I refer to the various meetings and correspondence between our two offices over the past few months in which we have discussed the Auckland light rail City Centre to Māngere project (the project).

My Office has an interest in this project because of its scale and significance to the Auckland region and the country as a whole, and because of our interest in good procurement practice generally.

Concerns were raised with us about the decision to run a “parallel process” to select a delivery partner for the project. This would have selected a delivery partner based on two competing proposals – one provided by Waka Kotahi / New Zealand Transport Agency (NZTA), the other provided by NZ Infra a proposed joint venture between the New Zealand Superannuation Fund and Canadian institutional investors, Caisse de Depot et Placement du Quebec (CDPQ) (NZ Infra) – rather than running a fully competitive market process.

The particular concerns raised with us were whether the parallel process complied with the Government Procurement Rules1 and, if it did not, what risks this might pose to market confidence in the Government’s procurement practices, and its ability to provide assurance to Parliament and to the public that the chosen delivery partner would provide the best value for money.

For these reasons, we have been following the parallel process closely, with a view to deciding whether there were any matters that warranted an inquiry under section 18 of the Public Audit Act 2001.

Over recent months, we have talked to officials from the Ministry and from other government agencies, such as the Treasury, the Infrastructure Commission (and the Infrastructure Unit at Treasury before that), and NZTA, and have considered papers prepared by those agencies. Our main focus has been on the Ministry’s actions in relation to the project, and not on the content or merit of the proposals. The Ministry has helpfully provided us with relevant Cabinet papers and aide memoire papers.

On 24 June 2020, after completing its evaluation of the two proposals received from NZTA and NZ Infra, the Government announced that the parties to the coalition Government were unable to reach agreement on the preferred way forward with Auckland light rail and therefore decided to halt the parallel process. We understand that the Ministry and the Treasury will report to Cabinet soon on the best options for delivering the project.

Given this decision, it is important that we are clear about our concerns in relation to the process to get to this point. We have had several discussions with the Ministry and we acknowledge there is a difference of views about the process carried out to date. However, we are still left with a number of unanswered questions. Rather than attempting to answer these through a formal inquiry under section 18, we have recorded our views on the process that led up to the decision to run the parallel process. Our intention in doing so is to help inform any future procurement process for the provision of light rail in Auckland or other similarly complex infrastructure projects.

The rest of this letter is divided into three parts. In the first part, we summarise the background to the decision to run the parallel process based on the information the Ministry has given us. In the second part, we set out the main aspects of the relevant Government Procurement Rules. In the third part, we set out our views on the process outlined in the first part, based on our discussions with your Ministry.

Background

May 2018

In May 2018, the Cabinet appointed NZTA to lead the development of a business case for the procurement of the project, and to work in conjunction with the Ministry and the Treasury to develop a process for assessing proposals for light rail.2 We understand that, at that point, the broad parameters of the project and proposed delivery model were based on those developed through the Auckland Transport Alignment Project (ATAP).

At the same meeting at which NZTA was appointed, the Minister of Transport informed his Cabinet colleagues that an unsolicited proposal to develop light rail had been submitted by NZ Infra in April 2018.

From the work we have done, and the information provided to us, it remains unclear whether information about the NZ Infra proposal was passed on to NZTA and, if so, what instructions or guidance were provided to NZTA on whether or how it should consider the NZ Infra proposal.

July 2018

In July 2018, NZTA began a market engagement process. We understand the purpose of this market engagement was to gauge interest in the project and to collect information that would inform the content of the business case for the project, including potential delivery models, delivery partners, and financing options.

August 2018

In August 2018, NZ Infra submitted a proposal for light rail to NZTA. We understand this was done as part of NZTA’s market engagement process. The Ministry told us the version of the proposal NZ Infra submitted to NZTA was different from the one NZ Infra had submitted to the Minister of Transport in April 2018.

August – November 2018

From the documents we have seen, NZTA, with assistance from EY (Sydney) assessed the NZ Infra proposal against guidelines prepared by the Ministry of Business, Innovation and Employment on Unique Unsolicited Proposals (the 2013 UUP Guidelines), as well as a number of other domestic and Australian State Treasury guidelines on assessing unsolicited proposals. This was while continuing with its market engagement process and developing the business case.

