PAPER B
Purpose: for Decision
REPORT TO
CABINET
Date
: 5
SEPTEMBER 2006
Subject: HIGHWAYS
MAINTENANCE PRIVATE FINANCE INITIATIVE EXPRESSION
OF INTEREST
Report
of: THE
STRATEGIC DIRECTOR OF ECONOMIC DEVELOPMENT AND
REGENERATION
IMPLEMENTATION
DATE: 18 SEPTEMBER 2006
PURPOSE
1.
To approve the
submission of an Expression of Interest for a Highway Maintenance Private
Finance Initiative to the department of transport by 10th September
2006.
BACKGROUND
2.
Notwithstanding recent
increases in highway maintenance budgets, 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.
3.
The decline in road
condition is accompanied by a decline in asset value and increased highway
maintenance costs are generated in restoring roads to a good condition. There is a high national demand for conventional
capital funding for highway maintenance as all responsible local authorities
endeavour to address their maintenance backlog.
4.
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.
5.
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 transport asset
management plan (TAMP) to be delivered, it is essential that alternative
funding sources were identified and utilised.
6.
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 the economic, social and
environmental wellbeing of the Island. 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 to 12 years.
7.
The term of the PFI
Project is likely to be 25 years with major capital investment being undertaken
in the first 7 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.
8.
The commitment required
from the Council is that its Highways FSS will need to be 100% ring fenced to
the PFI Project. Whilst this will mean
some reduction in overall Council budget flexibility, it does ensure that
highway network is guaranteed proper levels of funding.
9.
In February this year
the DfT announced a pathfinder round for Local Government Private Finance
Initiative (PFI) in Highway Maintenance (HM).
A fund of £600m PFI credits was to be made available to local
authorities applying through this round.
10.
Local authorities were
invited to submit Expressions of Interest (EoI) by 10th September
2006.
11.
The Council has
maintained an open dialogue with DfT and with a range of advisors concerning
the development of a PFI in this area, and have closely observed the process
through which Birmingham and Portsmouth City Councils have secured PFI projects
for highway maintenance.
STRATEGIC CONTEXT
12.
The proposed PFI sits
within the objectives of a range of local strategies and plans seeking to
deliver a long-term vision for how the Island is developed. The Local Strategic
Partnership, Island Futures, have set the overarching “2020 Vision” to “build
an Island with a future” which is contained within the Island’s Community
Strategy.
13.
This informs the Local
Development Framework (LDF), the “Island Plan” that provides the broad planning
policy for the Island. Feeding into the
LDF is the second Local Transport Plan (LTP 2006-2011) for the Isle of Wight;
this was submitted in March 2006. The
PFI will seek to deliver the Council’s aspirations in LTP2 for effective
highway asset management.
14.
Within the IW Council’s
regeneration strategies and initiatives derived from the over arching Area
Investment Framework (AIF), the PFI has a significant role to improve the local
infrastructure and support economic regeneration of the Island. While at the same time the Highways network
is a key component of creating a quality public realm that will underpin work
to deliver Council strategies such as the Tourism Development Plan and Crime
& Disorder Strategy. Issues of
sustainability within the PFI project will be addressed in line with the
Council’s commitments as part of Agenda 21.
15.
At a corporate level,
the PFI seeks to deliver two of the Council’s five key objectives “to drive the
sustainable regeneration and development of the Island” and “to create safer
and stronger communities”. Within the
recently agreed Local Area Agreement it is a key priority for improving the
Island’s infrastructure through the delivery of economic development
objectives.
16.
In line with the
Government’s agenda for public service reform, there is innovation in the means
of procuring policy solutions with an increasing recognition that partnership
with the private sector can yield benefits.
Such benefits are achieved through a better allocation of risk, which
gives the incentive to develop creative solutions with regard for the long
term, drawing on the experience of private sector partners in planning, project
development and risk mitigation whilst maintaining public control on policy
initiatives. A partnership will enable
the Council to draw on private sector approaches to business development, asset
life-cycle management and supply chain management. The Council has placed this approach at the heart of its recently
adopted “Aim High Change Management” plan.
CONSULTATION
17.
The Quality Transport
Partnership, Chamber of Commerce, Government Office for the South East (GOSE)
and Partnerships UK have been consulted on the PFI proposals.
FINANCIAL/BUDGET IMPLICATIONS
18.
As stated in paragraph
8 above, it is anticipated that the financial commitment required from the
Council will be no more than its existing revenue budget contribution to the
highway maintenance service, and that this amount plus annual adjustments for
inflation will have to be fully ring fenced to the PFI Project for the entire
25 year period. This is based on the premise that any affordability gap will be
bridged by the award of PFI credits for the project. The risk created by this premise is analysed below.
19.
The nature of PFI
Projects is such that the Government will provide PFI credits for the capital
elements of any scheme and not ongoing increases in revenue budget
requirements. For a significant ‘fence to fence’ highway maintenance project
the most significant aspects of capital expenditure will take place in the
initial 7 year rehabilitation period. However, the whole life cycle maintenance
strategies would require additional capital expenditure throughout the
remainder of the project life to retain the highways network at the improved
standard achieved in the first 7 years of the project.
