Part 3: The City Rail Link Board's governance

Governance of the City Rail Link project.

3.1
In this Part, we discuss:

3.2
We assessed the Board's governance of CRL Ltd and the CRL project against the eight elements of effective governance (see the Appendix). In summary, we expected the CRL Ltd Board to:

  • have a clear focus on its core purpose of governing the CRL project, understand its role, and have the right mix of people, capability, and experience;
  • set a constructive tone from the top and have effective relationships;16
  • have good information systems and controls to support effective decision-making and accountability; and
  • be clear about accountabilities and transparent about performance.

3.3
We also considered how well the CRL project is keeping to the approved time frames and budget and the Board's role overseeing this.

Summary of findings

3.4
The CRL Ltd Board has a clear understanding of its mandate and authority. It is capable and demands a high level of performance from CRL Ltd and, through CRL Ltd, the Link Alliance. The CRL Ltd Board uses a "trust but verify" approach to assessing the quality and extent of the information that it gets.

3.5
The CRL Ltd Board has also ensured that CRL Ltd has the underlying systems and processes it needs to support the CRL project.

3.6
The CRL Ltd Board has also shown that it can handle significant challenges, such as getting the Sponsors to agree to widen the CRL project's scope and funding in 2019 and dealing with the effects of the Covid-19 pandemic.

3.7
CRL Ltd has not provided a fully updated delivery schedule (or confirmed time frame) for the whole CRL project for some time. However, the CRL Ltd Board has been closely involved in ensuring that CRL Ltd's management addresses the effects of the Covid-19 pandemic by trying to keep the CRL project progressing and avoiding delays wherever practicable. However, the biggest challenges to the CRL project might come in the testing and commissioning phase.

3.8
The Covid-19 pandemic is expected to continue to affect the CRL project. CRL Ltd has publicly advised that it has a pending claim for additional costs from the Link Alliance for matters related to the Covid-19 pandemic.

3.9
When we finalised our report, the CRL Ltd Board considered that it could not reliably estimate what the agreed amount of the claim would be. However, the CRL Ltd Board has acknowledged that it could be significant. CRL Ltd says that it will have a clearer idea of the CRL project's completion date and costs by the end of 2022.

3.10
Although this is a difficult situation, it is important to resolve this issue as soon as possible.

The CRL Ltd Board is governing the CRL project under difficult circumstances

The CRL Ltd Board has a clear understanding of its mandate and authority

3.11
The CRL Ltd Board is clear on its strategic purpose and accountabilities to the Crown and the Council in their roles as joint shareholders of CRL Ltd and as the CRL project's Sponsors.

3.12
The CRL Ltd Board is meeting its responsibilities, including:

  • requirements to get approval from Ministers and the Council for its significant decisions, such as to release tender documents or enter significant contracts; and
  • implementing and monitoring compliance with any conditions that the Sponsors attach to their approvals.

3.13
Each Board member we spoke with was strongly aware of CRL Ltd's mandate and boundaries. This included the dependencies between the CRL project and the wider network improvements.

3.14
Although the CRL Ltd Board can monitor Link Alliance's performance and compliance with its contract, the CRL Ltd Board is clear that the Project Alliance Board makes decisions about the main works.

3.15
Although CRL Ltd's purpose is delivering the CRL project, it has also taken on related projects at the Sponsors' request. These were funded separately to the CRL project and include:

  • carrying out urban realm improvements at Lower Albert Street for the Council; and
  • doing some early work on the urban development programme for the wider station precincts for the Crown and the Council.17

3.16
These related projects do not appear to have unduly taken time or resources away from the CRL project.

The CRL Ltd Board is capable and is focused on the right matters

3.17
We found that the CRL Ltd Board is well set up for governing the CRL project and CRL Ltd. The Sponsors have appointed qualified directors to the Board. The directors have relevant and diverse experience, including infrastructure experience in New Zealand or overseas (such as installing a metropolitan underground rail network).

3.18
The CRL Ltd Board papers that we looked at focused on the right matters, such as emerging issues, project delivery and assurance, risk management, financial management, health and safety, and corporate accountability. The Board's meeting minutes include directors' declarations of interests. Discussions are recorded in enough detail to show what matters were considered in reaching decisions and determining follow-up actions.

3.19
The CRL Ltd Board reviewed its performance in 2021, which is good practice. As a result, the Sponsors approved changes to CRL Ltd's constitution to allow an additional director with strong experience in rail systems and integration to be appointed. Appointing a director with this experience should complement the Board's experience as the CRL project enters the testing and commissioning phase.

