Case of Transit New Zealand

Introduction
New Zealand is a relatively ‘young’ country. It was settled by Europeans by 1814, th
e first
Government was established by 1814 and a treaty (Treaty of Waitangi) between Que
en Victoria and
the native population (Maori) was signed in 1840. The treaty continues to have a
powerful influence
today.
The history of road management in New Zealand has been one of steady e
volution. Prior to 1954
roading was largely managed on a provincial basis guided by about 14 Main Highwa
ys Boards.
These operated independently and were funded by locally derived levies on proper
ties. They were
uncoordinated, standards varied and there was no recognition of the need for a n
ational network of
arterial routes built to a consistent standard. The Ministry of Works was also a
very powerful force in developing the infrastructure of New Zealand at this tim
e. It was responsible for the design and construction of major capital projects
which the Government at the time decided were necessary, including roads. The fi
rst significant change in the management of roads was the passing of the Nationa
l Roads Act 1953. This abolished the Main Highways Boards and replaced them with
the National Roads Board (NRB). The NRB had the power to declare roads to be St
ate highways, thus defining a national
network, and deciding on the standards to which these would be built. The Govern
or-General of New Zealand appointed the members of the NRB on the recommendation
of the Minister of Works. Member representation of the NRB is shown in Figure 1
. The Minister of Works was Chairman and the Ministry of Works and Development (
MWD) also had two seats on the Board. The MWD had considerable influence on deci
sions made by the NRB.
Membership of the National Roads Board
• National Roads Board 1954-1989
• Minister of Works – Chairman
• Two officers of the Ministry of Works
• One representing the Ministry of Transport
• Two nominated by the NZ Counties Association
• One representing cities of greater than 20,000 people
• One representing towns of less than 20,000 people
• One representing commercial vehicle users
• One representing private motorists.

The NRB was serviced by a division of the MWD (Roading Division) and the MWD als
o managed,
constructed and maintained the State highway network. This network totalled appr
oximately
10,000km with a further 82,000km of local roads being managed by the 210 territo
rial authorities that
existed at that time. The NRB funded State highways 100% and local roads at an a
verage of 50%
through a complex system of subsidy and grants. Virtually all State highway work
funded by the NRB was undertaken by the MWD “as of right”. The inability of the NRB
to “shop elsewhere” meant that the MWD personnel who were not seconded to the NRB,
could promote and control progress on desired projects. In practice, the work ac
hieved was more due to the ability of key personalities in MWD to plan and work
together, than from a clear distinction between the funder and deliverer roles.
That said, enormous progress was made in establishing the roading infrastructure
, which is the backbone of New Zealand’s economy and continues to provide a sound
basis for development.

The Desirability of Separation

One could ask why is it desirable to operate the commercial role separately from
policy/regulatory
activities¹. To better assess the benefits of separating commercial activities fro
m policy/regulatory
activities, and then corporatising the commercial business, one should look at t
he advantages and
disadvantages observed in New Zealand over the last few years. Note that some cl
ient advantages
could be seen as disadvantages by consultants and contractors. From a client s1:
perspective we
analyse the position.
Advantages
The advantages to the client are that:
a) Accountability for the respective parties can be defined.
b) The client is forced to define and document what is required from a consultan
t or contractor.
Quality can be specified and performance measured against the written brief.
c) The consultant or contractor knows what is required as it is set out in the d
ocumentation.
d) It forces the consultant or contractor to deliver what the client has specifi
ed and not what they
think the client wants. Day-to-day problems, such as the engagement of labour ar
e removed
from the client’s responsibilities.
e) It enables a choice of consultants or contractors (if they don’t perform, don’t r
e-engage them).
f) Liability for actions is allocated to the respective organisations, (no longe
r will the client pay
for re-work to correct design or construction errors.).
g) Innovation can be encouraged into the provision of services and physical work
s.
Other factors, include expenditure for plant and facilities, can be based on the
ability to obtain a
commercial return to the contractor or consultant. It might still be appropriate
for the client to build a
remote depot because of a particular benefit long-term. Before a contractor make
s that decision it
would be essential to weigh up the risks of losing the contract next time round.
The costs of works or services decrease but administration costs increase slight
ly because of the need
to prepare briefs and manage consultants and contractors.
Disadvantages
The disadvantages2 for the client are, in some cases, real and in others are per
ceptions. They include:
a) Becoming very reliant on the consultant for expenditure control.
b) Losing direct control of contracts to the consultant and hence, for instance,
cannot step in and
terminate the contract without the consultant s agreement.
c) Contractors can mess up a roading project. This brings public discredit to th
e client.
2 The client in this context is the representative for the road user that is pur
chasing the benefits for the taxes that the
road user has to pay in the form of fuel excise or road user charges.
3 There was also early difficulty for the separated consultancy part of the form
er Ministry of Works being ‘tough’ on
the Government owned construction operation, given that the staff all originally
came from the same organisation. (This was
a short-term disadvantage that has now worked its way out of the system).
d) The client has very limited direct access to the contractor, having to take a
ny action through
the consultant.
e) The RCA client’s staff become remote from operational activities and so can eas
ily lose touch
with reality.
f) The role of research changes. Activities that will improve resource use are p
redominantly
being left to consultants and contractors to fund. In other words, introduction
of new
techniques requires the client to take a different approach and encourage innova
tion. Doing
so can be an advantage.
g) Because profitability is so important, and margins are driven down by competi
tion, there are
less opportunities for the training of young staff. This has become a real probl
em in New
Zealand.

