CBD South East Sydney Light Rail: follow-up performance audit  11 June 2020  -  NSW Auditor-General

In February 2015, the estimated total cost and capital funding approved for the project was $2.104 billion.

In November 2019, the Minister for Transport announced that the revised construction costs for the project were $2.9 billion, based on a briefing prepared by TfNSW staff. The briefing stated the updated estimated total cost of the project was $2.993 billion (excluding financing costs).

Our audit found the total cost of the CSELR project will exceed $3.1 billion as the briefing did not include:

• $36.07 million for pre-contract award costs
• $60.0 million for the small business assistance package
• $57.77 million in additional financing costs (as at 30 June 2019) directly attributable to delays in the project.

The cost of the CSELR project will exceed the cost reported by TfNSW.

The project delivery office prepared monthly Financial Performance and Risk (FPR) reports throughout the delivery of the light rail. The reports contained accurate capital expenditure information, but the information was not complete as it did not include other known project costs.

Between February 2015 and mid-2018, the CSELR Advisory Board was responsible for oversighting costs against budget. TfNSW regularly provided the Board with FPR reports until May 2017. After this time, TfNSW provided one report (August 2017) to the Advisory Board.

Subsequently, the CSELR Project Control Group (established mid 2018) had responsibility for monitoring spend against project funding allocation and revised forecasts. TfNSW did not regularly provide this group with FPR reports. TfNSW advises that some members of the Project Control Group had access to these reports, but was unable to provide evidence that the reports were regularly considered by the Project Control Group.

In our first report on the CESLR (2016), we recommended that TfNSW update and consolidate information about project costs and benefits and ensure that it is readily accessible to the public.  In 2016, in response to our recommendation, TfNSW published current information on the 2015 project cost and benefits to the Sydney light rail website. Since then, TfNSW updated the information on the website on two occasions. However, TfNSW's updates have not always been accurate:

• On the June 2019 Light Rail Benefits factsheet (published on the Sydney Light Rail website), TfNSW described the project cost as $2.1 billion and noted that it had entered into a revised agreement with ALTRAC Light Rail operating company (OpCo) which included an additional sum of $576 million. This information did not align with the approved revised budget of $2.734 billion used internally as it did not include $57.77 million in additional financing costs.

• On the November 2019 Light Rail Benefits factsheet (published on the Sydney Light Rail website), TfNSW used an updated construction cost figure of $2.9 billion. The source figure for this reported project cost was actually $2.993 billion. This cost figure also did not include other associated project costs.

The 2015 CSELR project benefits realisation plan noted that ‘Journey times and service capacity are central to realising customer benefits.’ The June 2019 amended project deed includes required journey times of 37.5 to 38.5 minutes for 97 per cent of services from Circular Quay to Randwick and Kingsford branches respectively.

From 1 March to 7 March, 97 per cent of journeys from Circular Quay to Randwick were 51 minutes and 25 seconds or less, with an average journey time of 42 minutes and 5 seconds. ???

TfNSW has established a committee with OpCo to bring the average journey time down to meet the contracted journey time included in the project deed.

In the 2013 detailed economic appraisal of the CSELR (developed as part of the business case for the CSELR), TfNSW estimated that the net present value of transport operating benefits at $707 million, of which $442 million (or $47.0 million per annum) would be savings due to avoided bus service costs.

In November 2014, in response to changes to the project scope, TfNSW revised the transport operating benefits (which included savings due to avoided bus service costs) to $686 million.

In June 2019, TfNSW estimated that it achieved savings of $8.2 million per annum as a result of the October 2015 changes to Sydney CBD bus services. TfNSW expects to achieve an additional cost savings of $8–10 million per annum following implementation of its 2020 integrated bus service plan for South Eastern Sydney. The final integrated bus service plan is yet to be finalised and endorsed.

These latest estimated savings resulting from changes to bus services are significantly lower than the figure TfNSW used to calculate the project benefits in 2013.

TfNSW advised us that there have been changes in customer demand for travel in South Eastern Sydney since the CSELR project business case was prepared in 2012, which it attributes to significant growth of residential development in the eastern suburbs of Sydney.

