Tauranga City Council car park building project

26 May 2021

Marty Grenfell
Chief Executive
Tauranga City Council

Tēnā koe Mr Grenfell

TAURANGA CITY COUNCIL CAR PARK BUILDING PROJECT

In 2018, the Tauranga City Council (the Council) began building a car park building in the city (the Project), and in June 2020 the Council decided to abandon the construction with a partly built car park. This decision was informed by expert engineering advice that there were serious seismic design issues with the building.

At the point the Council decided not to continue with the building, it had spent $19 million on the project. It was estimated that it would cost $9.8 million to demolish the building and restore the site. The Council decided not to demolish the building, and instead on 19 March 2021 it sold the site to the lead contractor for $1. Selling the unused material and structural steel and the negotiated settlement of the construction contract resulted in a final payment of $200,000 to the Council.

In the end, the Council will have nothing to show for the money it has spent. This raises significant questions about the procurement process used by the Council for the building. We decided to look into the issue.

Since we started looking at this issue, the Minister of Local Government has appointed Commissioners at the Council. Also, we saw that the Council had initiated reviews of its procurement policies and practices. In light of these events, I considered that rather than carry out a full inquiry, this letter setting out the broad matters I am interested in, my comments about them, and some recommendations might be more useful to the Commissioners.

There are some matters we have chosen not to cover (such as the cause of the failure and the selection of the structural design engineer), which the Council is considering separately.

In this letter, I have commented on the Council’s procurement in this case and have recommended that, as it reviews its procurement policies and procedures and implements change in response to the reviews, the Council:

• use robust, evidence-based processes to guide decision-making, especially where there are differences of opinion;
• include requirements before a project starts to set out accountability and governance measures, identify key stakeholders, and establish record-keeping processes; and
• review its use of supplier panels.

The Council’s procurement for the Project

Deciding what was needed

The Council has been considering parking in the central city for many years. The Council received regular reports and expert advice about parking to help it make decisions, including deciding on its strategic direction.

The Council’s 2012 City Centre Strategy objectives included:

• strengthening the central business district (CBD) as a commercial centre, cultural heart, and quality retail destination;
• reducing CBD traffic;
• promoting other modes of transport; and
• managing parking demand and supply to support the economic competitiveness of the CBD.

The Council’s Transport Strategy 2012-2042 had a vision of “a place that is easy and safe to move around, and a place that is built to fit our hills, harbour and coast.” To achieve this, the Transport Strategy included a balanced network with several travel options, encouraging alternative modes of transport and managing parking demand.

In 2015, the Council faced issues such as a growing population, pressures on the transport network, and the need to replace the Council’s administration buildings. There were plans for sites in the city that would reduce the amount of available parking. Local businesses were keen to make parking free for shoppers, but the Council received advice that there was no evidence free parking would stimulate business in the CBD. The Council also received advice that private investors were unlikely to be interested in developing a parking building because the low price of council parking would mean a low rate of return. The Council was also advised that parking demand could be controlled by increasing pricing.²

In 2015, a proposal for the Council to build a car park building on a site it owned in Harington street site was formally approved as part of the Council’s long-term plan, which describes the Council’s intended priorities after consulting with the community.

There was no business case or any overall procurement plan for the Project. In 2016, the Council sought tenders for the Project, including for a quantity surveyor and a project manager. An architect and structural engineers were contracted in March 2017. In July 2017, a Council paper prepared by Council staff presented four design options. Each option offered a different number of car parks, information about estimated costs, and the net present value.³ All options had negative net present values of between -$6.5 million and -$10.1 million. The Council paper recommended “Option 1”, which had two basement levels and seven levels above ground, and the “highest” net present value of -$6.5 million. The cost of this option was estimated at $27.1 million.

The Council resolved to approve Option 3, which had two basement levels and nine levels above ground, and a net present value of -$6.8 million. The estimated cost of this option was $31.6 million. In August 2017, the Council revoked that decision and approved Option 1 instead.⁴

Construction of the car park building started in June 2018. However, in September 2018, elected members asked council staff to consider alternative uses for the site, such as building apartments on top of the car park. The Council sought advice on the costs of terminating the contract with the main contractor. The Council was advised that there were no viable alternatives and cancelling the existing contracts would incur significant costs.

