State Highway Maintenance and Operations Review consultation document

Transcription

1 State Highway Maintenance and Operations Review consultation document The State Highway Maintenance and Operations Review was established to investigate options for improving efficiencies and outcomes for road users.

2 our purpose creating transport solutions for a thriving new zealand NZ Transport Agency Published July 2012 ISBN (print) ISBN (online) Copyright: July 2012 NZ Transport Agency If you have further queries, call our contact centre on or write to us: NZ Transport Agency Private Bag 6995 Wellington This publication is also available on NZ Transport Agency s website at

3 State Highway Maintenance and Operations Review July 2012 NZ Transport Agency 1 Contents 2 Foreword 3 Introduction 4 Issues for discussion and feedback 7 Next steps 8 Timeframes

4 2 NZ Transport Agency State Highway Maintenance and Operations Review July 2012 Foreword We have significant pressures from a constrained fiscal environment across the board, driven by the current international economic environment and its implications for the NZ economy. The entire public sector is being asked to find ways of driving greater efficiencies and to manage within existing budgets. For its part, the NZTA is facing a 6% annual increase on its maintenance, operations (M&O) and renewals expenditure during the next three years, without any corresponding increase in budget. This amounts to a $160 million shortfall over the next three years. We know that driving prices down to unsustainable levels for the industry is not the answer, so we need to look at other ways to drive efficiency through better economies of scale and the most efficient and effective use of resources across New Zealand. That is what the State Highway Maintenance and Operations Review (M&O Review) is all about. We would like to hear your views on our service delivery (procurement) ideas. This is a genuine consultation process and while we have views based on the analysis, no final decisions have been made. We encourage sector-wide engagement to ensure any changes are well informed and sustainable. Colin Crampton General Manager Highways and Network Operations NZ Transport Agency

5 State Highway Maintenance and Operations Review July 2012 NZ Transport Agency 3 Introduction The Road Maintenance Taskforce (RMTF), established by the government in July 2011, has been conducting a review to identify opportunities for road controlling authorities (RCAs) to deliver M&O more efficiently and effectively. The RMTF interim recommendations include options to unlock additional efficiency and effectiveness gains through increased collaboration between RCAs, better asset management and service delivery. In parallel with the RMTF review, the NZTA established the M&O Review in 2011 to investigate options for improved efficiencies and outcomes within its own state highway activities. Reflecting the critical role of the industry in the maintenance and operation of the state highway network, the M&O Review has been a collaborative process led by a working group comprising NZTA asset and business managers and representatives from contractors and consultants (Fulton Hogan, Downer, MWH, Transfield, Opus and Higgins). The working group has met regularly for the past nine months to contribute to the review process. As a working group, there are a number of things we all agree on: The need to strengthen our asset management capability even further, building on New Zealand s good international reputation. This will be implemented in the form of a new Asset Management Group working across the state highway business to ensure that we deliver optimised levels of service and performance across the 11,000km of state highway network. Work is already underway to determine the scope and areas of focus, and the form of the group is expected to be finalised by Christmas The need for the NZTA to continue driving improvements in programming, activity prioritisation and rationalising levels of service across the various levels of state highway through a range of value for money initiatives. The majority of this work is expected to be complete within the next 12 months. There is an opportunity for the NZTA to collaborate more with suppliers, customers and our RCA partners to achieve better transport outcomes. The working group has also considered in detail what efficiency opportunities there are in the service delivery (procurement) area. Key inputs considered by the working group and publicly available as part of the wider industry consultation now underway are: NZTA report, Summary of measurement phase output, April NZTA, Root cause analysis, July PWC report, Evaluating different approaches to maintenance and operations procurement, February Rationale report, Financial analysis of M&O procurement options, June Opus report, SH network physical works procurement survey, June 2012 NZTA report, Procurement Task Group discussion paper, June The next step is to seek wider industry feedback on proposed changes to the NZTA s M&O procurement practices based on the analysis. As part of the seven-week consultation period, the NZTA will hold a series of engagement sessions with key regional suppliers, territorial local authority representatives and NZTA asset managers to explore the ideas arising from the review.

