DBFO Briefing Pack

March 2005

  1. General briefing notes
  2. A historic summary of DBFO projects
  3. Current DBFO projects
  4. DBFO projects - key dates & durations
  5. DBFO projects in the pipeline
  6. NAO and PAC reports into the first four DBFO projects (historical information)
  7. Questions and answers
  8. Net present value ranges
  9. DBFOs per cent of the core and existing HA networks
  10. Parliamentary questions and answers
  11. Value for money savings for DBFO projects & PSC explanation
  12. Discount rate explanation
  13. Useful documents and how to obtain them
DBFO Briefing Pack

General briefing notes

Background

Design, build, finance and operate (DBFO) started life as a precursor and transition to motorway tolling, designed to create an operating industry which took a long-term commercial view and which might manage tolled motorways in the future. With this in mind, the Conservative Government announced in November 1992 that private-sector companies might be invited to bid for DBFO projects, with remuneration from the government according to usage.

The DBFO concept was included for consultation in 'Paying for Better Motorways: Issues for Discussion' (May 1993). A preliminary note on the principles applying to DBFO was published in April 1994. Welcomed by the City and industry, financial advisers Hambros/Pricewaterhouse then carried out a more intensive consultation on risks.

As a result of this consultation exercise, the DBFO form of contract was developed. In summary, the private sector, over the 30-year life of the contract, assumes responsibility for the operation and maintenance of a length of existing road (where appropriate) and the detailed design and construction of specified improvement schemes and their subsequent operation and maintenance. These responsibilities lead the private sector to focus on delivering whole-life cost efficiencies. DBFO has developed into a method of procurement worth pursuing in its own right as an alternative to other forms of procurement using conventional funding arrangements.

The first eight DBFO projects - Tranches 1 & 1A

Tranche 1
Tranche 1A

Contracts for the first eight DBFO projects were all awarded in 1996 (sometimes referred to as tranches 1 and 1A). These involve the private sector in managing about 600km or 5 per cent of the existing Highways Agency network and delivering 11 road improvement schemes with an estimated capital value in excess of £550m. Ten of the 11 schemes were completed and opened to traffic by Spring 1999, with the remaining scheme, the A30 Honiton to Exeter Improvement, opened in the Spring of 2000.

Reimbursement on these contracts is primarily by means of shadow tolls paid according to usage of the project road, plus bonus elements for safety enhancements and charges for lane closures and penalty points for not achieving set operating standards.

Value-for-money savings

The first four DBFO projects were the subject of a National Audit Office (NAO) report published on 28 January 1998, and a subsequent Public Accounts Committee hearing on 23 February. The conclusion of the latter was that the Highways Agency (HA) had made significant value-for-money (VFM) savings in the order of £100 million. A separate analysis of the first eight projects shows that they delivered VFM savings averaging 15 per cent.

The VFM of DBFO projects is established by placing each risk associated with the project with the party best able to manage that risk. Principal risks transferred to the private sector in the first eight DBFO projects included construction cost (including unforeseen ground conditions), opening date, operation and maintenance over 30 years, and traffic. Risks retained by the Department for Transport (DfT) included completion of the statutory procedures, land assembly, additional works required by the Secretary of State and events such as extreme weather conditions.

Tranche 2 Projects

Three DBFO projects were out to tender when the Accelerated Review was announced soon after the General Election in 1997. These were:

These projects were subsequently cancelled. A number of other projects (A40 West London Approach & A36 Wessex Link) have also been considered for DBFO status but have been rejected. Information for all these projects is presented in 2c - Tranche 2 project fact sheets (Historic summary of DBFO projects).

Post Tranche 2 DBFO projects
The A13 Thames Gateway DBFO Project

Approved as part of the accelerated review of the trunk road programme conducted in summer 1997, the A13 DBFO provides a vital link in the transport infrastructure to assist regeneration in East London, improving east-west access to Docklands, the Lower Lea Valley and other parts of east London.

Following a pre-qualification exercise, four bidders were selected and tenders invited in August 1998. Tenders were returned in March 1999 and bidders shortlisted in August 1999. A provisional preferred bidder was selected in December 1999. The successful tender was awarded to Road Management services [RMS (A13) plc]. The contract signature was made in April 2000 and work commenced on 11 July 2000.  At contract award the project was transferred to Transport for London (TfL), who are now responsible for this DBFO contract.

The A13 Thames Gateway DBFO project is the first example of a DBFO reflecting the government's integrated approach to transport. This is achieved by a new payment mechanism that moves away from the all-vehicle shadow-toll payment mechanism used on previous DBFO contracts, replacing it with a combination of:

This mechanism was the starting point for the development of payment mechanisms for two new DBFOs announced by Lord Whitty in December 1998 (see below).