20.
In order to calculate
the likely amount of PFI credit required, each of the components must be built
into a financial model of the project. These components will include backlog
maintenance, whole life cycle maintenance, potential insurance premiums and
claims costs and the likely costs a successful contractor would build into any
tender to secure the requirements of an output specification.
21.
The Council has been
working with its external advisors to identify each of these components and
their potential impact on the financial model. By their nature, some of these
components are essentially revenue expenditure. As a result of the requirement
for PFI credits to be linked to capital expenditure only, this can have a
significant impact on the affordability gap, and adjustments must then be made
to the financial model to reduce any affordability gap identified.
LEGAL IMPLICATIONS
22.
The Council has a duty
under the Highways Act (S41 HA 198) to maintain the highway network and therefore
has the power to investigate alternative funding arrangements in order to
discharge that duty. Statutory
Instrument 1999 No. 2106 The Local Authorities (Contracting Out of Highway
Functions) Order 1999.
“Contracting out of functions of local highway authorities
2. Any function of a local highway authority which is
conferred by or under any of the provisions described in Schedule 1, 2 or 3 to
this Order may be exercised by, or by employees of, such person (if any) as may
be authorised in that behalf by the local highway authority whose function it
is.”
24. The
submission of an EoI creates no future obligations but, if the EoI is approved
by the Department for Transport will enable development of the next stage of
the bidding process through drafting an outline business case.
OPTIONS
25.
The needs of the
highway network on the Island both in terms of backlog of repairs and life
cycle costs are considered to be beyond the current financial resources of the
Council. The only affordable option
currently available appears to be a PFI.
The options are therefore:-
I.
To submit an EoI for a
highway maintenance PFI.
II.
Not to submit an EoI
for a highway maintenance PFI and to identify alternative funding opportunities
to restore and maintain the highway network.
EVALUATION/RISK MANAGEMENT
26.
One of the key aims and
immediate priorities within the Council’s Corporate Plan is to ‘Have an
accessible, effective and integrated transport system for the Island’.
Delivering a Highway Maintenance PFI will achieve the aim. Submitting an EoI on
10 September 2006 is a key step to achieving the corporate priority.
27.
The risk held on the
Council’s corporate risk register notes that the appointment of external
advisors and the development of a Transport Asset Management Plan and Highways
Infrastructure Asset Register have provided the necessary information to enable
progress to be made towards an effective EoI submission. A recent meeting with
the Department of Transport has also supported a submission being made.
28.
As the first step towards
achieving approval for a Highway Maintenance PFI project, the risk to
achievement of the corporate aim is reduced by submitting the EoI. By contrast,
not submitting an EoI will mean that the corporate risk will remain at a high
level, with little prospect of its being substantially reduced through
conventional finance streams.
29.
A risk in this process is
the possibility of there being an affordability gap requiring a greater
contribution from Council revenue budgets, as set out in paragraphs 8 and 19
above.
30.
The next stage in the
process is the development and submission of an Outline Business Case (OBC).
The OBC part of the project plan will involve further discussions with the
Department of Transport (DfT), and may require some of the financial components
included within the EoI to be reassessed. Such a reassessment could result in
the identification of an affordability gap which would need to be considered by
the Council before submission of the OBC and Treasury Programme Review Group
approval of the project.
31.
The best possible EoI
must be submitted, taking account of the latest guidance from the DfT and from
the Council’s advisers.
32.
The draft EoI attached
will require further work prior to the Cabinet meeting in the event that any
significant changes are proposed a revised version of the draft will be
circulated at the Cabinet.
33.
The period following
the Cabinet but prior to submission of the EoI may require further revisions to
this draft. The recommendation made by
this report enables further amendments to be made, provided they are within
defined parameters, up to the submission deadlines.
34.
The potential PFI
project is the largest public project ever contemplated on the Isle of
Wight. The development of the project
will benefit from public scrutiny and the recommendations include a request to
the Scrutiny Committee to add a line of enquiry to their work programme.
RECOMMENDATIONS
|
35.
That the Head of
Engineering Services be authorised to: (1)
submit an Expression
of Interest to the Department of Transport seeking a highways maintenance PFI
project. (2)
agree, in consultation with the Cabinet
Member for Environment, Planning and Transport, the final draft Expression of
Interest ensuring that the submission draft does not depart from the draft
available to the Cabinet, only in order to improve the quality of the Council
submission. 36.
That the Cabinet
invite the Scrutiny Committee to add one or more lines of enquiry to its work
programme as the development of the proposed PFI continues. |
BACKGROUND PAPERS
Project
group working papers
APPENDICES
Expression
of Interest for Highway Maintenance PFI
Contact
Point: Stephen Matthews
Tel:
(01983) 823777
|
DEREK ROWELL |
CLLR IAN WARD |
|
Strategic Director of Economic Development and
Regeneration |
Cabinet Member for Environment, Planning and
Transport |