The UUP Guidelines form part of The Government Procurement Rules and provide guidance on whether, if an agency receives an unsolicited proposal, it is justified in departing from a competitive procurement process in order to negotiate exclusively with the party submitting the proposal.3

Among other matters, the UUP Guidelines require agencies to consider whether a proposal offers a solution to a need, is unique, and has not been requested by Government. A proposal is not seen to meet the criteria in the UUP Guidelines if it is an advance proposal for a requirement that has already been identified and socialised in the market, or where it is an advance proposal for a requirement for which a competitive process is planned.

As described in the documents, NZTA concluded that the NZ Infra proposal did not meet the criteria in the UUP Guidelines. In November 2018, NZTA informed NZ Infra that its proposal did not meet the criteria in the UUP Guidelines but that if NZ Infra wished to be considered as a potential delivery partner it could submit its proposal as part of a later, formal procurement process.

December 2018 to January 2019

In December 2018 NZ Infra submitted a third version of its proposal. We understand from the Ministry that it was not until NZ Infra submitted this version of the proposal that it became clearer how NZ Infra might deliver a solution in Auckland.

The Minister asked the Ministry and the Treasury to separately assess the NZ Infra proposal. The Ministry told us that this was because of concern that NZTA might have had a conflict of interest when assessing the NZ Infra proposal because the proposal was for NZ Infra to replace NZTA as the lead agency, and that NZTA might have been constrained in its ability to consider the proposal by its own operating principles.

The Ministry told us that it did not carry out a formal assessment of the NZ Infra proposal against the criteria in the UUP Guidelines, but considered that, in broad terms, it was sufficiently unique to justify officials taking a closer look at it. At the same time, officials from both the Ministry and the Treasury were clear in their advice to Ministers that there were risks in considering the NZ Infra proposal outside of the market engagement process being run by NZTA. The risks included potential non-compliance with the UUP Guidelines and adverse reaction from the supplier market.

For the documents we have seen, in December 2018 the Minister told his Cabinet colleagues that the NZ Infra proposal had been further developed and was a potentially credible alternative, and that he had therefore asked officials to provide a full assessment that would enable the Government to decide how to proceed. He said the Ministry and Treasury officials would work closely with both NZ Infra and NZTA in carrying out this work, and that in the meantime:

• NZTA would continue with its existing programme of work; and
• officials would work with NZTA to consider any impacts of the two exercises proceeding in parallel.

January 2019

In late January 2019, officials from the Ministry and the Treasury visited Canada to meet representatives from CDPQ, Canadian Government officials, and parties with experience working with CDPQ. Representatives from the NZ Superannuation Fund attended the CDPQ meetings. We understand the purpose of this visit was to enable officials to learn more about CDPQ and to have an opportunity to talk to other parties who had worked with CDPQ on similar projects.

Also at this time, from the documents we have seen, officials from the Infrastructure Transactions Unit at the Treasury briefed the Ministers of Transport and Finance and proposed three options for light rail. Those were:

• a competitive procurement process led by NZTA to enable comparisons on delivery capability, price, and timeliness;
• an NZTA-led procurement with some flexibility to suppliers on funding, design, delivery, and operation of light rail; or
• exclusive negotiation with NZ Infra and pausing the NZTA process until negotiation concluded. Officials advised against this option, saying it would weaken the Government’s negotiating position, make it hard to assess relative value, would affect market confidence, and expose the Government to legal challenge on the basis that the Government was not following its own UUP Guidance.

February 2019

In February 2019, NZTA informed the market that the Government had asked the Ministry and the Treasury to carry out a further assessment of the NZ Infra proposal and that any further market engagement would pause while that process was under way.

Also at this time, the Infrastructure Transactions Unit at the Treasury briefed the Ministers of Infrastructure and Finance about the NZ Infra proposal, and cautioned against considering a single proposal outside of a competitive procurement process and in the absence of a detailed business case.

The Infrastructure Transactions Unit noted there was considerable interest from overseas investors and contractors and that there was a risk that market participants would withdraw from engaging with NZTA if sole negotiations were pursued with NZ Infra.

In the documents we saw, Ministry officials agreed that exclusive discussion with NZ Infra might result in a “strongly negative” market response and reduce the Government’s negotiating ability. However, there were other aspects of the Infrastructure Transactions Unit’s assessment of the NZ Infra proposal that the Ministry disagreed with.