A1 Darrington to Dishforth DBFO Project

The A1 Darrington to Dishforth DBFO project contains two upgrading and widening schemes, with a capital value of about £245 million. Construction has been completed on this project.

A249 Stockbury (M2) to Sheerness DBFO Project

The A249 DBFO project contains three improvement schemes with a capital value of about £100 million. The contract was signed in February 2004.

M25 DBFO Project

The M25 DBFO project comprises the existing Area 5 network and Dartford Crossings - which together form the Project Road. Once let, a DBFO Company will assume responsibility for the operation and maintenance of the Project Road and a programme of capital works including the widening of up to approximately 102km of the existing M25, generally to dual 4 lane standard. The project is currently at the preferred bidder stage.

Scottish and Welsh Office DBFOs

DBFO is not just a procurement option used in England. The Scottish Office awarded the A74(M)/M74 DBFO in April 1997 and the Welsh Office the A55 in December 1998. Both contracts are expected to deliver VFM savings, although in the case of the A74(M)/M74 DBFO, a National Audit Office (NAO) report concluded that the net benefits may be less than the £17 million calculated by the Scottish Office. The price, however, can be expected to remain VFM.

General briefing notes

A historic summary of DBFO projects

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2a - Tranche 2 project fact sheets

South Midlands Network

The project road comprises sections of the trunk road network in the Counties of Leicestershire, Northamptonshire and Bedfordshire, and to a lesser extent Buckinghamshire and Oxfordshire. Centred on the A6 and A43 trunk routes where they intersect at Kettering, it also includes sections of the A421 and A428.

South Midlands Network

A6 trunk routes

The section of the strategic north-south A6 trunk road included in this project extends from the southern outskirts of Leicester to the north side of Luton. Whilst principally rural in character, this section of the A6 passes through a number of towns and villages.

A43 trunk routes

The A43 trunk route forms an important north-south connection between the A1 to the south-west of Stamford and Junction 10 on the M40 to the north of Oxford. The route is generally rural in character, with discontinuities at the two major urban areas, Kettering and Northampton.

A428 Norse Road Link

The A428 is an east-west route linking Coventry in the West Midlands to Cambridge and the east ports beyond via the A14. The A421 is a rural primary route, which currently extends from Bicester to the A6 south of Bedford. The Bedford Southern Bypass, which has now been constructed, will provide a link between the existing A421 to the south of Bedford and the A428 to the east.

The A428 Norse Road Link scheme was withdrawn following the roads review of July 1998 and the remaining schemes (A43 &A6 trunk routes) were conventionally procured under the TPI.

Length of project road: 251km
Estimated Construction Costs: £116 million
Date of ITT issue: 3rd March 1997
Date of suspension: 19th June 1997
Type of road: Dual 2 carriageway

Highways Agency advisers

Technical: Halcrow Group Ltd
Legal: Denton Hall
Financial: Hambros/Pricewaterhouse
Design Agent: Bingham Cotterell, Northamptonshire C.C., Peter Fraenkel & Ptnrs, Thorburn Colquhoun
Cumbria to Bradford

Cumbria to Bradford

The Cumbria to Bradford project road runs from the A590/A592 junction at Newby Bridge via the A590, A65, A629 and A650 to the eastern terminal point of the proposed Bingley Relief Road. In addition to its strategic function as a trans Pennine route, the project road serves as a connecting route between intermediate centres of population. It also acts as a recreational route for tourism interests associated with the Lake District and Yorkshire Dales National Parks and Bowland Area of Outstanding Natural Beauty. This scheme was part of the Government's accelerated roads review and was subsequently suspended. The conclusion of the review was such that the DBFO tender period for this scheme was terminated.

The component schemes will be undertaken as follows:

Length of project road: 106km
Estimated Construction Costs: £104 million
Date of ITT issue: 4th February 1997
Date of suspension: 19th June 1997
Type of road: Dual 2 carriageway
Contingent scheme: Type A (A650)
Tenderers: Road Link, Connect, Autolink, The Trafalgar House/ Autostrade Group
Project manager: Highways Agency

Highways Agency advisers

Technical: Halcrow Group Ltd
Legal: Denton Hall
Financial: Hambros/Pricewaterhouse
Design agent: Babtie Group Ltd
Hyder
Weald & Downland
Weald & Downland

The project road comprises sections of three trunk road routes, the A21 London to Hastings trunk road, the A259/A27 South Coast trunk road and the A26 trunk road between the A27 and the port of Newhaven. The A21 trunk road runs southwards from the A25 at Sevenoakes to the outskirts of Hastings. The A259/A27 trunk road from Hastings to Brighton is part of the Folkestone to Honiton South Coast Trunk Road. It is the only strategic east-west route across England south of the M20, M25 and M4 corridor and it links the major towns of Folkestone, Hastings, Eastbourne, Lewes, Brighton, Worthing, Portsmouth, Southampton and Bournemouth. The A26 trunk road provides access to the port of Newhaven from the A27 at Beddingham. This scheme was part of the Government's accelerated roads review and was subsequently suspended. The conclusion of the review was such that the DBFO tender period for this scheme was terminated.

