Part 2: About the Stronger Christchurch Infrastructure Rebuild Team

Effectiveness and efficiency of arrangements to repair pipes and roads in Christchurch.

2.1
In this Part, we describe:

Summary of this Part

2.2
The main points outlined in this Part are:

  • SCIRT is a team of public and private organisations, formed to rebuild the pipes and roads in Christchurch.
  • SCIRT was established after the 22 February 2011 Canterbury earthquake to cope with the increased scale of damage.
  • SCIRT has three functional layers – a governance framework, an Integrated Services Team, and five delivery teams.
  • The SCIRT model has features designed to promote efficiency, contain cost inflation, and encourage behaviours that support an effective and efficient rebuild.

What is SCIRT and what does it do?

2.3
SCIRT is a mixed team of public and private organisations that have agreed to participate in a contract arrangement called an alliance.

2.4
An alliance is formed between public entity funders and asset owners, which are also referred to as "owner participants" or "clients", and private contractors, which are known as "non-owner participants". Each non-owner participant provides a delivery team to carry out the physical construction works. The alliance arrangement is the delivery vehicle used to carry out a construction project or programme of works.

2.5
The SCIRT alliance involves three owner participants (the three public entities) – CCC, NZTA, and CERA – and five non-owner participants. The five non-owner participants are City Care Limited (City Care), Downer New Zealand Limited (Downer), Fletcher Construction Company Limited (Fletcher Construction), Fulton Hogan Limited (Fulton Hogan), and McConnell Dowell Constructors Limited (McConnell Dowell). Among the three public entities, CERA is a funder only, CCC is a funder and asset owner, and NZTA is a funder and asset owner.

2.6
SCIRT is tasked with repairing and reconstructing the horizontal infrastructure damaged during the two major earthquakes of 4 September 2010 and 22 February 2011, as well as damage from the aftershocks and earthquakes that followed. The term "horizontal infrastructure" refers to the pipes that form the water supply network, the wastewater or sewer network, and the stormwater drainage network, as well as the roading network, which includes walls and roading structures.

2.7
Planning for the horizontal infrastructure rebuild connects closely with the Land Building and Infrastructure Recovery Plan. Planning is informed by the CERA Recovery Strategy and the Christchurch Central Recovery Plan. It should also be co-ordinated with other utilities' recovery plans, as co-ordinated by CERA, and other CCC plans to inform infrastructure recovery.

2.8
On 4 May 2011, the participants entered into an initial alliance agreement to repair horizontal infrastructure in Christchurch. This established SCIRT. The Alliance Agreement was signed on 22 September 2011.

2.9
The participants agreed to a scope of repair work, limited to the city boundaries of CCC, that included:

  • repairing and reinstating the water supply, stormwater drainage, and wastewater drainage systems (including reticulation, pressure mains, pumping stations, reservoirs, and waterways);
  • repairing and reinstating the local road network, the state highway network, bridges, and some retaining walls; and
  • other works as agreed.

2.10
It was agreed that this work would be to a standard and level of service comparable to that which existed immediately before the September 2010 earthquake. There is flexibility in the Alliance Agreement to include other works in the scope of repair work if they promote value for money.

2.11
Because the condition of below-ground assets takes time to assess, there remains uncertainty about what the final cost will be. Waiting for decisions to be made about the wider rebuild, such as identifying land to be assigned to the red zones, has also added to this uncertainty. These decisions affect the configuration and design of future infrastructure.

2.12
The initial estimated cost to repair Christchurch's damaged horizontal infrastructure was $2.015 billion (this figure includes SCIRT and non-SCIRT work). In 2013, a revised estimate for the SCIRT component of the work assessed the costs as $2.496 billion. It will be funded by CCC, NZTA, and CERA.

2.13
In June 2013, the Crown agreed to contribute a maximum amount of $1.8 billion to the rebuild of horizontal infrastructure. The maximum amount includes CERA funding 60% of costs for the water infrastructure, and NZTA funding 83% of the roading infrastructure. CCC will fund a total of $1.14 billion.

2.14
An independent assessor will review the extent of damage to infrastructure and the cost for repair before December 2014. The Crown's agreed level of contribution could go up or down as a result of the review.