What a good procurement process looks like

A good procurement process starts with robust policy and processes. The Council’s procurement policy identifies the need to plan, approach, select, award, and manage procurement. This approach is consistent with the five principles of government procurement, which councils are encouraged to follow. These are:

• plan and manage for great results;
• be fair to all suppliers;
• get the right supplier;
• get the best deal for everyone; and
• play by the rules.

The Ministry of Business, Innovation and Employment (the Ministry) describes procurement as having a life cycle. The stages of the life cycle are planning the procurement, sourcing, and managing the contract.⁵ These steps are also outlined in the Government Procurement Rules published by the Ministry. Planning includes identifying what is needed, setting up good governance and management arrangements, and planning for the right type of procurement process.

What is needed?

A robust procurement process starts with identifying what outcomes are sought and deciding on the procurement option that can deliver these outcomes. This is not always straightforward and often requires consultation and expert advice.

Good strategic decision-making needs reliable and accurate information. Tools such as business cases and reports from experts (where issues are technical or need specialist input) help assure decision-makers that the option they choose will meet their objectives and provide value for money.

Who will be responsible?

Those involved in governance and management need to understand their role and responsibilities. Planning should include setting up effective governance arrangements to provide direction and oversight to ensure that the project is delivered for the right cost and at the right time. Clear accountabilities are also needed so that people know what the project’s intended outcomes are and whether those outcomes are being achieved.⁶

How will we get the right outcome?

Planning is critical. A good procurement process will include guidance to ensure that the project team follows the right procedures for the particular project.

An objective of any procurement is to get the best value for money. However, this does not necessarily mean spending the least amount of money. Depending on what outcomes are sought, other factors will be relevant, such as quality and whole-of-life costs.⁷

Having identified the best method for selecting suppliers, the process must be run fairly and evaluated in a balanced and transparent way. As part of the planning, this process should be identified and documented.

Planning how to get the best outcome and sourcing for the Project

As noted above, elected members had not settled on the final design and intended outcome for the Project before procurement started. According to the Council’s procurement policy, the starting point for the procurement should have been a risk assessment, which would have identified the overall procurement process for the Project. This risk assessment did not happen. Further, no written procurement plan was created for the whole Project.

The sourcing process started in 2016, with separate procurements for a study into air rights, a town planner, quantity surveyor, and project manager. Procurement plans were created for many of these individual components, but little if any consideration seems to have been given to the approach to procurement for the Project overall.

Different approaches were taken depending on the contract. There is minimal documentation for many aspects of the procurement, and the time frames for procurements were often short. For example, the tender for the structural engineer was advertised on 10 March 2017 and closed on 17 March 2017. The contract was awarded on 27 March 2017.

Some tenders appeared to have been evaluated based only on price and without assessing the tenderer’s ability to meet the tender requirements. That is not to say the suppliers involved were not capable of meeting the requirements, but price was prioritised over ability when selecting the successful tender.

The Council had previously created a supplier panel for another, larger programme of work called the Campus and Civic Facilities Project, which also included car parking. The Council used that panel to source contracts for work.

To establish the supplier panel, the Council invited suppliers to tender for specialities, such as engineering, architecture, cost management, and planning. Tenders were evaluated against various weighted criteria, including:

• their relevant experience and track record;
• capability and capacity;
• availability; and
• health and safety.

Once they had been evaluated against that criteria, their rates were assessed to establish the best value for money.

The Council used the supplier panel for five separate procurements in relation to the Project. In three cases, suppliers were directly approached. In two cases, two of the suppliers were asked to take part in a secondary procurement process (where quotes were provided). Some of the panellists approached by the Council were asked to tender or quote for work outside the area of speciality for which they had been selected for the panel. 

The Council commissioned an external review of the procurement process by McHale Group Limited. The review identified several issues with the procurement process and documentation, including:

• gaps in documentation and information;
• conflict of interest management practices not aligning with good practice;
• several procurement process timelines appearing to be compressed;
• incomplete documentation to support direct engagements; and
• no evidence that due diligence activities were conducted.

The McHale Group review recommended that the Council review its policies and procedures and procurement more broadly to check whether the issues were systemic. The Council’s chief executive has taken steps to implement those recommendations.

As well as the recommendations made by the McHale Group, we recommend that the Council review its use of supplier panels. When supplier panels are used for procurement, they should be fit for purpose. Last year we published guidelines for using supplier panels.⁸ In that guidance we noted that public organisations should:

• be confident that a panel is the best procurement option; 
• have good relationships with suppliers and be transparent with them about work going through the panel;
• monitor panel performance to see whether they are delivering the benefits expected; and
• follow the Government Procurement Rules when setting up and using panels.

