SUMMARY/PURPOSE

1. To approve the submission of the Expression of Interest (EOI) for a Highway Asset Management Private Finance Initiative (PFI) to the Government.

RULE 15 - ACCESS TO INFORMATION RULES

2. This paper was intended for an early meeting of the incoming Executive after the 5 May local elections. Intelligence from Central Government suggests that invitations to submit expressions of interest may be invited very soon after the general election on the same date. The report needs to be taken now to avoid the danger that expressions of interest are invited, with a closing date, prior to the scheduled meeting of the Executive.

BACKGROUND

3. The Executive has previously formally approved the need to explore a PFI for Highway Asset Management, and approved funding of £120,000 over two years to prepare an EOI.

4. Notwithstanding short-term increases in highway maintenance spending, the condition of the Island’s road network remains below standard. Routine inspections and various structural condition surveys indicate that urgent and substantial investment is needed to improve and maintain the highway network asset.

5. The decline in road condition is accompanied by a decline in asset value and increased highway maintenance costs in restoring roads to a good condition. The backlog of highway maintenance on the Island is estimated to be valued in excess of £160 million. There is a high national demand for conventional capital funding for highway maintenance as all responsible local authorities endeavour to address their maintenance backlog. The Government has set local authorities the target of arresting decay in the highway asset by 2005 and removing the backlog of repairs by 2011.

6. The needs of the highway network on the Island are therefore considered to be beyond the current financial resources of the Council, particularly when viewed against the traditional funding competition from other service areas. To enable an acceptable highway asset management programme to be delivered, it is essential that alternative funding sources are identified and utilized. Many local authorities are now exploring areas of additional funding for highway asset management projects, particularly the use of PFI’s.

7. The benefits of improved funding will ensure that maintenance backlogs are properly addressed and life cycle asset management techniques and strategies implemented to ensure that the restored highway network is maintained in a good condition. Failure to secure the necessary levels of investment will result in continued and accelerated deterioration of the highway network. Restrictions on the use of road space will increase through safety considerations with attendant reductions in accessibility. There will follow inevitable adverse consequences for economic activities and transport in general. Even at present rates of maintenance funding, it is estimated that the highway network will be life expired, i.e. having nil residual life, within the next 10 years.

STRATEGIC CONTEXT

8. Effective highway asset management is wholly consistent with all corporate Plan objectives, the 2020 Vision that seeks economic regeneration of the Island, and the Island Transport Vision and the associated Local Transport Plan that seeks to achieve improved integrated public transport. The Government supports and encourages all local authorities to maximise the opportunities afforded by Public Private Partnerships (PPP’s) including the use of PFIs.

9. The term of the PFI Project would be between 25 to 30 years with major capital investment of £160 million being undertaken in the first 5 to 6 years to rehabilitate the network to a sustainable level. Whole life cycle maintenance strategies would then be implemented for the remainder of the term. The affordability gap, i.e. the difference between the cost of the PFI Project and the Council’s spend on highway asset management, is bridged by PFI Credit. PFI Credit is a non-refundable Special Grant and not permission to borrow.

10. The commitment required from the Council is that its Highways FSS will need to be 100% ring fenced for the life of the PFI Project. Whilst this will mean some reduction in overall Council budget flexibility, it does ensure that the highway network is guaranteed proper levels of funding.

11. Key Milestones for the Highway Asset Management PFI contract are shown in Appendix 1.

CONSULTATION

12. Consultation has taken place on the scoping of the services within the EOI with the Portfolio Holder and staff and it is recognised that a PFI for highway asset management is the only way forward to clear the backlog of repairs.

13. A PFI workshop was held on the 2nd March 2005 with the Portfolio Holder, senior council officers and representatives of the District Auditor.

14. Consultation has taken place outside the Council with the following:-

Department for Transport

HM Treasury

4Ps – Government PFI experts

District Audit

Portsmouth, Birmingham City Councils

Telford & Wrekin Council

A number of PFI contractors

Specialist PFI technical, financial & legal advisers

FINANCIAL/BUDGET IMPLICATIONS

15. The Council is faced with three options:

· Retain the status quo and accept that the road network will become progressively more unaffordable to maintain, leading to prioritisation of available resources and eventually to closure of some routes

· Use prudential borrowing powers to make the necessary investment to bring the network up to a sustainable standard

· Use a PFI scheme to achieve the same end.

16. Appendix 2 attempts to demonstrate the differing impact that the last two options would have on the Council’s finances. The PFI option costs are roughly neutral over the life of the project whereas the prudential borrowing approach involves an additional revenue charge of up to £15 millions per annum, and amounting to a cumulative £297 millions over the project period (or about £5,500 per band D taxpayer). In addition to the increased revenue cost, which would have to be met from higher taxes or reductions in other services, the prudential borrowing approach would leave the Council with additional debt of £199 millions at the end of the 25 year period which would need to be serviced by future generations.

17. The figures shown in appendix 2 are indicative, and in the event of a successful bid in May to the Government, the new Executive would need to conduct a full gateway review of the project, including the robustness of the assumptions made, key risks, and the project governance arrangements, before allowing progression to the next phase.

LEGAL IMPLICATIONS

18. There will be a number of corporate governance issues beyond the approval the EOI for a Highway Asset Management PFI. These will be dealt with in a future report to Executive.

OPTIONS

19. Option 1: To approve the submission of the Expression of Interest to the Government for a Highway Asset Management Private Finance Initiative as detailed in Appendix 3.

Option 2: To use prudential borrowing powers to make the necessary investment to bring the highway network up to a sustainable standard.

Option3: Do nothing.

EVALUATION/RISK MANAGEMENT

20. The highway network will continue to deteriorate unless significant increases in maintenance budget are provided to rehabilitate and then properly maintain the network. A PFI project appears to be the only sustainable way of achieving this improvement.

21. Without PFI, there is a large risk that the economic regeneration of the Island as envisaged in the 2020 Vision and the Island Transport Vision which are used to drive forward the regional South East Plan, the Island Plan (LDF), the Local Transport Plan and the Tourism Development Plan, will not be realised due to lack of suitable transport infrastructure.

22. The process for approval of a PFI requires the authority to submit an EOI, which is in essence a mini business plan. Once this is approved, the Government require an OBC for approval, which is the full business case developed from the EOI. This process is intended to avoid Councils incurring large abortive costs in the event that the Department for Transport and HM Treasury do not approve the PFI. The implication for the authority is that subject to approval of the EOI, there is a high degree of certainty of approval for the OBC. There is always an element of risk that the EOI could be approved and the OBC turned down. However, our advisers on PFI have told us that the risk is extremely small.

RECOMMENDATION

23. To approve Option 1 as set out in paragraph 19.

BACKGROUND PAPERS

24. Report to Informal Executive 30^th July 2003

Report to Executive 10^th September 2003

Report to Informal Executive 15^th November 2004

2020 Vision

Island Transport Vision

South East Plan

Corporate Plan 2002-05

Local Transport Plan

Island Plan (Local Development Framework)

Tourism Development Plan

APPENDICES

25. Appendix 1 Key Milestones for Highway Asset Management PFI Contract

Appendix 2 Comparison of PFI with Borrowing under the Prudential Code.

Appendix 3 Expression of Interest

Contact Point : Steve Matthews, Head of Engineering Services Tel 823702 email: [email protected]

STEVE MATTHEWS

Head of Engineering Services

PETER HARRIS

Portfolio Holder for Transport