Transport economist explains poor project selection behind Westconnex : Kennedy Submission, Part One

(Ed: Transport economist Lyall Kennedy’s submission will be published in several parts. It has already been sent to the NSW Department of Planning. This first part includes a focus on the NSW Auditor General’s 2014 report on Westconnex that has never been properly responded to by the Baird government. As some referencing as been lost in this publication, full PDF will be published later on this site)

Introduction

My name is Lyall Kennedy. I am a Transport Economist with over 38 years experience in transport delivery and planning. I have held senior executive roles in the State Government and the private sector.

I am currently Director of Kennedy Consulting Pty Limited providing transport management and planning advice to the private and public sectors.

I also spent four years on Ashfield Council including as Mayor in 2011 and 2012.

I am very concerned that the WestConnex project has been ill conceived and the weaknesses of the proposal have been amplified through poor governance.

My submission largely focuses on transport issues. Whilst I don’t cover other aspects of the EIS, I am concerned about other aspects particularly the impact on air quality and the loss of houses within the Haberfield Conservation Area.

I strongly urge the Department of Planning & Environment to reject the M4 East EIS. Some of the reasons I call for this are elaborated below.

I would welcome the opportunity to expand on my concerns at any public hearings that may be held as part of your deliberations.(This is an important point. The Westconnex project desperately needs open and transparent inquiry including hearings but the NSW government has no plans for these.)

Lack of Transparency and Proper Process in Project Selection

The Federal and NSW governments have called WestConnex the largest road infrastructure project in Australia’s history. For such a major piece of infrastructure it has had a relatively short period of review. It appears to have been ‘fast-tracked’ bypassing important evaluation steps aimed at providing assurance to government and the taxpayers that the project is the best solution.

The Productivity Commission in its recent inquiry into public infrastructure found, “an urgent need to comprehensively overhaul processes for assessing and developing public infrastructure projects.”

It pointed to “numerous examples of poor value for money arising from inadequate project selection, potentially costing Australia billions of dollars”. It argued that further spending under the status quo will simply increase the cost to users, taxpayers and the community, and lead to more wasteful infrastructure.(1)

At the request of the Senate Select Committee into the Abbott Government’s Budget Cuts, the Grattan Institute recently prepared a paper on infrastructure financing and expenditure with a focus on transport infrastructure.(2)

To get a better return from infrastructure spending, governments should focus on selecting the right projects, and on making the business cases and their underlying assumptions more transparent. Governments can also get a better return through use of new technologies to get more value out of existing infrastructure; through minor augmentation and relief of pinch points; and through more systematic maintenance.

“The capacity to waste money is a serious risk for infrastructure, given the very large amounts of money involved.” (p.1)

Infrastructure investment over the past five years has been about one per cent of GDP higher than a decade earlier. Such a significant increase would have been expected to have some visible effect on GDP growth. There is no evidence it has done so, with GDP growth still well below three per cent per annum and below historic growth rates.

“The wrong projects can destroy value and divert funds from projects that would be more valuable to the economy and community.” (p.4-5)

“Australia could get better value from public infrastructure by making better project selections. Unreliable or non-existent cost-benefit analyses have been an obstacle to optimal project selection. Recent large infrastructure projects in Australia have typically suffered from cost overruns of about 15 per cent, while patronage has been 15 per cent lower than projected, on average. As a result, real cost-benefit multiples are expected to be about 25 per cent lower than projected on average. All other things being equal, this consistent overestimation of benefit-cost ratios is making uneconomic projects look viable at the approval stage.” (p.5)

Unfortunately, the WestConnex project does not appears to be an example of industry best practice in project selection and transparency (see NSW Auditor General’s comments below). Calls for the release of the business case have been opposed by both the Federal and NSW governments. If there is such a compelling business case, then why isn’t it being shared with the Australian taxpayers who are bearing the risks associated with this project.

The NSW Auditor General’s Performance Audit of WestConnex conducted in 2014 highlighted the importance of proper evaluation and identified some serious deficiencies in the development of the WestConnex project.

The Executive Summary of the Auditor General’s audit concluded:

“In the period covered by this audit, the processes applied to WestConnex to provide independent assurance to Government did not meet best practice standards…

“The preliminary business case submitted for Gateway review had many deficiencies and fell well short of the standard required for such a document. Further, on our analysis, the business case put to the Government still included some deficiencies that independent Gateway reviews and external assurance arrangements, if they had occurred, should have identified…

“The post-business case governance arrangements did not clearly separate board-level responsibilities for commissioning from responsibilities for delivering the WestConnex project. After not separating the roles, they also failed to provide mechanisms to effectively manage the conflict between these roles.

