22 March 2019

Iain S
email:  [FYI request #9770 email]

Dear Iain

RE:  Central Interceptor Project

Auckland Council has forwarded your request for information dated 6 March 2019 to Watercare Services
Limited (Watercare) for response, received by Watercare on 12 March 2019.

That is appropriate as Watercare is the entity undertaking the Central Interceptor Project (the Project).

You have requested “a copy of the final recommendation letter and any minutes or memos to the Board to
proceed to the award.”  You have also asked for “the final winning tender price as well as the other bidders
prices that were submitted”.

Contract Signing

On Thursday 14 March 2019, Watercare signed a contract with Ghella-Abergeldie Joint Venture (GAH) for
the delivery of the Project.  The project includes the Grey Lynn tunnel.

Attached is the media release which notes the cost of the project is $1.2billion.

Contract Award

Procurement for the Main Works Contractor for the Central Interceptor was a multi-stage process, to
ensure that we had contractors with a demonstrated track record and ability to deliver a contract of such
scale and complexity, and ensure a competitive outcome was achieved that could be demonstrated to
provide best value for Auckland.

The initial phase of the procurement was an Expression of Interest process, where firm(s) had to
demonstrate that they met the required criteria for the delivery of works.  This culminated in four of eight
contractors being selected to go through to provide a formal proposal for the works in early March
2018.  The decision to take forward four contractors was to ensure we did not expose ourselves to risk of
contractor withdrawal for any reason, which may have resulted in delays, additional costs and or a lack of
competition in the bidding process.

The Request For Proposal was released in May 2018, and a highly interactive process with each of the
bidders was undertaken, until tenders were submitted in September 2018.  This was to ensure that the
bidders clearly understood the scope of the work (significant geological information was made available).
Also any alternatives to the base case design could be agreed prior to the pricing being submitted.  By
providing this certainty, all tenderers were able to quantify the risk allocation more accurately, which was
reflected in the pricing.

All four bidders submitted proposals in September 2018.  The reviews of the tender confirmed all bidders
were capable of undertaking the project to the required standard.  The review of the financial information
confirmed that we have received an extremely favourable outcome for Watercare and Auckland, well
within the original 2017 Business Case for the project.

The lowest price bid was the one selected and recommended to the Board. This did not include the Grey
Lynn Tunnel which was later approved by the Board.  The recommendation was endorsed by the project’s
independent advisors who are leaders in the fields of pricing; financial capability; insurance; engineering
and design; and legal.

At all times, the process was bound by strict probity conditions to ensure that the process was above
challenge.

The Board of Watercare at its meeting of 29 January 2019 resolved to approve:

  The award of the Central Interceptor main works (including the Grey Lynn tunnel) to GAH and
  That the Chair and Chief Executive review the contract before any extract is signed

Attached is an extract from the minutes of the meeting of 29 January 2019.

Also attached is the management report upon which the Board relied in resolving to award the
construction contract to GAH.

Information in the attached minutes and report, including the contract sum, as well as other bidders’ prices
that were submitted, have been withheld based on the following grounds under the Local Government
Official Information and Meetings Act (LGOIMA):

  Making the information available would be likely unreasonably to prejudice the commercial
position of the person who supplied the information (i.e. the GAH and the other bidders): section
7(2)(b)(ii); and
  The information that has been withheld is confidential, making it available would be likely to
prejudice the supply of similar information or information from the same source (i.e. tender
information from future bidders on Watercare projects, or from the present bidders), and it is in
the public interest that such information should continue to be supplied: section 7(2)(c)(i).

Watercare is satisfied, under section 7(1) of the LGOIMA that withholding this information is not
outweighed by other considerations which make it desirable, in the public interest, to make the
information available.  This is particularly the case given the total cost of the project has been made public.

You have the right, under section 27 of the LGOIMA, to make a complaint to the Ombudsman about
Watercare’s decision to withhold this information.

Project Cost

The contract sum is obviously an important component of the project cost and there are other important
components.

As stated, the Board was in receipt of a paper from Management for its meeting of 29 January 2019. The
paper provides an updated estimate of the total capital cost of the project as being $1,266.8m which
includes the contract then proposed to be executed with GAH which in turn included the cost of the Grey
Lynn tunnel.