The component schemes will be undertaken as follows:

Length of project road: 117km
Estimated Construction Costs: £142 million
Date of ITT issue: 6th January 1997
Date of suspension: 19th June 1997
Type of road: 2/3 lane dual carriageway
Contingent scheme: Types A & B (A259)
Tenderers: Road Management Group, UK Highways, Express Route, The Modern Highways Group
Project manager: Highways Agency

Highways Agency advisers

Technical: Halcrow Group Ltd
Legal: Denton Hall
Financial: Hambros/Pricewaterhouse
Design agent: W S Atkins
Kent C.C
Carl Bro Group
Mott MacDonald
A40 West London Approach

The A40 is an important strategic radial route running in a generally east/west direction from inside the M25 to London's West End. At its western end it connects with the M40 motorway, Junction 1 while at its eastern end it connects with central London via the A501 and M41. The project road is one of the main arterial routes into central London. Starting in Buckinghamshire it passes through the Boroughs of Hillingdon, Ealing, Hammersmith and Fulham, the Royal Boroughs of Kensington & Chelsea and the City of Westminster. It is extensively used by commuters, tourists and commercial traffic from and to the Midlands.

The A40 West London Approach DBFO project, together with its two constituent schemes was cancelled in July 1997 as it was considered likely that this improvement scheme would encourage car commuting.

Length of project road: 25km
Estimated Construction Costs: £75 million
Type of road: Dual 2/3 carriageway
Project manager: Highways Agency

Highways Agency advisers

Technical: Halcrow Group Ltd
Legal: Denton Hall
Financial: Hambros/Pricewaterhouse
Design agent: Sir Frederick Snow
Howard Humphreys
A36 Wessex Link

The Wessex Link DBFO Project was also cancelled in July 1997. The result of the Roads Review in respect of the relevant schemes is as follows:

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2b - A13 Thames Gateway DBFO project fact sheets

A13 Thames Gateway DBFO project
  1. The A13 Thames Gateway DBFO project, approved as part of the Accelerated Review of the trunk road programme conducted in summer 1997, provides a vital link in the transport infrastructure to assist regeneration in East London, improving east-west access to Docklands, the Lower Lea Valley and other parts of East London.
  2. The route is of major importance to industry located along the A13 and provides heavy goods vehicle links from east London and Docklands to the M25 and Tilbury Docks. The project road ceases at the Greater London Authority (GLA) boundary at Wennington.
  3. Following a pre-qualification exercise, four bidders were selected and tenders invited in August 1998. Tenders were returned in March 1999 and bidders shortlisted in August 1999. A provisional preferred bidder was selected in December 1999.
  4. The contract was awarded to RMS (A13) plc by the Highways Agency, with contract signature on 12 April 2000 and a commencement date of 11 July 2000.
  5. The A13 DBFO contract was novated from the Highways Agency to Transport for London under the terms of the GLA Act on 3 July 2000.
Details of the project
  1. During the 30-year contract RMS is required to operate and maintain:
    • the existing A13 from Butcher Row in the West to Heathway in the East;
    • the new A13 bypass from Heathway to Wennington which opened in December 1999; and
    • the Limehouse Link Tunnel, Aspen Way and the East India Dock Tunnel.
  2. The DBFO company is also required to construct:
    • the A13 Ironbridge to Canning Town Improvement, consisting of widening and an additional flyover (estimated cost £43.7 million and substantially completed in October 2004);
    • the A13/A117 Woolwich Manor Way Improvement, consisting of replacing an existing flyover and providing a dual three lane carriageway road (estimated cost £39.6 million, substantially completed in August 2004);
    • the A13 Movers Lane Improvement, consisting of a new dual three lane underpass (estimated cost £26 million, substantially completed in August 2003); and
    • the A13/A112 Prince Regent Lane, which consists of an underpass, slip roads and a new junction (estimated cost £36.5 million, substantially completed in August 2004).
  3. The core requirements of the DBFO contract were also strengthened to include:
    • providing monitoring equipment to improve accident response times. This equipment can be used for traffic management purposes;
    • installing variable message signs that will be used to warn drivers of congestion ahead and to advise of alternative routes and modes of transport available; and
    • five-year management plans to incentivise the private sector to develop solutions that support Government policy. Examples include environmental improvements and ideas for integrating different modes of transport such as park and ride sites etc.
    • The expected completion date for all the construction works, which includes the communications systems and all civils works associated with the improvement schemes, is currently May 2005.
A13 payment mechanism
  1. An alternative payment mechanism was devised for the A13 DBFO, designed to incentivise the private sector to deliver a service in tune with the government's approach to integrated transport (i.e. the Roads Review five key criteria of integration, economy, environment, safety and accessibility). This payment mechanism moves away from the all-vehicle shadow-toll payment mechanism used on previous DBFO contracts, replacing them with a combination of:
    • Availability - Accounting for approximately 70 per cent of the DBFO company's income, payments are linked to road availability which, in turn, incentivises them to maximise the time that the road is available to road users, particularly during peak hours. Financial incentives include keeping bus lanes open and available for use.
    • Separate footway and cycle way availability payments - The needs of the non-motorised user are also recognised by linking payments to the DBFO company's performance in keeping footways and cycle ways available to pedestrians and cyclists.
    • HGV/bus shadow tolls - Long-vehicle volume-based payments encourage the DBFO company to efficiently manage public transport and commercial goods vehicle traffic, while providing no incentive to increase car usage.
    • Safety payments - Safety payments are designed to encourage the DBFO company to reduce the number of accidents.