The CRL Ltd Board questions and challenges advice appropriately

3.20
The ability to govern well and make good decisions relies on getting good-quality information at the right time.

3.21
We found that the CRL Ltd Board requires CRL Ltd's management to provide it with good-quality and timely reporting that contains robust analysis and recommendations. The CRL Ltd Board regularly tests, questions, and challenges the advice it receives.

3.22
We saw that the CRL Ltd Board actively seeks extra information when it is unsatisfied with the information that CRL Ltd's management provides. At times, the CRL Ltd Board has directed management to review its performance against good practice (such as for risk management and health and safety) in New Zealand or overseas organisations.

3.23
The CRL Ltd Board has asked for improvements to the reports it receives from CRL Ltd's management. For example:

  • The CRL Ltd Board receives regular reports on the status of the CRL project delivery programme. In early 2021, the CRL Ltd Board asked management to chart the critical path with commentary on "hotspots, traffic lights, and what is creating heat on the critical path" in the report.18
  • To provide a more integrated picture, the CRL Ltd Board asked for an assurance report that combines previously separate reporting on rail, systems, programme, delivery, forecasts, and risk.

3.24
The CRL Ltd Board does not rely only on the information CRL Ltd provides about the CRL project's progress and the Link Alliance's performance. The CRL Ltd Board invited the Link Alliance's Project Director to attend Board meetings to directly tell it about the progress of, and risks to, the Link Alliance's works.

3.25
CRL Ltd has appointed an Alliance Performance Coach. Their role includes providing the CRL Ltd Board with a second opinion on how well the Link Alliance is performing. This includes how well the Link Alliance is working with Auckland Transport and KiwiRail.

3.26
In our view, the approach that the CRL Ltd Board takes has the right balance of "trust but verify" towards the information and advice it receives, especially given the CRL project's scale and its importance to Auckland and the country.

The CRL Ltd Board has used contractual remedies when necessary

3.27
CRL Ltd's management works closely with the Link Alliance. There is evidence that the relationships in the Link Alliance and with Auckland Transport and KiwiRail have supported improved performance.

3.28
Nevertheless, the CRL Ltd Board has intervened to improve performance when there have been concerns about the way the Link Alliance is operating. The CRL Ltd Board has not hesitated to use contractual remedies when the Link Alliance does not improve quickly enough.

3.29
For example, CRL Ltd issued two improvement notices to the Link Alliance, one in 2020 and in 2021. Among other improvements, this led to:

  • changes in the Link Alliance's organisational structure to make it more effective and efficient and to provide better assurance over delivery; and
  • improvements in the quality (including the reliability of some data) and responsiveness of the Link Alliance management team's reporting to the Project Alliance Board.

3.30
Issuing improvement notices could have damaged the relationship between CRL Ltd and the Link Alliance. However, we were told that these notices improved their shared understanding of what they each must do to deliver the CRL project and work together more productively.

3.31
It is critical that the reports the Link Alliance provides to the Project Alliance Board have clear and reliable information to inform its decision-making. In turn, clear reports from the Link Alliance reports to CRL Ltd will enable its management to provide clearer information to the Board.

The CRL Ltd Board has ensured that CRL Ltd has suitable underlying systems and processes to effectively run the organisation

3.32
Under the Board's direction, CRL Ltd has set up the underlying systems and processes for CRL Ltd to meet its statutory accountabilities, including:

  • setting up an Audit and Risk Committee and a People and Remuneration Committee;
  • supporting the changes that CRL Ltd's chief executive made to the management team to separate responsibility for project assurance from project delivery;
  • identifying and keeping critical staff during the CRL project to maintain knowledge, skills, and experience and support long-term working relationships with contractors; and
  • over time, adding controls to strengthen CRL Ltd's assurance and governance practices, such as appointing a private firm to act as its internal auditor.

The CRL Ltd Board has shown it can handle significant challenges

3.33
The CRL Ltd Board has already led CRL Ltd through some challenging situations. For example, during the CRL project's early phases the CRL Ltd Board needed to recruit a new chief executive for CRL Ltd after the first chief executive left. While recruiting the new chief executive, the CRL Ltd Board supported the interim chief executive by being more closely involved in CRL Ltd's day-to-day operations.

3.34
The CRL Ltd Board then supported the new chief executive as he reshaped the senior leadership team and organisation to bring stability to crucial roles and better support the CRL project.

