Auditor General’s Report November 2016

Auditor General’s Report released November 2016

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

table of changes reflected in the December 2014 updated economic appraisal

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

Potential conflict of interest was not recognised
We identified a potential conflict of interest with two members of the main works PPP contract pre-tender assurance review panel. This was because they worked for organisations actively involved in the development of the CSELR project.

One of these members declared the conflict of interest, and the probity advisor monitored it. The other member did not, and TfNSW did not address this in its submissions to the NSW Government. Rather, the submissions for approval of the RFP for the main works PPP highlighted the independence of the consultants.

We do not question the capability or diligence of these members. But to maintain confidence in a procurement process, it is vital that any potential perception of conflict of interest is recognised and addressed.

1. Executive Summary

The Central Business District and South East Light Rail (CSELR) project is a large public transport infrastructure project. Its current estimated capital cost is $2.1 billion in 2014 dollars, excluding finance, operation and maintenance costs.

The project has attracted much public interest and has economic, environmental and social impacts for the State. Chapter 1 sets out the project in detail.

This audit assessed how well Transport for NSW (TfNSW) ensured that planning and procurement for the CSELR project achieved value for money within the parameters set by the NSW Government. These included timeframes for planning, procurement and delivery.

We examined the period from the development of the Sydney Light Rail Strategic Plan, which started in August 2011 and was published in October 2012, through to the finalisation of the major construction contract in February 2015.

Conclusion

The CSELR project suffered many of the same problems we reported for WestConnex, Large construction projects and the Albert ‘Tibby’ Cotter Walkway.

The established assurance framework provided that TfNSW undertake the assurance reviews of the CSELR project. However, this approach did not provide the independent assurance required for such a major infrastructure project. In addition, the planning and governance arrangements, while approved by the NSW Government, skipped important assurance steps. And tight timeframes meant planning was inadequate and normal governance systems were not initially in place. This contributed to underestimating costs and overestimating benefits.

As a result, between 2011 and 2014, TfNSW did not effectively plan and procure the CSELR project to ensure it maximised value for money for New South Wales.

TfNSW continues to manage problems created because of these shortcomings. Above all, it did not finalise key third party agreements that affected the design and scope of works before issuing tenders and signing the major public private partnership (PPP) contract. This has increased the project’s complexity and risks, and reduced value for money.

TfNSW is on track to deliver the CSELR project. But it will come at a higher cost and with lower benefits than expected in the approved business case. The project benefit-to-cost ratio decreased from 2.4 to 1.4 by the time the NSW Government awarded the PPP contract. As this remained a positive result, the project still went ahead.

Our audit found that TfNSW’s due diligence and probity in the procurement process was detailed and met NSW Government requirements.

Since the planning stages, TfNSW improved the project’s governance and assurance framework. It implemented rigorous monthly assessments to monitor risks that may affect the timeframe and budget. There is also stronger external oversight by the CSELR project Advisory Board and Infrastructure NSW. TfNSW advised that it has progressively finalised third party agreements, with one outstanding in October 2016.

More generally, since our reports on WestConnex and Large construction projects, the NSW Government has strengthened assurance processes for infrastructure projects. Infrastructure NSW now independently administers risk-based assurance reviews for capital projects, and advises the NSW Government of any risks so they can be addressed.

From this point, TfNSW should finalise design and scope issues as soon as possible and continue robust monitoring and reporting of the CSELR project. But our more important recommendations centre around the need to apply the lessons learned from the CSELR project to large capital projects in the future.

 

Key findings

Planning and procurement did not ensure the best value outcome for the State

Between 2011 and 2014, Infrastructure NSW delegated assurance reviews of major transport projects, including the CSELR project, to TfNSW using the TfNSW Investment Gating and Assurance Framework. Despite this delegation being provided for in the assurance framework at the time, this approach did not provide the independent assurance required for such a major project.

TfNSW followed project-specific planning and procurement processes for the CSELR project. The NSW Government approved these processes because of the project’s significance and to meet its preferred timelines.

However, these processes departed from the Major Project Assurance Framework and TfNSW’s own Investment Gating and Investment System by not requiring a preliminary business case and two early independent gateway assurance reviews.

These systems are designed to provide assurance that projects remain viable throughout their life cycle. They are flexible, but they require agencies to make the case that a government commitment will:

  • be cost-effectively delivered
  • achieve maximum benefits
  • have affordable operating costs.