April 2019

In April 2019, officials briefed the Minister of Transport on the need to review the expected outcomes for the project. Officials advised that:

• Although various documents developed over time had referred to outcomes for the project in various ways, to date the Government had not endorsed any specific outcomes for the project.
• NZTA had taken the ATAP expectations as a starting point and based the work it had been doing on the draft business case for the project on those expectations.
• The NZTA draft business case had the following priority objectives:
  • capacity and access improvements along the corridor and to the city centre and Auckland Airport precinct; and
  • unlocking growth along the corridor, especially for housing around Māngere, Onehunga, and Mt Roskill.

Our understanding is that consideration of the NZ Infra proposal had prompted questions about whether the objectives NZTA had used as the basis for the business case were sufficiently well described and prioritised to inform a clearer set of project outcomes and trade-offs. Officials considered a review of expected outcomes (agreed between central and local government) was therefore essential to set direction for the next phase of the Auckland Light rail programme.

In the paper, officials asked the Minister of Transport to note:

• the proposed approach to confirming outcomes for the project;
• that they would arrange a meeting for the Minister with senior leaders and politicians from Auckland Transport, Auckland Council, and the NZTA to discuss thinking as it developed;
• that a briefing would be provided to him in June 2019; and
• that a Cabinet paper or briefing should be provided to key Ministers seeking a Government position on outcomes for the project.

May 2019

In May 2019, according to papers we have seen, the Minister of Transport reported to Cabinet that as both the NZTA and NZ Infra proposals offered their own set of advantages and disadvantages, he was seeking the Cabinet’s endorsement of his preferred approach which was to run a ”parallel process”. This process would involve:

• NZTA working with officials, continuing to develop and enhance its business case; and
• officials undertaking memorandum of understanding (MOU) discussions with NZ Infra, so that the Government could arrive at a very clear position on the merits of its proposal. This would require NZ Infra to put forward sufficiently developed elements of their proposal, so that the Government could reasonably make a decision about a preferred delivery model and partner for light rail.

The Minister said that, to inform both streams, he had commissioned officials to clarify the outcomes the Government was seeking from light rail in Auckland. On completion of the parallel process he intended to report back to Cabinet with his findings, and seek further decisions. The documents describe that his goal at that time was to enable the Government to make decisions on its preferred delivery approach and delivery partner.

The Minister described risks and benefits to the parallel process approach. The benefits were that it allowed for competition between two parties, and on completion of the process, the Government would be able to work through its choices in a structured way. The risks included that:

• the parallel process would not be well received by the market;
• the market might not be willing to engage with NZTA if it perceived the Government was in exclusive discussions with NZ Infra;
• the market might consider the parallel process was not sufficiently transparent, which might affect confidence in the Government’s procurement process; and
• the parallel process was a departure from NZ Infra’s preferred process and there was a risk it might not wish to engage on the Government’s terms.

The Minister noted that he had considered two other options put forward by officials, including:

• Progressing the existing NZTA business case, with limited opportunities to review it to introduce greater levels of innovation. He said this option potentially offered the quickest avenue to light rail, and offered a high degree of certainty for partners, Government, and the market. However, the NZTA had advised that it would be desirable to review its current approach as it saw opportunities to offer a better solution.
• A “refreshed market process”. This was officials’ (from both the Treasury and the Ministry) recommended approach. This option would be based on a “maximum flexibility, minimum constraints” approach to enable greater levels of innovative ideas being considered for the delivery of light rail in Auckland. All market participants would have an opportunity to submit as part of a competitive procurement process, allowing the Government to consider the merits of their respective proposals. The key disadvantage with this approach was time, with officials estimating that to initiate market engagement, run a procurement process, and to complete contracting with preferred suppliers would take 18 months to two years.

The Minister did not consider that either of these other options would result in the best solution for light rail in the Government’s timeframes. He said that a refreshed market process could yield other feasible innovative proposals but could also give rise to the risk of further delay and uncertainty. He therefore recommended that the Cabinet endorsed his preference for a parallel process, taking between four and six months, involving:

• further progressing and finding opportunities for NZTA, working with officials, to enhance its current business case – including providing an opportunity to better consider innovative solutions, and for NZTA to assess its preferred procurement approach and financing models; and
• alongside this, entering into preliminary discussions with NZ Infra. This would involve seeking to develop a mutually agreeable draft MOU and high-level term sheet.