2.15
Appendix 1 summarises the circumstances leading to the formation of SCIRT.

Features of an alliance

2.16
The Australian Government National Alliancing Contracting Guidelines note that one of the most significant aspects of alliancing is the treatment of risk. In a traditional contract, the buyer's terms and requirements are often in the form of a request for tender, to which the seller responds with a solution and a price. The risk assessment is built into the price for each party, and each will stand to win or lose depending on whether the actual cost is higher or lower than predicted. The higher the seller's perception of risk, the higher their tendered price.

2.17
Alliance contracting offers an alternative for particularly complex and risky projects. The buyer and seller collaborate to prepare the requirements and the proposal. The team works together in good faith with a "no disputes" arrangement, fostering a "no blame" culture. Participants collectively share the project's risks and outcomes. This provides the foundation for collaboration and best-for-project decisions, and encourages innovation.

2.18
The Australian Guidelines say that successfully setting up an alliance depends on several main factors:

  • forming an integrated team, containing staff from non-owner and owner organisations with good collaboration and project culture;
  • a project solution along with a design solution, construction methodology, and project delivery arrangements;
  • commercial arrangements that are intended to foster alignment, desirable team behaviours, and project outcomes; and
  • a target out-turn cost or "TOC".1

2.19
Alliances have been adopted overseas for large and complex construction projects. For example, the British Airports Authority2 adopted a partnering approach to construct Terminal 5 at Heathrow Airport in the United Kingdom. The project posed multiple challenges, including a large scale, highly material risk, constrained site access, and design changes expected during the project.

2.20
Alliances are in use in New Zealand for large infrastructure projects, such as NZTA's Waterview Connection project to complete a motorway ring route around Auckland City. Examples of alliance contracting used in New Zealand for small-scale reconstruction after disasters are uncommon. However, research by the University of Auckland has shown that reconstruction favours a collaborative environment where there is large-scale disaster, such as the situations experienced in China after the Yangtze River flooded in 1998 and an earthquake in Sichuan in 2008.

Structure and role of SCIRT participants

2.21
Figure 1 sets out the organisational structure of SCIRT. The following section explains the roles of the various parts.

Figure 1
Organisational structure of SCIRT

Figure 1 Organisational structure of SCIRT.

*The representatives for CCC, CERA, and NZTA on the CGG are the same officials who represent the three public entities on the SCIRT Board. The CGG was renamed the Horizontal Infrastructure Governance Group in October 2013 (see paragraph 5.12).

The three public entities

New Zealand Transport Agency

2.22
NZTA is a funder and asset owner in SCIRT. It has a significant role in the Canterbury earthquake recovery, which is explained in our 2012 report, Roles, responsibilities, and funding of public entities after the Canterbury earthquakes.3

2.23
NZTA funds 83% of the cost of reinstating local roads.

Christchurch City Council

2.24
CCC owns most of the assets and is a funder of SCIRT. As a territorial authority, it is required by the Local Government Act 2002 to act on behalf of its community. Under that Act, CCC is expected to meet current and future needs for good quality local infrastructure, public services, and regulation, in a way that is most cost-effective for households and businesses. Good quality local infrastructure means efficient, effective, and appropriate to present and anticipated circumstances.

Canterbury Earthquake Recovery Authority

2.25
CERA does not own any of the infrastructure assets, but it is a significant funder. CERA was established under the Canterbury Earthquake Recovery Act 2011 to provide strategic leadership and to co-ordinate activities to ensure an effective, timely, and co-ordinated rebuilding and recovery effort in Canterbury.

2.26
When SCIRT was established, CERA had only just been formed.4

2.27
The three public entities are able to give directions to ensure that the work SCIRT completes is consistent with, and integrated into, the wider recovery for Canterbury.

The non-owner participants

2.28
The non-owner participants are the private construction companies from which the delivery teams are derived. They are Downer, Fulton Hogan, McConnell Dowell, Fletcher Construction, and City Care. We briefly describe each company in Appendix 2.

SCIRT structure

2.29
SCIRT is organised into three functional layers:

  • SCIRT governance;
  • the Integrated Services Team (IST); and
  • the delivery teams.

2.30
There are two governing bodies with different membership and functions. The Client Governance Group (CGG) consists of the three public entity members only, with an independent chairperson appointed by the Minister for Canterbury Earthquake Recovery. The SCIRT Board consists of member representatives from each of the owner and non-owner participants. The position of chairperson is rotated through the participants. In combination, these bodies, along with the parent organisations, provide the governance framework for SCIRT.