6 4 NZ Transport Agency State Highway Maintenance and Operations Review July 2012 Issues for discussion and feedback 1. Longer-Term Contracts We are considering the benefits of longer term contracts, subject to performance. Currently most contracts are for three to five-year terms. The working group s findings based on best practice across other jurisdictions has led to a recommendation for nine-year term contracts, under a renewal structure subject to supplier performance. For suppliers, longer contract duration would reduce administrative costs associated with re-tendering after shorter terms and deliver increased certainty upon contract award, which enables better allocation of resources and longterm investment in learning and development. For the NZTA, it encourages greater competitiveness at tender time and will underpin future strengthening of our partnership/ collaboration with industry to deliver better outcomes. These potential gains would be undermined without appropriate performance tension, so the idea of having longer term contracts goes hand-in-hand with potential changes in contract type and incentives. 2. New M&O Contract Form We believe there are benefits in developing a new M&O contract model, based on the best attributes of the other existing contract types (hybrid, PSMC, traditional and alliance). The alliance model is likely to be retained but the new contract form would replace all other existing contract types. There could be some exceptions to this such as bridge management, tunnels, avalanche control, which may continue to be procured under a traditional contract form. Standardising the approach to contracts will drive better consistency across the regional state highway networks. It will help with benchmarking and understanding the reasons for variances in unit cost of activity, enabling NZTA asset managers and suppliers to work together to identify opportunities for innovation and/or knowledge-sharing across networks. Standardising contracts should also help reduce the administrative burden and commensurately increase efficiencies. It will also ensure all parties to a contract have clear and aligned expectations and can focus on performance. Drawing from the M&O Review s findings in relation to the best attributes of current contract models, it is proposed that the new M&O Value Service Delivery Model contract would: be based on the NZS:3910 form of contract with an independent engineer to the contract contain a mix of both output and outcomebased requirements clearly define the risk profile within the contract and look to transfer risk to the party best positioned to manage it. Where the scope of the works is clear, the basis of payment could be lump sum and where the scope of the works cannot be clearly defined, a more transparent cost approach could be adopted include cost fluctuation mechanisms and day works mechanisms for valuing works that cannot be adequately scoped, such as winter maintenance, emergency or additional works have flexibility to adjust quantities and levels of service throughout the contract period have clearly defined and measurable outcomes and value for money performance measures, and mechanisms to incentivise performance. This could result in pain/gain mechanisms which incentivise the supplier to deliver on the right outcomes have strong governance with formalised relationship-based partnerships through contract management boards and quality supervision of construction be based on an open book approach to provide more transparency on value and sufficient data to enable benchmarking across multiple networks. The NZTA s discussion paper discusses two options for the proposed Value Service Delivery Model. The first includes the single supplier approach and the second, a more conventional consultant, contractor and client relationship. We would like to engage with stakeholders on these ideas and gain a better understanding of the benefits and risks associated with each approach.

