SEMINAR ON LEGAL, ECONOMIC AND IMPLEMENTATION ISSUES IN PPP PROJECTS

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Safe roads, Reliable journeys, Informed travellers

• SEMINAR ON LEGAL, ECONOMIC AND IMPLEMENTATION
  ISSUES IN PPP PROJECTS
• Warsaw, Poland 17 and 18 June 2008
• UK ROAD PPP CONTRACTS PRINCIPLES, POLICY AND
  IMPLEMENTATION
• by
• ALEC BRIGGS, Senior Project Manager, Highways
  Agency
• and
• BARRY DREWETT, Technical Director, Pell
  Frischmann Consultants Limited

2

• OUTLINE OF PRESENTATION
• Part 1 Principles and Policy Alec Briggs
• Role of HA and Background
• Key Objectives of DBFO (PPP) Procurement
• Procurement Process, Risk and Performance
• DBFO Projects Awarded To Date
• Some Lessons Learnt
• Next DBFO Project M25 London Orbital
• Part 2 Implementation Case Study Barry
  Drewett
• A1 Darrington to Dishforth Project Summary
• Procurement History
• Tender Period
• Construction Period
• Congestion Management Payment Mechanism

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ROLE OF HA and BACKGROUND The HA is an Executive
Agency of the Department for Transport Responsib
le for operating, maintaining and improving the
7,500 km strategic road network in England,
valued at 84bn, carrying a third of all traffic
and two-thirds of freight traffic(over 130 bn
vehicle-kilometres per annum) In conjunction
with its Customer First initiative, its primary
aims are to provide Safe RoadsReliable
JourneysReal-Time Information for Travellers
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• Main Types of Procurement Contracts

Major Improvement Projects

• Design, Build, Finance and Operate (DBFO) (PPP)
• Early Contractor Involvement (ECI)
• Design Build (DB)

Maintenance

• As part of DBFO contracts (PPP)
• Managing Agent Contractor (MAC)

Specialist Services
Framework Agreements, e.g. design services
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Indicative Budgets 2008-09 Headline Programme
Expenditure

• Major Schemes 1,049M
• Managing Traffic (incl. Traffic Officer Service)
  125M
• Technology 220M
• Maintenance 896M (incl. DBFO service payments)
• Small Schemes Research 193M

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KEY OBJECTIVES OF DBFO PROCUREMENT

• To foster development of a private sector road
  operating industry
• To transfer appropriate levels of risk to private
  sector
• To provide better outturn cost certainty
• To provide earlier delivery of large projects
• To foster improved partnerships between public
  and private sectors (less adversarial contracts)
• To provide scope for innovation in all areas
  including finance
• Overall, to provide better value for money

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PROCUREMENT PROCESS, RISK and PERFORMANCE
Typical Procurement Process for
Privately-Financed Major Highway Scheme
Land acquisition
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Risk Assessment and Management

• RISKS ASSESSED under Highways Agencys Value for
  Money Manual
• Risk Assessment WORKSHOPS held
• OUTPUT feeds into
• - Highways Agencys Risk Management (HARM) Model
• - PUBLIC SECTOR COMPARATOR
• - decisions on ADVANCE WORKS
• - CONTRACT requirements (risk transfer to
  private sector)

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Risk Allocation
Few risks retained by Highways Agency, such as

• Land acquisition
• Change (instigated by HA)
• Unforeseeable archaeology
• Imposition of User Paid Tolls

Majority of risk transferred to private sector
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Contract Requirements

• High-level CORE requirements, such as
• - providing and maintaining a SAFE highway
• - providing appropriately HIGH LEVEL OF SERVICE
• - MINIMISING ADVERSE EFFECTS on third parties /
  environment
• Specific TECHNICAL requirements, such as
• - compliance with HAs STANDARDS
• - QUALITY and DURABILITY requirements

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• Current Standards for OM during Whole Contract
  Period

Purpose to overcome need for HA changes in
standards as contracts become older

• DBFO Cos obliged to automatically adopt revised
  or new standards for OM over whole concession
  period
• Only exception Step Change (remote
  unforeseeable change affecting whole motorway and
  trunk road network)
• Not applicable to design and construction
  (standards fixed)

