Welcome to

Public Information Session

IW Highways PFI

16 June 2011

Edward Giles

Stuart Love

Jay Jayasundara

Purpose

• To explain

• What is Highways PFI

• How it is funded

• What are the benefits

• Timescales

• Answer your questions

What is PFI?

• Private Finance Initiative (PFI)

• Private funding for delivering public services

• A means by which

• Private sector makes capital investment in a public asset –

front up

• Private sector provides service over life time of contract

• Public sector makes service payments – over the project

lifetime

• Performance – rewarded through Service payments -linked

to quality & minimising disruption

What is included in the PFI?

What is included in the PFI?Publicly maintained Highway Network

• Refurbishment – capital works – over 7 years

• Roads, bridges, footways, retaining walls, lighting, street

furniture, traffic signs, CCTV, drainage schemes, 17 major

capital schemes, car parks, new highway depot, cycle ways

• Life cycle maintenance – capital works – over 18 years

• Maintaining upgraded assets to standard

• Routine maintenance – over 25 years

• Street cleansing, grass cutting, hedge trimming, ornamental

planters, cleaning bus shelters, signs, street lighting

• Operating highway network – over 25 years

• Winter maintenance; energy payment; attending road traffic

accidents; emergencies (flooding..); operations of CCTV; traffic

lights; car park ticketing machines; removal of animal

carcasses…

How is PFI Funded?

• Government Grant

• For Capital works –- £260m NPV (Cash over 25yrs £487m)

• Biggest ever Grant – not a loan

• Council Contribution

• For Maintenance & Operations

• Maximum £8.3m in first year

• Not “new” money

• Simply transfer of current spend on Routine Maintenance &

Operating Highway Network

• £260m Govt Grant + IWC Contribution = Project Cost

• Final Cost of IWC Contribution, expected to be around £1m to

£1.5m less – finalised in November 2012

• Hence, £8.3m is upper end of IWC contribution

• Total Investment – just under £0.8bn over 25 years.

Where is £8.3m currently spent?IWC’s Statutory Responsibility - maintenance & operation

• Employs – over 70 staff in area within PFI scope – salary, accommodation,

overheads

• Contracts for street cleansing, winter maintenance, street lighting energy,

lighting maintenance, CCTV 24 hr operation, traffic lights, grass cutting,

planters, hedge trimming

• Cleaning of signs, bus shelters, street furniture, attending road traffic

accidents, animal carcasses, highway trees, trees adjacent to highways..

• Emergencies, flooding, supporting special events, festive decorations

• Road space allocation for Statutory Undertakers, NRSWA, collection of

fines, administering licences – skips, scaffolds, hoarding, oversailing…

• Temporary traffic orders, highway support to planning application,

unauthorised attachments, “A” boards

• Condition surveys of the highway network, safety inspections, bridge

inspections

• Customer inquiries, FoI requests, government statistics responses,

insurance claims

Local Employment opportunities• Civil Engineers & designers

• Technicians – site setting out, qauality control, supervision,

inspection, geologists…..

• Environmentalists – pollution control, flora & fauna, drainage,

archaeologists, tree & grass maintenance, water, carbon

• Lighting/electrical engineers & technicians

• Admin – IT experts, Accountants, Quality controllers,

• Ground workers, kerb layers, machine operators, masons,

painters, drainage workers

• Concrete/black top technicians

• Immediate Supply chain – aggregate industry, transport

industry

• Wider supply chain – hotels, farm products, local shops, …

Climate projections for 2020

Summer rainfall: -

10% Winter rainfall:

+10% Summer

temperature:+1-2°C

Source: UK Climate Impacts Programme

‘These projections show us the future we need to avoid,

and the future we need to plan for’

Hilary Benn

Carbon & Water• Carbon Footprint & Water Footprint Tool to measure usage

• Modeling Embedded & Consumed

• Isle of Wight predicted to be an area of significant water scarcity by 2025

• 30% of water already sourced from mainland

• Bidders – bid total carbon & Water likely to be consumed – in construction &

operations

• Bid – evaluated as part of selection process

• Winning bidder’s Carbon & Water – locked into contract

• Required to report carbon & Water consumption annually

• If consumption exceed bid – penalty applies

• Key drivers – significant incentive to locally source material, reduce transport,

max recycling, reduce energy consumption

• First ever bid model in a PFI Contract

• Practical delivery of Eco Island theme

Street lighting & Energy

• Major contributor to Carbon footprint - incentive to change to an

efficient lighting system

• Proposed LED lighting replacement – in the early CIP years

• Central Management system – providing ability to reduce lighting

levels, vary on/off times, turn off lights, detect faults remotely,

integrate with other remote control system

• Housed in single control room with CCTV - ability to increase

lighting – when an incident happens

• Incentives to reduce energy consumption & lighting cost by 50% or

more

• Lots of innovation in this area

Flexibility post contract

• Refinancing

• Best Value Reviews

• Future changes to technology, innovation,

efficiencies gain share 75:25 in Authority’s favour

• 3rd Party income – 75:25 in Authority’s favour

• Fully priced works schedule

• Requirement for market testing

• External competition

Will I see any difference?

