Part 3: What the agreements were designed to achieve

3.1
In this Part, we explain how the three agreements were all designed to provide cost-effective management of the district roading networks by discussing:

• the objectives of Transit and the councils when entering into the agreements; and
• the main features of each of the agreements.

Objectives of Transit and the councils

3.2
Transit and local authorities have to balance national transport requirements and local needs in following their different statutory objectives as road controlling authorities. Transit's main objective is to operate the state highway system in a way that contributes to an integrated, safe, responsive, and sustainable land transport system. Local authorities administer their networks of local roads in the interests of their ratepayers and manage local development. Development alongside state highways leads to local traffic using state highways in urban areas more, which affects the efficiency and effectiveness of the national transport network. Transit and local authorities have to work in partnership to resolve the implications of land-use planning on state highways and to achieve greater integration of high-level planning for transport and land use.

3.3
A common theme in the objectives of Transit and the councils when entering into the collaborative agreements was that they wanted cost-effective management of the state highways and local roads within the districts as a single district roading network.

Objectives of delegation from Transit to Rotorua District Council

3.4
Rotorua District Council and Transit sought locally accessible and integrated delivery of roading services at no additional cost.

3.5
In approaching Transit in 1990 to request the delegation, Rotorua District Council saw the main advantage as the public having to go to only one organisation for district roading matters.

3.6
After operating the delegation informally until mid-1996, the council noted that the benefits for it had included the council's staff and consultants dealing with local problems at a local level through a "one-stop shop" for district roading matters. The council noted that benefits had come at no additional costs to the council, as an administration fee paid by Transit covered staff time and expenses for administering state highway activities.

3.7
During negotiations to formalise the delegation, the council provided Transit with evidence of the council's resources and capability to deliver the required services for state highways. The formal delegation from Transit noted that Transit considered the council to have the resources and capability to exercise the delegation. It also noted that Transit had determined that the delegation would not result in an increased cost to the state highway account.

3.8
The council's chief executive told us that the main reasons for formalising the delegation were the better services provided by the "one-stop shop" approach and improvements to the network, rather than cost savings.

Objectives of agreement between Transit and Marlborough District Council

3.9
Marlborough District Council and Transit sought improvements in service delivery and cost savings.

3.10
The main objective of the Local Roads Asset Management Agreement between Marlborough District Council and Transit is to get "the most cost effective delivery and maintenance of roading services in Marlborough through an alliance that enables them to work together in a co-operative environment".¹

3.11
The council and Transit identified other objectives and benefits of collaboration as:

• cost savings to both parties through better buying power with suppliers and contractors, and less administration by centralising processes and removing duplication of effort;
• maintaining service levels at least to existing standards; and
• the advantage to ratepayers from combining the expertise of Transit and council staff , setting up a Marlborough Roads office in Blenheim, and keeping the focus on local road customers.

Objectives of joint contract let by Transit and Western Bay of Plenty District Council

3.12
Western Bay of Plenty District Council and Transit sought efficiencies through joint management of roads.

3.13
Western Bay of Plenty District Council approached Transit because it believed that the district roading network could be more efficiently managed through joint maintenance contracts for local roads and state highways. This was because local roads and state highways in the Western Bay of Plenty district are formed in a "fish bone" design, with state highways running down the centre and local roads connecting to the state highways as spines, with few interconnections between the local roads.

3.14
By entering into a joint 10-year performance-based contract, the council and Transit aimed to:

• manage the effect of growth on district roads without increasing the roading rate levied by the council;
• reduce maintenance expenditure on state highways in the district and achieve net savings to Transit;
• at least maintain current levels of service;
• enhance the identity of both the council and Transit as road controlling authorities; and
• maintain the management identity of each party.

3.15
At the time, Transit saw wide-ranging benefits, including significant efficiencies, from being able to develop and implement effective alliances with local authorities. Transit saw Western Bay of Plenty District Council as a good potential alliance partner because of the council's willingness to form an alliance and the good relationship that Transit had with it.

