Part 5: Effect of decisions about levels of service and funding

5.1
In this Part, we discuss:

• levels of service;
• changes to funding arrangements; and
• effect of delays in resolving disagreements about the use of available funding.

Summary

5.2
The three main factors that influence decision-making for asset management are:

• the condition of the pipe or road;
• the desired level of service (the performance standard an organisation intends the asset to deliver to its customers)¹⁵ that the assets should deliver in the future; and
• the funding available.

5.3
The three factors are interrelated. For example, if the condition of a pipe is poor and there is limited funding available, the standard of the repair may get the pipe functioning again, but not to the desired level of service.

5.4
In our 2013 report, we recommended that the public entities agree on the levels of service that the rebuild would deliver, confirm the funding arrangements, and consider a second independent review of the Infrastructure Recovery Technical Standards and Guidelines. As a result of our recommendation in 2013, and improvements in SCIRT's governance practices, we expected the levels of service and funding arrangements to be clear and agreed. We also expected the public entities to decide these matters jointly, in a collaborative and timely way.

5.5
The public entities faced challenges in deciding the appropriate funding and levels of services for the horizontal infrastructure. In disaster recovery work, getting the balance right between competing interests is difficult. For example, there may be tensions between:¹⁶

• local decision-making and central decision-making; and
• investing now to save later and the amount of funding available.

5.6
The levels of service are now agreed, the funding arrangements are confirmed, and a second independent review of the Infrastructure Recovery Technical Standards and Guidelines has been carried out. The funding arrangements, however, took up to 19 months to confirm, creating funding uncertainty for about 30 wastewater and stormwater projects for more than eight months. The funding arrangements were confirmed in late 2015 and, as at March 2016, all projects decided as eligible for funding under the Cost Sharing Agreement were scheduled to proceed.

Agreed levels of service

The public entities have agreed on the levels of service for pipes and roads. As a result SCIRT now designs stormwater and wastewater pipes to two standards.

5.7
SCIRT now has a clearer understanding of the standard it should deliver its projects to, and the levels of service for pipes and roads. This results from:

• the agreement reached by the public entities about the levels of service that pipes and roads should meet;
• revised design guidelines;
• the changes made to the Infrastructure Recovery Technical Standards and Guidelines because of the second independent review; and
• the directions SCIRT now receives from the Infrastructure Programme Co-ordination Team (and the Council for wastewater and stormwater pipes) about applying the design guidelines to projects.

5.8
The public entities shifted from a "damage repair" approach (all damaged assets are repaired) to a "network performance approach" (repairs are prioritised to improve the overall functionality and serviceability of the network) in 2014 for water supply, wastewater, and stormwater pipes. This means that some earthquake-damaged pipes might not be repaired because the damage does not meet a threshold for repair under the network performance approach.

5.9
The public entities shifted away from the original goal of restoring the horizontal infrastructure to the levels of service delivered before the earthquakes. The Council describes this shift in its Infrastructure Strategy 2015-2045:

SCIRT's scope was to originally restore pre-earthquake levels of service. However, due to the budget reductions … the SCIRT scope is now focused on repairing earthquake damage.

This is subtly different from the original scope and means that in situations where a repair is warranted rather than renewal, only the earthquake damage will be repaired, not the level of service deficiency. Where full renewal is required it will be delivered to meet the current design and construction standards.

5.10
SCIRT uses design guidelines agreed by the public entities in 2014 to assess damaged assets and design each project. Changes were made to the design guidelines to reflect the move to a network performance approach and funding changes. Both roading and water supply assets have agreed design guidelines.

5.11
In 2014, CERA and the Council agreed on an approach to the design guidelines for wastewater and stormwater pipes. SCIRT now designs these projects to two standards in an effort to balance the inherent tensions between investing now to save later and the funding available under the Cost Sharing Agreement. The Council decides the standard to which particular wastewater and stormwater pipes are to be repaired. It is also responsible for any funding difference between the standard eligible for funding under the Cost Sharing Agreement and its preferred standard. This gives the Council the opportunity to choose the best solution, taking into consideration both the desired level of service performance and the available funding.

5.12
The decision to design to two standards was made in 2014 as part of the optimisation exercise (see paragraph 5.16). Because of this decision, several projects needed to be redesigned and some needed more design work. Despite the extra design time and costs, overall project costs did not necessarily increase.

