigated by specifying minimum levels of sub-contractor content in the OMC contracts). c) Reduction in competition for on-going capital works contracts, due to reduction in contractor numbers/capacities. d) Impact on the sustainability of existing small and medium sized suppliers. e) Short-term loss of existing knowledge due to insourcing of professional services. f) Loss of professional service providers in the region, and impact on other GDC services e.g. water utilities. g) Impact on NZTA Napier office in terms of reduced network areas and therefore the staffing requirements for the future. 15 MAY 2013 REV 8 PAGE 21

22 Proposed Road Transport Organisation Chart 15 MAY 2013 REV 8 PAGE 22

23 Governance Group I.e. HNO Senior Staff and Napier State Highway Manager Governance Group I.e. Chief Executive; Group Manager Engineering and Works Tairawhiti Roads Business unit jointly governed by NZTA and GDC, with formal 50:50 co-management agreement and cost recovery in place, hosted in Gisborne District Council offices. People Support: NAPIER: Safety Manager Business Unit General Manager Organis Sup Proj Team Manager PAM/Principal Customer Se and Fron Network Manager Planning WELLINGTON: Asset Manager Capital Manager Contract Manager Northern Area Contract Manager Urban & Western Principal Network Manager Safety Coordinator Admin and Fin Su Regional and D Pla Network Outcomes Regional Maintenance and Planning Team Design Engineer Admin Officer Network Manager Network Manager Inform Techn Regulator Policy Su Procurement Team Communication Team Note: Staff will be parented to GDC and NZTA in a ratio of 8:3 respectively. Staff parented to NZTA will occupy middle-tier positions detailed in the above structural diagram. 15 MAY 2013 REV 8 PAGE 23

24 Governance Group I.e. HNO Senior Staff and Napier Highway Manager Governance Group I.e. Chief Executive; Group Manager Engineering and Works People Support: NAPIER: Safety Manager Proj Team Manager PAM/Principal Network Manager Planning WELLINGTON: Network Outcomes Regional Maintenance and Planning Team Procurement Team Communication Team Asset Manager Tairawhiti Roads Business unit jointly governed by NZTA and GDC, with formal 50:50 co-management agreement and cost recovery in place, hosted in Gisborne District Council offices. Capital Manager Design Engineer Contract Manager Northern Area Business Unit General Manager Admin Officer Contract Manager Urban & Western Network Manager Note: Staff will be parented to GDC and NZTA in a ratio of 8:3 respectively. Staff parented to NZTA will occupy middle-tier positions detailed in the above structural diagram. Principal Network Manager Network Manager Safety Coordinator Organisation Support: Customer Service and Front desk Admin and Financial Support Regional and District Planning Information Technology Regulatory and Policy Support 15 MAY 2013 REV 8 PAGE 24

25 Key Attributes of the Organisation Structure: 1. Contract Managers and Principal Network Manager meet the M&O Review guidelines for the management of OMC contracts. 2. The Asset Manager will largely focus on GDC assets, with Network Outcomes providing AM inputs on behalf of NZTA assets. 3. The remaining roles will work across the assets of both GDC and Network Outcomes as estimated in the following table and be will be cross-charged accordingly. 15 MAY 2013 REV 8 PAGE 25

26 Estimated Split of Business Unit Time Roles Key Tasks Estimated Percentage of Employment time GDC % NZTA % Notes General Manager Business unit operations and management. Contract Manager Management of OMC, Northern Area Geographic area Contract Manager - Management of OMC, Urban & Western Geographic area Asset Manager Supporting GDC AMP Capital Manager Capital Programme Delivery Design Engineer Assisting Capital manager Principal Customer Stakeholder relationships Network Manager and people management Customer Network Technical Support Manager Customer Network Technical Support Manager Safety Co-ordinator Community Education Role unchanged Admin Officer Supporting Business Functions TOTAL SPLIT OF TIME 71% 29% Indicative Net Present Value Financial modelling of the preferred option indicates annual savings in the range of $2.55m to $5.83m, with a net present value of between $17m and $43m (over 10 years at 8%). This is based on the assumptions (both conservative and optimistic) listed in the following table. Financial Modelling Key Assumptions Professional Services Total full-time equivalents (FTE s) across NZTA and GDC reduce from 12.7 (predominantly supplied under contract from Opus) to 2 FTE s due to: o o o Insourcing of professional services to highly skilled staff employed in the integrated business unit. Professional services for the Eastland Network ($50k p.a.), land legalisation and bridge expertise will still be required. Some of the professional services functions eliminated will be incorporated into the OMC contract costs. For this indicative case the level of professional service costs in the new contracts has remained high at $1.9m across the new network. NZTA will provide technical expertise through the formation of the Transport Asset Management Group (TAMG). No cross-charging for this service has been included in this financial analysis 15 MAY 2013 REV 8 PAGE 26

