SUMMARY OF FINDINGS

Introduction

The purpose of this section is to create a summarised version of the full report. This summary includes all major findings but in the interests of brevity a great deal of material has been omitted. A reading of the full report is desirable - or at least for sections of particular interest to individual readers.

The summary is addressed in the first instance to the newly elected members (elected March 31, 2001) of the Rodney District council.

This summary may not completely satisfy everybody - some matters will be glossed over, others barely mentioned for that is the nature of a summary. The content of the summary has been a result of the personal judgements of the writer intended to "hit all the hot buttons" - to give a clear impression of the essence of the report and of the issues concerned with the PenLink project.

Fortunately, any perceived gaps of the summary are covered in the full report. At the proposed April-May 2001 briefings of the incoming Council, clarification/amplification of all PenLink related data will be possible.

The report has taken considerable time to complete. Field work - research etc was concluded in early November of 2000. Since that time events have moved on including, by March of 2001 the withdrawal or settlement of all Designation and Resource Consent appeals under the Resource Management Act. References (with earlier dates) in the report to appeals should be read in the light of later events.

A comprehensive report concerned with the PenLink project was called for, based on extensive research and supported with full documentation. The terms of reference were agreed following considerable deliberations.

Completion of the assignment culminating in this report has involved a major commitment of resource including input from RDC senior management and the RDC’s professional advisors.

At the outset, it is appropriate to record that at all times the assistance given the writer, both in compiling research material and responding to all enquiries has been unstinting and supportive. This has been most appreciated.

The Importance of Penlink

The efforts of those involved in this exercise signals the importance of the assignment to the RDC. Its importance can be attributed to the following two matters:

• The PenLink project, its Weiti River bridge crossing, its associated roading and the complimentary widening of Whangaparaoa Rd is the largest and most complex project the RDC has to date dealt with. This is true of its capital cost of $70 M and because the proposed BOOT-type funding and management contractual arrangements involving private sector funding are for large sums of capital expenditure associated with commitments which will be put in place for the very long term.

• Arising from the previous council’s demise, a vacuum of current knowledge concerning PenLink amongst decision-makers, (the Council to be elected in March of 2001), has developed. The newly elected council will have to be "brought up to speed" and be fully briefed about PenLink’s plans - plans put on hold for over 15 months.

Progress with the concepts, design and consents for the project together with public consultation on PenLink is well advanced. Councillors will discover that the ground has been very fully prepared.

All that remains is for discussions and debate of the project to be held, and for a "go-no-go" decision - that is the decision to proceed or not with PenLink to be made.

The go no-go decision relates to the decision to proceed. It does not finally commit the RDC, as there are a number of points at later dates at which PenLink as proposed may be discontinued.

The Rodney District Commissioner, Mr G Kirby explicitly stated within the terms of reference for this assignment that one of the main objectives of this report was "to fully inform the new Council" about PenLink.

Given the projects significance, the new Council needs to be fully informed on these matters and very significant effort and expense has been associated with the projects preliminary plans. It is intended therefore that in the interests of saving the costs of re-performing these steps, that credit should be taken for past efforts - and used as a basis for future decisions. This report is presented in evidence to support this objective - to seek "buy-in" from elected members for the decisions taken already.

It is important to state though, that the "buy-in" should result from an informed and balanced consideration of the pro’s and cons of the project - to avoid any hint that the new Council’s decision is in any way "pre-determined".

The task of informing the new Council about PenLink also includes full consideration of the reasons for earlier decisions, appreciation of the risks involved, mature reflection - if need be a robust debate all leading to a decision to proceed or not with PenLink as proposed.

At an early date, scheduled for May of 2001 elected members will be asked whether they wish to proceed with PenLink, (the so called "go-no-go" decision). Their consideration of this report and other related reports should form the basis for reaching a decision.

Nature of the Task

The Act however is non-prescriptive as to its information requirements - for whilst suggesting a form of "benefit cost" analysis, the Act contemplates a number of different methods by which to reach the goal of making good policy and financial decisions.

The guidelines emphasise the need to consider all matters relevant to an assessment including consideration of alternatives:

• "A "S 122C" report

The Report

• Volume I - the principal "Report" commences with this Summary of Findings, followed by an introduction, the content of which has already been briefly described in this summary. The remainder of the report comprises a further eight sections dealing with various topics - some of interest for their concepts - (Process), others for use in documenting the history of the project - (History and Consultation).

• Volume II - Appendices. This volume commences with a "Roadmap" describing the hierarchy of research material, documentation, appendices and references associated with the report. This is designed to assist readers in their identification and understanding of how the components of the report all fit together.