Changes to funding arrangements

The public entities made changes to funding estimates over the last three years. These changes were partly due to the uncertainties inherent in disaster recovery work. Funding has now been confirmed.

5.13
Funding arrangements were finally confirmed in late 2015. The public entities have made changes to funding estimates since our 2013 report. Generally, these changes are because of the uncertainties inherent in disaster recovery work, and the public entities revisiting decisions about the work programme and estimated costs as better information became available.

5.14
The funding arrangements were revisited over time:

• In 2013, the public entities signed the Cost Sharing Agreement (June 2013) and the Memorandum of Understanding (September 2013) in which the Crown estimated that it would contribute $1.8 billion for rebuilding the horizontal infrastructure. The Council estimated that it would contribute $1.14 billion. Most, but not all, horizontal infrastructure repair work funded under the Cost Sharing Agreement is to be carried out by SCIRT.
• In April 2014, Cabinet decided to take a network performance approach to levels of service (thereby removing the eligibility of some repair work from under the Cost Sharing Agreement) and noted that CERA would "continue to pay all eligible and valid invoices, which from 1 April 2014 may include components of renewals [replacement of old pipes], on the basis of 60 per cent Crown financial assistance" for repairing water infrastructure.
• In April 2015, the Independent Assessor reported that the estimated cost of horizontal infrastructure repair work to be done under the Cost Sharing Agreement would be $2.899 billion (approximately $41 million less than the total expected by that Agreement in 2013).
• On 23 November 2015, Cabinet decided that the Crown's revised financial contribution would be $1.689 billion ($111 million less than estimated in 2013), and confirmed that "the general Crown policy for government financial assistance in recovery is not to fund renewals (i.e. not fund the depreciated portion of assets), and the maximum Crown contribution of $1.800 billion for the Council's horizontal infrastructure recovery costs was set on this basis."

5.15
Figure 9 shows the funding estimates, and each public entity's estimated contribution, from 2013 to 2015 (where available).

Figure 9
Horizontal infrastructure funding estimates from 2013 to 2015

^ The Independent Assessor's report did not divide out the Crown and Council shares.
† Department of Internal Affairs, through the Ministry of Civil Defence and Emergency Management.
* From the Memorandum of Understanding (September 2013) to the Cost Sharing Agreement (June 2013).
** From Cabinet paper (Horizontal Infrastructure funding, 2015, paragraph 12) – the figures were rounded.

5.16
From April to July 2014, the public entities, with help from SCIRT, also carried out an "optimisation exercise" to reprioritise projects within the programme's remaining funds. The optimisation exercise was necessary because work planned under the Cost Sharing Agreement exceeded the available funding. The resulting report set out a proposal for allocating funding and prioritising work, and identified that changes in contributions from the public entities might be necessary. For example, the Council and CERA might have needed to contribute more funding for water infrastructure repairs. The Horizontal Infrastructure Governance Group used the results from the optimisation exercise to reprioritise projects.

Effect of delays in resolving disagreements about the use of available funding

Funding uncertainty and associated delays can be costly in an alliance. About 30 SCIRT projects ready for construction were put on hold for more than eight months as a result of some funding disagreements. Despite the uncertainty, all projects decided as eligible for funding under the Cost Sharing Agreement are now scheduled to proceed. The Council is responsible for any repairs to earthquake-damaged assets not carried out by SCIRT or not covered by the Cost Sharing Agreement.

5.17
The uncertainties inherent in disaster recovery work can lead to inefficiencies. Public entities can manage this through timely information sharing, collaboration, and prompt resolution of disagreements.

5.18
The public entities worked well together to resolve some of the funding issues. For example, CERA and the Council agreed to some minor financial adjustments for some early projects because they were not eligible for funding under the Cost Sharing Agreement. The Council and NZTA resolved issues raised in the Independent Assessor's report (April 2015) about repairs to roads, bridges, and retaining walls.

5.19
However, some of the disagreements could have been dealt with better. For example, CERA and the Council disagreed about how to fund wastewater and stormwater pipe repairs, and this led to delays (see paragraphs 5.20-5.24 ).