2.31
The IST is at the operational level of SCIRT. It consists of managers and staff who are a mixture of secondees from the participating entities and various consulting practices. It fulfils a project-managing function to define, design, price, and oversee projects of work for construction.

2.32
The lead contractors of the delivery teams are subgroups of the non-owner participants. The delivery teams also include companies subcontracted by the lead contractors. They compete for work based on performance against cost and service measures.

2.33
The delivery teams operate within the management systems of their parent companies but report back to the IST and must conform to SCIRT standards and expectations. The IST monitors and reports on the delivery teams' performance to the SCIRT Board.

SCIRT governance

Client Governance Group

2.34
The CGG was set up in December 2011. The CGG was created after SCIRT was already operating, so it is not mentioned in the Alliance Agreement.

2.35
There are three full members on the CGG, one from each of the three public entities, as well as an independent chairperson. The independent chairperson received a letter of appointment from the Minister for Canterbury Earthquake Recovery. However, further information about expectations and delegations has not been provided.

Purpose

2.36
The purpose of the CGG is stated in its terms of reference:

… to provide leadership so that CCC, CERA and NZTA will work together to deliver the recovery of the City's Horizontal Infrastructure, which is effective, efficient and resilient, for the People of Christchurch and New Zealand.

2.37
The CGG's terms of reference require it to approve a purpose and set of performance objectives/outcomes that give clear direction to team members participating in the infrastructure rebuild.

Responsibilities

2.38
The terms of reference also define specific responsibilities for the CGG. The CGG's role is to produce and maintain a governance framework for delivering the Infrastructure Rebuild Plan. This includes providing a process for escalating issues and making decisions about infrastructure, and appointing subcommittees as needed.

2.39
The CGG has several strategic and planning roles. It is to inform the development of wider recovery strategies and to ensure that work delivered under the SCIRT alliance is consistent with the wider recovery strategies. Also, the CGG has to prepare a process for approving decisions about betterment and exceptions to standards. External factors can affect the work of the Alliance, and the CGG is responsible for considering and responding to the effect of those factors.

2.40
All members of the CGG are directly or indirectly funders of SCIRT. Therefore, the CGG approves the annual work programme and budgets, and co-ordinates SCIRT's funding requirements. It also reviews audit reports and the implementation of controls.

2.41
The CGG is responsible for meeting the clients' obligations under the Alliance Agreement. It monitors SCIRT's progress and budget through annual and monthly reports that cover progress, trends, and performance against milestones and performance objectives. Importantly, the CGG is to ensure value for money and manage prioritisation of costs.

Subcommittees

2.42
Four subgroups or subcommittees support the CGG in its role: Scope and Standards, Infrastructure Funding, Strategy, and Communications.

2.43
As well, a Client Manager and the Client Management Team provide governance, operational, and secretariat support to the CGG. They are responsible for providing a single point of contact between the CGG, its subgroups, and SCIRT management.

2.44
A Scope and Standards Review Committee preceded the formation of the CGG. It was set up to agree on standards for the infrastructure repairs and renewals in keeping with good practice and to ensure that the right type of infrastructure is provided.

SCIRT Board

2.45
The SCIRT Board (previously known as the Alliance Leadership Team) comprises senior executives of the three public entities and the non-owner participants. The representatives from the three public entities on the SCIRT Board are the same representatives as on the CGG.

Purpose

2.46
The role of the SCIRT Board is to:

  • administer the Alliance Agreement;
  • provide guidance to the participants on the work done under the alliance; and
  • provide a forum for the participants to discuss and resolve issues under the alliance.

Responsibilities

2.47
Under the Alliance Agreement, the duties of the SCIRT Board include:

  • setting policy and giving philosophical and strategic direction to successfully deliver the works and achieve SCIRT's other objectives;
  • deciding, approving, or reviewing issues and resolving any differences as required under the agreement;
  • approving the commitment of resources to work; and
  • confirming appointments to, and monitoring the performance of, SCIRT's management team.

2.48
The SCIRT Board's decisions are made through voting by all participants (owner and non-owner), with a requirement that all decisions must be unanimous.