“The WestConnex project offers several lessons. While good internal controls are critical, they are not a substitute for externally managed Gateway reviews. Steering committees and boards cannot be responsible for both project delivery and independent assurance and reporting to the Government. Responsibility for commissioning should be clearly differentiated from the responsibility for project delivery. Challenging deadlines heighten the need for good assurance but, paradoxically, also the risk of departure from best practice.” (p.3-4)

“The Government approved a new Major Projects Assurance Framework in December 2011…
“The objective of the Framework is to increase the Government’s confidence and assurance in planning and implementation of major projects through their entire lifecycle, specifically:

– prevent projects failing or not realising their stated objectives/benefits
– improve clarity in the feasibility phase of projects
– drive better governance
– inform Cabinet Infrastructure Committee intervention

“A key component of the Major Projects Assurance Framework is the Gateway review system. The Gateway system is a series of structured reviews at key decision points (gates) in a project’s lifecycle. Gateway gives the Government a level of independent assurance on:
whether an investment in a project is warranted
the strategic options considered
the agency’s capacity to manage and deliver the project on time, on budget and achieve desired project outcomes
whether a project is on track and ready to move to the next phase.”(p.10-11)

WestConnex Concept

“Based on the Major Projects Assurance Framework, we expected a Gateway review (or similar arm’s length, independent review) either during the concept phase or early in the development of the business case.

“The Major Projects Assurance Framework introduced a Gate Zero to provide assurance that projects are well justified after considering a wide range of options. A Gateway review or similar should therefore be conducted early in a project’s life cycle to provide assurance around whether:
the need for a project is properly defined
there is justification for addressing that need
the best value means of servicing that need are being proposed after considering a broad range of alternatives and their associated costs and benefits.

“We also expected that Infrastructure NSW or some other body would have recognised the need for a Gateway review during the concept phase, or early in the development of the business case and taken steps to ensure this occurred, including reporting to the Cabinet Infrastructure Committee.

“There was no independent Gateway review or equivalent undertaken at the concept stage. Infrastructure NSW has indicated that the concept paper it prepared to advise Government before WestConnex was publicly announced was not subjected to any independent assurance reviews. The first gateway review was of the preliminary business case late in the business case development phase.

“We saw no evidence that:
the Government specifically exempted WestConnex from the Major Projects Assurance Framework Gate Zero
provided an explanation or justification for the variation from the Major Projects Assurance Framework
the alternative approach adopted was assessed as being equivalent to, or better than, the Major Projects Assurance Framework.

“…we believe that a Gate Zero Gateway review should have been conducted. It would have provided independent assurance that the project was justified…

“Infrastructure NSW’s roles at this stage of the WestConnex project were in conflict. It was responsible for developing the WestConnex concept and at the same time it was the key agency responsible for providing assurance to Government over major capital projects including WestConnex. A fundamental principle is separation between those providing independent assurance and those developing and delivering a project.” (p. 16-17)

Developing the business case

“Given no Gate Zero Gateway review was conducted during the concept phase, we expected one (or an equivalent arm’s length, independent expert review) at the beginning of this phase.

“In line with the Transport for NSW Investment and Gating System we also expected to see the following Gateway reviews (or equivalent arm’s length, independent expert reviews)
a strategic business case review (Gate One)
a preliminary business case review (Gate Two)
a final business case review (Gate Three).

“We expected there would be acquittals of each of these reviews, and that the review reports and acquittals would be provided formally to Infrastructure NSW and followed up in each subsequent Gateway review or equivalent. 
We also expected regular progress reports to, and monitoring by, Infrastructure NSW.” (p.21)

“We expected to see outputs from the other peer reviewers but detailed reports were limited to infrastructure solutions, capital costs and traffic analysis. Even here, timing was a concern. The peer reviewer engaged to review the traffic analysis produced a report, but not until November 2013 after the business case went to the Government. The reviewer’s report indicated that the review was supposed to be continuous throughout the process of modelling, but the traffic modellers were too pressed for time to consult on a continuous basis with the peer reviewer. The reviewer described the exercise as more an audit than a peer review. The reviewer concluded that the traffic data he received in early August 2013 ‘raises questions about the underlying quality of the modelling’.