Cabinet agreed to endorse the Minister’s preferred approach. In August 2019, NZ Infra and NZTA confirmed they would take part in the parallel process as set out in the May 2019 Cabinet document. They submitted their proposals in November 2019.

In June 2020, the Government announced its decision to end the parallel process.

The Government Procurement Rules

The Government Procurement Rules (the Rules) set out the standards of good practice for government procurement. They incorporate New Zealand's international commitments on government procurement and are therefore a means of ensuring that New Zealand complies with its obligations under relevant international treaties. The stated purpose of the Rules is:

• To guide agencies to procure responsibly and achieve public value.
• To provide and maintain the integrity of government procurement.
• To promote New Zealand’s values – which include a commitment to open, transparent, and competitive government procurement that meets agreed international standards.
• To encourage commercial practice.
• To support economic development.
• To build high-performing public services.

Following the Rules is stated to be essential:

• To provide open and fair competition that supports innovation and helps create a competitive, productive supply basis in New Zealand.
• For New Zealand being valued as a desirable trading partner, by demonstrating professional practice and maintaining our reputation for integrity.

The Rules are mandatory for a large part of the public sector, including all the agencies involved in the procurement process in this case (the Ministry of Transport, the Treasury, and NZTA). The Rules apply to all contract types, including public private partnerships. Although mandatory, the Rules are intended to work as a “flexible framework designed to help agencies make balanced procurement decisions” rather than to be applied in a rigid way.

The term procurement in the Rules covers all aspects of acquiring goods, services, and works, but focuses mainly on the process of sourcing. Sourcing covers planning the procurement, market research, approaching the market, evaluating responses, and negotiating and awarding the contract.

Although referred to as rules, the Rules are a mixture of rules, principles, and guidelines that are intended to guide public organisations to procure responsibly and achieve public value, and provide consistent and transparent standards to give people confidence in the integrity of government procurement. The principles underlying the rules include the need to:

• plan and manage for great results, including identifying your needs, understanding the market, and choosing the right process;
• be fair to all suppliers, which creates competition and gives all providers a chance to participate;
• get the right supplier, which includes selecting one that can deliver what is needed at a fair price and on time, and where risks are identified and managed by the right person;
• get the best deal for everyone, which includes getting value for money, considering the social and economic effects, being able to monitor and measure the outcomes, and being accountable for the results; and
• play by the rules, which includes being accountable and transparent, and all parties acting responsibly.

Even where a specific rule does not apply (because, for example, it is not applicable to the particular type of procurement, or an exception to the rule applies), agencies are expected to have regard to, and comply with, these underlying principles.

The Rules are intended to be read in conjunction with various guidelines. These include guidelines produced by the National Infrastructure Unit on better capital planning and decision making, guidelines on long-term investment plans produced by the Treasury, and guidelines on market engagement and unsolicited proposals and market engagement produced by the Ministry of Business, Innovation and Employment.

There is a presumption in favour of using open competitive procurement processes to give all suppliers the opportunity to compete, unless an exemption applies or direct procurement is justified in the circumstances. Agencies are required to openly advertise procurement opportunities on the Government Electronic Tenders Service if the maximum total estimated value of the procurement meets or exceeds the relevant value thresholds and the Rules do not allow for an exemption from open advertising.4 The Rules allow for exemptions from open advertising in emergencies if there is only one supplier, prototypes, if a supplier is offering exceptionally advantageous conditions, and in the case of “unsolicited unique proposals”.5

The Rules required that if an agency exempts a procurement from open advertising, it must:

• obtain evidence of the facts and circumstances to verify the reason/s for the exemption; and
• document the rationale for the decision.

As well as the presumption in favour of a competitive procurement process, overall there is a strong emphasis in the Rules on transparency, fairness, and designing processes that are proportionate to the value, risk, and complexity of the procurement.

Our views on the parallel process

There seems to be general agreement among the parties that we spoke to that, in terms of procurement processes, the parallel process involving NZTA and NZ Infra was unusual. The fact that the process was unusual was not, in itself, a matter of concern to us. As noted above, the Rules are intended to operate as a flexible, not rigid, framework. Although agencies are required to comply with the Rules, the Rules emphasise the need to design a procurement process that is proportionate to the value, risk, and complexity of the procurement.

