Part 2: Designing and selecting service delivery models

2.1
In this Part, we set out our findings about how NZTA:

• understands its supplier market for maintenance and renewal work;
• plans and provides guidance for its maintenance and renewal procurement in the long term; and
• selects appropriate service delivery models for the work.

2.2
In this Part, we make two recommendations.

Understanding the supplier market

NZTA has a clear understanding of its supplier market and has been responsive to recent market conditions. However, NZTA needs to prepare, and review on an ongoing basis, specific strategies to encourage more suppliers into some maintenance and renewal work that is dominated by a very small number of large suppliers. In our view, more competition is likely to increase the quality and value for money of the services provided.

2.3
NZTA's supplier market for maintenance and renewal work is dominated by a small number of large national and international suppliers. Although there is a broader range of local and regional physical works suppliers, there is a limited number of professional services suppliers nationally. This is shown in Figure 2, which breaks down the percentage of professional services contracts for general road maintenance and renewal of the state highway network by supplier. It shows that Opus International Consultants Limited (Opus) held nearly two-thirds of the professional services contracts in early 2011.

Figure 2
Distribution of professional services contracts for highway maintenance and renewal, by supplier, as at March 2011

2.4
The dominance of Opus in professional services work for the inspection and management of bridges and other structures on the network is even more pronounced. In early 2011, it held 78% of NZTA's contracts by number for the inspection and management of bridges and other structures.

2.5
NZTA liaises closely with suppliers at national and regional levels, and understands the nature and characteristics associated with its supplier market. In its State Highway Portfolio Procurement Strategy 2010 (the Strategy), NZTA recognises that the current maintenance and renewal supplier market is characterised by a small number of dominant national suppliers, with a range of other prospective suppliers battling to retain their presence in the market. NZTA staff we spoke to described the supplier market as "relatively narrow".

2.6
NZTA notes in the Strategy that it is difficult to define what constitutes a healthy and sustainable supply market. But it considers that the answer is to have at least three national or inter-regional suppliers actively involved in its business, each with a reasonable share of its work and/or a reasonable share of other works within the land transport sector. The number of NZTA's current professional services suppliers for general road maintenance and renewal aligns closely with this goal. It was not clear from the Strategy how NZTA determined that at least three national or inter-regional suppliers constitute a healthy and sustainable supply market. However, NZTA staff told us that three suppliers is a good mix because it provides competition in a demanding environment where, to be effective, suppliers need strong management competency, systems, capacity, and staff.

2.7
In recent years, NZTA has been responsive to supplier market conditions. In December 2009, NZTA introduced a price deviation adjustment for considering professional services tenders to deter the unsustainable tender prices it had been receiving. The price deviation adjustment penalises tenderers for submitting prices less than 90% of the median of the tendered sums. Also, between September and October 2010, NZTA carried out a physical works sector health check and capability review to focus on the effect of the market downturn and opportunities to assist the industry. The outcomes of the review emphasised the need for funding certainty, continuity of work within each area, and opportunity for suppliers to grow capability and capacity.

2.8
NZTA understands its dominant role in the supplier market at a national level. Because of its level of expenditure on maintenance, operations, and capital improvement on the network, NZTA recognises in the Strategy that it is a "leader and shaper" of the supply industry. NZTA is mindful of the effects its actions have on the overall health and sustainability of the supply industry.

2.9
At a regional level, NZTA is only one of a number of road controlling authorities that also includes local authorities, which are responsible for maintaining local roads. Any assessment of the condition of regional supply markets needs to take into account local authority arrangements. Although there are clear benefits through efficiencies of scale that can come from the existing market share, NZTA is concerned about long-term value for money if a supplier's market share were to extend to the point where a monopoly or duopoly was created.

2.10
As a result, NZTA is aware of the need to minimise any barriers to entry into the maintenance and renewal market and to look at strategies that may encourage a greater range of suppliers. Although NZTA did not conclude that specific measures were required at the time the Strategy was prepared, it has identified some initiatives that could encourage a greater range of suppliers. These initiatives are largely focused on the procurement process and include changing the proportions of each of the non-price attributes in tender evaluations - for example, a greater weighting on the personnel non-price attributes or a lesser weighting on company experience could be appropriate in some cases. Other examples include using different supplier selection methods, and considering using new delivery models.