Main features of the delegation from Transit to Rotorua District Council

3.16
The delegation from Transit to Rotorua District Council focuses on protecting the quality and cost of existing service delivery through regular review. The delegation also allows some flexibility to improve the standard of maintenance.

Regular review of the delegation

3.17
The delegation specifies that Transit will review the delegation at three-yearly intervals to consider the council's performance, the council's resources and capacity to continue exercising the delegation, and the costs to the state highway account. It also specifies that Transit can revoke the delegation if, following a review, it finds that the delegation results in an increase in cost to the state highway account or that the council no longer has the resources and capacity to exercise the delegation.

Flexibility to improve the standard of maintenance

3.18
Within the main payment clause of the delegation, there is flexibility for the council to decide to do maintenance work on state highways that is of a higher standard than that prescribed by Transit or that is in addition to work required to comply with Transit standards. The clause notes that Transit will contribute only such costs for above-standard work that it thinks fit.

Main features of the agreement between Transit and Marlborough District Council

3.19
The agreement between Transit and Marlborough District Council incorporates features designed to achieve cost savings and better management of the district roading network.

Consolidation of maintenance contracts

3.20
The council and Transit anticipated that cost savings would principally come from restructuring existing maintenance contracts. They planned to let combined contracts for maintaining both state highways and locals roads. They also planned to reduce the geographical areas covered by the contracts so that there would be only two contracts – a northern contract and a southern contract covering areas north and south of the Wairau River respectively.

3.21
At an early stage of considerations to set up an agreement, the Ministry of Transport advised Transit and the council that they would need to show, with some certainty, that the projected savings would be achieved before the Minister’s notice would be published in the New Zealand Gazette, as required under the Transit New Zealand Act 1989, to allow Transit to participate in the agreement.

3.22
Transit and the council decided to advertise the maintenance contract for the northern area before the agreement was set up. The tenders received showed that they could expect to make savings. Based on the tenders for the northern area maintenance contract and a prediction of similar levels of savings from tendering the southern area maintenance contract, Marlborough District Council expected to achieve annual savings of $718,000 and Transit expected to achieve annual savings of $300,000. They also predicted annual savings of about $660,000 to Transfund for subsidised work.

3.23
Both the northern and southern area maintenance contracts were successfully let. The northern contract was let from 1 July 2000, and the southern contract was let from 1 July 2001. Both contracts were re-tendered at the end of their term, and new contracts are now in place. We discuss the savings achieved in Part 5 (paragraphs 5.8 to 5.11).

3.24
Transit and the council also expected to make further savings by consolidating the provision of professional services that support the management of the network. Transit estimated that it would save around $140,000 annually. A single contract for the provision of professional services for the management of both state highways and local roads within the Marlborough area was let from 1 July 2001.

3.25
The Transit business case for entering into the agreement noted that the savings in the state highway programme from the combined contracts more than covered the start-up and ongoing costs for the Marlborough Roads office.

Bringing together of Transit and council expertise

3.26
When the Marlborough Roads office was set up, it was staff ed by bringing together the council’s and Transit’s staff with expertise in the areas of asset management, project management, planning and network protection, customer service, and administrative and financial support.

3.27
Staff employed by the council became employees of Transit in the Marlborough Roads office. The council wanted to retain the local knowledge and credibility that these employees had with the councillors, council staff , and the community. A clause in the agreement prevented Transit from transferring these staff on a permanent basis to any location outside the Marlborough district in the first two years.

3.28
Since the Marlborough Roads office was set up, staffing has been stable and none of the former council employees have left.

Separate identity and customer focus for Marlborough Roads

3.29
Part of the agreement was for the Marlborough Roads office to be set up as a local Transit office, but with its own identity separate from that of the council and Transit. Transit and the council considered that this was important for the office to have a customer focus.

