ANALYSIS: The people of Wellington are relieved that Transmission Gully finally appears to have the “clear run” to the finish line Transport Minister Phil Twyford promised, but is there more to this than meets the eye?
Months of stasis have whittled down the promise of Transmission Gully to one objective: get it built.
Infrastructure NZ CEO Paul Blair said a Public-Private Partnership (PPP) for Transmission Gully was originally supposed to provide innovation and foreign capital at a price cheaper than the Government could manage.
“People complain about having chip seal outside their house. On one of New Zealand’s largest roading projects – and something that’s been waited on for decades – how are they going to feel about having chip seal?”
Right now, few of these objectives have been achieved. The final price of the road will be $1.25 billion – nearly 40 percent more than its original $850 million price tag. The cash injection needed to complete the project will be provided by taxpayers rather than bankers.
Meanwhile, most of the road’s surface will be chip seal – innovative because it’s an unusual choice for a state highway of this sort, but an innovation unlikely to be welcomed by the road transport sector. Road Transport Forum chief executive Nick Leggett thought it was a compromise on standards:
“People complain about having chip seal outside their house. On one of New Zealand’s largest roading projects – and something that’s been waited on for decades – how are they going to feel about having chip seal?”
Transmission Gully is a PPP arrangement between the New Zealand Transport Agency (NZTA) and the Wellington Gateway Partnership consortium which includes the CPB HEB joint venture building the road and Ventia (which will carry out a 25-year maintenance contract attached to the road).
“[NZTA were] faced with Hobson’s choice really. It’s only the best possible deal from a set of extremely unpalatable options.”
Work on the project came to a halt under lockdown thanks to a force majeure clause which gave every party the right to walk away from the contract.
Author of Government for the Public Good Max Rashbrooke said the problem was private partners to this contract had NZTA “over a barrel”.
“[NZTA was] faced with Hobson’s choice really. It’s only the best possible deal from a set of extremely unpalatable options.
“How could they [NZTA] ever walk away from the whole project? You can’t leave Transmission Gully unfinished. It’s literally impossible.
“If they tried to play hardball, the consortium at this point would quite possibly walk away having got some of their payments up front. What on earth would you do as a public sector? Spend years dragging onto a decade suing the consortium over it while you essentially have no road?”
Cost-plus
There are two ways of seeing the agreement to pay out $145.5m to the CPB HEB joint venture building the road, before the road has been completed.
From NZTA’s perspective, it holds the builders accountable. The builders will get paid every month (under the original PPP contract they would only get paid at the end of the contract) but that would allow the Government to hold them to account if they’re not performing because they will be able to withhold the final $7.5m until after the road opens on September 27.
However, the arrangement also bears major similarities to one of the most generous forms of contracting: a cost-plus arrangement where you are paid month by month for the work you complete.
The current arrangement is that 10 percent of the total project’s budget will be paid out to the builders in advance to complete less than 15 percent of the work.
NZTA will also pay an additional $45.5m for a new road surface on 9km of road near the Wainui saddle – although it is unclear whether this sum will be paid in advance or on settlement of the full amount due for the road’s construction.
Regardless, Road Transport Forum’s Leggett agreed the PPP arrangement had turned into something very similar to a “cost-plus” arrangement.
“If we’re going to have a proper review we would expect those are the issues that would be examined – and why they happened.”
A $1.25b chip seal road
Chip seal causes environmental noise complaints and damage to vehicles. Roading experts who have spoken to Newsroom predicted it would likely require resealing every three years.
Leggett put the trade-off like this: “The road is going to be cheaper to seal, but it’s going to require sealing more often”.
Partial road closures to conduct maintenance work will likely consume a good chunk of the 25 years CIMIC-owned contractor Ventia will spend maintaining the road.
“You would hope they’re innovating towards better solutions, longer lasting solutions … but I suppose there’s flexibility for going the other way as well.”
NZTA has said the private partners have key performance indicators to meet in terms of keeping the road open and traffic flowing.
However, terms of the agreement between NZTA and the consortium allow for a lower level of performance to be accepted while the road is undergoing maintenance works – or if scheduled maintenance works are taking place according to an agreed-upon annual plan.