Major Points Raised Within the Report

The following information of this "summary" section of the report encompasses the content of the full report. For each section, in most cases the "topics" chosen are first explained, then the major significant findings for each area of interest connected with the topic are briefly recorded.

Caution: This summary is not a substitute for a full reading of the report, particularly for matters of complexity, as these require a full and careful analysis. The detail of the full report supports each finding and these particulars may be readily studied by readers who wish to be fully informed on any particular subject.

FINDINGS

COMMENTARY

Introduction and Terms of Reference (Section 2)

The overriding objective - of "a S 122C report" as described in the legislation is "the promotion of prudent, effective and efficient financial management by local authorities".

The basic (S 122C) objective was extended for this assignment by the Commissioner to include broad informational and documentary purposes.

The PenLink project is a proper candidate for a project-related benefit cost study.

This is due to its significance both in terms of the size of expenditures and the long-term commitments involved.

In the view of the Auditor General, a S 122C compliance report encompass assessments of costs and benefits of a non-financial nature including policy and political considerations. SOLGM guidelines point to the need for a comprehensive S 122C assignment to consider alternatives. (See also comments above.)

A balanced and objective report is necessary to promote good decision-making. This will involve a consideration of alternatives to any proposal.

The PenLink project as planned is well advanced, decisions have already been taken concerned with the project’s design, properties have been purchased and the proposed funding - a BOOT-type (Build Own Operate and Transfer) contract is being developed. Legislation is being promoted to enable PenLink to be a tolled facility. The current RDC Annual Plan reflects these decisions.

The newly elected Council will be faced in May 2001 with making a "go no-go" decision concerning the PenLink plan.

The assignment has been conducted mindful of the recent events which saw the previous Council replaced by a Commissioner. These events have affected progress with PenLink and of particular significance to this report is the need for newly elected (March 2001) members to be fully informed on matters concerned with the project.

It is a clear intention of this report to elicit the "buy-in" of decision-makers (elected members) relating to past decisions. Credit is intended to be taken, (in the interests of cost savings by not reperforming the steps) to progress PenLink. This intention is a reasonable one provided elected members are still free to reach their own appropriate decisions.

FINDINGS

COMMENTARY

Section 2 (continued)

A balanced report should include reference to the views of those who oppose the project. The core of remaining opposition - the level of which has markedly declined since PenLink was first proposed, remains (not unnaturally) the objections of those directly affected. These persons are in the main, some residents of Stillwater.

The major social impact of PenLink has been identified as affecting some property owners in the Stillwater area. The trade off of benefits from PenLink for "the many" will be offset by the costs to "the few" who will suffer losses because their properties are proposed to be taken. Elected members need to carefully weigh this situation when evaluating the projects benefit and costs.

The S 122C report’s objectivity has been influenced by the need to preserve commercial confidentiality confined to financial details of the BOOT-type bid tendering process. The level of confidentiality that is acceptable concerns the fine detail of the proposed tender. It does not extend to full discussions by elected members of matters concerning the merits of PenLink when compared to the alternatives to it.

To maintain the necessary competitive tensions within the tendering process it has been necessary to restrict the level of detail that can be made public concerning the BOOT bid. There are sound reasons for following this course - in spite of the risk of any claims that "the public interest" requires fuller disclosure. This view is supported by an opinion of the Council’s legal advisors.

PenLink, is by New Zealand Local Government standards a very challenging and unconventional project. The writer (after considerable research) is unaware of any similar project that consists as does PenLink of all of the following inter-related components:

• "relatively" low value - less than $100 M
• a pilot scheme with its associated learning curve for the components involved
• a need to sponsor special "local" legislation
• BOOT-type funding and
• proposed tolling of the facility using advanced tolling technology.

The combination of all of these factors places very significant demands on the Council. Whilst there is clear evidence from both RDC management and their professional advisors of a determination and a demonstratable competence for "getting it right", elected members should be left in no doubt that PenLink as proposed poses major challenges!

FINDINGS

COMMENTARY

History of the Project (Section 3)

The History section of the report is a "potted" version of key events taken from the full research database. Selection of these "key" events, demonstrates the evolution of PenLink. The notion of a tolled "Weiti Crossing" commenced with private sector interest in "the eighties". Council developed its own strategies in the growing knowledge that:

• the Whangaparaoa Peninsula’s traffic woes would progressively worsen
• the widening of Whangaparaoa Road alone would have severe social impacts and high costs - without any Transfund subsidy (which based on present information indicates that PenLink would not qualify for)
• a BOOT-type private sector funding, construction and management of a tolled (PenLink) facility was planned
• subject to the conduct of all necessary RMA and other steps to assess the effects of its plans, a Weiti River bridge would be necessary and
• the RDC’s borrowing limits would "prevent" the Council from funding a Weiti crossing project.