By departing from the established process, the CSELR project suffered similar problems to those we reported for other infrastructure projects. Common problems include tight timeframes without justification, project scope defined too narrowly, underestimated costs and overestimated benefits.

TfNSW pursued tight project timelines for the CSELR project without fully documenting its consideration of the impact on costs, risks and benefits, and it presented a business case with an inadequate economic appraisal.

There were also problems specific to the CSELR project. Internal and external reviews repeatedly drew attention to the need to finalise the project’s design and scope of works. Yet TfNSW did not finalise key third party agreements that would affect the design and scope of works before tendering or before signing the two main contracts. This added to the project’s complexity and risk, and reduced value for money for the State.

TfNSW advised us that:

  • project contingency funds will be sufficient to cover any contract variations
  • such funds have been ‘ring-fenced’ in the project budget
  • scope changes will be managed effectively within the existing contingency allowance.

Some of the project contingency funds have already been applied to these changes. But contingency funds also need to cover unknown risks that may emerge during construction and delivery. TfNSW will need to closely monitor risks to the project timeframe and budget, with independent oversight by the project’s Advisory Board and Infrastructure NSW.

Costs are higher and benefits are lower than the approved business case

In November 2013, the project business case summary estimated the CSELR would cost $1.6 billion. At that time, TfNSW still needed to address outstanding issues, such as:

  • fully assessing capital costs
  • ensuring the economic appraisal was realistic
  • negotiating traffic management assumptions with Roads and Maritime Services (RMS)
  • finalising third party agreements.

By the time TfNSW signed the main works PPP contract in December 2014, the capital budget had increased by $549 million to $2.1 billion. Some of this increase was due to scope changes and planning modifications. However, most – $517 million – was caused by mispricing and omissions in the business case.

Similarly, CSELR project benefits decreased from the business case estimate of $4.0 billion to an estimate of $3.0 billion in December 2014. This was mainly due to increases in travel time assumptions flowing from changes in project scope.

These changes meant the benefit-to-cost ratio decreased from 2.4 to 1.4. This was still a positive result and the project went ahead.

Probity and due diligence processes met NSW Government requirements

Agencies must follow probity and due diligence requirements to show their project procurement is fair and objective. These are set out in NSW Government procurement policies, and in national and state PPP guidelines.

Overall, TfNSW met these requirements for the CSELR project. It adopted a detailed probity framework. An independent probity advisor concluded that TfNSW’s evaluation process for selecting the two main contractors was fair and had due regard to probity. TfNSW also applied due diligence to the PPP bidders, consistent with its guidelines for projects of this kind.

At the same time, the early works package should have been included in a key gateway review. The tender evaluation process was comprehensive. However, TfNSW had used incorrect assumptions in the Public Sector Comparator (PSC) benchmark to assess value for money. It is normal practice for the PSC to be updated as a project evolves. TfNSW presented the first PSC calculation with the CSELR project business case. It then updated the PSC on a number of occasions to reflect changes in the project costs and benefits. In October 2014, TfNSW made the final adjustment to the PSC because a key assumption was incorrect. The incorrect assumption was that management effort and associated contract interface risks would be the same for a traditional delivery model as a PPP.

It is unfortunate that TfNSW discovered the incorrect assumption in the PSC so late in the process, and after tenders for the PPP were evaluated. National PPP guidelines permit the PSC to be adjusted after bids are received in certain circumstances, including where changes to assumptions are required. We note that external reviews found that the PSC update process was consistent with the national PPP guidelines and did not unfairly impact proponents.

We found no evidence that the PPP contract TfNSW entered into will not be delivered. TfNSW included provisions in this contract to mitigate the risk to the NSW Government that the contractor cannot fully deliver against its obligations.

 Recommendations

  1. For the CSELR project, Transport for NSW should, by December 2016:
    1. finalise outstanding design and scope issues
    2. ask the project Advisory Board to confirm that controls over the budget and use of contingency funds are consistent with NSW Government decisions and NSW Treasury guidelines
    3. update and consolidate information about project costs and benefits and ensure that it is readily accessible to the public
    4. ensure the Sydney Light Rail Project Director provides six-monthly briefings to the TfNSW Audit and Risk Committee.
  2. For all capital projects, Transport for NSW should comply with the Infrastructure Investor Assurance Framework.

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