3.35
Another challenge the CRL Ltd Board faced was changing how CRL Ltd delivered the CRL project in response to changing market conditions. When one firm withdrew from the CRL project, and another firm became insolvent, the CRL Ltd Board recognised that the delivery model might need to change.

3.36
CRL Ltd provided advice to the Sponsors that the best procurement and delivery model for the CRL project's main works was an alliance. Before this, CRL Ltd's approach was to design each set of works in-house and contract out its delivery. The CRL Ltd Board succeeded in getting the Sponsors to approve the new approach.

3.37
Between April and June 2019, the CRL Ltd Board secured the Sponsors' agreement to increase the CRL project's budget to support its widened scope (to allow nine-car station platforms), fund increased costs of construction, and increase contingency in the CRL project's budget.

3.38
This meant increasing the Crown and the Council's joint committed investment in the CRL project to $4.42 billion. The proposal was a result of several months' work reviewing the CRL project's scope and budget.

3.39
As with other major infrastructure and construction projects, the Covid-19 pandemic has significantly affected the CRL project and could continue to affect it for some time. For example, CRL Ltd is having to manage rising costs of construction and supply chain issues (particularly shipping).

3.40
From August 2021 to April 2022, Auckland was in various levels of lockdown. Changes in health and safety procedures affected the CRL project. For example, social distancing affected how work could be done.

3.41
The CRL project's specialist nature, complexity, and scale mean that CRL Ltd relies heavily on skills that not many people in New Zealand have. The Covid-19 pandemic has significantly affected the ability of CRL Ltd to recruit skilled international workers for the CRL project.

3.42
The Link Alliance has been training New Zealand-based workers on site to help make up for the skills shortages. In other instances, CRL Ltd staff with relevant expertise have helped the Link Alliance with certain tasks. However, international workers are still needed to build up the existing workforce.

3.43
During 2020 and 2021, we were told that the Board's chairperson discussed workforce issues affecting the CRL project with the Minister of Transport and the Deputy Mayor of Auckland.19

3.44
The CRL Ltd Board also supported CRL Ltd in working with the Ministry of Transport and the Council to provide the information needed to secure Managed Isolation and Quarantine places and bring in as many needed workers as possible into the country.

The CRL Ltd Board is taking steps to provide increased certainty about the CRL project's time frame and costs

3.45
During our audit, CRL Ltd was not always able to provide a fully updated delivery strategy and schedule for all phases of the CRL project. This is a requirement of the Project Delivery Agreement.

3.46
It is clearly preferable to have reliable information about the CRL project's schedule. However, the Covid-19 pandemic has created significant uncertainty (we discuss this further in paragraphs (paragraphs 3.61-3.67).

3.47
Until a fully updated schedule can be produced and confirmed, CRL Ltd's management provides the CRL Ltd Board with continually updated estimates of time frames for all the individual works.

3.48
The Link Alliance contributes to this by carrying out regular reviews of its work programme to continually update the information for the main works. Each review provides updated information on time and costs. It also becomes the new baseline time frame until the next review.

3.49
At the time that we finalised our report, CRL Ltd expects the sixth review, due in June 2022, to include time frames for the testing and commissioning phase of the CRL project (see paragraph 2.36). Auckland Transport and KiwiRail need this information to update the plans for their roles in this phase.

3.50
This approach enables the Link Alliance and CRL Ltd to have a consistent understanding of the situation. It also allows them to take any action that is possible with the available resources to avoid delays.

3.51
CRL Ltd shares these reviews with the Assurance Manager and Joint Sponsors Team so that they have the most up-to-date information. CRL Ltd regularly updates the critical path and cost information and reports the results of the reviews to the Board. We describe what the Sponsors' officials do with the reports in Part 4.

3.52
In February 2021, the CRL Ltd Board asked CRL Ltd's management to start providing information on three scenarios for the Link Alliance's work programme – "stretch", "conservative", and "most likely" – to inform its decision-making.

3.53
The CRL Ltd Board asked CRL Ltd's management to include commentary on each of the scenarios in the delivery report. In turn, the CRL Ltd Board provides this information to the Joint Sponsors Team as part of its monthly reporting.

3.54
The Covid-19 pandemic has created much uncertainty about time frames and cost. It is important that the CRL Ltd Board continues to regularly update the Sponsors as the situation develops. This will ensure that there are no surprises and allow the Sponsors to factor these risks into wider investment decisions.