Corporatisation/Privatisation
The key to which mode of operation to adopt is; “Can it be privatised without comp
romising
State/Government objectives?” If it can, then all commercial activities within a g
iven department
should be corporatised and eventually readied for privatisation. The British hav
e defined privatisation
as “a process which transfers ownership and control of a state asset to the privat
e sector”. This is also
the definition used in New Zealand, and is not to be confused with obtaining ser
vices from the private
sector, i.e. contracting out work.
If a corporatised Government activity is essentially a monopoly it should be ret
ained in Government
ownership, at least until adequate competition is available, or other accountabi
lity mechanisms, such
as an industry regulatory body, are in place, but this must be the Government’s ch
oice.
The New Zealand Model for Transport
The Government decided that all land transport expenditure should be considered
on an equal basis.
That is, expenditure on roads, passenger transport and traffic enforcement shoul
d be prioritised within
one body. The institutional forms followed in New Zealand (refer to Figure 3) we
re modelled on the
Scandinavian approach using the principles set out in Section 4.1. The role of t
he Ministry of
Transport is to advise and service the Minister of Transport on policy and legis
lative areas.
Separate agencies have been established, each with their own board, to manage th
e safety regulations
on behalf of Government for the respective modes of land, sea and air. Other fun
ctions, including
management of the State highway system and allocation of road taxes followed a s
imilar model.
The railways system was corporatised in 1990 and sold to the private sector in O
ctober 1993. The
land occupied by rail operation (the rail corridor) was not sold by Government b
ut leased for a
nominal rental of $1 per year for a 97 year lease. This met the Treaty of Waitan
gi requirements that
the land did not pass out of Crown ownership.

