Part 2: Preparing for the roll-out

Crown Fibre Holdings Limited: Managing the first phase of rolling out ultra-fast broadband.

In this Part, we discuss how well Crown Fibre understood its purpose, prepared for the roll-out, and tendered for, and negotiated contracts with, commercial partners.

Summary of our findings

Crown Fibre prepared for its role of overseeing the performance of the commercial partners well. People at Crown Fibre understand its purpose, and this guides what they do.

Crown Fibre carried out a lot of preparatory work, including the high-level design of a fibre-optic network to meet New Zealand's future needs and selecting capable commercial partners to build the network.

Crown Fibre (and the then Ministry of Economic Development)5 designed contracts and other documents. People we spoke with considered that the contracts and other documents set out the roles and responsibilities of Crown Fibre and the commercial partners clearly. They also considered that time, cost, and quality expectations were clear and are now well understood.

The design and approach to building the network were well informed

We expected to see evidence that the network's design was informed by research and consultation. We also expected the partnership models to be described well enough for all parties to be clear about how they would work together and what was expected of them.

Overall, Crown Fibre prepared well for rolling out UFB1. The people we spoke to and the documents we reviewed showed that Crown Fibre had a clear understanding of its purpose. Crown Fibre drew on comparable local and international experiences when designing the network and planning its approach to implementing it.

Crown Fibre understands its purpose and role

Crown Fibre's purpose is to meet the Government's objective for the UFB Initiative. Understanding this purpose is critical. If everyone's activities are driven by a shared understanding of purpose, the objective is more likely to be achieved, and the intended societal and economic benefits are more likely to be realised.

Crown Fibre understands its role and responsibilities. Crown Fibre's role has two core parts and includes five main tasks (see paragraphs 1.11-1.12). These tasks directly contribute to achieving the Government's objective. We saw that many references in the strategic documents and reports we examined aligned with this objective.

People at Crown Fibre told us how their particular roles contributed to meeting the Government's objective and ensuring the success of UFB1. They understood the potential value to New Zealand and were excited about being part of the project. One person said, "I'm involved in this project for my grandchildren."

The fibre network has been designed to meet New Zealand's future needs

Crown Fibre led the design of a network that is intended to remain fit for purpose for 50 years. Crown Fibre informed the design by researching experiences of, and approaches to, rolling out a telecommunications network in Singapore, South Korea, the United States of America, Australia, and the Netherlands. Crown Fibre also got advice from local industry experts on New Zealand's particular needs and challenges.

The specific and detailed requirements for bringing the network components together to form a system are set out in Network Infrastructure Project Agreements with each commercial partner. Crown Fibre asked independent advisers whether the Network Infrastructure Project Agreements reflected the best approach to a telecommunications network roll-out. The advisers concluded that they represented best practice in New Zealand.

Crown Fibre also considered the needs of "priority users" – hospitals, schools, and businesses – when designing the architecture. It worked with priority users to understand the size of the task and the best ways of working with them and with commercial partners. People told us that Crown Fibre took the time to understand their needs and worked closely with them to resolve any challenges.

The models used fit the circumstances and long-term aims

In our view, the public-private partnership models adopted suited the arrangements for co-investment and transfer of ownership of the network. The Government wanted the commercial sector to build and run the network. However, the Government knew that it was uneconomic for the commercial sector to build the network without the Government co-investing. The commercial companies building the network would eventually repay the investment and own the network. This was described as "having skin in the game".

Crown Fibre and the then Ministry of Economic Development designed business relationship models to support the commercial sector eventually owning and operating the network. These designs were refined from earlier government models.

Crown Fibre and the then Ministry of Economic Development also drew on international and local telecommunications and investment expertise and experience, including examples that had not worked well. For example, Australia's model of setting up its own government-owned telecommunications provider was considered to be unsuitable. The Australian model did not fit the expectations here of private-sector ownership (and open access) and eventual repayment of the Government's investment.

The process for selecting commercial partners was sound

The Government has established mandatory procurement principles for public entities to follow when engaging the services of the private sector. These principles support a process that is fair, contestable, and transparent. Following sound processes to find capable commercial partners increases the likelihood of success.

In our view, Crown Fibre employed a sound approach to procurement and selecting commercial partners. Crown Fibre got independent advice and assurance on procurement and the selection process from several credible sources. This advice and assurance was positive, with one describing Crown Fibre's actions as consistent with its Invitation To Participate, with internal governance and policy documents, and legal and probity principles for procurement processes.