Our initial concern was that, given the strong presumption in the Rules that the best way to ensure value for money is some form of competitive market process, a parallel process involving only two parties did not, on the face of it, seem proportionate to the value, risk, and complexity of this particular procurement. We therefore wanted to understand what consideration officials had given to the Rules (including any advice provided about this point), and if the Rules were not to be applied, what was the justification for that approach and what steps were taken to ensure the good practice principles underlying the Rules were given effect to, even though the Rules were not.

Mixed messages: procurement or policy?

We sought the Ministry’s view about whether it thought the Government was engaged in a procurement process, and how the process adopted reflected the Rules and underlying principles of good procurement. We saw some mixed messages about whether this process involved procurement activity, and whether Rules applied, or whether the process was about developing policy (that is, what form light rail in Auckland might take).

The Ministry described the work as giving rise to core policy choices (including policy trade-offs and system decisions) to be presented to Cabinet. We were told that the Ministry believed it was necessary to reconsider the policy parameters of the light rail project as a result of the NZ Infra proposal.

The Ministry has publicly described the end point of the parallel process as being to select a delivery partner for light rail, but maintains that it was not engaged in a procurement process of the sort contemplated by the Rules or to which the Rules could be applied “given the core policy choices that were ultimately to be made by Cabinet”. The Ministry described the work as a policy process (which was required to understand the interaction between policy concessions and commercial and financial terms, and comparing these to what the Crown could achieve itself), in which the Government was deciding which option (an NZTA-led model or the NZ Infra proposal) was the preferred model for light rail. The Ministry has also told us it was not appropriate to consider the NZ Infra proposal solely through the lens of the Rules or the guidelines.

It is difficult to reconcile the Ministry’s view with a process that intended to ultimately result in the selection of a party to deliver services for which they will receive significant public money. Here, the intended outcome was to select a preferred delivery model and delivery partner to commission and deliver light rail and to commit to pay public money to deliver this outcome, using a particular funding model. In addition, we saw advice from officials to Ministers that referred to the principles of procurement and the need to adopt a competitive process for selecting a provider, and about possible market reaction to the parallel process.

It seems unusual to us for such a fundamental reconsideration of project scope/parameters to occur alongside the selection of a party to deliver light rail, or at the same time as exclusive negotiations with a delivery partner might occur (once one was selected). In our view, where something occurs that causes the overall project parameters and the procurement approach to be reconsidered, or for the key policy settings to be revisited, the more appropriate step would be to terminate any existing process in an open and transparent way and revisit the policy and planning for the project.

Procurement represents a spectrum of activity.6 This spans project initiation, needs analysis and early market engagement, through to formal approach to market, negotiation and contracting, contract management, and review. Policy considerations and the principles of good procurement are not mutually exclusive - a firm policy footing and good planning are important parts of the procurement process. Done early in the process, they inform the market engagement and formal procurement of the services or product which follow.

We note that in May 2018 Cabinet appointed NZTA to develop a business case for the procurement of a light rail solution based on the Cabinet-approved ATAP parameters, and early market engagement had started in July 2018. In our view, in 2018, when the project was in the project planning stage, the principles underpinning the Government Procurement Rules should have been actively considered and formed the basis of advice to Ministers.

We were told at one point that it was open to the Government or Cabinet to choose not to follow the Rules in certain situations. Although it is correct that the Rules do not have the force of law, we note that they are mandatory for many public organisations. Where there is potential for international investors, we need to be mindful of the international obligations we have under free trade agreements. The Rules are designed to guide public agencies to procure responsibly and achieve public value, and maintain the integrity of government procurement and New Zealand’s reputation as a country that “plays by the rules”. This is something which Rules, and the principles in the Rules, are designed to promote.

In our view, it would be a rare situation where the Rules are not a relevant consideration. Any departure from the Rules, and the reasons for it, should be clearly and transparently explained to the market and the public so those tendering can have confidence in Government procurement processes. To not do so puts New Zealand’s reputation at risk, domestically and internationally.

