Auditor-General’s overview

New Zealand Transport Agency: Maintaining state highways through Network Outcomes Contracts.

E ngā mana, e ngā reo, e ngā karangarangatanga maha o te motu, tēnā koutou.

A well-managed state highway network is important to the success of our nation. The state highway network links our towns and communities, farm gates and ports, airports and holiday destinations. In 2018/19, vehicles travelled almost 24 billion kilometres on state highways. The state highway network is one of our most significant built assets – it is more than 11,000 kilometres long and valued at about $50 billion.

The New Zealand Transport Agency (the Agency) is responsible for managing and maintaining state highways. It spends a significant amount – more than $500 million – maintaining them each year. Effectively maintaining the condition of state highways is critical. Poor maintenance of the state highway network will increase fuel usage, vehicle running costs, travel times, and potentially reduce safety. New Zealanders ought to be able to trust that the Agency is maintaining our state highways effectively and efficiently.

In 2013, the Agency decided it could more effectively and efficiently maintain state highways by using Network Outcomes Contracts with suppliers. These are contracts between the Agency and suppliers to provide all management and maintenance activities for state highways, such as traffic control, resurfacing and rehabilitating roads, and maintaining road markings, street lighting, and marker posts. The Agency uses these contracts to, through the work of suppliers, maintain more than 90% of the roads making up the state highway network. By 2018/19, the annual amount spent through these contracts increased to nearly 50% of the Agency’s overall spending on state highway maintenance. (Spending outside these contracts includes work to maintain bridges on the state highway network and state highways in Auckland.)

My staff looked at how well the Agency is using these contracts to maintain state highways and the outcomes being achieved, including the effect on the road condition of state highways.

What we found

According to the Agency’s State Highway Procurement Strategy 2014, the main difference between the Network Outcomes Contracts and previous performance-based contracts is that the key result areas in the contracts are now better aligned with the outcomes sought by the Agency at a strategic level. This change aimed to shift the emphasis of the contracts from the services a supplier will carry out to the outcomes those services will achieve.

Most of the key result areas in Network Outcomes Contracts are clearly aligned with the outcomes the Agency is working toward. Some, such as the key result area for road user safety, include performance indicators that provide a clear view on whether the intended outcome is being achieved.

However, other performance indicators and operational performance measures, such as for network performance, remain largely focused on outputs and compliance. In these key result areas, the extent to which the measures enable an overall assessment of road network condition, and the link to the Agency’s overall outcomes, are unclear.

The Agency has recognised this. In the latest round of contracts, it has removed some of the compliance-based key performance indicators and is considering introducing a key performance indicator about the condition of the road network. In my view, if done, this will help the Agency to better understand how well these contracts are working to support the overall outcomes of safe, reliable, and resilient state highways.

The Agency has a number of pressures it needs to balance to maintain the network. Maintaining an increasing and more complex network with limited funding requires making trade-offs. One of the reasons that the Agency changed to the Network Outcomes Contracts was to gain greater control over the timing and type of road maintenance and renewal work.

The Agency has strengthened the process it uses to decide when to resurface and rehabilitate state highways to ensure that this work is done at the right time, in the right place. The Agency told us that previously it had over-invested in the condition of the network by renewing state highways too early.

In my view, the changes the Agency has made seem appropriate to ensure that investment is well targeted. However, I note that, since 2009/10, the Agency has spent less on renewing state highways than the rate of depreciation for the state highway network. Depreciation is an estimate of the portion of the asset that was “used up” during the year, and we would normally expect the rate of renewals to match the rate of depreciation. Spending less indicates some risk to the Agency’s long-term ability to maintain the condition of state highways. The Agency is aware of this risk, and has highlighted that additional investment in the network will be required as part of developing the next Government Policy Statement on Land Transport.

Broadly, the Agency has maintained the overall condition of the state highway network adequately to meet the road condition performance measures in its annual report. However, when we analysed those performance measures for the state highways maintained through Network Outcomes Contracts, we noted a declining trend for some measures. People we spoke to, including staff from the Agency, suppliers, councils, and road user groups also told us they think parts of the network are getting worse, or about to get worse.

The Agency told us that this decline is a result of the changes made to the management of maintenance work and renewals. Previously, the Agency was exceeding its performance targets for the condition of the roads. We acknowledge this but, given the forecast gap between budgeted and required renewals, it will be important for the Agency to monitor these measures closely and take action if the road condition continues to deteriorate.

We also consider that the Agency should formally assess whether it is achieving the expected benefits from introducing Network Outcomes Contracts, and take steps to strengthen its identification and monitoring of strategic risks.

What we recommend

To help improve the Agency’s management of the contracts, I have made four recommendations. These recommendations are aimed at helping the Agency improve its monitoring and management of outcomes, benefits, and risks that affect its ability to maintain the state highway network. The recommendations also aim to support the collaborative intent of the contracts.

The Agency has started work to address my recommendations – for example, by setting up a Maintenance Contracts Governance Group to measure and report on risks, benefits, and outcomes for all of its maintenance contracts. By fully addressing my recommendations, the Agency should be able to achieve better value for money from the $500 million spent each year on maintaining state highways, and New Zealanders will have the benefit of driving on better maintained roads.

I thank the Agency, suppliers, councils, road user groups, and other organisations for their support, co-operation, and openness throughout my audit, and their efforts in making state highways safe, reliable, and resilient in connecting
New Zealanders.

Nāku noa, nā

Signature - JR

John Ryan
Controller and Auditor-General

31 July 2020