Auditor-General's overview

Earthquake Commission: Managing the Canterbury Home Repair Programme - follow-up audit.

In October 2013, I published a report on the performance of the Earthquake Commission (EQC) in managing the Canterbury Home Repair Programme (the programme). I said that my staff would carry out follow-up work to track EQC's progress with my recommendations.

In my 2013 report, I described EQC's role, the challenging circumstances for it and the people of Canterbury, and how the programme was performing at the time. The circumstances have continued to be challenging, changing, and complex.

In 2013, I concluded that EQC's performance in managing the programme had been mixed. EQC had set up the programme quickly and had generally managed repair costs well. However, EQC had not dealt with homeowners as well. Project management costs were also at the upper end of what I considered to be reasonable in the circumstances.

I made five recommendations to help EQC give homeowners more certainty and improve the consistency of EQC's repair practices. I recommended that EQC improve its auditing of repairs, improve its communication with homeowners, refine its key performance indicators, review the configuration of repair and project management services, and identify and record lessons learned.

In my 2013 report, I described the importance of ongoing reinsurance cover. Since that report, EQC has continued to obtain reinsurance while working to improve the programme.

Securing reinsurance is important because, if EQC had not had it when the Canterbury earthquakes happened, the direct cost of the programme to the taxpayer would have been higher. Continuing to secure reinsurance is important for reducing the cost to the taxpayer of another large-scale natural disaster during the period of reinsurance cover. If EQC had failed to continue to obtain reinsurance cover, the wider New Zealand insurance industry and potentially the wider economy could have been adversely affected.

EQC has made improvements to the programme

Since 2013, EQC has made improvements to all of the areas of programme activity that I made recommendations for. These improvements include introducing an initiative to give customers more certainty about when their homes would be repaired, rationalising repair hubs to support more consistent repair processes and practices, and introducing more consistent and complete performance indicators.

EQC has a contract with Fletcher Construction Limited to project-manage repairs in the programme. The contract requires Fletcher Construction to source and manage contractors, monitor and inspect repair work, and keep full and accurate repair records as the provider of project management.

On 18 May 2015, EQC agreed a variation to its contract with Fletcher Construction to support the eventual completion of the programme. The variation now includes a set of incentives and performance measures about repair quality, time, and cost.

Although contractors and Fletcher Construction have responsibilities in the programme, EQC continues to be ultimately responsible for the programme.

It is difficult to assess EQC's overall performance in managing repair quality

We found it difficult to assess EQC's overall performance in managing repair quality, even though EQC has improved its understanding of repair quality since my 2013 report.

On one hand, there are problems with the quality of some repairs. On the other hand, many thousands of people are residing in repaired houses. Homeowners' perceptions of the quality of repairs depend heavily on their individual circumstances and experiences.

Some of the programme's repair work has not met the requirements of the Building Code, as found in the Ministry of Business, Innovation and Employment's 2015 report about 101 home repairs in Canterbury.

Although that report's findings are not statistically representative of the whole programme and are about a small number of all repairs, they indicate problems with some programme controls for some repairs. That report has also resulted in EQC intending to recheck the repair files of 3600 homes (as at 28 August 2015).

EQC estimates that about 8%-10% of homes repaired in the programme have needed some aspect of the repair work to be remedied. However, EQC's survey of customer satisfaction immediately after repairs have been completed shows that 84% of surveyed customers were satisfied or very satisfied with the quality of repairs in 2014/15.

EQC has continued to support good health and safety practices. This is reflected in low numbers of reported serious harm incidents and low numbers of reported injuries for every million hours worked, compared with construction industry benchmarks. This is a considerable achievement.

The programme has taken longer than expected

EQC's original target date for ending the programme was December 2015. EQC brought the end date forward to December 2014 but did not meet this target. December 2014 was a "stretch target", but EQC did not make this clear in its communications to customers, who might have had different expectations.

Some homeowners have not received the level of certainty they were expecting and have had to wait a long time for information.

EQC says that it is "exerting every effort to ensure that the remaining settlements are completed as soon as reasonably practicable". However, EQC has not set a new end date for the programme.

