Report to INFRASTRUCTURE SERVICES Committee for decision

15/247 Subject: Prepared by: Network Outcomes Contracts Dave Hadfield (General Manager - Tairāwhiti Roads) Meeting Date: 6 August 2015 Report to INFRASTRUCTURE SERVICES Committee for decision SUMMARY The Gisborne Network Outcomes Contracts (NOCs) are due to commence on 1 October 2015 and involve the maintenance of 2,220 km of state highway and council roads. The combined roading network was divided into two areas, western and northern. Registrations of Interest were called in December 2014. The tender process identified two tenders for the northern contract and a sole tender for the western contract. Services South East (SSE) has been identified as the preferred supplier for TR15/02 - Northern Outcomes Contract. The Gisborne District Council component is for $30,394,817.25 for five years. A further two years of renewal is reliant on achieving contract outcomes. The outcome of the western tender has not been resolved (at the time of writing the report). Negotiations have commenced with the sole tenderer targeting a reduction in tender price in line with the estimate. Negotiations commenced on 20 July with a 3 August completion date. Until this process is complete, procurement rules preclude the release of the engineer s estimate. Following the NZ Transport Agency procurement process for subsidised roading activities, Services South East are recommended as the preferred supplier for the TR15/02 Northern Outcomes Contract. This is a five year tenure with two rights of renewal dependent on performance. The Council s delegation manual enables the Committee to approve the recommendations as they are within the 2015-2025 Long Term Plan allocations. The State Highway portion of TR15/02 Northern Outcomes Contract for the NZ Transport Agency for $28,962,226.30 has been endorsed by the NZ Transport Agency approval channels on 23 July 2016. As this is a joint contract between Council and the NZ Transport Agency, final approval can only be awarded to Services South East if both parties are in agreement. A585025 Page 1 of 11

RECOMMENDATIONS That the Committee 1. receives the report 2. awards TR15/02 Northern Outcomes Contract to Services South East for the maintenance of Gisborne District Council roads for five years for $30,394,817.25 (GST exclusive) 3. agrees to a further two years renewal subject to Services South East achieving contract performance. Dave Hadfield General Manager Tairāwhiti Roads Peter Higgs Deputy Chief Executive Group Manager Engineering & Works Keywords: Tairāwhiti Roads, roading, state highway, NZ Transport Agency, Network Outcomes Contract A585025 Page 2 of 11

1. BACKGROUND The purpose of this paper is to update the Committee on progress of the Gisborne Network Outcomes Contracts (NOCs) tender process and recommend courses of action for progressing the northern and western NOCs to respective next stages. The tender scope of works involve: aggregating state highway and local road maintenance contracts and the inclusion of renewal and resurfacing works utilising the NZ Transport Agency Network Outcomes Contract (NOC), which is a performance based model. The scope of works in the Gisborne District Council programme includes the maintenance of sealed and unsealed roads, lighting, mowing, chemical controls, street lighting and additional items like the maintenance of reserve car parks. The contracts were split into two areas: 1) TR15/01 - Western contract 137 km of state highway and 1,208 km of Council roads which encompass the wards of Gisborne city, Taruheru-Patutahi and Waipaoa wards (1,345 km). 2) TR15/02 - Northern contract 194 km of state highway and 678 km of Council roads and includes the wards of Tawhiti-Uawa and Matakaoa Waiapu (872 km). The coverage areas were defined by network challenges like heavy traffic demand, emergency responses and subsidence site management and the ability for the contractor to respond to these, rather than kilometre split. In broad terms, the western area is less volatile compared to the northern area. The NOCs involve a NZ Transport Agency contract format which includes bundling of transport activities into a single document but the state highway and council activities were itemised into different schedules. Tenderers were only allowed to win one contract to ensure two experienced roading contractors remained in the district. The NOCs required the main contractor to sublet 20% of the work to local contractors as part of their bid to sustain a healthy local workforce. The Council had the ability to influence the documents by ensuring the recommendations of Report EW14/230 Northern Region Road Maintenance Contract Performance Review were included. The procurement arm of the NZ Transport Agency held early discussions with both council and state highways staff in regards to transparent pricing. The risk for staff to mitigate was the potential for tenderers to load costs to the determent of either party. This would be resolved by separate contract schedules and benchmarking tenders against other provincial network outcome contracts. 2. DISCUSSION In December 2014, registrations of interest were called for the NOCs. The tender bids were assessed on company attributes (45%) and contract price (55%). The tender process identified two tenders for the northern contract and a sole tender for the western contract. A585025 Page 3 of 11