The evolutionary nature of the PenLink project can be discerned from a review of its history. The Council did not start out with its mind made up.

The chapter of events recorded by this section of the report supports later conclusions "that no decisions were pre-determined", that "consultation has been extensive" and all preliminary procedures/processes required to date for PenLink have been conducted.

FINDINGS

COMMENTARY

Processes (Section 4)

This section is intended to meet some of the informational objectives of the assignment in so far as they relate to the "Processes" associated with PenLink.

The section identifies six separate - though interrelated - processes:

• Council’s operational (process)
• Council’s democratic
• RMA related
• PenLink technical-engineering related
• BOOT tendering
• Consultation (- the next section of the report is devoted to a full coverage of these processes).

Whilst much of this section is merely a matter of record and of information, the parts relating to the BOOT tendering process are of particular significance. The BOOT process in this report is described in as simple terms as possible - in spite of the complexities involved. It is important for elected members to appreciate the mechanics of the process as later sections - for example Financial Analysis are based on knowledge of how BOOT contracts operate.

The concluding part of this section describes the steps which the PenLink project Working Party (a group comprising RDC engineering staff and professional advisors) is following to implement the BOOT arrangement.

The description of the BOOT process includes steps that lead to the "go-no-go" decision of newly elected members - scheduled for May of 2001.

There are further democratic processes in the pipeline. Approvals to proceed further with the project are being sought, following which the later BOOT and other processes will be progressed.

Consideration, of this "S 122C" report (and others) are important elements/steps in the democratic processes associated with PenLink.

FINDINGS

COMMENTARY

Consultation (Section 5)

This (large) section - it comprises about one-third of the total content of Volume I of the report has the following two objectives:

• to meet the Commissioners infor-mational requirements and
• to establish the comprehensive nature and thereby the legitimacy of all consultation processes already completed.

A very detailed report of consultative events was called for. Research has established that Consultation has been extensive - as an expert witness within the RMA process put it "the most intense and comprehensive conducted for a major infrastructure study in the Auckland region to date" [ref; 980805.5]

The findings of the survey however need to be judged within a context. The context involves the fact that the public opinion survey for PenLink as proposed was "at no cost to ratepayers" and affects "only the residents of the Hibiscus Coast area".

The record shows that the RDC has covered all of its (consultative) bases.

Elected members are entitled to rely on this evidence. This will significantly contribute to their "buy-in" for the PenLink project.

(Note: Should the context change - for example if the HBC’s Area Committee’s constitution alter, then survey and other findings could be invalidated.)

FINDINGS

COMMENTARY

Funding -
and other related (S 122C) Compliance Matters (Section 6)

This section records the RDC’s adherence to and compliance with the financial management and funding provisions of the Local Government Act. At this time many of the provisions are either only partially completed or may not be relevant. Those that are not presently relevant include funding provisions relating to borrowing which if the proposed BOOT funding is put in place will not become operative.

Subject to the caveats concerning applicability or relevance, the funding requirements of the law to date have been complied with.

FINDINGS

COMMENTARY

Technical, Engineering and Related Compliance "Issues" (Section 7)

This section whose title "Technical, Engineering and Related Compliance "Issues"" may be something of a misnomer, is a repository for the issues which require airing concerning PenLink, - "Technical" sounds better than "Repository".

This section has been included to give a focus for elected members by identifing matters which form part of a comprehensive debate about the merits of PenLink. Some, but by no means all, are matters which have already been "decided" -subject however to ratification by the new Council.

A balance needs to be struck in considering past decisions, a balance between taking credit for these actions and on the other hand risk reopening the inquest. The risk exists that to accept earlier decisions without proper informed discussion and reflection may lead to claims of pre-determination. On the other hand, too widespread and poorly focussed a debate may prejudice the valid acceptance (buy-in) of much of what has been achieved, (for example the RMA designation and consents processes).

The matters raised should be aired at the (Apri/May) 2001 briefing of new Councillors.

The RDC’s professional advisors must respond in a satisfactory manner to Councillors enquiries. The stakes are too high to accept any less.

The highly summarised form of the issues listed, merely addresses the key questions without any accompanying and detailed points of clarification.