2. Recommendations

By June 2020, Transport for NSW should:

1. publicly report average weekly journey times

2. publicly report the final project cost

By December 2020, Transport for NSW should:

3. publicly report the updated expected project benefits

By April 2021, Transport for NSW should:

4. publicly report on benefits achieved during the first year of operations.

The CSELR project involves constructing a new light rail service that runs from Circular Quay along George Street to Central Station, through Surry Hills to Moore Park, then to:

• Kingsford via Anzac Parade

• Randwick via Alison Road and High Street.

In 2016, the Auditor-General published a performance audit report on the CSELR project. The audit assessed how well Transport for NSW (TfNSW) ensured that planning and procurement for the CSELR project achieved value for money within the parameters set by the NSW Government. It covered the period from the development of the Sydney Light Rail Strategic Plan beginning in August 2011 to the major construction contract completion in February 2015. The audit found that TfNSW would deliver the CSELR at a higher cost with lower benefits than in the approved business case and recommended that TfNSW update and consolidate information about project costs and benefits and ensure that this information it is readily accessible to the public.

Specifically, the Auditor-General made the following recommendations:

1. TfNSW should, by December 2016:
   1. *        finalise outstanding design and scope issues
   2. *        ask the project Advisory Board to confirm that controls over the budget and use of contingency funds are consistent with NSW Government decisions and NSW Treasury guidelines
   3. *        update and consolidate information about project costs and benefits and ensure that it is readily accessible to the public
   4. *        ensure the Sydney Light Rail Project Director provides six-monthly briefings to the TfNSW Audit and Risk Committee.
2. For all capital projects, Transport for NSW should comply with the Infrastructure Investor Assurance Framework.

In November 2018, the Public Accounts Committee (PAC) examined TfNSW's actions taken in response to our 2016 performance audit report on the CSELR project. The PAC recommended that the Auditor-General consider undertaking a follow-up audit on the CSELR project. The PAC noted ‘the paucity of detailed information provided in additional responses to questions taken on notice by TfNSW witnesses about a range of financial and project management information raises significant concerns about the current state of the project’. The PAC concluded that there is merit in increasing the transparency and accountability of information.

Between May 2018 and the January 2019, the Legislative Council Public Accountability Committee conducted an inquiry into the ‘Impact of the CBD and South East Light Rail Project’. Its January 2019 report similarly ‘questions whether the costs of the project are being managed effectively.

In October 2014, TfNSW selected Connecting Sydney (which subsequently changed its name to ALTRAC Light rail) as the preferred proponent for the light rail public private partnership (PPP).  ALTRAC Light Rail is the operating company (OpCo) responsible for delivering, operating and maintaining the CSELR. OpCo engaged Alstom Transport Australia Pty Limited and Acciona Infrastructure Australia Pty Ltd, who together form its Design and Construct Contractor (D&C).

The project’s business case summary was published in November 2013, estimating a cost of $1.6 billion. However, the budget had increased by $549 million to $2.1 billion when Transport signed the main works PPP contract in December 2014.

Major construction of the CSELR started in October 2015. The project experienced significant delays, and by March 2018, financial performance reporting prepared by TfNSW showed that expenditure on construction of the light rail was $213 million behind schedule, and that the project would likely cost $135 million more than budget.

In April 2018, D&C filed a lawsuit in the NSW Supreme Court, alleging that the NSW Government had engaged in misleading or deceptive conduct when providing information on how to manage electricity cables on George Street.

Between April 2018 and June 2019, TfNSW engaged in a facilitation process with OpCo and D&C. The Minister for Transport established a Steer Co to coordinate the response to the litigation and negotiate new commercial positions on behalf of government.

On 3 June 2019, the Minister for Transport announced that the NSW Government had reached a settlement agreement with OpCo. The settlement agreement resolved existing disputes on modifications to the scope of the project and introduced new construction and delivery milestone incentives for the OpCo. As part of the settlement, D&C also agreed to permanently withdraw its claim of misleading or deceptive conduct. The cost to government for the settlement is $576 million, which includes incentive payments ($44.0 million) and a two year extension to OpCo's licence to operate the light rail (worth $221 million).