2.11
We recognise that maintaining and renewing the state highway network is demanding work that requires competent and skilled suppliers. We also acknowledge that not all suppliers will have the capability or capacity to work on the network. However, the dominant share of maintenance and renewal work on the network by some large suppliers has created near monopolies and duopolies in some maintenance and renewal work, particularly for professional services work. In our view, NZTA should prepare, and review on an ongoing basis, specific strategies to encourage more suppliers into those markets. These strategies could follow a review of the health of the overall supplier market and be used to promote more competition in these areas by ensuring the sustainability of small to medium-sized suppliers within particular maintenance and renewal areas or regions.

Long-term procurement planning and guidance

NZTA has clear accountabilities and responsibilities for long-term procurement and a clear procurement approach for the delivery of maintenance and renewal work. NZTA also has comprehensive and detailed guidance for purchasing services and contract management.

2.12
NZTA has clear accountabilities and responsibilities for long-term procurement activities. NZTA's Contract Procedures Manual sets out a clear delegation schedule for NZTA's HNO group for a range of procurement activities associated with professional services and physical works. This includes delegations for approving procurement strategies, advertising tenders and open price envelopes, and awarding and varying contracts. This includes NZTA Board approval of contracts worth more than $50 million.

2.13
NZTA also has clear accountabilities and responsibilities for long-term procurement planning as an "approved organisation" to receive funding for land transport activities under the Land Transport Management Act 2003 (the Act). Under its own Procurement Manual for activities funded through the National Land Transport Programme (the Procurement manual), NZTA is required to have a procurement strategy that documents its long-term approach to procuring transport sector activities funded under the Act. The Project Service team within the HNO group (based in NZTA's national office) was responsible for preparing the Strategy. This was approved by the NZTA Board in July 2010.

2.14
NZTA's long-term procurement approach for the delivery of maintenance and renewal work is clearly outlined in the Strategy. The Strategy updated the Long Term Procurement Plan previously published by Transit New Zealand in June 2005. The Strategy covers both maintenance and renewal, and improvement work. Its purpose is to establish a long-term approach to implementing asset management and improvement projects on the network. The Strategy has specific objectives to:

• aid the engagement of suppliers who can deliver quality and value for money, and meet the needs of NZTA's customers;
• ensure that appropriate whole-of-life considerations are made in the way procurement is carried out;
• encourage competition and sustainable, efficient markets; and
• encourage supplier innovation.

2.15
The Strategy outlines contextual detail about the Government policy statement on land transport funding and the National Land Transport Plan (NLTP). It references NZTA's Investment and Revenue Framework that links the Government policy statement and the NLTP, and demonstrates how the NLTP gives effect to the Government policy statement. The Strategy sets out a range of delivery models for both asset management (maintenance and renewal) and asset improvement (new and improvement work) activities and sets out guidance about supplier selection methods, and contract forms and processes.

2.16
NZTA guidance for purchasing and contract management activity is comprehensive and detailed, and outlined in a number of manuals. The Procurement manual contains specific procurement procedures approved by NZTA for use when purchasing infrastructure, planning and advice, and public transport services. The Procurement manual sets out how value for money is achieved when purchasing goods or services to deliver activities. It provides guidelines on the steps that (if followed) will maintain or enhance value for money through the procurement process.

2.17
The Contract procedures manual details NZTA's procedures for procuring professional services and physical works. The HNO group uses these procedures to implement the requirements of the Procurement manual. NZTA also has the State highway professional services contract proforma manual, which sets out standard specifications for professional services contracts, including specifications for state highway network management, contract management, and the management, surveillance, and quality assurance of physical works contracts.

Selecting service delivery models

NZTA uses a range of models for the delivery of maintenance and renewal work, and prepares procurement strategies to determine which approach and model is the most appropriate in specific areas and regions. However, NZTA needs an up-to-date national assessment of the quality and value for money that the range of models is delivering.

2.18
NZTA uses a range of models to deliver maintenance and renewal work on state highway roads, and state highway bridges and other structures. Generally, these involve procuring consultants for professional services, and contractors for physical works services, in the 25 areas, and for the specialist inspection and management of bridges and other structures in the nine regions. Each area and region has its own complexities and demands.

2.19
NZTA uses four main service delivery models -– traditional, hybrid, Performance Specified Maintenance Contracts (PSMC), and alliancing. Figure 3 outlines each model in more detail.

Figure 3
Service delivery models used by NZTA with contractors and consultants

2.20
The rationale for the delivery models in place at a national level is based on an historic approach of promoting a balanced mix of models. This approach has been in place since 2000 when Transit New Zealand managed the network.