Crown Fibre's approach ensured that the process was fair and contestable. Crown Fibre's challenge of the first Invitation To Participate, and its recasting to make it more suitable, was evidence of this. The assessment of proposals was extensive. Overall, Crown Fibre's approach helped it to find the commercial partners that it considered best placed to build the network.

Crown Fibre redesigned and recast the first Invitation To Participate

The first proposals that Crown Fibre received highlighted problems with the then Ministry of Economic Development's first Invitation To Participate. Crown Fibre took over the lead procurement role from the Ministry in early 2010 and started assessing the proposals. The proposals did not meet the UFB1 principles and so were considered unsuitable. The Invitation To Participate stipulated componentry that would deliver a broadband network but that would not support "open access" to internet service providers, which was a fundamental principle of UFB1.

Crown Fibre redesigned the Invitation To Participate and consulted on it widely, seeking advice from the telecommunications industry and the companies that had responded to the first Invitation To Participate. Crown Fibre also drew on international experience and expertise. The new Invitation To Participate, widely released in June 2010, explicitly sought proposals to build a network that would support open access.

The new Invitation To Participate included templates to help interested parties submit comprehensive and complete proposals. This also helped Crown Fibre to assess and compare proposals consistently. Crown Fibre also made sure that potential proposers knew they could contact Crown Fibre with questions.

Crown Fibre appropriately assessed potential commercial partners and their proposals

Crown Fibre had to clearly understand its own expectations of proposals to assess and compare them properly. Crown Fibre and the then Ministry of Economic Development set criteria for assessing a proposer's ability and willingness to build on time, within cost constraints, and to the right quality. In our view, the criteria were comprehensive, well thought out, and appropriate.

Crown Fibre applied the criteria to proposals under various scenarios. The scenarios modelled different mixes of commercial partners for the whole roll-out and different geographical allocations of work.

There were two types of criteria – factual (more easily measured) and those requiring judgement. For example, fact-based criteria looked at a proposer's financial performance and their capability. Judgement-based criteria included a proposer's willingness to work and share with others building the network and their motivation to build on time and to the right quality.

Crown Fibre used the criteria to decide which proposals were worthy of closer inspection. Crown Fibre also visited all short-listed proposers to discuss their visions and plans with them and view their existing operations. These steps helped Crown Fibre to get fuller information about each proposer.

Crown Fibre kept its commercial partner selection options open

Crown Fibre kept its selection options open until the final stages. We saw a continuing flow of information and dialogue with the short-listed proposers. Information flowed to Crown Fibre's board at a steady pace in the days before the board made recommendations to Shareholding Ministers and the Policy Minister. Dialogue between the short-listed proposers and Crown Fibre stayed open. Crown Fibre made sure that it clarified and answered any questions proposers asked.

Crown Fibre assessed the potential financial effect of a partnership on the short-listed proposers. Potential commercial partners had to be financially sound, and the scrutiny involved the use of external experts. These experts forecast financial effects in different scenarios, including various mixes of final commercial partners and various allocations of geographical areas.

The short-listing of proposals included a Final Binding Offer process. This means that proposers made commitments to keep to the details of their proposal if they were eventually selected. Details of the Final Binding Offer process and proposals remain commercially sensitive, so we cannot describe it in detail. However, we consider that the process helped select capable commercial partners. Final Binding Offer documents showed a balanced and consistent application of the criteria.

Crown Fibre received updated proposal information until the final decisions. This continued to reshape the Final Binding Offer assessments and potential commercial partner combinations.

Crown Fibre got independent advice to ensure that the process was fair

Crown Fibre sought legal and probity-specific advice from independent experts at various points in the selection process and when it recognised procurement risks. This advice helped ensure fairness and contestability. The advice was independent of Crown Fibre's internal legal team.

Crown Fibre was seen as having done an effective job. For example, one independent expert advised Crown Fibre on adhering to principles of transparency and treating all proposers fairly, without unduly advantaging or disadvantaging any. They were satisfied that Crown Fibre had followed their advice appropriately and that the proposers had a fair opportunity to succeed in a genuinely contestable process. Another adviser considered that the Invitation To Participate probity and process documentation was of a high quality and to the level expected of a high-profile endeavour such as this.