The cost of each of the individual components of the total capital cost have been withheld for the reasons
given above which apply both to GAH and Watercare.  To provide that information would be to reveal the
pricing strategy, adopted by each of the four bidders.

Comment

The probity of the tendering process was the responsibility of Deloitte ensuring the process was robust,
transparent and fair.  This ensured that the key elements of the bids, including the contract price, were
extremely tightly held.

At no time have the bids by the four bidders been made public nor shared with the bidders.  Deloitte who
were responsible for the probity of the bid process have continued their involvement in the Project. Very
few people in Watercare are aware of the bid prices and those people who are aware have all signed
confidentiality agreements. They have all been requested to keep the bid prices to themselves.

The bidders all spent significant sums and invested significant executive time in making their bids for a
project of international significance. They will remain in competition for major projects both in New
Zealand and overseas.  Each of the bidders included world class overseas companies who are specialists in
tunneling of major projects. They regularly compete worldwide for projects of the scale of this project, and
larger.

What is publicly available is the total cost of the Project at $1.2b.

The success of the Project will be judged against the Project being completed on or before the end of 2025
at a cost not exceeding $1.2b.

Yours sincerely

Rob Fisher
Company Secretary

MEDIA RELEASE
UNDER EMBARGO TO 14 MARCH 2019

Aucklanders to enjoy cleaner beaches and waterways with a new
super‐sized wastewater tunnel

On Thursday 14 March, Watercare and the Ghella Abergeldie Joint Venture will celebrate signing the
contract to construct Watercare’s Central Interceptor, a $1.2 billion wastewater tunnel with
associated infrastructure. Construction will start with site works in May and the whole project is
expected to be completed by 2025.

This 13‐kilometre tunnel is a vital infrastructure project for Auckland and is part of Watercare’s
wider wastewater strategy to protect and enhance the natural environment.

Watercare’s chief executive, Raveen Jaduram says that in older parts of central Auckland,
wastewater and stormwater flow into a combined network of pipes. When it rains, stormwater
overwhelms these pipes, which are designed to overflow into waterways.

“We want everyone to be able to enjoy clean waterways, beaches and estuaries – that’s why we’re
building the Central Interceptor. It will run underground from Western Springs to the Mangere
Wastewater Treatment, collecting wastewater along the way via link sewers and drop shafts.”

While the Central Interceptor is being built, Watercare will deliver further projects in the area such
as separating the stormwater and wastewater pipes. The largest of these projects is the Grey Lynn
wastewater tunnel which is a two‐kilometre extension of the Central Interceptor.

“We are delighted to say that the Grey Lynn wastewater tunnel has been included in our
construction contract with Ghella Abergeldie Joint Venture,” says Jaduram. “This is an extremely
good outcome for Aucklanders because it means a better result for the environment without any
extra cost for customers. Together, the Central Interceptor and our western isthmus projects will
reduce overflows in the area by at least 80 per cent.”

Watercare has a long history of delivering large‐scale and complex projects. Back in 2005, the
company carried out the largest rehabilitation project in New Zealand’s history by removing the
oxidation ponds from the Manukau Harbour and upgrading the Mangere Wastewater Treatment
Plant to improve the quality of treated wastewater.

More recently, Watercare built a large wastewater tunnel that runs from Parnell to Orakei, referred
to as Project Hobson, using the same tunnelling boring technique that will be employed for the
Central Interceptor. This allowed the removal of an old sewer that bisected Hobson Bay and reduced
overflows.

Jaduram says the Central Interceptor is Watercare’s largest project to date: “Because it is a key part
of our region‐wide wastewater strategy, it was important to find the best company in the world to
construct it. So after a vigorous tender process we chose Ghella Abergeldie Joint Venture with over
150 years’ experience working on major tunnelling and wastewater projects across the globe.”

New Zealand’s Ghella representative, Francesco Saibene, says:  “We have been very impressed with
Watercare’s process. They kept to the intended timing, were clear with requirements and the
evaluation process. Plus, the probity measures in place were very robust. One key factor was the
extreme dedication and professionalism Watercare has demonstrated on the project. This was an
ideal situation for our JV which had an international component that needed those certainties.