Repair costs have continued to be well managed

As at 30 June 2015, about $2.7 billion had been spent on the programme. Of this, about $399 million has been spent on programme management and claims administration, including $340 million on the project management services provided by Fletcher Construction. About $258 million of this is direct project management costs, including staff and facilities. The remainder is the margin on repair costs paid to Fletcher Construction.

EQC has continued to manage repair costs well. The increase in repair costs since February 2011 is below the Canterbury inflation rate for new houses in Canterbury. The rates ceiling approach used within the programme to control actual repair costs has continued to be effective.

Since 2013, the project management component of the programme's total costs has increased.

The unique scale and type of the programme means that there are no other directly equivalent programmes to definitively compare project management costs against. Instead, those costs can be indicatively viewed only against other indicators of project management costs.

The programme's project management costs are generally at the upper end of multiple New Zealand indicators of project management costs as a proportion of building costs. Viewed from another perspective, EQC's claims-handling costs are in the middle of a large reinsurer's experience of those costs for a range of international jurisdictions.

There are still repairs to be completed

According to EQC, 66,252 repairs had been "practically completed" as at 30 June 2015. This has been, and continues to be, a major exercise. EQC refers to these as "primary substantive repairs". Also, a large number of emergency repairs and home heating installations were carried out early in the programme.

Although considered to be "practically completed", some of these repairs still require further work, such as a repair to a garage or drainage work, to be fully completed.

As at 30 June 2015, EQC estimated that there were an additional 1018 primary substantive repairs in progress (yet to be practically completed) and 1767 primary substantive repairs yet to start.

An estimated 2923 repairs already carried out require further investigation to determine whether they need additional work to be fully completed.

Complaints could be better managed

Although EQC has made improvements to how it manages complaints since 2013, it cannot easily identify all complaints about the programme, has no formal mechanisms for using complaints information to improve its processes, has not fully integrated complaints systems between EQC and Fletcher Construction, and could improve its resolution of complaints.

The nature of EQC's customer interactions has been the subject of many complaints. EQC has received advice on how to improve its customer service and has made this advice publicly available.

Effective management of repair costs but mixed customer experiences

For several reasons, it is difficult to reach an overall conclusion on the performance of the programme in terms of efficiency (whether results have been maximised for the cost), effectiveness (whether the programme has delivered the expected results), and economy (whether the cost has been reasonable).

These reasons include the trade-offs that have to be made in the programme, including between timing and cost. They also include the programme's broadly defined goals – to properly complete all repairs safely, as quickly as practicable, and in a manner that provides value for money in the circumstances.

Two aspects of the performance of the programme are particularly notable. The first is EQC's effective management of repair cost inflation – meaning that repair costs appear to be economic in the circumstances. The second is EQC's mixed performance in terms of customer interactions and experience – meaning that the programme has not been fully effective in the circumstances for some customers, including some vulnerable people.

EQC has not completed repairs for vulnerable people significantly sooner than for other customers. However, it has, on average, issued work orders to begin repair work sooner for those customers. Large numbers of people have been identified as vulnerable, and efforts have been made to work with vulnerable people in the programme.

Some people who are still waiting for repairs to be completed may not be able to live in their homes. Their frustration with the performance of the programme is understandable. Others who have faced long periods of uncertainty about the status of repair work or who have needed more work done after the original repair work may also be frustrated with the programme's performance.

It is important that EQC does not lose sight of the ongoing importance of effective service delivery and learning from customers' complaints.

Lessons are being learned and identified

EQC has started to record lessons learned from the programme and is committed to being able to deal with large-scale events in the future. For example, EQC has recognised that a long and complex process to resolve claims has caused distress to homeowners and that this has been compounded by dissatisfaction with the quality of EQC's communications. It is important that these lessons are well understood in case they are needed in the future.

I thank the many people in community organisations, EQC, Fletcher Construction, and other agencies for their input to this report.

Signature - LP

Lyn Provost
Controller and Auditor-General

18 November 2015