From 3 June 2019, OpCo and D&C increased their efforts to construct and deliver the light rail, in line with the new timetable agreed as part of the settlement. First passenger service for Circular Quay to Randwick started on 14 December 2019. Passenger services on the line between Circular Quay and Kingsford commenced on 3 April 2020.

After the NSW Government approved the final business case, TfNSW consulted the Department of Premier and Cabinet, NSW Treasury and Infrastructure NSW on an appropriate governance model. In November 2013, the Minister for Transport appointed the Sydney Light Rail (SLR) Advisory Board to provide project oversight and independent assurance; advice to the Minister and Premier; advice to the Secretary and the Project Director on critical decisions and endorsement of recommendations to government.

In April 2015, TfNSW established a stand-alone project delivery office to deliver the CSELR project and oversee the operation of the existing Inner West Light Rail service. The delivery office originally reported to the Secretary for TfNSW but TfNSW advises that in later years the delivery office reported to the Deputy Secretary Infrastructure and Place. TfNSW advises that this structure has subsequently changed, and the delivery office currently reports to the Head of the Sydney Project Delivery office. TfNSW also advises that the project delivery office also provides information to the TfNSW Program Management Office.

We also note that in July 2015, Infrastructure NSW strengthened its assurance role of the CSELR project to:

• conduct regular health checks
• administer gateway reviews at key stages in line with the Infrastructure Investor Assurance Framework
• report monthly to the NSW Government.

In July 2018, the Minister for Transport approved further changes to the governance arrangements by establishing the SLR Steering Committee (referred to as the Steer Co) and Project Control Group. The role of the CSELR Advisory Board changed to an advisory only role.

The objective of the Steer Co is to:

• develop and govern strategy and execution in relation to the Sydney Light Rail project's financial, commercial and project performance issues
• recommend solutions and negotiate commercial positions
• provide advice to the Secretary of Transport on critical/major decisions and endorsement of recommendations to government

• co-ordinate litigation, progress, performance, disputes, communications (media) and major risks in relation to the Sydney Light Rail project.

In February 2015, the estimated total cost and capital funding approved for the CSELR project was $2.104 billion, excluding financing costs.

In June 2019, following the execution of the deed of settlement and release on 31 May 2019, the NSW Government approved an increase of $576 million in capital funding for the project, increasing the total budgeted cost of the project to $2.680 billion.

In November 2019, based on a briefing prepared by TfNSW, the Minister for Transport announced that the revised construction costs for the project were $2.9 billion. The briefing stated the updated estimated total cost of the project was $2.993 billion excluding financing costs, and noted that TfNSW was exploring funding options for the increase of $313 million.

The $2.993 billion total project cost contained in the briefing included:

• $2.104 billion (approved budget at February 2015)
• $576 million deed of settlement (announced May 2019)
• $87.0 million remaining funds from an advance payment made by TfNSW to OpCo
• $73.0 million for additional direct project management and delivery costs
• $72.0 million for additional costs relating to the Sydney co-ordination office, including safety measures and campaigns, and corporate overheads
• $81.0 million project contingency provision
• an assumption that all milestone and incentive payments included as part of the facilitation settlement are payable.

At March 2020, we identified $153.84 million in additional costs incurred by TfNSW that should be attributed to managing and commissioning the CSELR project, bringing its estimated total cost to $3.147 billion. Namely:

• $36.07 million for pre-contract award costs.
• $60.0 million for the small business assistance package - TfNSW advises that it did not include this in the estimated total cost as TfNSW are funding the package as an operating, not a capital, expense. However, the package is a related cost, and as such we have included it in our estimate. As at February 2020, TfNSW has spent $52.0 million of the $60.0 million allocated.
• $57.77 million in financing costs (at 30 June 2019) - TfNSW advises, in line with TPP15-02 Budgeting for Availability based on Public Private Partnerships, it does not include financing costs in the published budget figures. However, TfNSW has incurred additional financing costs for the project as a result of entering into a $500 million Supported Bank Liquidity Facility in July 2018. These additional financing costs are directly attributable to delays in the project, as such, we have included them as part of the estimated total cost.

We also note that the figure does not include any funding for the Light Rail Nuisance Class Action. TfNSW advises that its insurer is currently underwriting this potential expense, and is unlikely to result in additional cost to government for the project.