“Of utmost importance for us is that Watercare has much the same values and vision as Ghella and
Abergeldie, creating an environment where our joint venture can put the same amount of
dedication and passion into this project, which will leave a long‐lasting legacy to Auckland and its
residents.”

This project continues to meet its scheduled milestones and stay within budget.

Watercare will fully‐fund the Central Interceptor using revenue from its water and wastewater
service charges, infrastructure growth charges and borrowings. The project has been included in the
Asset Management Plan since at least 2010 and is built into the price path. The Funding Plan for
2018 to 2028 projects price increases over the period of:
  For water supply, an average of 2.5 per cent per year
  For our wastewater service, an average of 3.3 per cent per year.

This represents an overall average annual price increase for combined water and wastewater of 3
per cent per year for a typical household.

Watercare will not receive any money from Auckland Council towards this project. The council’s
water quality targeted rate is being used to rehabilitate streams as well as address stormwater
network and private septic tank issues.

/Ends

Attachments
 Route map
 Brochure

Fast facts
  Central Interceptor:
o  13 kilometres long, 4.5 meters in diameter
o  Large capacity: the tunnel can store 200,000 m3 of wastewater which enables
Watercare to control the flow rate to the treatment plant
o  Connects to two link sewers, both 2.4 meters in diameter
o  Connects to 16 drop shafts, up to 80 meters deep
o  Connects to one pump station at the Mangere Wastewater Treatment Plant
o  The TBM is expected to progress at a rate of 15‐20 metres per day

  Grey Lynn Tunnel:
o  This will be a two‐kilometre‐long extension of the Central Interceptor tunnel (15
kilometres total)
o  Included in the construction contract
o  Essentially, 15 per cent more tunnel for the same total project budget.

  Project build from 2019 to 2025.

  Ghella Abergeldie Joint Venture has over 150 years’ experience working on major water and
wastewater projects and has successfully completed numerous projects of this scale across
the world.

For media enquiries and images please contact the Maxine Clayton on 022 046 13.

MINUTES

4.4
Contract Award for the Central Interceptor

S Cunis spoke to the report.  The following points were discussed.
  Four letters of endorsement:  The four letters of endorsement were emailed to the Board on Friday, 25
January 2019 (Appendix A to these minutes).
  Financial capability of GAH:  PwC has advised that based on the forecast information seen to date, Ghella
has sufficient liquidity to meet forecast commitments over the period of time reviewed.  S Cunis confirmed
that the GAH joint venture contract for the CI will on a joint and several basis.
  Spoil management: One resource consent is still required, relating to the spoil handling at Ascot Road.  We
are providing the information required for this consent to GAH, as this is their responsibility.
  Escalation: Watercare has made provision for hyper escalation in the risk allowance.
  Confluence chamber: We have allowed up to $10m in the contract for the Confluence Chamber.  This is an
old asset (60 years old) and we do not know its exact condition, as it is underground.
  SPV:  M Bridge is meeting with Council CFO, Matthew Walker on Friday, 1 February 2019. We understand
that the Ratings Agency has given approval for a SPV.  The scope of any SPV will be discussed on Friday.
  Media interest: D Hawkins, Chief Corporate Affairs Officer, noted there will be limited media interest in the
project until underground drilling starts. However, we have started community engagement already and this
will escalate ahead of the May start date.
  Contract signing: The Mayor will attend the signing of the formal contract.
  Legacy: In response to questioning from the Board, S Cunis noted that the legacy component of the
project is still being discussed with GAH.
  Price: Management confirmed that the contract price remains within the overall budget and will not be
made public. The overall budget figure is the one that will stay in the public arena.
  Red flags:  S Cunis noted that to date, there are no red-flags.  Mike Weatherall of Simpson Grierson will
provide an Endorsement Letter before any contract is signed.

The Board resolved to approve:
o  The award of the Central Interceptor Main Works (including the Grey Lynn Tunnel) to Ghella-Abergeldie
Harker Joint Venture, for a sum not exceeding
and
o  That the Chair and Chief Executive review the contract before it is executed by the Chief Executive.