Victoria University of Wellington School of Government lecturer Barbara Allen said while the “partnership” side of a PPP was supposed to allow the private partner to innovate, Transmission Gully had proven that could be a double-edged sword.
“You would hope they’re innovating towards better solutions, longer lasting solutions … but I suppose there’s flexibility for going the other way as well.”
Rashbrooke said NZTA had clearly come to an agreement on a “performance envelope” in the original contract that was loose enough to allow for a lower quality of road surface to be put in place.
It was a problem commonly seen with “performance-based” regulation measures where less prescriptive objectives were set and it was up to the contractor to figure out how to meet those.
The problem was that didn’t prevent people from choosing an inadequate set of materials – like many builders had done when similar “performance-based” measures were put in place in the lead-up to the ‘leaky homes’ crisis.
He said these sorts of measures were more likely to be part of a PPP contract than a traditional design and build one because a conventional form of contract was more prescriptive.
“If the set of performance requirements are sufficiently loose that the consortium is not in breach of them by resurfacing and closing down a lane every few years then I would have thought there was something significantly wrong with those performance specifications.”
It’s all good in theory
However, the use of chip seal is puzzling for another reason. CIMIC owns both CPB contractors – which own 80 percent of the joint venture building the road – and Ventia (the firm maintaining the road).
The maintenance contract is more lucrative than the construction one. If CPB had used a more expensive road surfacing material, that could have led to maintenance savings for its sister company Ventia further down the line.
However, NZTA general manager transport services Brett Gliddon said that despite their common ownership, both CPB and Ventia negotiated separately with the agency. Same too for the Wellington Gateway Partnership. Ventia’s payout due to Covid-19 was still being finalised on Friday, but was expected to be $5m.
Rashbrooke said the theory behind PPPs – and tying a consortium to a maintenance contract – was that the interests of all parts of a consortium would align with each other. Different parts of the consortium negotiating independently would seem to indicate that wasn’t the case.
“The theory sounds good if your theory doesn’t really take into account how people operate.
“The consortium is already making decisions that are going to increase its maintenance costs and which don’t make sense from a rational point of view.
“I wouldn’t be hugely confident that the maintenance part of this project is going to run any more smoothly than any other part of it.”
The ultimate backstop
A government inquiry into Transmission Gully is likely to examine all of these issues in detail. It will be led by the Infrastructure Commission and will use an independent international expert to assess all parts of the project from the bid right through to present-day events.
Allen said the whole saga was evidence that the public sector was the “ultimate backstop” when it came to PPPs.
“Everybody’s happy to say ‘Oh yeah we’ll get the private sector to innovate’ until such time as they can’t or something goes wrong.
“Ultimately the public sector is the backstop position for when things go wrong when you’re dealing with the private sector.”
However, Blair said the project had experienced three major setbacks outside of its control: resource management act hold-ups ( caused it to miss the first season of earthquakes), the Kaikoura earthquakes and Covid-19.
We went into a contract that was really buttoned down and didn’t allow a lot of room to move in an environment that turned out to be really, really volatile.”
He said it was unreasonable to expect any public-private contract to price and incorporate earthquake or pandemic risk.
A government inquiry into the matter should look at Transmission Gully in the context of all PPPs and alongside comparable design and build contracts (many of which had also experienced cost blow-outs and construction issues).
“Whether it was a design-and-construct or a PPP is really irrelevant. We went into a contract that was really buttoned down and didn’t allow a lot of room to move in an environment that turned out to be really, really volatile.”
Others blame the common problem of underbidding on major construction projects. Something that’s common to a lot of them.
Leggett – who was Mayor of Porirua when the decision was made to go ahead with Transmission Gully – said the road was always seen as a $1b project even when the successful bid came in below that.
“We tend to go for the cheapest and we get what we pay for.
“The figure for Transmission Gully was always that it was a billion-dollar 27km highway … so then when it came in at $850m there was a bit of surprise about it.”
He believed the current inquiry – scheduled to finish by the middle of next year – should be delayed until the whole project was completed and people were better able to assess what had happened.
“Phil Twyford wants a road built. Everyone involved in this wants a road built and opened.
“The main aim should be to get the thing built, not to pick over the bones of something that isn’t yet completed.”
