Business cases for large roading projects 'disconnected' from reality - ministry

The government has been warned that business cases for many projects - even large roading projects - have become so weak that they are disconnected from reality.

The Transport Ministry (MOT) has told the government that "investment decisions have become disconnected from the available revenue and market capacity," in proactively-released documents.

"There has been a breakdown in the relationship between business case developers, decision makers and funders."

This warning was issued in November, with the problems of poor planning going on for years, and persisting.

"The system is not working effectively to support Cabinet decision-making," Treasury said in its latest quarterly investment report available, to March 2024.

It found that a big issue with investment planning was "poor strategic thinking", right from the start.

The stakes have grown higher due to the scale of infrastructure demands, and of the government's build programme, including the 17 national roads of national significance (RONs), worth at least $20 billion.

Treasury, the MOT and NZTA Waka Kotahi are now all trying new ways to improve planning.

"I made my expectation clear that NZTA will need to build a much more efficient business case process by the end of the year," Transport Minister Simeon Brown told RNZ on Monday.

"Business cases have become increasingly costly and time consuming for the sector without necessarily leading to better investment choices and more efficient and timely infrastructure delivery," he said in a statement.

Treasury told RNZ it had delivered the first part of a multi-year overhaul of the entire investment management system.

"We are resetting expectations for business cases," it had said earlier.

The MOT is also beginning work on a 'Future of the Transport Investment System' plan.

MOT's warning to Brown in November overshadowed subsequent planning for the RONs, when it said:

"Decisions are increasingly being made without business cases being completed and the project scope and cost being fully understood, meaning more cost increases, delays and ultimately an inability to deliver intended benefits."

Brown put out his overall 2024-27 transport plan earlier this month, with a focus on big projects.

"My expectation is that business cases for Roads of National Significance, as with all transport projects, are developed efficiently and in line with best practice," he said on Monday.

The initial cost for RONs - estimated to complete 14 of the 17 highways - was $17.3 billion in the MOT papers, plus another $3b for the other three.

The latest estimates have been entirely blanked out of the newly-released documents.

"Initial cost estimates are increasingly unreliable indicators of final costs", MOT stated.

Officials have updated the initial RONs estimates with a "simple" model, applying inflation, contingency and overhead charges. But it also listed 10 wild-card factors that can influence costs, ranging from ground conditions to fast-track legislation.

The planning problems had overall "resulted in a level of investment in the transport sector that is neither affordable nor deliverable", the ministry said.

The road projects depend on Waka Kotahi, and it already has a lot of on its plate, including current business cases at: SH1 at Utiku near Taihape, to stabilise the land; SH38 Wairoa to Murupara; SH6 Cromwell to Frankton, Frankton to Kingston and Haast to Hawea for resilience work; SH1 and SH88 in Dunedin; to replace the single-lane Albert Town Bridge on SH6; and on updates to business cases for SH2 done before Cyclone Gabrielle.

Business cases that are off the mark have also plagued Health NZ Te Whatu Ora, such as with its Dunedin Hospital rebuild that has escalated to $1.7b.

Treasury found that business cases, in general, too often relied on data that was inconsistent and "immature".

For example, the 2021-24 transport plan was based on four percent inflation over three years, and encountered a 20-28 percent rise in input costs for state highway maintenance.

Treasury has also found agencies were flouting investment rules.

"Inadequate application leads to poorly scoped investments, with cost overruns and delays, without appropriate decision points for Cabinet to mitigate this," it said in the quarterly investment report.

Under its new review, it has issued two new guidance documents about investment management system and changed assurance processes "to ensure stronger independent assurance on high-risk investments to support ministerial decision-making", it said.

Tensions in the fix

Attempts to fix these issues have created their own tensions.

Treasury said the aim of its systems review was "shorter business cases that are faster to produce, and have the key information".

But at the same time it had identified "inadequate planning time" as one of three key shortcomings. Some business cases simply were not being finished.

Speed was one point where the messages were mixed, while scale was another.

The new transport plan's focus is on big builds, though Brown has told agencies he also expects projects to "take a 'no frills' approach".

His officials told him in November that business cases needed to fully investigate all possible options and delivery methods, including "do nothing" and minimal investment, "before settling on any higher-cost interventions".

NZTA was even more blunt in its 30-year Arataki plan:

"Solutions that cost less and are most effective will be used more often than major investment. This includes planning, demand management, and making the most of existing infrastructure."

It issued the latest version of Arataki last September, just before the new government came in.

There have been many previous attempts to fix business cases.

The Transport Agency adopted Treasury's 'better business cases' framework in 2013, then tried recently to make more efficient.

Its new "benefits framework" would identify a project's benefits early on and improve business cases, it said last year.

"Business cases will be targeted, and include only what is required.

"This work aims to create a significant improvement in the time and cost to develop business cases, as well as a more accurate cost estimation."

The agency is now introducing a "planning and investment evidence base programme" to make a change to "enabling evidenced-based decision making".

Brown told RNZ on Monday he had refocused a road efficiency group on ensuring that all investment in road maintenance and renewals was being spent effectively.

He also just announced a new 'Performance and Efficiency Plan' to ensure the NZTA was focused on "getting back to basics", he said.

Consultants often play a big role in business cases. One firm was paid $1.17m by NZTA, at more than $2000 a day, for work that included a state highway investment business case, while another received $220,000, and a third almost $700,000.

Millions have been spent on business cases for a second connection across the Waitematā.