Lessons Learnt
a) The lessons learnt during the period of transport reform process were that:
b) Mixed regulatory, policy and delivery functions in large government departmen
ts hamper
efficiency and blur accountabilities.
c) Corporatised functions need a finite period of protection to make the cultura
l and
organisational changes necessary to be commercially successful.
d) Having to specify the works or services to be purchased focuses the clients’ mi
nd clearly on
the need for, and the form of, the work or service and its cost.
e) The wider interests of the community need to be taken into account but indivi
dual interests
should not prevent the overall benefits.
Formation of Transit New Zealand
Legislation
In September 1989, legislation was passed which created Transit New Zealand (Tra
nsit) as a Crown
entity, replacing the previous National Roads Board (NRB). Transit’s role, as stat
ed in its
empowering legislation, was “to achieve a safe and efficient land transport system”.
Its functions
included the allocation of funds for all roads and urban public transport, and t
he control and
management of the State highway system. A Board governed Transit in the same way
that a private company would operate. The Board’s seven to ten members had no spe
cified sector representation. Appointments were made solely on their ability to
ensure that the objectives of Transit are achieved. In practice, the Board has a
wide range of professional, business and sector experience. The Ministers’ of Fin
ance and Transport nominate board members (and the Chairman and Deputy Chairman)
for appointment by the Governor General. The Board’s accountability to the Minist
er of Transport is through an annual Performance Agreement. The Board also repor
ts to Parliament through an Annual Report prepared against its Statement of Inte
nt. All are publicly available documents. While the Minister may give direction,
and has done so on a very few occasions, the Board is wholly responsible for it
s actions.
The staff of that part of the previous MWD, whose responsibility was to service
the NRB, became the
staff resource of Transit. The original structure involved a staff of approximat
ely 170 with a head
office located in Wellington, the capital of New Zealand, and seven regional off
ices.
Competitive pricing
The legislation which created Transit also established that all works undertaken
on the State highway
network (both professional services and physical works) had to be competitively
priced from 1 July
1991. The same requirement was progressively applied to local roads.
The objectives of competitive pricing were to:
a. encourage competition
b. not to exclude those who would have been willing to compete
c. have regard to efficiency of administration, and
d. the safety of the public.
The tendering of all works and professional services had to be carried out in ac
cordance with
procedures approved by Transit (later Transfund). The procedures were prescripti
ve but had to be
followed if Government funds were involved.
Issues Related to Competitive Pricing
The introduction of competitive pricing meant that the “relaxing period” for the Wor
ks
Corporation (the SOE arising from the MWD) was over. Up until this time Works Co
rporation had
exclusive right under formal agreements to undertake all routine maintenance act
ivities and
professional services for State highways. This involved annual negotiation of ra
tes, but did not leave
the road “client” in a position where it could engage alternative suppliers. Both or
ganisations were
keen to move towards unit rate work. Future certainty for the Works Corporation
was dependent on it
improving its efficiency. Initially contract documentation was available for con
struction works, but this had never been developed for maintenance activities or
for professional services. While the services required were generally well unde
rstood by Works Corporation, documentation specifying these works or services in
a form suitable for tendering did not exist. In looking at overseas practices f
or contracting out
maintenance at that time we found little that was relevant or that had been oper
ating for sufficient
time to make any reasonable assessments of their effectiveness. Documentation ha
s now been developed and has been tested, generally to the satisfaction of the s
uppliers. The procedures for tendering are also well proven, although there cont
inues to be concern about the way in which these are applied in practice. Howeve
r, in the ten years they have been in place they have changed the behavior of al
l parties (road controlling authorities and suppliers) in the market and achieve
d substantial savings in costs.
Future Challenges
A P Talvitie of the World Bank summarised the reform process occurring around th
e world and
identified five stages as follows:
Phase 1 Traditional construction and maintenance organisation. A traditional pub
lic
works ministry of either state or federal government, employing large
numbers of staff.
Phase 2 Identification of client and deliverer functions. More emphasis on
efficiency in the provision of works or services and the start of contractingout
work. Public works organisations tend to be replaced by a Ministry of
Transport for policy direction.
Phase 3 Separation of client and delivery organisations. Increasing emphasis on
policy, especially the environmental issues, and the continuing drive for
more efficiency, pushes the separation of client and deliverer. The
traditional public service deliverers are normally corporatised. A Roads
Board for the management of funding normally appears in this phase.
Phase 4 Corporatisation/privatisation of the deliverer. In this phase, governmen
towned
delivery organisations are at least corporatised, or more likely
privatised, by either sale or devolution of these activities to the private
sector. A more dedicated road fund normally appears in this phase.
Phase 5 Corporatisation of the client organisation. In this phase the client roa
d
manager would become the formal owner of the roads on behalf of
government and manage them as a government corporation achieving a rate
of return on the value of the assets.
No doubt there is a sixth phase, and this could involve some form of privatisati
on of some or all of the
road network. This has occurred, to a limited degree, throughout the world altho
ugh no country has
yet privatised, or corporatised, its entire network and had to deal with all the
ramifications of a natural
monopoly. Road management and road organisations throughout the world are curren
tly between phases 1 and 4 of Talvitie’s five stages, depending on the particular
government’s role in directing reform. However, the trend has been to progress tow
ards phase 4 over time. Each country has adopted different methods of reform and
moved at different rates, but nearly all have moved through the phases in seque
nce
without omitting any stage. New Zealand is currently at the end of Phase 4. Furt
her reform in New Zealand continues to be the subject of much political debate.
Privatisation of the roading system is not an option being considered in New Zea
land. However, private sector funding and tolling on new facilities is an option
being considered to meet future roading needs. Adequate and secure funding is l
argely the key to ensuring that there is an appropriate roading system.

Lessons Learnt
The lessons learnt in New Zealand are:
a) Legislation for an entity needs to clearly specify the outcomes desired, prov
ide the power and
framework for accountability and avoid prescribing the detail of operations.
b) A competitive environment for the provision of works or services achieves eff
iciency and
changes behaviours. However, care is needed to ensure that a preoccupation with
savings
does not result in a reduction in quality or value.
c) In today s environment organisational change is inevitable. Successful organi
sations are those
who are in tune with the environment in which they work and can anticipate and a
djust to
change when it occurs.