Report to the Board of Watercare Services Limited
Prepared for the 29 January 2019 Board meeting

Contract Award for the Central Interceptor
Purpose

Team

Information
Discussion

Decision

Prepared
Recommended
Submitted

N Varcoe
S Cunis
R Jaduram
Commercial
Executive Programme
Chief Executive
Manager
Director
Intellectual capital
People and culture
Community and
Financial capital &
Natural
Assets and
stakeholder relationships
resources
environment
Infrastructure

1. Recommendation and key points
That the Board approve:
a)  the award of the Central Interceptor Main Works (including the Grey Lynn Tunnel) to Ghella –
Abergeldie Harker Joint Venture, for a sum not exceeding
; and
b)  the Chief Executive to execute the contract.

Key points

The November 2018 Board meeting approved the selection of the Ghella – Abergeldie Harker Joint
Venture (GAH) as the Preferred Bidder for the delivery of the Central Interceptor programme of
works, subject to a negotiation process to resolve key issues.

That negotiation process has now been completed. All key issues have been resolved to the
satisfaction of the Central Interceptor programme team and its independent advisors, as listed in
Appendix A. Letters of Endorsement from these four independent advisors will be provided to
Board members either before, or at, the January 2019 Board meeting.

We are now ready to execute a contract with the Preferred Bidder.

The updated estimate of the total capital cost of the project is $1,266.8M, which includes the
contract to be executed with GAH for a sum not exceeding
). This is within the total
approved capital expenditure of $1,268.5M.
2. Purpose and context
2.1 The Preferred Bidder process
The November 2018 Board meeting approved the selection of the GAH as the Preferred Bidder for the
delivery of the Central Interceptor programme of works.

Since then, the Central Interceptor programme team has undertaken a process of negotiations with GAH,
in order to resolve the key issues identified during the Tender evaluation.
This process has now been completed and we now recommend that the contract be awarded to GAH. All
key issues have been resolved to the satisfaction of the Central Interceptor programme team, and this has
been endorsed by our independent advisors.  The process has led to some changes to GAH proposal for
undertaking the works, all of which are considered preferable by Watercare, as well as some adjustments
to the contract value.
2.2 The purpose of this paper
The purpose of this paper is to:

Set out the key issues and how they’ve been resolved

Provide an update of the expected capital cost of the project

Recommend that the Board approve the execution of a contract with the Preferred Bidder.

3. The details
Sections 3.1 to 3.3 below describe the key issues addressed during the Preferred Bidder negotiation
process, how they have been resolved and the current status of any remaining issues.
Section 3.4 presents the updated estimate of the capital cost for the project.
3.1 Financial capability
Price Waterhouse Cooper (PwC) were engaged to conduct further due diligence on the financial capability
of the Preferred Bidder.
The limited procedures being completed cover the following specific areas:
i)
margins on large projects,
ii)
cash flow analysis,
iii)
access to capital
iv)
pipeline of work and capacity.
PwC has had cooperation and exchange of information with both finance teams, utilising PwC Italy to
liaise with the team at Ghella head office in Rome. The level of detail of information received has differed
between the JV partners.  PwC representatives have spoken to both sets of auditors.
At the time of preparing this paper, the review has raised no red flags.
Some key points are:

Based on recently completed (2013 to 2018) and current contracts, both entities appear to
generally budget and manage project costs well. On average across projects, actual or forecast
margins are close to budgeted margins.

Projects and project risks appear to be managed closely.


Both sets of auditors noted conservatism in accounting for claims which could provide upside to
forecasts. No going concern issues were noted.

Based on forecast information seen to date, both Ghella and Abergeldie appear to have sufficient
liquidity to meet forecast commitments over the periods of time reviewed. Further analysis is being
done around the working capital cycle within the month, which may need to be monitored and
managed, if required.

Ghella has significant available unutilised banking facilities and holds cash in overseas subsidiaries.

Abergeldie has indicated that the shareholder has previously provided financial support when
required for business acquisitions and other (non-contract related) purposes.