With one single tenderer it was unlikely to produce a competitive price. The issue was raised at the 15 April 2015 Joint Governance Group (JGG) meeting. The JGG gave direction to continue with the tender process as the cost to submit a NOC bid costs tenderers about $250,000. The price envelopes revealed two tenders for the combined northern contract were below estimate of $67.7M. Services South East providing a lower price of $59.32M over Fulton Hogan $65.2M and that Downer had submitted a tender price 12% over the engineer s estimate for the western contract. (This estimate is not provided for and reasons are given later). Fulton Hogan was the preferred supplier after their attributes were ranked. This equated to a price-quality advantage of $2.95M and required Services South East to provide a tender price below $62.3M, which they did. This outcome allows for a favoured supplier to be announced for the northern contract and for that contract to proceed to the next stage of the tender process. The procurement rules governing our tender process require the tender evaluation team s need to address any points of clarification and risks in a pre-letting phase. These agreements are then incorporated into the final contract documents but the submitted price of $59.32M from Services South East remains the same. The pre-letting phase was finally concluded on 20 July and now both the NZ Transport Agency and Council are obtaining approvals from their respective governance structures. The state highway portion of this contract will be going to the NZ Transport Agency Value Assurance Committee for endorsement on 23 July. The Council delegation manual is explicit that all contracts over $1,000,000 must be approved by Council. But the Infrastructure Services Committee has delegation to award contracts within agreed Long Term Plan funding allocations, which the proposed recommendation does. The final allocation of Services South East costs of $59,357,043.55 for TR15/02 - Northern Contract are: Gisborne District Council $30,394,817.25 for 678 km of road NZ Transport Agency $28,962,226.30 for 194 km of road When the tender price for the western contract was opened, this was 12% above the estimate which is unacceptable. A course of action was approved by the JGG on 10 July to: 1) Enter negotiations with Downer for a fixed short duration (two weeks) targeting a reduction in tender price to the tender estimate. 2) If these failed decline the Downer offer and retender the western contract. Negotiations commenced with Downer on 20 July so the tender estimate for the western contract cannot be published until the negotiation phase is completed on 3 August 2015. If negotiations fail with Downer, the retender of the western contract does cause timeline conflicts with the national NOCs rollout. This still needs to be confirmed as to whether it can precede the Nelson and Hawkes Bay contracts. Either way the existing current contracts for the City EW11/01 with Fulton Hogan and Western EW09/09 with Downer would need to be negotiated to target a revised commencement date between February and June 2016. Any potential extension of existing Council maintenance contracts will have to come back to this Committee for approval. A585025 Page 4 of 11

In summary, the report seeks the Committee s approval for the maintenance of the Council Roads components of TR15/02 - Northern Contract to Services South East for $30,394,817.25 for five years. A two year right of renewal is reliant on achieving contract performance. The operational start date for commencement is 1 October 2015. 3. CONTRACT OUTCOMES The overall contract objective is to drive improved performance outcomes, with a particular interest in the following key areas: 1) Safety Safety is of paramount importance on the journey to zero harm. Measure achievement and commitment to health and safety outcomes. Measure opportunities to improve safety outcomes for customers. 2) Customers Customers access needs are always considered. Respond to customers requests and manage their expectations. 3) Sustainability Maintain a sustainable and engaged contracting market. Contribute to a transport system that adds positively to New Zealand s economic, social and environmental welfare by adopting good practice and acting in a responsible manner. 4) Assurance and Value Quality outcomes underpinned by accurate network information and knowledge. Make sound investment recommendations and decisions based on reliable, robust and proven evidence. 5) Network Performance Ensure the physical indicators of service quality have been provided. Demonstrate that promises made during tendering add value and are delivered. Give customers timely and accurate information so they can make informed choices, and schedule works to minimise disruption. 4. PROCUREMENT PROCESS Prior to advertising the NZ Transport Agency contracts, the following information is required: 1) Drafting a procurement strategy before the contracts are let. This details what is being tendered, the scope of works, release of contracts to the market, and a full explanation of risks and how these will be mitigated. 2) Consultation with the industry at a national and local level prior to the contracts being let. 3) Completing an impact report of the NOCs on the Gisborne district contracting industry. The report recommended that 23% of the works within the NOCs needs to be sub-contracted to local suppliers to sustain a healthy market within the district. This is 3% above the national average. To qualify as a local supplier, the lead contractor must show they are not a subsidiary or hold a linked financial interest to them. 4) The total process was supervised by Audit NZ, including group and individual interactives with tenderers. Audit NZ will report on the procurement process and suggested improvements to Council and NZ Transport Agency. A585025 Page 5 of 11