27 Financial Modelling Key Assumptions Physical Works Contract form savings in each work category proposed to be bundled into a new contract form: 3.3% conservative - 7.7% optimistic. Contract aggregation savings in sealed pavement maintenance and renewals, drainage, environmental and traffic services: 3.5% conservative 10% optimistic. Contract Term the OMC contracts will be let for 7-10 years (NPV savings is calculated on 10 year term). This provides mainly non-fiscal benefits so no direct financial benefit is assumed. Initiation Costs A conservative amount of $280k and optimistic amount of $230k reflecting the set up costs of the business unit, but excluding any other costs (as described in Section 6, Financial Case). NZTA Benefits The OMC contract form will be implemented by the NZTA in the near future with or without aggregation with GDC. For this reason, the benefits to the NZTA of contract bundling have not been included in the overall NPV. These benefits range from $0.4m to $1.0m p.a. Benefits to NZTA of network aggregation with GDC are included. Undervalued Existing Contract The existing NZTA principal contract is undervalued in the current market. The financial analysis (status quo and future physical works) has been adjusted by $1.7m to reflect the likely true market value of this contract An amount of $0.8m has also been included to GDC status quo and future physical works to reflect the likely true market value of their principal contracts. NPV Calculation 10 year term, 8% discount rate, with savings assumed to commence from year 0, i.e. the same year as implementation. 15 MAY 2013 REV 8 PAGE 27

28 Table 1 Indicative Savings and NPV Analysis Gisborne District Council - NZTA Collaboration Internal Costs Professional Services STATUS QUO PREFERRED OPTION GDC + NZTA = TOTAL GDC/NZTA Collaboration 8 FTE's 3.3 FTE's 11.3 FTE's 11 FTE's 7 FTE's 5.6 FTE's 12.7 FTE's 2 FTE's Physical Works Area EASTERN NORTHERN WESTERN SH 2 & 35 4 Regions 2 Regions URBAN NORTHERN &WESTERN Kilometres , ,281 Contracts Network and Asset Management Maintainance & Operations Renewals & Rehabilitation (and Prev Maint.) Bridge Maintenance Minor Works, Safety, PT or New Infrastructure TOTAL CONTRACTS Annual Expenditure ($million) Conservative Optimistic Ops, Mgmt and Admin $2.34 $1.48 $3.82 $2.75 $2.02 Physical Works * $23.35 ** $ $38.71 $37.24 $34.68 TOTAL ($million) $25.69 $16.84 $42.53 $39.98 $36.70 * Status quo expenditure is based on the average budgeted over next 3 years (flatlined under RLTP) ** Status quo and future GDC physical works includes an increase of $0.8m to reflect current contract undervalue + Status quo and future NZTA physical works includes an increase of $1.7m to reflect current contract undervalue Conservative ($million) Optimistic ($ million) Annual Savings $2.55 $5.83 Gisborne District Council $1.54 $3.52 Rates Component $0.61 $1.38 NZTA SH's Gisborne $1.01 $2.31 Implementation Costs -$0.28 -$0.23 NPV over 10 Years (@ 8%) $16.95 $ MAY 2013 REV 8 PAGE 28

29 4 Possible inclusion of other road networks The opportunity exists for further regional clustering by including other state highway areas or local roads into the collaboration. This may be a relatively simple process for the state highways but the inclusion of other district councils will introduce additional challenges, particularly given the current local government review process which has commenced in Hawkes Bay and may be initiated in Bay of Plenty. The full benefits of clustering would only be gained when the state highways and adjacent local roads are aggregated under a common management and service contract. Therefore it may be logical to consider a separate project with the Wairoa and Opotiki District Councils to assess their interest in clustering their local roads with the respective state highways. The following sections summarise: a) the case for including just the Wairoa or Opotiki state highway networks into the GDC/NZTA collaboration (i.e. excluding the District Council local roads) b) the case for including the Wairoa or Opotiki state highway networks and the respective local roads. 4.1 Wairoa or Opotiki State Highway Network The inclusion of the Wairoa and Opotiki SH networks would significantly increase the size of the sealed network of the collaboration. The Wairoa SH network is currently managed as part of the Hawkes Bay region. The Opotiki SH network is currently managed as part of the East BOP region, however this is under review with the possibility of it being included in the collaboration between NZTA and Rotorua District Council. Benefits of including the Wairoa and Opotiki SH networks into the Gisborne collaboration include: 15 MAY 2013 REV 8 PAGE 29