Crown Fibre's board also received assurance from our financial auditors on its procurement approach. Our auditors described it as a "very good process" that was "well planned, formal and consistent with that set out in the Invitation To Participate and its own internal Invitation To Participate guidelines".

We saw correspondence showing that Crown Fibre's board considered, discussed, and, when appropriate, acted on the advice provided.

The board was well informed in making final recommendations

The board of Crown Fibre was highly engaged in the selection process. The board had to give its full attention to a growing volume of complex information with increasing frequency as final selections approached. The board provided challenge and scrutiny to management's views on the recommendations. The board also insisted on external advice when it thought that Crown Fibre needed that advice to deal with proposers.

The board of Crown Fibre got good information to help it make recommendations to the decision-making Ministers. Crown Fibre management made sure that this information was clearly understandable. The board also asked senior management which proposers they considered best able to build the network and therefore best to contract with. The final commercial partner recommendations appeared logical and well thought out.

The contractual documents are comprehensive

Contractual documents are the foundations that business relationships are built on. These documents should make accountabilities and expectations clear, to ensure a common understanding of the objectives and tasks. We expected the content of the contractual documents to uphold the partnership model and set clear expectations for the parties' respective roles and responsibilities. Contractual documents should specify how each party compels the other to meet its accountabilities and the processes to follow when they do not. We call these contracted enforceability rights "performance levers".

Overall, the contracts between Crown Fibre and its commercial partners have helped the parties to understand their accountabilities and responsibilities, and their responsibilities to each other. Provisions in the documents help Crown Fibre exert a strong influence on the performance of commercial partners. The operating framework also includes processes for resolving disagreements between the parties. Crown Fibre and its commercial partners appear to understand the documents and their implications well.

The contractual documents clearly set out obligations, requirements, and accountabilities

Contractual documents need to be suitable for the specific arrangements they document. The contractual documents for the roll-out cover partnership arrangements, co-investment and funding, the transfer of asset ownership, and the build expectations.

Crown Fibre found the standard public-private partnership contracts available from the Treasury unsuitable and, with the then Ministry of Economic Development, designed new contracts for its specific work and partnering arrangements. External legal experts found that the new contract formats contained the kind and level of provisions expected in agreements for a project of this nature.

The contractual documents help set out accountabilities between Crown Fibre and its commercial partners. This helps make roles and responsibilities clear, by specifying arrangements and obligations.

Limited versions of the contracts are available on each commercial partner's website. Publication is a contractual requirement, to provide a degree of public transparency. Crown Fibre told us that this is not usual practice in public-private partnerships.

How Crown Fibre can influence performance is clear and understood

Crown Fibre has a strong influence on the performance of its commercial partners during the roll-out. It can use several performance levers if the commercial partners do not meet expectations. These levers include "liquidated damages", which the commercial partners can be required to pay if they do not meet certain roll-out or connection expectations or if one commercial partner's commitments to marketing ultra-fast broadband fibre to the public are not kept.

One of the strongest influences on performance is the payment arrangement for completed work. The commercial partners are paid only when the quality of completed work has been assured under Crown Fibre's User Acceptance Testing programme. The testing programme measures the work done against the Network Infrastructure Project Agreement standards. We discuss this further in Part 3.

Crown Fibre also oversees and influences the performance of its commercial partners through its membership of partnership governance bodies. Staff and some board members from Crown Fibre are on the boards of the local fibre companies and the Chorus Steering Committee for this work.

There are clear dispute-resolution processes

The framework for contract management includes clear processes for resolving disputes. In our view, these processes suit the arrangements for the roll-out, rely initially on the goodwill of the parties, and are workable. No matter how clearly contractual documents set out expectations, parties can sometimes have different understandings of the finer detail of the contracted tasks. Documents supporting the contracts set out how disputes processes can be triggered, where any dispute gets escalated to if need be, and how a final decision is made.

The local fibre companies have a generic dispute-resolution process, which starts with an assumption that matters can be resolved in good faith. The process escalates if this proves not to be possible, through various levels of the roll-out hierarchy. If this does not work, matters go to expert determination. The expert's decision will be final, and the parties will share any costs equally.

Chorus has a different contractual arrangement with Crown Fibre and a different dispute-resolution process. Good faith provisions also apply. If they fail and lower-level escalations are unsuccessful, a specifically established Senior Committee makes the final decisions. This committee comprises the chairperson of the Chorus Steering Committee, the Chorus board chairperson, and the Crown Fibre board chairperson.