3.55
In our view, it is also important for CRL Ltd to continue being transparent with the public about the challenges that the CRL project faces and the impacts that the Covid-19 pandemic could have on the CRL project's time frames and budget.

3.56
The works at Britomart East are some of the last works to be procured. The scope for these works has increased and is likely to have funding implications for the CRL project.

3.57
We understand that the Sponsors will address the need for further funding for the Britomart East works when they consider CRL Ltd's recommendations for addressing the pending claim from the Link Alliance for additional costs related to the Covid-19 pandemic (see paragraph 3.61).

The biggest challenges to the CRL project are likely yet to come

3.58
In our view, the way the CRL Ltd Board has managed challenges in the past and the way it is monitoring the Link Alliance's performance means that it is well placed to govern the CRL project to completion.

3.59
However, there are more challenges ahead. It seems likely that there will be continuing disruptions to supply chains and pressures on the cost of materials.

3.60
CRL Ltd is likely to continue having difficulties getting enough expertise from overseas to support the work. This is because of competition from other infrastructure projects in New Zealand and overseas.

3.61
CRL Ltd is currently assessing the Covid-19 pandemic's impact on the CRL project's time frame and costs. CRL Ltd has publicly advised that it has a pending claim for additional costs from the Link Alliance for matters related to the Covid-19 pandemic. The claim covers the period from 20 June 2020 to 31 December 2021.

3.62
The impact of these matters is currently uncertain. Although the additional project costs cannot be reliably quantified at this point, they could be significant. Settling the claim involves negotiating how increased costs incurred to date will be shared and assessing the impacts of the Covid-19 pandemic on future costs.

3.63
After the 2020 Covid-19 lockdowns, CRL Ltd and the Link Alliance worked together to recover as much lost time as possible and negotiate how they would share the costs associated with the delays. That was a relatively straightforward process because the lockdowns were short.

3.64
Later lockdowns and workplace restrictions were prolonged, which meant that the pending claim for costs related to the Covid-19 pandemic is more complex and will take longer to resolve.

3.65
The Crown and Council recognise that further investment might need to be committed. As we discussed in paragraph 2.17, the CRL project carries a specific fiscal risk for the Crown. In response to the pending claim, the Council's Group Interim Report for 31 December 2021 includes an unquantified contingent liability related to CRL Ltd.

3.66
When the claim is settled, and construction of the main stations and tunnels is largely completed, there will be greater clarity on when and at what cost the CRL project can be delivered.

3.67
CRL Ltd told us that it will have more clarity on the CRL project's completion date and costs by the end of 2022.

3.68
Project cost and time frame are two fundamental matters that governance needs to maintain its focus on. Once the claim has been resolved, we expect CRL Ltd to provide advice to the Sponsors on options for the CRL project's cost and time frame, and the potential effects of those options on realising the CRL project's benefits.

3.69
The Assurance Manager reported to the Sponsors' officials that CRL Ltd's work programme will continue to be under substantial pressure, especially in the latter stages of the CRL project.

3.70
Because multiple contracts will be in progress at the same time, the CRL Ltd Board will need to assure itself that CRL Ltd has enough capacity to deliver its work programme, proactively mitigate risks, and address problems as they arise. The Board's meeting minutes show that the CRL Ltd Board is aware of this.

3.71
The CRL project's third phase (which includes testing and commissioning) is likely to challenge its governance arrangements. In our view, the current arrangements do not support the delivery partners' Boards to make efficient and joint decisions on matters where alignment is necessary. This could lead to problems. We discuss this further in Part 4.

3.72
As well as these challenges, the chairperson of the CRL Ltd Board is stepping down soon and will need to be replaced.

3.73
Even with effective governance and everyone's best efforts to deliver the CRL project as planned, the Sponsors' agreement in 2019 to fund the CRL project at P50 meant that there was a 50% chance they would need to commit more funding to deliver the CRL project. The Covid-19 pandemic has exacerbated this risk.

16: "Tone at the top" refers to leaders demonstrating the behaviour that they expect to see in their organisation.

17: Kāinga Ora and Eke Panuku have now taken over responsibility for the urban development programme.

18: The critical path is the longest sequence of tasks to complete a project. The tasks on the critical path are critical because if they are delayed, the project's completion will be delayed.

19: The Deputy Mayor of Auckland is responsible for the relationship with the CRL Ltd Board on behalf of the Council. He discusses any issues with the Mayor of Auckland as needed.