2.49
The SCIRT Board is focused on governing SCIRT so that it fulfils its principles and achieves its objectives. The CGG is focused on ensuring that SCIRT delivers outcomes that are consistent with the entities' objectives.

SCIRT operations

Integrated Services Team

2.50
The IST is made up of various specialist professional staff, including closed-circuit television (CCTV) specialists, engineers, geographic information systems operators, estimators, planners, and business analysts.

2.51
The SCIRT Management Team is part of the IST and provides SCIRT's everyday management. It is headed by the Alliance General Manager, who is appointed by the SCIRT Board. The Alliance General Manager reports monthly to the Board on behalf of the IST.

2.52
The IST maintains plans and procedures to manage all important aspects of SCIRT's work. Currently, about 290 people are in the IST, which includes staff seconded from NZTA and CCC and each of the non-owner participants.5 IST staff are seconded, rather than directly employed by SCIRT.

Delivery teams

2.53
The delivery teams are the non-owner participants that have entered into an unincorporated joint venture. They are still independent entities, and they compete for work.

2.54
A minimum of 40% of the work completed under SCIRT, by cost, must be subcontracted to parties outside SCIRT. A competitive process must be followed to select suitable subcontractors. The non-owner participants are then responsible for ensuring that subcontractors meet the same standards of operation and key result area (KRA) reporting that they do.

Commercial framework

2.55
SCIRT's commercial framework has features designed to promote efficiency, prevent rapid price increases, and foster behaviours that support an effective and efficient rebuild. In Part 4, we assess whether this framework is achieving that. The features are designed to motivate delivery teams to compete and to collaborate. We discuss some of the features below.

Fee structure

2.56
The fee structure consists of three components called "limbs":

  • Limb 1 – a reimbursement of actual costs;
  • Limb 2 – a fixed margin for profit and overhead; and
  • Limb 3 – a performance-based incentive payment or penalty shared among owner and non-owner participants.

2.57
Figure 2 sets out the three-limb fee structure. We discuss this fee structure in more detail in Part 4 (see paragraphs 4.133-4.142).

Figure 2
Breakdown of the three-limb commercial arrangement

Figure 2 Breakdown of the three-limb commercial arrangement.

Behaviours

2.58
The commercial framework comprises a system of penalties and rewards that are intended to foster certain behaviours:

  • Delivery teams aim to deliver projects below target cost, to avoid overruns that would result in a penalty or "pain" situation.
  • Delivery teams compete to increase their share of work because this increases their fee income.
  • Work allocation is based on performance against target cost and performance across KRAs. To get more work, delivery teams strive to improve against cost and service performance areas.
  • The delivery teams performing better will be allocated more work.
  • The incentive payment or penalty (Limb 3) is shared among delivery teams, which encourages collaboration to maximise profit and minimise loss, because they win or lose together.
  • The size of Limb 3 is modified by an overall performance score, which further encourages delivery teams to collaborate to improve on aspects of service performance.

Allocation and performance measures

2.59
The allocation of work is determined by performance against target cost and against five service performance KRAs. These were established in the Alliance Agreement and are intended to drive behaviours consistent with the Alliance's objectives. The five areas are:

  • safety;
  • value;
  • "our team";
  • customer satisfaction; and
  • environment.

2.60
The KRAs are broken down further into key performance indicators (KPIs) and measures against which delivery teams are assessed. A performance score is generated from the assessment. The KRAs and respective KPIs are weighted to place greater importance on particular areas. We discuss this in more detail in Part 4.

2.61
A delivery performance score (DPS) is generated for each delivery team, to influence the allocation of projects. A team with higher DPS will have a higher target share of the total programme.

2.62
An overall performance score (OPS) is generated as a consolidated measure for all delivery teams to adjust the final Limb 3 payment.

1: Referred to as "target cost" in this report.

2: The British Airports Authority is now known as Heathrow Airport Holdings.

3: Available at www.oag.govt.nz.

4: CERA was formed on 29 March 2011. Its full powers were brought into force on 19 April 2011 by the Canterbury Earthquake Recovery Act 2011.

5: Thirty are from CCC, one from NZTA, eight from City Care, 16 from Downer, nine from Fletcher, 26 from Fulton Hogan, and eight from McConnell Dowell. More than 20 other organisations have seconded staff to SCIRT, mostly design staff.

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