5. CONTRACT RISK A definition of risks on the network has to be clearly defined for contractors who tender for the work. This ensures that both parties clearly understand future demands that may occur on the network over the term of the contract. The major risks for the Gisborne network are: Projected forestry volumes over the next 7 years of the contract. Subsidence sites and performance measures on unsealed roads. Increasing traffic volumes along SH35, Tauwhareparae, Mata, Kopuapounamu, Horehore, Waingake, Kanakanaia, Parikanapa and Whakarau roads. Poor quality aggregates and long haulage distance. Pavement deteriorates during winter. These risks are discussed with tenderers during group and individual interactives prior to prices being submitted. An example is that both the NZ Transport Agency and Council would not entertain a variation to the submitted tender price based on increased traffic growths when both parties has provided this information in the tender documents. 6. LEVELS OF SERVICE The State Highway (LOS) in the NOCs is determined by the One Roading Network Classifications (ORNC). The Council s (LOS) for this contract followed the same philosophy of ORNC but was heavily influenced by Report EW14/230 Northern Region Road Maintenance Contract Performance Review. The recommendations such as clearly defining the scope of additional works, future traffic volumes, refocus on drainage, auditing regimes and outcomes based contracts are incorporated into the local roads specifications of the document. 7. ESTIMATES PRE-TENDER 7.1 The Process The engineer s estimates for the northern and western NOCs were drafted by Tairāwhiti Roads staff. These were benchmarked against schedule rates provided by the NZ Transport Agency Marlborough Roads office as they also manage local roads and state highways. The estimates were then peer reviewed by NZ Transport Agency staff in Napier. An independent assessment was then undertaken by Bond Ltd. They provided an estimate using costs from tenders received across New Zealand. Tairāwhiti Roads staff are not involved in this assessment but only answer points of clarification from Bond Ltd. The two estimates are compared, any differences clarified and the final estimate confirmed for the NOCs. 7.2 Release of Tenders to Market The issue of releasing the tender to suppliers before they submit their prices was discussed with the JGG on 15 April 2015. It was agreed not to release them. Audit NZ understood the rationale for not supplying the estimate for the western contract as it was a sole tenderer. Audit NZ asked Council and NZ Transport Agency staff to reconsider their position for the northern contract as there were precedents set with other NOCs rollouts. A585025 Page 6 of 11

The JGG agreed with Audit NZ, the engineer s estimate for Northern TR15/01 for 5 years is $67.71M. This was sent to both Fulton Hogan and Services South East prior to them submitting their tender bids. 7.3 Tender Evaluation The procurement process now allows a higher weighting for attributes for tenders based on 45% attributes and 55% price which differs from the historic 30% attributes and 70% price funding regime. After reviewing the attributes for the northern contract, Fulton Hogan was the preferred supplier and this equated to a price-quality advantage of $2.95M. When the tenders were opened the following prices were received: Company 5 year costs Transport Agency Council Annual Transport Agency costs Annual Council costs Engineer s estimate by Bond Ltd (M) $67.71 $34.12 $33.60 $6.82 $6.72 Fulton Hogan Ltd $65.21 $33.48 $31.72 $6.34 $6.70 Services South East $59.35 $28.96 $30.39 $5.79 $6.08 After reviewing Services South East bid, the tender evaluation team is content that their bid is achievable. Pre-letting commenced with Downer on 20 July. Under procurement procedures the engineer s estimate cannot be released until these are completed. The Gisborne NOCs are seventh out of 23 rolled out in New Zealand. The trend of receiving bids below the estimate is consistent with recently awarded NOCs (the average range is from +1 to -10%). 7.4 Future Tender Procurements The NZ Transport Agency has signalled to industry that it is not interested in lowest price at all costs (unsustainable bids) and will now trial a new procurement model called Purchaser Nominated Price. This model involves the principal providing a fixed cost for the scope of works and the tender is then 100% based on attributes. The critical component is the engineer s estimate and involves a minimum of three independent estimates. If negotiations fail with Downer then this procurement model would be used. 8. CONTRACT SUPERVISION Each month the contract is formally measured by maintenance contract managers. These mandatory results are delivered to the NZ Transport Agency Asset Management Group. This group reviews the audits and benchmarks and reports on national trends. Tairāwhiti Roads will be required to supply the state highway data for the northern and western contracts to this group. Once the contracts are operational then performance reports on Council s roading network can be provided to the Infrastructure Services Committee. A585025 Page 7 of 11