7 State Highway Maintenance and Operations Review July 2012 NZ Transport Agency 5 3. Contract Aggregation There is evidence which suggests that there are benefits in aggregating contracts across the state highway network. Currently, more than 80% of the contract areas are less than 500km long. Comprehensive analysis of data for the state highway network shows that in all cases as network length increases the corresponding network expenditure does not increase proportionally. In other words, the unit cost of maintenance per kilometre reduces. The analysis suggests that economies of scale deliver increased efficiency from an asset owner perspective. In addition, engagement with suppliers and asset managers across the regions undertaken as part of the review revealed that the optimum length per state highway contract is km to maximise efficiency and effectiveness of their own respective operations. This finding aligns well with the output from the rationale report, which suggests that the optimum state highway network length per contract is around lane km ( carriageway km based on a typical rural state highway). A smaller number of larger contracts would significantly reduce administrative and tendering overhead costs, enable optimal utilisation of resource (including plant), and support enhanced capability building across the industry through more strategic allocation of people and expertise. As well as being in line with international trends (United Kingdom, Australia and Canada), this approach is already emerging organically in the New Zealand market, with a natural trend towards contract aggregation (refer to the PWC report) that reflects the benefits inherent in aggregation supported by a robust subcontractor market. We would like to hear the views of our suppliers on this idea and engage in a discussion on the long term impacts on small and medium-sized suppliers and how this could be managed while achieving the aims of the review. The key to successful transition to contract aggregation is how the network is segmented. No specific network boundaries have been determined at this stage, but a range of obvious factors come into play including complexity, topography, traffic volumes, traffic management demands, distance from larger population centres, and expenditure. Refer to section 3 of the Procurement Task Group discussion paper for detail on the options and analysis. The working group has come up with a set of key criteria for assessing the various options for segmenting and configuring the network and seeks feedback on the options based on the following principles: Results in reduced overall costs to all parties in the maintenance and operation of existing and new infrastructure assets. Allows opportunity to utilise asset management expertise and reprioritise funding to areas of greatest need. Provides more consistent management of similar sections of state highway. Creates a scale and complexity that attracts and retains appropriately skilled staff with growth opportunities and long-term sustainability. Preserves opportunities for various degrees of collaboration between client organisations, that better match up the supply market and optimise economic factors. Ensures a competitive and sustainable market. Considers the primary purpose of the state highway and its contribution to both national and regional route availability and congestion. Considers the customers overall expectation and experience. Allows opportunity to explore and implement innovative concepts and manages risks that return benefits to all parties and the customer. Provides flexibility to redesign future network configurations. Resources are effectively and efficiently utilised and suppliers can benefit from current strong centres of labour skills and availability. Recognises the effect of change to suppliers, stakeholders, and client organisations and the ease of implementation to realise perceived benefits. Allows the wider supply chain to contribute to maintenance and operations activities.

8 6 NZ Transport Agency State Highway Maintenance and Operations Review July Fence-to-Fence approach to Term Contracts Based on the analysis, the NZTA considers there may be benefits in moving to fence-to-fence (all inclusive) network maintenance contracts, with some rare exceptions on a case-by-case basis for highly specialist or one-off works. Qualitative and quantitative evidence suggests that this will drive greater supplier ownership and accountability for the overall performance of the network and therefore deliver efficiencies for the NZTA. As well as financial savings from improving the coordination of works on any specific network, this approach will improve the road user/customer experience by ensuring there is coordinated programming of works, which will deliver travel time benefits and contribute to the NZTA s mandate to support economic productivity growth. 5. Contract Incentives It is proposed to strengthen and more uniformly apply a consistent range of performance incentives to ensure that the benefits of other proposed changes to contract type and tenure can be realised and to ultimately deliver better value for money. Currently there is significant variability in both how contracts specify performance incentives and penalties, including risk sharing, and how these are interpreted and applied. The range of potential performance incentives draws from the mechanisms already in use with the following key enhancements: PACE: More consistent application of the PACE system and more regular training on its application. At-risk payment ( bucket system ): Consolidation to a single system and development of guidance on its use. Additional works: Given that variations are typically high margin activities for suppliers, a system that apportions the amount of variations a supplier gets based on their performance will be a compelling performance incentive. Contract extensions: It is recommended that a central NZTA decision-making team be given responsibility for adjudicating on contract extension decisions based on an overall measure of performance. At the end of each contract extension a rebasing of contract rates could be implemented to manage the impacts of cost fluctuations. Earned value: Earned value involves monitoring actual accomplishment. It is an early warning management tool that enables the client to identify and control problems before they become insurmountable. External audits of the client s performance: We are recommending the introduction of external audits to assess the NZTA s performance as a client.

