Appendix 3: Wellington's Clear Water project

Procurement route

The Wellington Clear Water project for a new sewage treatment plant has been undertaken using a contract to design, build, maintain, and operate (DBMO).⁵⁶

The Wellington City Council (the Council) was aware that arrangements for the treatment and disposal of sewage were unsatisfactory. A long process of public consultation took place, resulting in a decision that there was a need for a modern sewage treatment plant with potential for expansion, designed to meet environmental standards based on legislative requirements and public expectations.

Expressions of interest were sought on a traditional procurement approach to designing, constructing, and operating the new plant. One proposal was received from a United Kingdom-based company proposing an alternative approach, including designing, building, and operating the plant for 25 years, with the right of renewal of the contract after 20 years.

A contract was awarded to this company in 1996 on the basis that the Council paid the company a lump sum to design and build the plant, followed by an annual operating fee. The new plant was commissioned in 1998.

The contractor operated the plant until June 2004, when it set up a subsidiary company to take over managing the contract. Since then, ownership of the subsidiary company has been transferred to a third company that now manages the contract.

Reasons for procurement decision

Council officers identified the following reasons for choosing this procurement route:

• The treatment plant required construction by a contractor with specific experience, and the Council did not possess the necessary skills or experience in-house. Therefore, the Council decided to prepare an output-based specification, and seek proposals from companies with significant experience and international expertise to determine the best means of achieving the outputs.
• The risk of achieving the outputs was transferred to the contractor.
• A contract to design, build, and operate the plant would provide an incentive to the contractor to establish a good-quality, low-maintenance facility, and so minimise maintenance costs. A company contracted to design and build the plant, but not operate it, would wish to maximise its profit margin at this stage, with the risk of future increased costs of maintenance.

The Council also identified reasons why it might not be appropriate to choose this procurement route:

• If different companies had been selected to design, build, and operate the plant, each company would have acted to assure the quality of the others’ work (though note the bullet point above that puts forward a contrary point of view).
• The ownership of the provider company has changed, and the people managing the contract on behalf of both the client and contractor at the early stages of the project are no longer involved. This is not surprising considering the long-term nature of the contract. Although this potentially weakens the case often put forward for long-term contracts of this nature – that they offer stability and continuity – in this case there is evidence of remarkable continuity. The chairman of the current provider company was previously chairman of the original provider company, and he has been involved for 10 years in the Clear Water project. Some of the private sector party’s operational staff have also been involved for a long time.

Lessons so far

Clearly specified outputs and outcomes

It is very important to specify clearly the outputs and outcomes required, and how these will be measured. In this case, it was found that the need for an environmentally acceptable solution, with a minimal effect on the local community, was open to different interpretations, leading to a number of disputes between the 2 parties during the construction and commissioning stages.

Long-term nature of the contract

When drawing up the specifications and contract documentation, it is very important to think about what might go wrong during the contract period, where risks should lie, and how contract terms might be interpreted in the future.

The contract also needs to be flexible enough to take account of potential changes to legislation, resource conditions, and community expectations, and of the different personalities who will be managing the contract on behalf of both client and contractor in the future.

Client contract management

In the first few years, the Council adopted a very arm’s-length approach to contract management. In 2002, a process for regular liaison about operations was introduced. Benchmarks have been set for performance, the contractor has been asked to write an operations manual, and the Council is undertaking more physical inspections. The contractor has also been asked to commission an independent report of its performance.

An Executive Review Group has also been set up, which meets every 2 months. This includes representatives of senior management of both the Council and the contractor, and addresses high-level issues. A community liaison group has also been established, which meets 3-4 times a year.

It is important that the Council retains knowledge and expertise internally to manage these types of contracts effectively. The Council manager who took over responsibility for managing the contract 2 years ago had to spend a great deal of time searching for documents related to the history of the contract. It is therefore important to ensure that contract documentation is properly stored and easily retrievable, preferably through a quality control system.

56: Since Wellington City Council entered the contract with the private sector provider, the Local Government Act 2002 has imposed restrictions on local authorities’ ability to make arrangements with other persons (except other local government organisations) for providing or operating water services. The Act prohibits any arrangement that has a term of more than 15 years, or that involves any transfer of pricing, management of services, policy development, or ownership of infrastructure. The Wellington Clear Water contract would have required significant modification had it been settled under these provisions. The requirement for a shortened term (that is, 15 years rather than 25) would also, very likely, have affected the economics of the arrangement.