[Note: There can be few if any claims of commercial confidentially made concerning these issues. Most relate to risk assessments which need to be made and settled before a decision to proceed with PenLink can be considered.]

The matters (the "Issues") raised include - in synoptic form:

• Is PenLink feasible?
• Is Penlink going to be "the best deal" for the Rodney District?
• What would be the alternatives to PenLink?
• What are the financial consequences of

• PenLink
• Its alternatives.

Full discussion of these issues will assist in elected members reaching their views.

FINDINGS

COMMENTARY

Section 7 (continued)

There is one issue raised within the "Technical" section which deserves to be highlighted. It is the question of the potential loss of ratepayer value arising from loss of the Transfund Subsidy. In normal circumstances this subsidy - of some $24 M would be paid by Transfund as their share of the costs of a Weiti Crossing and other related roadworks. It should be noted that the Crossing and other works meets Transfund’s subsidy benefit/cost criteria.

Ratepayers, via their petrol and road user charges have contributed to Transfund’s coffers but present plans do not involve payment to the RDC of any Transfund subsidy for PenLink. The unconventional nature of the projects funding appears to preclude the prospect of receipt of the RDC’s entitlement to a Transfund subsidy. Some "quid pro quo" for this would seem warranted.

A full and informed discussion on this matter is necessary to enable elected members to reconcile their views on this matter.

FINDINGS

COMMENTARY

Legislative Requirements (Section 8)

The PenLink project cannot proceed unless the RDC is given the appropriate legislative authority. The Council’s legal advisors and others are working with advocates (the local MP and others) and law draughtsmen to produce a (PenLink) Local Parliamentary bill.

Authorisation is needed to - inter alia:

• permit tolling
• allow the RDC to lease the PenLink land to the BOOT operator and
• to permit PenLink to be operated "cheek by jowl" with connecting local roads and State Highways.

PenLink’s legislative processes/
permissions must be satisfactorily concluded before it proceeds. Gaining legal authority is therefore a condition precedent to the letting of any tenders which recommences "the full PenLink process".

Present indications for the Local Bill appear auspicious and good progress toward gaining legal permission is being made.

However the present Government’s policies include an intention to "introduce wide-ranging roading reforms.

Should the RDC’s-PenLink Bill become "entangled" in the Governments own initiative, then it is not inconceivable that the RDC’s process could be overtaken or superseded.

Equally there is the prospect that PenLink could lead the way and precede the Government’s wider initiative.

There is a risk of "a collision" between the two legal processes. Only time will tell whether these concerns are realised or not.

FINDINGS

COMMENTARY

Financial Analysis (Section 9)

KPMG have been retained as the Council’s financial advisors. As part of the AEE processes conducted by Beca’s, financial analysis was conducted early on by KPMG relating to PenLink. Beca’s findings were analysed by KPMG who also conducted their own modelling and further study of the financial circumstances of the project. KPMG have also taken a leadership role in specifying the protocols governing the proposed BOOT-bid - the tender round. To date these matters are well advanced - but they can only be proven to operate as intended when they are implemented.

A full reading of this section of the report is strongly advised, as it is an area of both detail and complexity.

The process used (and described under "Processes" in this report) is based on overseas experience of "similar" projects. The process is all-important to a satisfactory outcome, as it (the process and its systems) are designed to simulate a competitive environment by having competing tenderers follow a process which will create "competitive tensions".

By these means the RDC is endeavouring to achieve the "best deal possible".

The objectives of the KPMG financial analysis were:

• to establish if the project was "feasible" or not - with this test relating to whether the private sector would be "likely" to enter into a BOOT contract with the RDC.

• to determine "benchmark" financial criteria - known as "the Financial Internal Rate of Return - (FIRR)". As part of the tendering round the benchmark FIRR would be used to evaluate tenders to enable a determination to be reached assessing if the RDC would get "a good deal" or not.

The financial analysis has been conducted as circumstances dictate on an analytical basis and is based on estimates which involve the use of judgements. Until the BOOT-bid process is completed the outcome of the process and the validity of the assumptions of the analysis will be uncertain. The process is intended to deliver the best deal possible and such an outcome is expected to ensue.

FINDINGS

COMMENTARY

Section 9 (continued)

Certain "confidentiality" restrictions have, (based on legal advice) been placed on the detail of PenLink’s financial arrangements. Provided that these restrictions are not unreasonable and are confined to "financial detail," confidentiality is justifiable. It is justifiable for the reason that its disclosure could provide tenderers with information that would have the potential to invalidate the BOOT-bid process.