The project delivery office prepared monthly Financial Performance and Risk (FPR) reports throughout the delivery of the light rail project. The reports contain capital expenditure information and are accurate, and were prepared for management and governance use. However, the reports are not complete as they do not include the additional costs to the CSELR project that we identified above.

TfNSW included risk information associated with costs in the monthly FPR reports. Between June 2017 and September 2018, each of the FPR reports we examined showed a decreasing likelihood that TfNSW could deliver the CSELR project within its approved $2.1 billion budget. However, TfNSW did not revise the Final Forecast Cost to $2.734 billion until June 2019, when a settlement outcome was achieved as part of the facilitation process. TfNSW has advised that the uncertainty of the facilitation process between mid-2018 and May 2019 made it difficult to revise the Final Forecast Cost.

Exhibit 2 shows reporting on the Final Forecast Cost and the likelihood of the project being delivered on budget. In May 2018, TfNSW's risk analysis identified a zero per cent chance of the project being delivered within budget. By July 2018, the risk model produced a final forecast cost $379 million greater than the $2.104 billion forecast cost.

From February 2015, the main governance bodies for the CSELR project were the -

a)      Sydney Light Rail Advisory Board (Advisory Board),

b)      Sydney Light Rail Project Control Group (Project Control Group); and

c)      Sydney Light Rail Steer Co (Steer Co).

The responsibilities of the governance bodies are shown in Exhibit 3.

In May 2016, the Advisory Board asked TFNSW to provide it with quarterly Final Forecast Cost estimates. TfNSW did not regularly report project costs against budget to the Advisory Board. In July 2017, the Advisory Board identified that the level of confidence in delivering the project on budget was decreasing and recommended that TfNSW monitor this closely. Between June 2017 and May 2018, TfNSW provided the August 2017 FPR (Financial Performance and Risk) report in October 2017. No other FPR reports were provided during this period. TfNSW did not regularly provide the Project Control Group with FPR reports. TfNSW advised that some members of the Project Control Group had access to the FPR reports but was unable to provide evidence that the Project Control Group regularly considered these reports.

Our 2016 performance audit on the CSELR project recommended that TfNSW ensure that the CSELR Project Director provide six-monthly briefings to TfNSW's Audit and Risk Committee. We found that, with one exception, the project director provided these briefings and that TfNSW has met the intent of our recommendation.

Since 2015, the CSELR has been subject to Infrastructure NSW's 'Infrastructure Investor Assurance Framework' (IIAF). TfNSW has participated in INSW reviews in line with the IIAF. These reviews include:

• monthly high profile/high risk reports - which provide a snapshot of the project during delivery
• independent gateway reviews
• health checks
• deep dive reviews.

TfNSW intends to undertake benefits realisation activities as part of the IIAF. Under the IIAF, at the final gateway review, NSW Government agencies assess benefits realisation when a project is fully delivered.

The 2015 BRP noted that ‘Journey times and service capacity are central to realising customer benefits.’ The 2015 BRP uses an average journey time of 35 -38 minutes (for travel from CBD to Randwick and Kingsford branches respectively. The June 2019 amended project deed includes required journey times of 37.5 to 38.5 minutes for 97 per cent of services from Circular Quay to Randwick and Kingsford branches respectively.

From March 1 to March 7, 97 per cent of journeys from Circular Quay to Randwick were 51 minutes and 25 seconds or less, with an average journey time of 42 minutes and 5 seconds. 60 per cent of journeys made during this week were 42 minutes and 37 seconds or less. The scheduled journey time during this period was 40 minutes. TfNSW has established a committee with OpCo which aims to meet the contracted journey time included in the project deed.¹ Exhibit 4 shows CSELR journey time data for three separate weeks in February, March and April 2020.

Under the terms of the Project Deed, TfNSW can, in some circumstances, reduce the monthly service payment it pays to OpCo if the journey time for a service exceeds the maximum service time by four minutes. The Project Deed also includes an interim ‘bedding in’ period, to allow OpCo time to optimise journey time, where this penalty does not apply.