Considering and applying the Rules can also support different ways of delivering public services. Innovation in the public sector is important. It can lead to new and better services for the public and more efficient ways to deliver current services. As we said in our 2013 report into the Government’s decision to negotiate with SkyCity Entertainment Group Limited for an international convention centre, procurement rules should not stand in the way of innovation.

Encouraging innovation while maintaining integrity in procurement

Businesses may use unsolicited proposals as a way to pitch innovative solutions to government outside of a competitive procurement process. There is a possibility that businesses use unsolicited proposals as a way to put proposals to government without having to compete for a contract. The UUP Guidelines aim to ensure that unsolicited proposals can be managed in a way that is transparent and fair and which encourages businesses to put their innovative ideas forward. One of the key criteria for such proposals is that they should not advance proposals for a requirement that has already been identified and socialised in the market, or be an advance proposal for a requirement for which a competitive process is planned.

Light rail had been identified as a Government priority and early market engagement had started. The documents we have seen show advice from the Ministry to Ministers and Cabinet that market engagement had indicated there was a high level of market interest in delivering options for light rail, and at least one other consortium had submitted an unsolicited proposal to deliver a light rail solution.

NZTA and the Ministry came to different views about whether the NZ Infra proposal met the criteria of the UUP Guidelines. NZTA assessed the August NZ Infra proposal and concluded that it did not meet the criteria. Although the Ministry has maintained that the process was not one involving procurement, it considered that the subsequent December 2018 NZ Infra proposal did constitute a unique unsolicited proposal that warranted further exploration. The Ministry told us that it considered the intent and principles of the guidelines (that is, to encourage innovation), but that it did not formally assess the proposal against the guidelines. The Ministry has also said that, like the Rules, the UUP Guidelines do not contemplate the types of issues contemplated by the NZ Infra proposal.

Given the circumstances, we have not needed to form a view about whether the NZ Infra proposal qualified under the guidelines. However, we would say that because an unsolicited approach might result in contracting for services outside a normal competitive procurement process, a careful, detailed, and documented approach to evaluating unsolicited proposals is required.

Advising on risk

In the SkyCity report, we noted that the quality of support and advice that officials provided to Ministers fell short of what we had expected. We considered what advice we would have expected to see. We expected officials to ensure that Cabinet was alert to principles of good procurement, legal risk, and the risk to New Zealand’s reputation if the Government was seen to not be playing by the rules (that is, applying the rules and relevant guidance equally) and not being transparent.

If a view had been reached that the Government was justified in not following its own rules in the circumstances, we would still have expected to see clear advice to Cabinet on how to give best effect to the principles of good procurement. Although some aspects of this advice was present in a draft Cabinet paper, the final paper omitted most of this detail, apart from noting that officials from both the Treasury and the Ministry recommended a competitive process and that the Minister’s preferred approach posed a risk to market confidence.

Future

As mentioned, the development of light rail in Auckland is an important project for the region and for New Zealand and will involve significant financial investment over a long period of time. It is critical that it is successfully procured and delivered. I remain interested in the progress of the project and in particular how the Government engages with the market and selects a provider for delivering light rail. I intend to maintain a watching brief on the progress of this project. How the Government goes about that process will not only affect trust and confidence that the process is being carried out appropriately, it will also affect the assurance provided to the public that the result will deliver the outcome that the public is paying for.

I thank the Ministry for its assistance with our work to date on this issue.

Nāku noa, nā

John Ryan
Controller and Auditor-General

1: At the time, the third edition of The Government Procurement Rules.

2: Cabinet agreed that NZTA, with the Ministry of Transport and the Treasury, jointly establish and report back to the Minister of Finance and the Minister of Transport on a process that could be used to assess all potential proposals, a process to engage with a range of prospective partners; and potential procurement options, including how partnership opportunities could be considered.

3: The Guidelines in place at the time were the 3d Edition of the Mandatory Rules for Procurement, subsequently replaced by the 4th Edition of The Government Procurement Rules.

4: Rule 14, Government Rules of Sourcing, third edition.

5: Rule 15, Government Rules of Sourcing, third edition.

6: See the procurement lifecycle chain of success diagram at page 6 of MBIE’s Mastering Procurement: a structured approach to strategic procurement https://www.procurement.govt.nz/assets/procurement-property/documents/guide-mastering-procurement.pdf.

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