Public concerns expressed relating to commercial confidentiality are therefore largely misplaced. Comfort for decision-makers - to compensate for some lack of knowledge, can be gained from the involvement of people - (professional advisors) and the integrity of the systems - (the BOOT-bid process). Both are factors intended to achieve a good deal for the RDC.

The particulars of the confidentiality issue are covered in more detail in the body of the report. One consequence of this issue is that considerable reliance is placed on the RDC’s professional advisors - principally KPMG. (See also the next point - below).  

KPMG have given no assurances that their views, stated in considerable detail as conclusions of the Financial Analysis section should be taken as representations or opinion. They have requested that their views be characterised as observations.

The combination of:

• the considerable reliance to be placed on the evidence of the RDC’s professional advisors - in part as a result of a lack of detail (withheld for reasons of "commercial sensitivity") and
• KPMG’s level of "assurance" for their evidence - termed "observations" signals to elected members the importance of their own assessments concerned with the financial arrangements of PenLink.

Elected members can take considerable comfort in the final event, as the process for the BOOT-bid provides a safeguard for this exposure. The BOOT-bid will not proceed to contractual terms unless the final evaluation process (concerned with the one preferred tenderer) meets the RDC’s benchmarked and other criteria. Right up to this point the RDC are not committed to PenLink.

FINDINGS

COMMENTARY

Section 9 (continued)

There is little doubt that the transfer of risks to the private sector is a, (possibly the most) significant motivation for the proposed PenLink financial arrangements. Public sector long-term projects involving large capital expenditures do not historically have a great track record. Given this history, even if the RDC were to demonstrate with some certainty that it could do PenLink itself, the exposures the RDC would in that event face might prove too daunting to embark upon.

Though no complete data has been provided of the RDC "doing it" option it seems that the view that the RDC could not "do it themselves" is not the full picture. For if the revenues from tolls more than offset the costs of servicing PenLink debt and other operating costs then the RDC "could do it".

This intriguing possibility should be explored further. "On the other hand," a shortfall of toll revenues over debt costs might be revealed and the risk-shedding to the private sector would then be seen "in relief," - as desirable - as would the possibility of receipt by the RDC of any concessions from private investors.

Amongst the consideration of alternatives to PenLink, these matters rank very highly.

Some residual risk would remain in "the RDC’s care" if PenLink proceeded. Certain non-insurable risks associated with government actions and force majure (earthquakes, tsunamis etc) will not be carried by the BOOT operator.

Most, though by no means not all PenLink risks will be the responsibility of the BOOT operator. The RDC would probably need to cover the uninsurable risks including exposures for the BOOT operator arising from (central) government actions.

FINDINGS

COMMENTARY

Decision Points (Section 10)

This section of the report catalogues the steps scheduled from the present - (2001) to completion - (2005) of PenLink.

This schedule will be of use to orientate elected members and to signal the challenges and decision points for the future.

A Final Summary - of Summaries

Readers of the report (or of merely this first section - "Summary of Findings") will draw their own conclusions upon the issues traversed throughout the report. A summary of all of these matters would be a daunting if not an impossible task. The pro’s and cons of any assessment of the merits of the PenLink proposal are too varied and complex to reduce to simplistic terms or to be conveyed in a highly summarised state.

But what can be attempted is to reach a few major and overall conclusions that are a combination of "positions" reached - based on the evidence and also those observations that are supported by applying common sense and logic - or at least the writers notions of these!

None of the conclusions are couched in absolute terms. Decision makers must still reach their own positions on these matters. Nevertheless the following overall conclusions, it is submitted are well founded and are made in expectation that their documentation is the least that could be expected from the writer of this report after such a prolonged, rigorous and detailed investigation.

Conclusion 1

Conclusion 2

Conclusion 3

Conclusion 4

Conclusion 5

Conclusion 6

• consideration of the merits and disadvantages of the RDC funding the project itself including the consideration of the relative risks and the rewards of an RDC-self-funded option. The prospect of the RDC carrying the risk of future operating losses will be prominent in these considerations.

• consideration of the "loss" of the Transfund subsidy

• consideration of the challenges presented by PenLink as proposed to the RDC, the implications of a BOOT-type contract including those related to its tendering, its contract management, its long term "lock-in" effects and the receipt of appropriate assurances from the RDC’s professional advisors.

Conclusion 7

Conclusion 8

Larry N Mitchell
Public Sector Finance & Policy Analyst
Puhoi 1243
Northland

March 16 2001