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TYPICAL PERFORMANCE INDICATORSEach Area of
Measure consists of a number of Performance
Indicators
Service Organisation Management Procurement of
Specialists Suppliers Supply Chain Management
Improvement of Client Relations Management
Improvement of Customer 3rd Party
Relations Innovation Value for Money Management
of Change
Product Delivery to Project Brief Highway
Design Structures Environmental
Assessment Traffic Economic Assessment Draft
Orders Statutory Processes Risk Register and
Opportunities Plan
Cost Reliability of Estimating
Forecasting Change in Scheme Cost Predictability
of Cost
Safety Health, Welfare Workforce
Development Compliance with CDM
Regulations Safety of the Public Accident
Frequency Rate
Time Change from Accepted Programme Reliability
of Programming Predictability of Time
Right First Time Right First Time Quality
Management System
The Performance Indicators have been selected to
reflect the Highways Agencys performance
expectations of its Suppliers
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DBFO PROJECTS AWARDED TO DATE

• Tranche 1 Works Payment Contract
• Cost Mechanism Award
• A69 Newcastle to Carlisle 9.4m Shadow tolls Jan
  1996
• A1(M) Alconbury to Peterborough 128m Shadow
  tolls Feb 1996
• A417/A419 Swindon to Gloucester 49m Shadow
  tolls Feb 1996
• M1-A1 Motorway Link, Leeds 214m Shadow
  tolls Mar 1996
• Tranche 1A
• A50/A564 Stoke to Derby Link 20.6m Shadow
  tolls May 1996
• A30/A35 Exeter to Bere Regis 75.7m Shadow
  tolls July 1996
• M40 junctions 1-15 37.1m Shadow tolls Oct 1996
• A168/A19 Dishforth to Tyne Tunnel 29.4m Shadow
  tolls Oct 1996
• Tranche 2
• A13 Thames Gateway, London 146m Lane
  availability Apr 2000
• (Transferred to T f L in July 2000)
• A1 Darrington to Dishforth 245m Congestion Feb
  2003
• A249 Stockbury to Sheerness 100m Congestion Feb
  2004

Key Point Mechanism needs to be tailored to
project
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SOME LESSONS LEARNT

• Schemes with large new-build elements more viable
  (more risk)
• Need to reduce tendering costs
• Need to reduce tendering / negotiation period
• Need for robust reality check, e.g. risk pricing
• Need for well-resourced DBFO companies
• Need to streamline contractual procedures
• Need for appropriate monitoring

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NEXT DBFO PROJECT
M25 London Orbital New-build cost 2bn O/A cost
(incl. OM) 5bn
Availability-based Payment Mechanism
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Managed Motorways (ATM)
Options for Motorway Management Access
control Speed control Hard shoulder running High
occupancy vehicle lanes Integrated demand
management
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Part 2 Implementation Case Study Barry Drewett

• A1 Darrington to Dishforth Project Summary
• Procurement History
• Tender Period
• Construction Period
• Congestion Management Payment Mechanism

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A1 DARRINGTON TO DISHFORTH DBFO PROJECT SUMMARY
Length 53 km New D4M motorway 22 km 2 TPI
Schemes
New or upgraded Motorway Communications
Facilities throughout
Works cost 245m Concession period 33 years
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• Key Technical Information
• Overall length 53 km
• New dual 3 lane motorway 22 km
• Motorway widening to 4 lanes 5 km
• Local road improvements 12 Km
• New/upgraded motorway
• communications facilities Project-wide
  Triple Package
• (minimum on B-W ECI section)
• Structures 5 viaducts 31 bridges 130 signal
  gantries
• Earthworks Excavation 3.8 m cubic metres
• Fill 4.4 m cubic metres

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• PROCUREMENT HISTORY
• Ministerial decision December 1998
• Expressions of Interest returned September 2000
• Tenders invited March 2001
• Tenders returned September 2001
• Preferred Bidder selected September 2002
• OGC Gateway 3 Review (Investment
  Decision) December 2002
• Contract awarded February 2003
• Construction/Maintenance commenced May 2003
• Substantial completion of Works January 2006
• Total completion of Works November 2006
• End of overall Contract Period May 2036