Funding for water infrastructure repairs

5.20
CERA and the Council disagreed about the implications of the Cabinet decision in April 2014 about funding of "components of renewals" (see paragraph 5.14), and the optimisation exercise in July 2014 (see paragraph 5.16). Communication from CERA to the Council about the Cabinet decision was poor. For example, the Council had to request a copy of the Cabinet decision under the Official Information Act 1982. CERA and the Council also had different interpretations of what the Cabinet decision would mean in practice, and the extent of these differences was not fully understood until early 2015.

5.21
A report in June 2015 said that this disagreement meant that 30 SCIRT projects (totalling $147.3 million) had yet to have funding confirmed, so construction could not begin. The report also noted that, because of the delays, it might not be possible to start some of the projects in SCIRT's work programme because they might not be completed by December 2016.

5.22
Prompt resolution of disagreements is important in the effective and efficient operation of an alliance. The Minister for Canterbury Earthquake Recovery and the Mayor of Christchurch are responsible, under the Cost Sharing Agreement, for issuing a joint direction if there is a funding disagreement. The funding disagreement about water infrastructure was not escalated to the Minister and the Mayor until mid-2015. The poor communication, mainly from CERA to the Council, meant that this issue was not recognised and addressed earlier. Given that the disagreement had arisen from misunderstandings, it would have been beneficial if CERA and the Council had prepared a joint paper setting out their different views and some options for the Minister and the Mayor to consider. This might have enabled the Minister and the Mayor to resolve the disagreement.

5.23
Funding for water infrastructure repairs was settled through a Cabinet decision on 23 November 2015 and a memorandum from CERA and the Council to the Horizontal Infrastructure Governance Group on 20 January 2016. The $1.689 billion decided by Cabinet is less than the Crown contribution estimated under the Cost Sharing Agreement (2013). This reduces the total funding under the Cost Sharing Agreement to less than estimated in the Independent Assessor's report (2015). The Council will also contribute less under the Cost Sharing Agreement. These reductions are partly due to inflation being lower than expected. All projects decided as eligible for funding under the Cost Sharing Agreement are now scheduled to proceed. The Council is responsible for any repairs to earthquake-damaged assets not carried out by SCIRT or not covered by the Cost Sharing Agreement.

5.24
If timely, open, and clear information was made available, delays could have been avoided. Bearing in mind the challenges for decision-making during disaster recovery, this funding disagreement could have been managed better if:

• CERA had advised the Council promptly of Cabinet's decision in April 2014 about funding for renewal of pipes and how CERA intended to implement the decision;
• the disagreement had been escalated more quickly to the Minister and the Mayor; and
• CERA and the Council had prepared a joint paper for the Minister and the Mayor, with a view to them giving a direction to the public entities under the Cost Sharing Agreement.

Long-term implications

5.25
Christchurch will have the agreed levels of service for water and road networks when the SCIRT programme finishes. Decisions about funding and levels of service are, however, likely to have long-term implications for the Council. Horizontal infrastructure with earthquake damage that is not repaired because it does not meet the threshold for repairs under the network performance approach, and is not eligible under the Cost Sharing Agreement, is likely to require more regular maintenance or earlier replacement. For example, SCIRT estimated that, after the horizontal infrastructure programme ends, the average remaining life of the wastewater network will be 4.5 years less than before the earthquakes.

5.26
The Council expects that it will need to increase its rate of replacing or repairing pipes and roads for the next 20-30 years. The Council's Long-Term Plan 2015-2025 sets out its estimates for the cost of future repair work, and notes the challenges in forming those estimates. In our audit of the Council's Long-Term Plan 2015-2025, we concluded that it had been prepared using the best information available, but relied on some significant assumptions, and that the Council rightly recognised that a high level of uncertainty remains about the estimated cost of repairs to all of the Council's assets.¹⁷ At the time of writing this report, the Council was in the process of amending its 2015-2025 Long-Term Plan.

15: National Asset Management Steering Group (2011), International Infrastructure Management Manual, 4th edition, section 2, page 18.

16: E McNaughton, J Wills, D Lallemant (2015), Leading in Disaster Recovery: a companion through the chaos, New Zealand Red Cross, pages 4-5.

17: Christchurch City Council, Christchurch City Council's Long-Term Plan 2015-2025, Christchurch (2015), pages13-14.