“The agencies concerned advised us that significant analysis and review of traffic numbers was undertaken by the specialist work streams established within the Project Office. However, we have seen no evidence of an independent, arm’s length review of the traffic analysis used for the final business case, by someone technically qualified to do so, before the business case was presented to the Government.
“We did not find peer review outputs for land use, urban planning or transport planning.”(p.26)

Gateway review of preliminary business case

“One formal, independent Gateway review was conducted during the development of the business case. This was of a preliminary business case.

“In its report to the Sydney Motorways Project Office (dated 14 June 2013), the Gateway Review Panel concluded that:

“due to lack of key information presented for the review, the Gateway Review Panel was not able to form a view on whether the project is a worthwhile and prudent investment (both economically and financially viable) for the NSW Government”.

“Further, the Gateway Review Panel stated that:
“A number of key documents were delivered later than anticipated and the Review Panel had very limited time to review the Silver business case.

“Relevant documentation relating to a number of critical areas of the business case was not available for review – these included the Governance Section, Financial Plan and Communications Plan. The absence of these documents did impact on the ability to review related sections.

“The Review Panel did not have access to a number of Stakeholders or documents that were considered essential in order to satisfactorily complete the review.

“The Review Panel noted that not all key benefits nor all key risks were adequately documented, and that the business case would benefit from these and other inclusions”. (p.28)

“The Gateway Review Panel also found the preliminary business case should have been more advanced than it was and would have benefited from previous iterations and review processes which had not occurred.

“The Gateway Review Panel’s ‘traffic light’ risk ratings against the Gateway criteria were all red and yellow, with no greens.” (p.29)

Red: critical and urgent – project strategy to address the shortcomings/recommendations is to be established before project is further progressed.

Yellow: Important and urgent – project should go forward with action on recommendations. Source: WestConnex preliminary business case Gateway review 2013.

Matters a Gateway review may have identified

“We reviewed the final business case and identified some issues with the underlying analysis which we believe a full Gateway review should have identified.

“These deficiencies related to the way the business case dealt with risks around traffic projections, project cost, economic benefits, financial analysis, governance arrangements and the procurement strategy.” (p.31)

Purpose of the business case

“Roads and Maritime Services say that the assurance provided to the Government on the WestConnex business case was appropriate for its purpose.

“It says the overall objective outlined in the Business Case Implementation Plan was to “produce a business case that demonstrates the overall technical and financial viability of the WestConnex scheme, consistent with the State’s Fiscal Strategy”.

“Roads and Maritime Services advised that at the conclusion of the business case in July 2013, Stage 1 was regarded as being sufficiently developed to proceed to procurement and environmental planning phases. For the other stages, the business case outlined a pathway for their further development and planning. It says that it was always envisaged that there would be additional Gateway reviews conducted on the component parts of the scheme.

“Roads and Maritime Services’ arguments do not justify the lower level of independent assurance provided on WestConnex than that offered by the Major Projects Assurance Framework. The objective was to “produce a business case that demonstrates the overall technical and financial viability of the WestConnex scheme, consistent with the State’s Fiscal Strategy.” Approval of the business case was the key decision point so far for this project, and arguably the stage at which independent assurance was most critical.”(p.31)

(Ed:This is end of quotes from NSW Auditor General’s report)

Conclusion to Part one of Kennedy Submission

Failure to abide by the Major Projects Assurance Framework and employ best practice governance from project inception has greatly reduced community confidence. The Community is being asked to comment on an EIS that is deficient in analysis of project justification.

A condition of consent for the M4 East should include adherence to the NSW Government’s Major Projects Assurance Framework. Vital gateway reviews which should have been undertaken before the preparation of the EIS (and certainly before awarding construction contracts) should be commissioned, completed and made publicly available before any further approvals are issued.

Footnotes


1. Inquiry into Public Infrastructure, Productivity Commission (2014)
2. Submission to Select Committee into the Abbott Government’s Budget Cuts, Marion Terrill, Transport Program Director, Grattan Institute (August 2015)

Part 2 of Lyall Kennedy’s submission can be found here

You have only three more days to lodge a submission to the M4 East EIS .. here’s how you can do it
https://m4eis.org/2015/09/11/how-to-object/

EIS submission Pub Night - Newtown Social Club October 28, 2015
EIS submission Pub Night – Newtown Social Club October 28, 2015
Advertisements

One thought on “Transport economist explains poor project selection behind Westconnex : Kennedy Submission, Part One

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s