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SEMINAR ON LEGAL, ECONOMIC AND IMPLEMENTATION ISSUES IN PPP PROJECTS Warsaw, Poland – 17 and 18 June 2008 UK ROAD PPP CONTRACTS: PRINCIPLES, POLICY AND.

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Presentation on theme: "SEMINAR ON LEGAL, ECONOMIC AND IMPLEMENTATION ISSUES IN PPP PROJECTS Warsaw, Poland – 17 and 18 June 2008 UK ROAD PPP CONTRACTS: PRINCIPLES, POLICY AND."— Presentation transcript:

1 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 Safe roads, Reliable journeys, Informed travellers

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

3 ROLE OF HA and BACKGROUND The HA is an Executive Agency of the Department for Transport Responsible 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 Roads Reliable Journeys Real-Time Information for Travellers

4 Main Types of Procurement Contracts ●Design, Build, Finance and Operate (DBFO) (PPP) ●Early Contractor Involvement (ECI) ●Design & Build (D&B) Major Improvement Projects: Maintenance: ●As part of DBFO contracts (PPP) ●Managing Agent Contractor (MAC) Specialist Services: Framework Agreements, e.g. design services

5 Major Schemes: £1,049M Managing Traffic (incl. Traffic Officer Service): £125M Technology: £220M Maintenance: £896M (incl. DBFO service payments) Small Schemes & Research: £193M Indicative Budgets Headline Programme Expenditure

6 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

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

8 ●RISKS ASSESSED under Highways Agency’s ‘Value for Money Manual’ ●Risk Assessment WORKSHOPS held ●OUTPUT feeds into: - Highways Agency’s Risk Management (HARM) Model - PUBLIC SECTOR COMPARATOR - decisions on ADVANCE WORKS - CONTRACT requirements (risk transfer to private sector) Risk Assessment and Management

9 ●Land acquisition ●Change (instigated by HA) ●Unforeseeable archaeology ●Imposition of User Paid Tolls Risk Allocation Few risks retained by Highways Agency, such as: Majority of risk transferred to private sector

10 ●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 HA’s STANDARDS - QUALITY and DURABILITY requirements Contract Requirements

11 Current Standards for O&M during Whole Contract Period DBFO Cos obliged to automatically adopt revised or new standards for O&M 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) Purpose: to overcome need for HA changes in standards as contracts become older

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

13 Tranche1WorksPaymentContract CostMechanismAward ●A69 Newcastle to Carlisle£9.4mShadow tollsJan 1996 ●A1(M) Alconbury to Peterborough£128mShadow tollsFeb 1996 ●A417/A419 Swindon to Gloucester£49mShadow tollsFeb 1996 ●M1-A1 Motorway Link, Leeds£214mShadow tollsMar 1996 Tranche 1A ●A50/A564 Stoke to Derby Link£20.6mShadow tollsMay 1996 ●A30/A35 Exeter to Bere Regis£75.7mShadow tollsJuly 1996 ●M40 junctions 1-15£37.1mShadow tollsOct 1996 ●A168/A19 Dishforth to Tyne Tunnel£29.4mShadow tollsOct 1996 Tranche 2 ●A13 Thames Gateway, London£146mLane availabilityApr 2000 (Transferred to T f L in July 2000) ●A1 Darrington to Dishforth£245mCongestionFeb 2003 ●A249 Stockbury to Sheerness£100mCongestionFeb 2004 DBFO PROJECTS AWARDED TO DATE Key Point: Mechanism needs to be tailored to project

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

15 M25 London Orbital New-build cost: £2bn O/A cost (incl. O&M): £5bn NEXT DBFO PROJECT Availability-based Payment Mechanism

16 Managed Motorways (ATM) Options for Motorway Management: Access control Speed control Hard shoulder running High occupancy vehicle lanes Integrated demand management

17 Part 2 – Implementation Case Study – Barry Drewett A1 Darrington to Dishforth Project Summary Procurement History Tender Period Construction Period Congestion Management Payment Mechanism

18 Length: 53 km New D4M motorway: 22 km 2 TPI Schemes New or upgraded Motorway Communications Facilities throughout A1 DARRINGTON TO DISHFORTH DBFO PROJECT SUMMARY Works cost: £245m Concession period: 33 years

19 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

20 PROCUREMENT HISTORY  Ministerial decisionDecember 1998  Expressions of Interest returnedSeptember 2000  Tenders invitedMarch 2001  Tenders returnedSeptember 2001  Preferred Bidder selectedSeptember 2002  OGC Gateway 3 Review (Investment Decision)December 2002  Contract awardedFebruary 2003  Construction/Maintenance commencedMay 2003  Substantial completion of WorksJanuary 2006  Total completion of WorksNovember 2006 pEnd of overall Contract PeriodMay 2036

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

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

23 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) SoSDBFO Co 100 %0 %100 % 100 – 150 %0 %100 % 150 – 200 %50 % 200 – 500 %90 %10 % > 500 %100 %0 % * Benchmark reflects actual costs at Tender

24 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

25 CONSTRUCTION PERIOD - Key Contract Information Client:Highways Agency Department’s Agent:Faber-Maunsell / Pell Frischmann Consultants DBFO Company:Road Management Services Contractor (CJV):Road Management Group (Amec- Alfred McAlpine-Dragados-KBR) Designer:Mouchel-Parkman Construction commenced:May 2003 Construction substantially completed:January 2006 Construction cost:£245m Overall Contract Period:33 years (for O&M)

26 Secretary of State Highways Agency Department's Agent (FM / PFC) Department's Representative (Highways Agency) DBFO Company (RMS) Contractor (RMG) (AMEC, A. McAlpine, Dragados, KBR) Designer (Mouchel-Parkman) Design sub-consultants (KBR, Carl Bro) Operation and Maintenance (A. McAlpine) Funders (Shareholders) (Bond Finance) (Bank Loans) DBFO Agreement (inc. Direct Agreement) Finance Company Construction Contract O & M Contract Design Contract Contractual Arrangements Total No. of contracts: 160

27 Health & Safety Design Review Structures Construction Motorway Communications Motorway Communications Environmental Management Environmental Management Quality Management Quality Management Non-Conformities, Certification & Records Non-Conformities, Certification & Records Traffic Management Traffic Management Operations & Maintenance Operations & Maintenance Public Relations & Communications Public Relations & Communications Land & Third Parties Land & Third Parties Project Forum HA DBFO Co CJV DES DASR DADRC Partnering + Partnering Protocol

28 ●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 Co’s cost (50+ penalty points in one year or one Warning Notice) Contractual Remedies:

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

30 l 4 agreed Compensation Events l 6 Department’s Changes l Outturn Works cost to HA around £221m v Pre-Contract estimate of £245m (both 2003 figures) l Dispute Resolution Procedure – not used for construction l 1 Dispute to date on Current Standards provisions l Payment mechanism working well Financial / Contractual Delivery – Key Points

31 Minimum Condition Criteria must be met before any payment made, e.g. TRACS CONGESTION MANAGEMENT PAYMENT MECHANISM Congestion Payments on Each of 50 Carriageway Sections

32 Active Safety Adjustment Criteria for Safety Payments or Deductions Cap Benchmark +PIAs £ Deduction £ Bonus C B A BC -PIAs Cap Zone A – no adjustments Zone B – enhanced adjustments Zone C – standard enhancements

33 Thank You! +44(0) (0)


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