9 State Highway Maintenance and Operations Review July 2012 NZ Transport Agency 7 Next steps Find out more The NZTA will be running industry specific workshops with key groups and Local Government NZ. Those groups will be responsible for inviting their own members. In addition to these sessions, nine workshops will be run in the state highway regions as shown below. We would like to limit the number of attendees in these regional workshops to per workshop made up of local authority and NZTA asset managers and a cross-section of local suppliers. Our state highway managers will organise their respective regional workshops. Presentations to industry Who RNZ NZCF ACENZ LGNZ Aggregate and Quarry Association of NZ Where (NZTA regional offices) Auckland Wellington Auckland Napier Wellington Dates 29 August (pm) 29 August (am) 30 August (am) 27 August (am) 6 September (am) Engagement workshops NZTA asset managers, key regional suppliers, and TLA partners. Napier Wellington Hamilton Auckland Christchurch Tauranga Dunedin Palmerston North Blenheim 4 September 13 September 12 September 30 August 11 September 3 September 10 September 5 September 21 September Contact Mark Kinvig ph or or [email protected] if you have any questions. Provide feedback We request those seeking to provide feedback do so via your associated industry groups identified above or, for NZTA asset managers and RCAs, via the NZTA state highway manager representing their NZTA regional office. You are welcome to provide your feedback in whatever form you choose, but below are a series of questions to assist you in structuring a response. The closing date for your feedback is 28 September Your feedback should be ed to m&[email protected] or posted to: M&O Review Attention: Mark Kinvig NZ Transport Agency PO Box 740 Napier 4140 Report back by the NZTA The NZTA is committed to timely decision-making and reporting to provide certainty around the path forward so that industry can begin planning for implementation. Once we have received your feedback, we will consider/analyse the information and report back by the end of October 2012.

10 State Highway Maintenance and Operations Review July 2012 NZ Transport Agency 8 Timeframes The engagement programme: Engagement launch with Geoff Dangerfield Two weeks to absorb the information available on NZTA s website Engagement sessions with industry and regions Two weeks to provide feedback to the NZTA 13 August August 27 August 21 September September Decision on procurement approach End of October 2012 Questions Longer-term contracts The NZTA is considering contract terms of nine years, consisting of three-year separable portions. The option of longer terms (eg evergreen) could be considered where supplier performance is exceptional, there is a lack of competition or the activity is of a specialist nature. The NZTA seeks your views on: the concept of moving to longer-term contracts the specific challenges and/or opportunities the concept presents for you. Contract Delivery Model The NZTA is considering terminating the use of the traditional, hybrid and PSMC contract delivery models (see exceptions below) and replacing these over time with a new contract delivery model. If adopted, it is expected that this new model would be a performance based contract building on the successful attributes developed in the three existing contract forms, including some of the alliance based practices, eg open book contracting. The NZTA anticipates continuing to use the alliance delivery model in very special circumstances. Some specialist areas, such as bridge management may still be procured through traditional contract forms. The NZTA seeks your views on: The concept of creating a new M&O contract model combining the best attributes from all current models. The single supplier model contract form. Having two types of new contract form other than the alliance; a single supplier and more traditional contractor, consultant, client contract form.

11 State Highway Maintenance and Operations Review July 2012 NZ Transport Agency 9 Contract Aggregation If the NZTA ceases the use of traditional contracts (subject to exceptions above), it is expected that a new contract form would include the majority of maintenance activities in a fence to fence contract form as currently adopted in the Hybrid and PSMC contract forms. Furthermore, the NZTA is considering several aggregation options for reducing the number of network maintenance contracts. NZTA seeks your views on: The concept of moving to fence to fence contracts. What the optimum network maintenance length for the state highway network should be. The market impact of aggregation and how this can be mitigated into the future. The specific challenges you see in your region with respect to contract aggregation. Any other criteria you think would be appropriate in assessing options for segmenting the network. Having specific requirements within larger contracts to sub-contract components of the M&O work. Contract Incentives The NZTA is recommending a more consistent and stronger approach to measure supplier performance as described in the procurement discussion paper. The NZTA seeks your views on the suggestions provided in the procurement discussion paper whether they will drive the right outcomes and what the potential risks are to both the NZTA and suppliers.

12 If you have further queries, call our contact centre on or write to us: NZ Transport Agency Private Bag 6995 Wellington This publication is also available on NZ Transport Agency s website at Our contact details CONTACT ONE Mark Kinvig PO Box 740 Napier 1410 Telephone: Fax: [email protected] CONTACT TWO Jack Hansby Private Bag 6995 Wellington 6995 Telephone: Fax: [email protected] CONTACT THREE Karen Kiriona PO Box 740 Napier 1410 Telephone: Fax: [email protected] July 2012