TfNSW engaged consultants to model likely journey times to inform adjustment of traffic light controls and to consider impacts on the broader road network. This work has been ongoing since 2016, and updates on the achievability of journey times have been a regular feature of Advisory Board and Project Control Group meetings. The audit team has sighted evidence regarding TfNSW’s work in developing traffic signalling control plans for intersections as well as repeated modelling to ascertain the impact of signalling changes on light rail journey time and the surrounding road network. TfNSW advised that this work is iterative.

In the 2013 detailed economic appraisal of the CSELR, TfNSW estimated that the net present value of transport operating benefits at $707 million, of which $442 million (or $47.0 million per annum) would be savings due to avoided bus costs.

In November 2014, in response to changes to the project scope, TfNSW revised the transport operating benefits (which included savings due to avoided bus costs) to $686 million.

In June 2019, TfNSW estimated that it achieved savings of $8.2 million per annum as a result of the October 2015 changes to Sydney CBD bus services. TfNSW expects to achieve an additional cost savings of $8–10 million per annum following implementation of its 2020 integrated bus service plan for South Eastern Sydney. The final integrated bus service plan is yet to be finalised and endorsed. The savings resulting from changes to bus services are significantly lower than the figure TfNSW used to calculate the project benefits in 2013.

TfNSW notes that there have been changes in customer demand for travel in South Eastern Sydney since the CSELR project business case was prepared in 2012, which it attributes to significant growth of residential development in the eastern suburbs of Sydney.

Our 2016 performance audit on the CSELR project recommended that TfNSW update and consolidate information about project costs and benefits and ensure that it is readily accessible to the public. In response to our recommendation, TfNSW published current information on the 2015 project cost and benefits to the Sydney light rail website. Since then, TfNSW updated the information on the website with project costs twice. On 3 June 2019, the website was updated to reflect the outcome of the settlement and stated that the final cost and an updated benefit-cost analysis will be determined following project completion and a final completion review by Infrastructure NSW. TfNSW updated the information again on 27 November 2019 to reflect the updated $2.9 billion project cost.

Public information on project costs has not always been accurate. In June 2019, TfNSW approved a revised project budget of $2.734 billion. Following this, TfNSW updated information on the website stating that the project cost was $2.1 billion and that there was an addition sum of up to $576 million post settlement, this would bring the total project budget to $2.676 billion. This means that the project costs published on the website were not accurate as it did not include $57.77 million in additional financing costs. TfNSW advises that, in line with TPP15-02 Budgeting for Availability based on Public Private Partnerships, it does not include financing costs in the published budget figures. However, TfNSW has incurred additional financing costs for the project as a result of entering into a $500 million Supported Bank Liquidity Facility in July 2018. These additional financing costs are directly attributable to delays in the project, as such, we have included them as part of the estimated total cost. Exhibit 6 shows project cost revisions and public reporting on project costs.

In November 2019, the Minister for Transport announced the revised project cost of $2.9 billion. A briefing note prepared by Transport for NSW that supports this announcement details that the total cost of the project is $2.993 billion. The $2.9 billion is incorrectly rounded down from the $2.993 billion source figure in the briefing note.

Additionally, the $2.9 billion figure does not include other known costs, such as the early works and small business assistance package. TfNSW advises that it did not include these costs in its public statements about the cost of delivering the light rail as they are not capital expenditure relating to the main project. We consider these costs to be directly related to the cost of delivering the light rail regardless of how TfNSW funds them.

Exhibit 6: CESLR project cost revisions and public reporting on project costs

Date	Approved revised project cost	Publicly reported project cost	Was a revised cost publicly reported?	Was the publicly reported cost accurate?	Audit comment
December 2014	$2.1 billion	$2.1 billion			Prior to 27 November 2019, the website reported the December 2014 revised cost amount of $2.1 billion.
June 2019	$2.734 billion	$2.1 billion + additional $576 million			On 3 June 2019, TfNSW updated the website with the outcome of the settlement. The project cost on the website did not align with the approved revised project cost of $2.734 billion.
November 2019	$2.993 billion	$2.9 billion			On 27 November 2019, TfNSW published a fact sheet on the CSELR project benefits on the website which included a revised construction cost of $2.9 billion. This update reflected the public announcement made by Minister for Transport on 22 November 2019. The $2.9 billion figure is incorrectly rounded down from $2.993 billion and does not include other known costs.
Key:	Yes	No