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TENDER PERIOD Key Points

• Tender preparation around 1½ years
• 4 tenderers invited tender return period 6
  months
• Tender assessment, short-listing to 2 tenderers,
  invitation and assessment of BAFO, and selection
  of Preferred Bidder 1 year
• Both BAFOs very favourable against PSC
• Final negotiations and contract-award 4½ months
• Overall pre-award duration just under 3½ years
• Process used up most of Contract Pre-Commencement
  Period
• HA underwrote early design costs if project
  failed
• Work started on-schedule in Spring 2003

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Financial

• Pass/fail on quality, then most economically
  advantageous on NPV assessment
• Last-minute Rating Agency requirement for AADSCR
  of 1.25 and minimum of 1.19 for Investment Grade
  Rating
• Solved by (1) increasing contractor equity (2)
  extending Contract Period from 30 to 33 years
  and (3) slightly reducing cost of Works.
• Equity lt 20
• Balance 50 EIB Loan and 50 Bond Issue
• Package Monoline-insured for AAA rating
• Financial close 2 weeks after contract-award

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• Shared Risk of Increases in Insurance Premia
• (Reflecting OGC (Office of Government Commerce)
  guidelines)

Actual Cost of Premia (Percentage of Benchmark) Liability (Percentage of Increase) Liability (Percentage of Increase)
Actual Cost of Premia (Percentage of Benchmark) SoS DBFO Co
100 0 100
100 150 0 100
150 200 50 50
200 500 90 10
gt 500 100 0
Benchmark reflects actual costs at Tender
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• Advance Works
• MAJOR SERVICE DIVERSIONS such as 132 kv overhead
  power lines associated with Ferrybridge Power
  Station
• MAJOR RE-LOCATION OF EXISTING FACILITIES such as
  Brotherton Ings Ash Lagoons
• IMPORTANT ARCHAEOLOGICAL INVESTIGATIONS such as
  at Ferrybridge Henge (Scheduled Ancient Monument)
• KEY POINT Client often in best position to
  manage risks involved in such works

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CONSTRUCTION PERIOD - Key Contract
Information Client Highways
Agency Departments Agent Faber-Maunsell /
Pell Frischmann Consultants DBFO Company Road
Management Services Contractor (CJV) Road
Management Group (Amec- Alfred McAlpine-Dragados-K
BR) Designer Mouchel-Parkman Construction
commenced May 2003 Construction
substantially completed January
2006 Construction cost 245m Overall Contract
Period 33 years (for OM)
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Contractual Arrangements
Total No. of contracts 160
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Partnering
Health Safety
Land Third Parties
Design Review
Structures
Public Relations Communications
Project Forum HA DBFO Co CJV DES DASR DADRC
Construction
Operations Maintenance
Motorway Communications
Traffic Management
Environmental Management
Non-Conformities, Certification Records
Partnering Protocol
Quality Management
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Contractual Remedies

• Non-Conformance Reports
• Letters
• Remedial Notices
• Penalty Points (generally up to 5 per breach)
• Warning Notices (material breach or 100 penalty
  points in 3 years)
• Increased monitoring at DBFO Cos cost (50
  penalty points in one year or one Warning Notice)

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Practical Delivery Key Points

• Opened several months ahead of programme
• Good construction quality
• Major pavement problem Contractors risk
• Very good safety record
• Minimal disruption to public (core requirements
  to keep traffic moving at all times)
• Post-Opening OGC Gateway Review (Benefits
  Evaluation) showed Project met all key objectives
• Has been operating successfully for over 2 years

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Financial / Contractual Delivery Key Points

• 4 agreed Compensation Events
• 6 Departments Changes
• Outturn Works cost to HA around 221m v
  Pre-Contract estimate of 245m (both 2003
  figures)
• Dispute Resolution Procedure not used for
  construction
• 1 Dispute to date on Current Standards provisions
• Payment mechanism working well

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CONGESTION MANAGEMENT PAYMENT MECHANISM Congestion
Payments on Each of 50 Carriageway Sections
Minimum Condition Criteria must be met before any
payment made, e.g. TRACS
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• Active Safety Adjustment
• Criteria for Safety Payments or Deductions

Zone A no adjustments Zone B enhanced
adjustments Zone C standard enhancements
-8
-2
2
8
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Thank You!
alec.briggs_at_highways.gsi.gov.uk 44(0)113 283
6303
bdrewett_at_pellfrischmann.com 44(0)1924 335 292