Although councils are not required to comply with the Government Procurement Rules, they provide guidance that councils are encouraged to follow. The decision to use some suppliers from the panel for different specialities was not good practice and suggests secondary procurement processes were not well understood.

Deciding who was responsible – management and governance

The Council had a project management office responsible for managing the Project. However, its procurement policy required a project management team to be created for the Project, and this did not occur. Instead, an external consultant was contracted to provide project management.

The Project did not appear to have a documented plan showing the governance and management roles. It is unclear what aspects of the Project were managed by the project manager and which were managed by council staff.  However, that does not mean that things did not happen. It appears that council staff worked hard to ensure that the Project was being delivered as fast as possible and for least cost.

As mentioned, the Council decided to abandon the construction with a partly built car park after it received expert engineering advice. This decision was made after the Council adopted a more structured approach, including restructuring the project management office and reviewing its procurement policy and procedures.

The Council has sought an external review of its project management process, which found several issues:

• inconsistent processes for managing and delivering programmes;
• lack of a robust system for project governance;
• lack of internal project management capability; and
• fragmented project planning, ownership, and accountability.

The Government Procurement Guide (prepared by the Ministry) recommends that before a project begins, a team is assembled, accountability and governance measures are set up, stakeholders are identified, and record-keeping processes are established.⁹ These steps were not taken during the inception and construction of the Project. We recommend that these fundamentals are embedded in the Council’s procurement processes.

Concluding comments

As we have outlined, there were several aspects of the Project that did not accord with good procurement or governance practice. These included a lack of a business case or overall plan for procurement, using panel members for work for which they were not appointed to the supplier panel, focusing on price to the detriment of whether the provider could deliver the work being contracted for, an unclear purpose for the Project even after it had started, and unclear responsibilities while it was being carried out. This is not what is expected when a local authority, or any public organisation, is spending public money.

We also question whether the negative net present values in the options considered by the Council should have led the Council to consider whether there were unquantified benefits that outweighed the negative net present value.¹⁰ The Council might have required further advice to help it evaluate the issues (which it did later after construction issues arose).

After stopping the construction of the car park building, the Council reviewed its procurement processes, took further advice from experts, and started to make recommended changes. I will be interested in what progress is made with the improvements to policies and procedures, especially as they relate to procurement. Although there is often pressure to complete projects quickly and for least cost possible, obtaining value for investments such as this one can require time, expertise, and the discipline of good procurement and project management processes.

I encourage the Council to ensure that its policies and procedures recognise this.¹¹ The Council has been through significant change recently with the appointment of Commissioners. I hope these observations will assist them, and other public organisations, with similar projects. Given the public interest in this issue, we intend to publish this letter on our website.

I thank the Council for the assistance it provided during this work.

Dave Lemmon
Manager Inquiries

1: We note the Council has reviewed both its project management planning and practices and its procurement policies and processes. Our review focused on procurement.

2: In 2014, parking costs in Tauranga ranged between $1 and $2 per hour (see Jenkins, M (2014), Tauranga City Centre Economic Vibrancy). Currently, hourly rates range between $2 and $2.50 per hour for casual parking. For more information, see tauranga.govt.nz.

3: The net present value (NPV) is a calculation that is used to determine whether the benefits of making a decision outweigh the costs. A negative NPV means the costs outweigh the benefits.

4: The documentation does not explain why the Council changed its decision.

5: The Ministry of Business, Innovation and Employment has a “procurement wheel” that describes the stages of procurement. See learning.procurement.govt.nz.

6: As noted in our 2015 work about Governance and accountability for three Christchurch rebuild projects, at oag.parliament.nz.

7: See “Principle 4 Get the best deal for everyone” of the Government Procurement Principles at procurement.govt.nz.

8: Office of the Auditor-General (2020), Getting the best from panels of suppliers, at oag.parliament.nz.

9: See guidance on setting up governance and project structures at procurement.govt.nz.

10: See the Treasury (2015), Guide to social cost benefit analysis, page 42. Although the Council is not required to follow the Treasury’s guidelines, they reflect best practice for public organisations.

11: I understand that as well as reviewing its procurement policy and processes, it has also implemented a new project management approach with the intention that the newly created Capital Projects Assurance Division will advise and oversee project management and procurement.