2.21
In 2005, Transit New Zealand's Long Term Procurement Plan noted that an assessment of the relative value for money each model offered at the time (which included traditional, hybrid, and PSMC models) had been carried out but that the results had been inconclusive at that stage. Data was readily available on the costs for each model, but, at the time, data about functional performance was difficult to extract from existing sources. On balance, Transit New Zealand considered that no one model displayed better results than any other in terms of performance on the network. On this basis, Transit New Zealand decided to stay with the mix of models that were then in place. In 2008, an alliance procurement model was implemented for the operation, maintenance, and renewal of the Auckland motorway network.

2.22
As at early 2011, 50% (12) of the 24 service delivery models for state highway maintenance and renewal services were traditional. A further 29% of contracts were hybrid (seven contracts), and 17% used the PSMC model (four contracts). The Auckland Motorway Alliance is the only alliance currently in place for maintenance and renewal work on the network.² Although there is more of a mix of models in place throughout the network when the total value of each contract delivery model is taken into account, in practice the current distribution of delivery models by number of contracts differs from the historic promotion of a balanced mix of models.

2.23
At a regional level, before new contracts go out to tender, the merits of different delivery models and contract performance are taken into consideration. However, since 2005, there have been no further formal national assessments of the relative value for money or performance of the delivery models in place across the network.

2.24
NZTA considers that there is an appropriate mix of delivery models in place. For NZTA, the value of the supplier market consists of some key aspects, including among others, the skills and capacity of their people and the market, the size and complexity of the work involved, and the degree of design and risk that can be transferred to their suppliers. NZTA considers that a mix of delivery models delivers the best value for money across these aspects.

2.25
NZTA's Strategy does not outline a rationale or target for the future mix of procurement models at a national level. Instead, when each maintenance contract comes up for renewal, NZTA's approach is to analyse the attributes associated with maintenance delivery models and the various key specific area characteristics as part of the delivery model selection process. This includes considering the network's size and shape, the network's complexity, supplier market conditions, the level of client involvement, their flexibility to deal with change, innovation potential, risk profile, stakeholder involvement and customer requirements, and focus on non-cost areas.

2.26
The Strategy also notes that all activities involving procurement will have their own specific procurement strategies that are consistent with the Strategy and that consider the specific detail and characteristics of the activity. During our audit, we found that there were specific procurement strategies prepared for new professional services contracts for maintenance and renewal for the Northland and Southland areas. Each strategy provided an outline of the performance of the previous supplier, an assessment of the local market of professional services suppliers and pricing environment, and the procurement process and model to secure a new supplier.

2.27
For the Auckland Harbour Bridge, NZTA was in the process of preparing a procurement strategy for a new maintenance contract at the time of our visit. More detail about NZTA's planning and preparation for a new maintenance contract for the Auckland Harbour Bridge is outlined in case study 1.

2.28
Although the procurement strategies we considered for new professional services contracts were detailed and thorough, our Wellington and Northland case studies (see Part 3) highlighted a number of practical aspects NZTA could consider at an area level when changing delivery models. These include more detailed communication and engagement with tenderers about the new model during the selection process, ensuring that the contract management approach and governance structure is appropriate, and reviewing staff and organisational capacity to ensure that the right skills and experiences are in place to manage the new contract.

2.29
The Strategy notes that NZTA is aware that, for many networks throughout the country, the delivery model has not changed for some time. NZTA considers that there are opportunities to complete a more in-depth analysis of the performance of the delivery models used on several networks and test whether it would be better served by using them in a different way. NZTA is also aware that the current approach, which divides the state highway network into separate networks, is also due for detailed review. NZTA anticipates that there will be changes to the overall proportion of delivery models in the next three years.

2.30
Because the nature and characteristics of each area of the state highway network are varied throughout the country, taking a criteria-based approach to selecting new delivery models makes practical sense. But the basic rationale for the current range of delivery models is more than 10 years old and needs review. This review will ensure that the criteria-based approach to selecting delivery models and the preparation of specific procurement strategies is better informed by an up-to-date assessment of the quality and value for money the range of models is delivering. The review should also determine the circumstances in which each model is likely to promote quality and value-for-money services.

2.31
This review could be used to inform adjustments to the delivery models in the future to ensure that they continue to deliver quality and value-for-money maintenance and renewal work. The review could take place as part of a detailed review of the way NZTA has divided the state highway network into areas and regions for maintenance and renewal purposes.

2: There are 25 areas with 24 service delivery models in place because one traditional contract covers two areas – Gisborne and Hawke's Bay.

page top