30 a) Enhanced integration and consistency of transport planning across the region. b) Savings due to the benefits of aggregation, adopting the OMC contract form (bundling) and extended contract term. c) Management efficiencies in providing a one network approach to East Coast region. d) Similarity to the Gisborne SH network rather than Hawkes Bay or Rotorua, in terms of topography, road usage and operational requirements. e) Satellite depot in upper East Coast can service in both directions i.e. towards Opotiki and Gisborne. f) Improved customer services one-stop shop contact point. Challenges of including the Wairoa and Opotiki SH networks include: a) The local government commission is currently reviewing the Hawkes Bay region, which will see possible amalgamations within the region. This could see Wairoa council affected and geographical boundaries changed. b) The full benefits of integrating the state highways into the collaboration will only be gained if the adjacent local roads of Wairoa and Opotiki District Councils were included. c) Widening the scope of the contract and performance measures to integrate the specific nature of the network(s). d) Maintaining balance of services for GDC when the business unit will be covering a much wider geographic area. e) Capturing the existing knowledge of the networks. f) The effect of removing the Wairoa network (in addition to the Gisborne network) from the current NZTA Napier office, in terms of staff numbers and skill base, economies of scale, regional planning etc. g) Conversion from incumbent contractors. Specific data on the cost of M&O and renewals is not readily available for the Wairoa and Opotiki SH networks, so the following shows indicative data. Savings forecasts are based on the assumption that Wairoa and Opotiki local roads are excluded, so the benefits are not as great as for the Gisborne NZTA and GDC networks: NZTA Wairoa SH NZTA Opotiki SH Length Sealed carriageway_km Estimated average M&O and Renewals Expenditure ($ million) Forecast annual savings due to aggregation and OMC contract form %-10.8% 4.6%-10.8% Forecast annual savings ($ million) NPV of savings over 10 years at 8% rate ( $million) MAY 2013 REV 8 PAGE 30

31 4.2 Wairoa District Council or Opotiki District Council Local Roads Wairoa District Council (WDC) has 897km of local roads which are currently divided into four maintenance regions. The council is undertaking a procurement review to improve the delivery of these services at reduced cost. Resurfacing and roadmarking of sealed roads has recently been carried out in conjunction with NZTA SH renewals programme. WDC is a party to the local government reorganisation application which proposes the amalgamation of the Wairoa, Napier, Hastings and Central Hawke's Bay TLA s into one authority known as the Hawke s Bay Council. Opotiki District Council (ODC) has 337km of local roads. The 203km state highway network makes up a large proportion of the roading in the OPC region, with a relatively low number of local roads branching from SH35 and SH2. Benefits of including the WDC and ODC local roads into the Gisborne collaboration include: a) Enhanced integration and consistency of transport planning across the region. b) Savings due to the benefits of aggregation, adopting the OMC contract form (bundling) and extended contract term. c) Management efficiencies in providing a one network approach to East Coast region. d) Satellite depot in upper East Coast can service local roads branching from SH35 towards Opotiki. Challenges of including the WDC and ODC local roads into the Gisborne collaboration include: a) The full benefits will only be gained if the Wairoa and Opotiki state highways are also were included in the collaboration. b) Widening the scope of the contract and performance measures to integrate the specific nature of the local road network(s) and the LoS requirements of each council. c) Maintaining balance of services for each RCA when the business unit will be covering a much wider geographic area. d) Capturing the existing knowledge of the networks. e) The effects of relocating the roading function for the existing council offices in terms of staff numbers and skill base, economies of scale, local planning etc. f) Conversion from incumbent contractors. g) Management and cultural differences of combining services across a greater number of organisations h) Reduced WDC/ODC customer service at the local level. i) Perception that management of core services is being removed from WDC/ODC control or not in a contractual style that WDC council staff consider to be favourable. j) Potential impact of local government reorganisation. The addition of the local roads will be most beneficial if the adjacent state highways are also included. This inclusion will not significantly improve the savings for GDC or NZTA but will provide savings to WDC and ODC due to the benefits of aggregation, adopting the OMC contract form (bundling) and 15 MAY 2013 REV 8 PAGE 31