3.30
The agreement provides for the Marlborough Roads office to be a single point of contact for day-to-day enquiries from the public and representatives of the council about the status, ownership, and use of the district roading network.

3.31
Representatives from the Marlborough Roads office are also required to meet regularly or to have routine contact with community groups and other organisations with a stake in the district roading network.

Close working between the council and the Marlborough Roads office

3.32
The agreement provides for Transit and the council to each appoint and make available a person designated as their representative for all matters concerning the agreement and dealings with the other party.

3.33
The agreement specifies requirements for Marlborough Roads office staff to report to the council on the functions they carry out on the council's behalf, together with requirements for consultation between the council and the Marlborough Roads office. Consultation requirements include representatives from Marlborough Roads attending council meetings and liaising regularly with the council's staff and councillors.

3.34
Transit was keen to include a relationship-based aspect to the agreement to recognise that the outcome would be enhanced if communication, trust, and openness were developed and maintained between Transit and the council. A partnering charter was proposed during the feasibility stage, along with specific actions and a mechanism for monitoring the ongoing relationship and high-level outcomes. A charter was never drawn up, but the council believed that the agreement with Transit was, in practice, operating as a partnering agreement.

Main features of the joint contract let by Transit and Western Bay of Plenty District Council

3.35
The Western Bay of Plenty contract has been designed to achieve better management of the district roading network and cost savings.

Tendered costs lower than estimated costs

3.36
For a contract to be awarded, the tender cost had to be at least 9% lower than the estimated cost of continuing with the current situation. The ability to reduce costs was based on the efficiencies expected from a long-term performance-based contract.

3.37
The level of expenditure after savings of 9% was considered to still be enough to:

• bring the roading assets up to the specified contract standards;
• maintain the assets to the contract standards for the next 10 years; and
• enhance and develop the network as specified.

3.38
The cost of the winning tender was more than 9% lower than the estimated cost of continuing with the traditional maintenance and contract system. We discuss the savings achieved in Part 5 (paragraphs 5.12 to 5.15).

Ten-year contract

3.39
The 10-year term of the contract is longer than that for traditional maintenance contracts, which mostly cover three to five years. The contractor told us that the 10-year term of the contract was important in enabling savings through efficiencies - for example, by allowing it to put more sophisticated systems and processes for planning work over an extended period in place.

Performance-based contract for a set sum

3.40
The overall objective of the contract is to provide a safe and efficient network. Contract outcomes specified under this objective are underpinned by the expected performance standards and the measures to assess performance against expectations.

3.41
The contract is for a set sum over the 10-year term to provide all products and services to meet the performance standards and contract outcomes. Getting the most profit possible from the set sum acts an incentive for the contractor to manage and deliver network maintenance activities efficiently and effectively.

Some specific risks transferred to the contractor

3.42
The contract seeks to allocate risks to the party best able to manage them. Specifically, the contract transfers risk to the contractor for the first $800,000 of emergency works in any one year following certain natural events, such as a major slip or road wash out.

Identifying improvements

3.43
The contract requires that, throughout its term, the contractor must explore, develop, and present to the Management Board potential improvements. The contractor must also look into potential improvements suggested by the council or Transit.

3.44
The contract indicates that improvement initiatives may, for example, lead to reduced costs, improved levels of service, improved safety performance, more features to meet road user needs, or increased life of the roading assets.

A co-operative approach

3.45
The contract notes that a co-operative approach by the contracting parties is fundamental to the concept of performance-based contracting. It states that the conditions of the contract seek to remove traditional adversarial relationships.

Summary of objectives and main features of the three agreements

3.46
In this Part, we have described the objectives and main features of the three collaborative agreements that we examined. All of the agreements have been designed to achieve cost-effective management of the relevant district roading network. Figure 3 summarises the objectives and main features of the three agreements.

Figure 3
Summary of the objectives and main features of the three agreements

Source: Office of the Auditor-General

1: Local Roads Asset Management Agreement, 17 November 2000, page 17.