Upgrading the Islands roads

Initial

Design Detail

Design

April 2013

Final

TenderPreferred

Bidder

6

months

6

months

10

months

What are the time scales?

5

months

5

months5

months

Mobilisation

No

ve

mb

er

20

12

May/J

une 2

012

De

ce

mb

er

20

11

Ju

ly 2

011

Octo

be

r 2

01

0

Refinement

What the Critics say?Critics Actions to address

• Rigid contracts

• Excessive profits

from refinancing

• Private sector

cannot borrow

cheaper

• Cost of borrowing

unknown for

contractor

• Loss of member

control

• Build in provision to change contract;

ascertain cost of making change up front

• Introduce sharing of refinancing gains in the

future; Fixed cost (except inflation) market

test future costs; build in best value reviews

• Contractor’s operational efficiencies greater

than additional cost of borrowing

• Contractor Fixes borrowing rate for the 25

years

• Write in reporting/ approval controls in

contract; make reporting transparent

What the Supporters say?Supporting Why?

• Efficient

• Price certainty

• Effective

delivery

• Better public

service

• Payments linked to performance; tasks

combined removing conflicts; no overlapping

contracts; efficient planning; modern

technology

• Fixed price contract provides cost certainty;

only variable is inflation - common to any

procurement

• No Service – No Payment; Delivery -

measured by performance targets; failure

leads to loss of income – big incentive

• Payments link to service – leads to

improvements in the service public receives

Excessive profits – secondary markets• Radio 4 programme 14 June – Treasury Select Committee & Public

Accounts Committee hearings

• Back ground – funding structure of contractor

• Mix of Debt & Equity = typically 15 to 20% equity around £20m

• Debt terms based on best borrowing deals at contract

• Equity – what the shareholders invest – accept both risks & rewards

• Internal Rate of Return determines profit they expect – 10% to 15%

• If contract performs well – share price goes up

• If share price goes up – shareholder may want to sell their shares

• Question – should they be entitled to sell shares & make profit?

• Share price increase – when performance exceeds expectations

• Gains – typically through aggregation – mainly FM, hospital types of

contracts

• Refinancing – to manage share of gains in Debt financing

• IWC Contract – will deal with Equity side gain – without destroying

incentives for improving performance

How is IWC dealing with PFI?

• 30 months of detailed contract planning, negotiations before

award of contract

• Comprehensive asset base and condition – strong basis for

contractors to bid on – significant work done to build this data

• Allocation of £7.6m of funding – to plan, prepare & manage

procurement – buying expertise where appropriate

• Dedicated team - building in-house capability & capacity -

for the future

What are the benefits?• One stop shop – refurbishment, maintenance & operations

• Refurbishment of the existing public highway network to current standards – roads, structure, cycleway, lighting, control room, street scene – retaining the heritage

• Life cycle maintenance of refurbished network for 18 years

• Hand back network in specified condition with residual life (typically 8 – 10 years minimum) – at end of 25 years

• Operate & maintain highway network to higher standard

• Carry out routine maintenance to maintain safety of the network

• A new depot & Central Control Room housing CCTV, Traffic signal, Yar Bridge controls – purchase land, build & handback

• Creation of apprenticeships & training schemes for next generation

• Island wide employment opportunity – between 100 to 500 jobs

• Significant up-skilling of Island Contractors & opportunity to deliver services

• Economic regeneration - £0.8bn worth of investment – economic benefit could be many times over

SummaryKey features

• £260m – non-repayable – only way to get huge investment

• Council contribution – same as what we spend now with potential

for savings

• Council – no borrowing – no repayment of any form

• Fixed price contract – Service payments linked to inflation

• Significant opportunity to create construction industry on the

Island

• Massive regeneration opportunity for next generation

• If no Highways PFI

• Piecemeal patching & mending

• Opportunity for greater efficiency missed

• Opportunity for potential savings missed

• Further public sector spend reduction-road closures inevitable

Our Contacts

Email:

Highways-pfi@iow.gov.uk

Website:

http://www.iwight.com/highways-pfi

Any Questions?

The Highways PFI is the single largest engineering

project the Island has ever committed to

www.iwight.com