32 extended contract term. Annual expenditure and an indicative forecast of savings, assuming the Wairoa and Opotiki state highways are included, are as follows: Wairoa District Council Opotiki District Council Total Length Lane_km Total Length km Total Length Sealed km 270 (urban 65/rural 205) 167 (urban 43/rural 124) Total Length Unsealed km Total VKT (Sealed & Unsealed) (000) 44,255 21,962 Average Annual Expenditure ($ million) M&O Local Roads ($ million) Renewals Local Roads ($ million) Total Forecast annual savings 5.1%-12.1% 5.1%-12.1% Forecast annual savings ($ million) NPV of savings over 10 years at 8% rate ($million) Commercial Case Provides an assessment of the commercial factors affecting the business case. 5.1 Procurement Strategy The specification and tendering of the contracts will be a critical success factor. The preferred option will utilise the OMC contract form which is being developed by NZTA for standardised use throughout NZTA state highways. This will incorporate shared general conditions of contract and will contain separable portions relating to specific GDC and NZTA assets. Key characteristics of the NZTA OMC approach: 75% Lump Sum component relating to the delivery of the specified Level of Service 25% Measure & Value component Defined allocation of risk NZTA will provide centralised support for the OMC procurement function and additionally are developing frameworks for: 1. Healthy Market Monitoring 2. Commercial model to estimate, tender, assess and monitor contract pricing and terms 3. Contract conversions to convert incumbent contracts to the OMC model as appropriate 4. Tendering the OMC 5. Tendering Principal s Advisor Contracts 15 MAY 2013 REV 8 PAGE 32

33 5.2 Existing Supply Contacts Professional Services GDC and NZTA are to clarify their approach regarding the conversion of existing contracts. Options to be evaluated based on the contract conditions and the development and timing of the TAMG advisory structure, include: Run to full term Secondment of professional services contract staff into the new NZTA/GDC Business Unit Early termination of contracts to coincide with establishment of the new business unit Physical Works GDC and NZTA are to clarify their approach regarding conversion of the existing contracts. Options will then be evaluated (subject to national prioritisation): Run to full term Renegotiation of contracts to incorporate NZTA components and merged under the OMC format Early termination of contracts to coincide with establishment of the new business unit. 5.3 Supplier Consultation Professional services and physical works providers were involved in the consultation process of this business case during January Their views and concerns are summarised below: Key Concerns Operational General agreement that operational efficiencies can be gained from combining NZTA and GDC road maintenance contracts and the inclusion of renewal works. Concern over practicality of applying NZTA state highway operating procedures to local roads. Managerial General agreement that insourcing professional services and locating NZTA function in Gisborne will provide improvements to asset management, planning and efficiency. OMC Format General acceptance of the move towards broader, longer term, performance based contracts. Concern that unsuccessful bidders for OMC contracts will face prohibitive barriers-to-entry in future OMC or capital works tenders. Resources Concern over retaining competitive service capacity of small and medium sized contractors. Concern over retaining emergency response capability in this remote, flood prone, low access region. Risk Concern that change to the integrated model is being forced too rapidly and based on philosophical rather than practical considerations. 15 MAY 2013 REV 8 PAGE 33

34 Financial Concern that savings will be minimal due to low profitability of existing contracts. Staffing Concern over contract and asset management skills shortage, and competition for staff between RCA and primary suppliers. KPI/KFA s Desire for performance outcomes to be specified on localised basis with specific management plans for strategic roads 5.4 Shared Service Arrangements The detailed business case will determine the methods of apportioning costs for shared services and providing for cost recovery between the parties where necessary: Shared services to be provided by GDC include office space, IT, Administration, Front Desk/Customer Relations, District Planning and Building Planning. NZTA will provide a range of support functions including: procurement, transport planning, PAM, M&O, TAMG, Traffic Operations Centres and specific support from NZTA Napier (Safety Engineer, Capital Engineer). 6 Financial Case This sets out the indicative financial implications of the preferred option. The funding required to initiate the preferred option is estimated at between $230k and $280k.This includes: 1. Creation of new Business Unit entity including legal aspects, 2. Capital assets (office fittings, computers, vehicles, branding), (May be transferred/supplied by the independent GDC/NZTA groups) 3. Recruitment, training and development of staff in the Business Unit Excluded from these figures are organisational restructuring costs. These are considered sunk costs as this process is taking place within GDC at present and will take place within the NZTA in time as they move to the OMC model. The costs of the following items will be determined during the establishment phase. While these costs may be substantial, they are unlikely to have a material impact on the 10 year NPV savings of the collaboration: 1. GDC undertaking a Special Consultative Procedure (if required) 2. Reassignment, scope variations or terminations of on-going contracts (to be actioned through engagement with suppliers) 3. Costs of the physical office location and support services (legal, accounting, insurance, IT etc.) which will continue to be supplied by the GDC 4. Costs of improving asset management databases (asset inventory, lifecycles, etc.) 15 MAY 2013 REV 8 PAGE 34