Ghella’s projects are operated via joint ventures – it is not jointly and severally liable on these,
limiting potential liabilities to their share of the JV.
3.2 Commercial
The key commercial items addressed are discussed below.
Issue
Status  Resolution
Parent Company

Guarantee
  Ghella S.P.A and Abergeldie Consolidated Pty Ltd have agreed, on a
joint and several basis, to enter into the form of parent guarantee
required.
Bonding
  ANZ has provided a letter of commitment to provide to GAH the
required form of bond to the required level of bonding.
Risk allowance
  GAH has provided all the information requested and have satisfied
the CI team that they have sufficient risk allowance to complete the
project without coming under undue stress in that regard.  There has
also been an increase to the Watercare risk allowance within the
current estimate, while remaining within the approved budget.
Overheads
  GAH has provided all the information requested and have satisfied
the CI team that they have sufficient overheads to complete the
project without coming under undue stress in that regard.
Escalation
  Watercare has agreed to cap the escalation exposure of GAH to
ensure that GAH does not come under undue stress in completion of
the project, should hyper-escalation occur in the current market. A
provision has been made in Watercare’s risk allowance.

3.3 Delivery
The key delivery items addressed are discussed below.

Issue
Status  Resolution
Management

accountabilities
  GAH has provided an alternative Project Director that has superior
communication and leadership skills, coupled with equal or better
experience.   A similar change has occurred for the H&S Manager
proposed at tender stage.
Adequacy of

resources
  H&S resources have been enhanced which will increase the level of
outcome achieved.  Overall, it is considered that GAHs offer has been
strengthened in key areas to address Watercare’s concerns.  GAH will
be expected to recognise the need and respond accordingly during
construction for ensuring suitable resources are in place at all times.
Spoil management
  Watercare remains of the view that the GAH approach to spoil drying
carries risk, which GAH has clarified that the risk remains with them.
Subcontracting

arrangements
  GAH has provided evidence of pre-engagements and confirmed key
subcontractor personnel similar.  Further GAH is now intending to
subcontract the production of precast tunnel lining segments, as
opposed to self-performing this task at Ascot Rd.
Confluence chamber

and rising main
  Due to risk around impacting the existing WWTP operation, the
potential for unforeseeable physical conditions, and the confluence
chamber condition, the Confluence Chamber item has been changed
to a provisional sum.
Sewer connections
  GAHs tender pricing contained a number of minor price errors and
omissions, which have been adjusted.
Tunnelling

methodology
  GAH has demonstrated that the TBM and associated features are
substantially compliant with the specifications and requirements.
Corrosion protection

lining
  GAH has indicated that it will engage international expertise from
people/organisations who have previously used the proposed
methodology.

3.4 Capital cost of the project (Nominal dollars)
Capital expenditure of
for this project has already been approved by the Board.  A further
was approved for the construction of the Grey Lynn Tunnel in November 2018 (to be delivered as
part of the programme of works associated with the Central Interceptor).  Therefore, the total approved
capital expenditure for the CI project is $1, 268.5M.

The breakdown of the current estimate of the project capital expenditure is below.
  The GAH contract for a sum not exceeding
is highlighted in blue.
  The difference of
(shown in black font) relates to spend by Watercare on Stage
1 and 2 works, coupled with an allowance for Risk and CI Enhancements.
Item
Total
$m Nom
Stage 1
  Planning, consenting, property, design and procurement
Stage 2
  Early Works
  Legal & Property
  Insurance
  Programme Management
  Stakeholder & Communications Management
  Commissioning & Handover
Stage 2
  Construction (includes Grey Lynn Tunnel)
  Provisional Sums within Contract
Risk Allowance
  Unforeseen Physical Conditions
  Hyper escalation
CI Enhancements
  Western Water Quality Improvement Programme
opportunities
  Digital Innovations
  Customer experience
Total Capital Cost
1266.8
Total Capital Approved
1268.5



Appendix A – Independent Advisors Letters of Endorsement
These letters will be provided to the Board either before, or at, the board meeting.
  Roger McRae – McRae Construction Services Ltd
  Michael Weatherall – Simpson Grierson
  Craig Rice – Price Waterhouse Coopers
  Ed Cook – Rider Levett Bucknall

Document Outline