Decision-making authority is clear and understood

The distribution of authority for decisions within the roll-out are clear and well understood by Crown Fibre and the commercial partners.

Crown Fibre derives strong decision-making authority from its government-mandated role. We saw an example of this authority in Crown Fibre's board material. This confirmed that, when forming contracts with the commercial partners, Crown Fibre's role was:

to ensure contracts are efficiently and effectively administered to support the on-time completion of the UFB deployment to an acceptable quality within the Government's fiscal envelope.

To support this oversight, Crown Fibre could determine financial arrangements that would ensure transparency, best support the early deployment of the network and services, and protect value for taxpayers. Crown Fibre had the discretion to enter into arrangements to achieve the Government's objective that differed from specific terms in the Invitation To Participate, provided the cost-benefit analysis was clearly favourable.

We were told that partnership governance bodies and project levels also have a level of decision-making authority over how they meet required standards. People we spoke to at various levels in Crown Fibre and the commercial partners agreed that it is clear who makes particular decisions and that they understand where that authority lies.

Agreeing detailed standards for building the network took longer than expected

It is pragmatic to finalise agreement of the finer details of diverse tasks in complex projects after the parties have committed to their involvement. It is more worthwhile to invest time and effort in such detail once those involved are committed to the venture.

We expected all the commercial partners to have had an opportunity to be heard and their views considered. We also expected agreement to be reached in a reasonable time, without unduly delaying the roll-out. We expected the agreement to result in all parties starting the work with a clear understanding of their tasks.

Reaching final agreement on the standards for building the network took some time because at first not all commercial partners shared Crown Fibre's understanding of the work required. The commercial partners' understanding of the standards improved, and the unexpected delays in reaching agreement did not delay the roll-out.

Detailed standards were confirmed after commercial partners were contracted

Crown Fibre had a strategy of signing contracts with its commercial partners and having them start their part of the roll-out as soon as the partners were ready. Crown Fibre wanted to show the remaining potential commercial partners that it was serious about getting on with the job. This also made clear that Crown Fibre was selecting commercial partners on their capability and capacity, not necessarily on scale or incumbency. This strategy meant a staggered start to the roll-out, and also starting in different parts of the country at different times.

Time and cost expectations were documented clearly, but Crown Fibre had to get agreement on the finer details of the standards for the build after all the contracts were signed. Crown Fibre did this using a "Document Finalisation Process".

Crown Fibre already had clear views on what these standards should be. Crown Fibre had learned from diverse international experiences with rolling out fibre-optic cable networks (successful and otherwise) in the United States of America, Australia, Singapore, and the Netherlands. Crown Fibre told us it consulted with local telecommunications and civil construction experts widely to understand New Zealand's geology and likely technical challenges.

Although Crown Fibre and its commercial partners understood the expectations about time and cost, they had different expectations of the necessary quality. Reaching agreement on standards through the Document Finalisation Process took longer than Crown Fibre expected. There was an unexpected amount of debate and disagreement between Crown Fibre and its commercial partners. In our view, the level of disagreement shows an initial lack of common understanding between them.

Quality expectations were better understood over time

The commercial partners have always understood well the time constraints on the roll-out as a whole. The commercial partners propose time frames for the whole roll-out to Crown Fibre for endorsement or further discussion, within the contracted time frame. The commercial partners define the overall time frames in the first planning document, called the commercial partner's Master Deployment Plan. These roll-out targets are broken down into annual targets, set each year by the commercial partner for Crown Fibre to endorse. Each commercial partner sets out the annual target time frames in a document called their Network Deployment Plans.

The Government's cost expectations are made clear in each commercial partner's contractual documents and are also well understood. The Government controls the costs by paying a specified price for each home or business premise passed. The commercial partner gets paid when quality is assured.

The commercial partners now understand quality standards well. The quality standards that were eventually agreed are defined in the Network Infrastructure Project Agreement. The commercial partners' understanding of the standards improved as they gained experience in laying the fibre. The gradual development of the commercial partners' understanding of quality has not adversely affected the roll-out, and progress so far has met expectations.

5: In July 2012, the Ministry of Economic Development, the Ministry of Science and Innovation, the Department of Labour, and the Department of Building and Housing were brought together to form the Ministry of Business, Innovation and Employment.