35 7 Management Case The management case addresses the achievability of the proposal and planning arrangements required to both ensure successful delivery and to manage project risks. The preferred option is focused on creating a business unit structure capable of managing the OMC model. Pre-requisites to this are the aggregation and bundling of contract forms, the inclusion of renewal works and the in-house ability to manage the contracts to deliver the specified performance outcomes. 7.1 Approvals Process Approval is sought to develop a Memorandum of Understanding between GDC and NZTA. This will provide the foundation for the establishment of the collaboration and the business unit. 1. NZTA approval is sought from DMT and VAC 2. Approval is sought from GDC. This will depend on the necessity and timing for a Special Consultative Procedure or other council process. 7.2 Project Risk Management NZTA and GDC will be required to identify the key individual(s) responsible for the management of the project risks. Potential risks include: a) OMC costs higher than estimated and/or current contract values b) Ability to procure and manage OMC contracts c) Reduction in competition for future OMC contracts in the long term, when the incumbent contractors are well established and barriers to re-entry for new contenders are prohibitive (this may be mitigated by specifying minimum levels of sub-contractor content in the OMC contracts). d) Ability to reassign/renegotiate existing contracts e) Timely establishment of the NZTA TAMG for provision of professional advice f) New contract form involves change in level of service g) Ability to recruit and retain a suitably qualified General Manager and staff, with the skills to manage the Business Unit, in-house professional services aspects, and large, complex physical works contracts h) Reduction in competition for on-going capital works contracts, due to reduction in contractor numbers/capacities. i) Impact on the sustainability of existing small and medium sized suppliers. j) Short-term loss of existing knowledge due to insourcing of professional services. 7.3 Key Project Milestones 15 MAY 2013 REV 8 PAGE 35

36 Date April 2013 May 2013 June 2013 July-Sept 2013 Oct/Nov 2013 Dec Mar 2014 July 2014 Nov 2014 April 2015 October 2015 Milestone Complete NZTA Approval of Council approval of Establish Joint Governance Group Update to suppliers Undertake GDC Special Consultative Procedure (if required) Develop governance terms of reference and policy Create the contractual joint venture agreement between GDC and NZTA Develop position descriptions and recruit Business Unit General Manager and other new staff Business Unit Established Develop draft tender documents Tender contracts Tenders close Award contracts Start OMC contracts N/b The time table will need to coincide with the development of the NZTA OMC model (including performance measures) and the TAMG. 7.4 Success Measurement The success of the collaboration project will be monitored and reported at the operational and governance level. The following high level performance measures have been identified. Further refinement of these will occur during the development of the business unit. a) Financial performance - Operational and management savings, reduced network costs, operational costs/asset life cycle/depreciation costs maintained or reduced, successful P&I reviews. a) Level of Service measures - Meeting LoS requirements, positive TAMG reviews, external & internal audits such at Telarc, Contract Management Reviews, NZTA benchmarking. b) Positive TAMG and M&O outcomes, RAPT reviews, Governance reporting, Contractor performance measures. c) Management and staff retention in the integrated business unit. Individual performance reviews, productivity reporting, financial management, placement interest, turnover rates, staff competency. d) Customer Relationships. Reduced handoff, customer satisfaction ratings and survey feedbacks. 15 MAY 2013 REV 8 PAGE 36

37 8 The Better framework This structure of this business case follows that recommended by the Infrastructure Unit within the New Zealand Treasury. The framework is a collaborative process for decision-making and comprises the 5 case approach. Source: (National Infrastructure Unit - NZ Treasury, 2012) 9 Works Cited National Infrastructure Unit - NZ Treasury. (2012). Better s- Investing for Change for Better Value. Retrieved from National Infrastructure Unit: NZTA. (2012). State Highway Maintenance and Operations Review. Wellington: NZTA. Rationale Ltd. (2012). Financial analysis of M&O procurement options. Rationale Ltd. 15 MAY 2013 REV 8 PAGE 37