9. COURSE OF ACTION After reviewing the tender outcomes, the JGG endorsed the following recommendations on 2 July and to progress them to Council and NZ Transport Agency. 1) Progress Services South East as the preferred supplier for TR15/02 - Northern Outcomes Contract for the Gisborne District Council roads for $30,394,817.25 for five years. A further two years renewal is reliant on achieving contract performance. 2) Enter negotiations with Downer for a fixed, short-duration targeting a reduction in tender price near the estimate. These started on 20 July and will end on 3 August. 3) If negotiations fail, decline the Downer offer and retender the western contract. To accommodate the retendering phase the existing Council contracts for the City EW11/01 with Fulton Hogan and Western EW09/09 with Downer would have to be extended to target a completion date to suit the revised NOC start date. 10. SIGNIFICANCE The matter is not significant in terms of Council s Significance Policy. Although the costs and term of the contract will be a significant cost to the community over time, the activity is already provided for in the Long Term Plan and Regional Land Transport Plan. 11. COMMUNITY OUTCOMES The recommendations support a Connected Tairāwhiti - a district that has essential infrastructure that is well planned, affordable, and equitable and meets the needs of our community now and into the future. 12. STRATEGIC CHALLENGES The proposal supports the strategic challenge of customer needs by understanding the needs of the customers and community and actively striving for value for money in providing the required levels of service. 13. POLICY There are no policy implications. 14. LEVELS OF SERVICE While there are no changes to existing levels of service; the monitoring regime of the NOCs will impose a higher level of supervision and reporting than previous roading maintenance contracts. 15. FINANCIAL 15.1 National Land Transport Programme 2015-2018 Gisborne s road maintenance allocation for 2015-2018 is $52.8m, which is the amount requested by Tairāwhiti Roads for the National Land Transport Programme 2015-2018. This request is $1.8m lower than the 2012-2015 expenditure of $54.6M. The NZ Transport Agency has not reduced funding but responded to a request from Tairāwhiti Roads for less road maintenance funding. A585025 Page 8 of 11

The lower request is in anticipation of the Tairāwhiti Roads joint and projected maintenance savings arising from an integrated one network approach to maintain the state highway and local road network. Council has then chosen to reinvest these anticipated savings of $600,000 per year to lift new roading infrastructure such as walking and cycling, LED lighting, resilience improvements and bridge strengthening projects without raising the overall roading rates. 15.2 2015-2018 Long Term Plan and National Land Transport Programme 2015-2018 The annual roading allocation is $17.60m (excludes projects) with a subsidy rate of 61%. This rate will increase over the next six years to 67% equating to additional $176k per year until 2021/22. Activities like bridge maintenance, traffic counts and electricity for street lights are excluded from the NOCs but need to be deducted from the allocation. Therefore the annual roading allocation is $16.60m. The Services South East bid will consume $6.08m of this sum. While this is 10% below the estimate of $6.72m, it needs to be compared against historic costs. Northern contract expenditure (millions) 2014/15: Maintenance 2.74m Renewals 2.11m Pre seals 0.28m Resurfacing 0.19m Rehabs 0.49m Flood damage Total 0.56m (clean-up cost only are included in NOCs - total bill was $1.71m) $6.49m There will be returns of $0.40m per year if Services South East is endorsed as the preferred supplier. 15.3 Business Case Financial modelling of the Tairāwhiti Roads business case preferred option indicates savings over the status quo will have a net present value of between $17m and $43m over a 10 year term. (Refer Appendix A Business Case). This information has been presented to Council and Infrastructure Services Committee on previous occasions. Tairāwhiti Roads and NZ Transport Agency staff believe the existing northern contracts were undervalued by $0.8m and $1.7m respectively. These values were included in the engineer s estimates to accommodate traffic volumes from forestry. (Refer Appendix A Business Case). To receive a bid below the engineer s estimate and existing contract rates for the northern contract is pleasing. The full annual savings can only be calculated and reported back to the Committee when a decision on the western contract is complete. 16. LEGAL Council has obligations under legislation to provide land transport services including regional responsibilities. The main acts which deal with these matters are the Local Government Act 1974, the Land Transport Management Act 1974 and the subsequent amendments. A585025 Page 9 of 11

The Council s delegation manual empowers the Infrastructure Services Committee the authority to approve the recommendations: Approve expenditure (including substituted capital expenditure) items that are provided for in the LTP or Annual Plan where the value of that expenditure exceeds that authority delegated to officers. Council approved Report 15/046 - Draft Regional Land Transport Plan 2015-2018 on 16 April 2015. Tairāwhiti Roads staff were able to construct an engineer s estimate for the northern area based on the Draft RLTP 2015-2018 allocations. Services South East bid is below this estimate and therefore within approved land transport funding allocations. Therefore the Committee has the authority to approve this recommendation. 17. CONSULTATION No consultation is required as the Tairāwhiti Roads business case has been included in 2015-2025 Long Term Plan and previous Annual Reports. 18. OTHER CONSIDERATIONS There is a potential that existing levels of service may decline during the transition phase. Staff not involved with the successful bid are already looking for other employment options. To mitigate this Tairāwhiti Roads is considering mitigation measures to reduce this risk which includes a minimal forward works programme to direct appointment of contractors to fill the gap until the new contractor is operational. 19. APPENDICES Appendix A Business Case A585025 Page 10 of 11

Appendix A : Business Case