In addition, the core requirements for the A13 contract have been amended to include provision of monitoring equipment to improve accident response times and variable message signs to inform road users of congestion, delays and public transport alternatives.

A13 Thames Gateway
A13 Thames Gateway

The following facts were correct as of the date of award for this project:

The A13 trunk road is a strategic East London/Thameside radial route. At its western end it connects with the City of London while its eastern end includes the new A13 Bypass to Wennington. The route is of major importance to industry located along the A13 and provides commercial vehicle links from East London and Docklands to the East Coast. These schemes are key to improving east-west access to Docklands, the Lower Lea Valley and other parts of East London, north-south local access and to supporting regeneration in a major part of the Thames Gateway. The Project will allow full use of the East India Dock Tunnel. The A13 passes through the London Boroughs of Tower Hamlets, Newham, Barking and Dagenham and Havering. The schemes included in this project are:

Length of project road: 20.5km
Estimated project value: £146 million
Date of ITT issue: 27 August 1986
Date of tender return: 15 March 1999
Contract signature: 12 April 2000
Commencement date: 11 July 2000
Novation to TfL: 3 July 2000
Tenderers: Connect, Tarmac/ Laing, Road Management Ltd, The Kvaerner/ Nutall/ Autostrade Group

Highways Agency Advisers

Technical: Halcrow Group Limited
Legal: Initially Denton Hall, now TfL
Financial: Initially KPMG, now TfL
Design agent: HyderMott MacDonaldGibb
Type of road: Single/dual carriageway

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2c - NAO press notice on the Scottish Office A74(M)/M74 DBFO Project

The Private Finance Initiative: The Contract to Complete and Operate the A74(M)/M74 in Scotland

HC 356 1998/99
9 April 1999
ISBN: 0102652996
Price: £10.15

Sir John Bourn, head of the National Audit Office, reported to Parliament today that the Scottish Office had managed an effective competition for the £214 million contract to complete the upgrading of the *A74(M)/M74 in Scotland to three-lane motorway and to operate the road until 2027. The private sector partnership with Autolink Concessionaires (M6) plc is expected to bring benefits which offset the higher cost of financing the project privately.

These benefits include construction of the road in around 22 months, compared with an estimated 36 months for a conventionally financed project. Early delivery of the road will increase the cost of the contract for the Scottish Office, but these extra costs are expected to be matched by the additional benefits to road users resulting from advanced completion.

The National Audit Office found that:

The report recommends:

Notes for Editors

*In April 1997, the Scottish Office signed a contract with Autolink Concessionaires (M6) plc to upgrade the existing 28 kilometre section of the A74 between Paddy's Rickle Bridge and Cleuchbrae in Scotland to motorway standard, and to operate and maintain the 92 kilometre length of the M74 between Millbank and the border. In return, the Scottish Office will make payments to Autolink based on the volume of traffic using the road, subject to a maximum in each year - so called "shadow tolls".

Press notices and reports are available from the date of publication on the NAO website at www.nao.org.uk. Hard copies can be obtained from The Stationery Office on 0845 702 3474. The Comptroller and Auditor General, Sir John Bourn, is the head of the National Audit Office employing some 750 staff. He and the NAO are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources.

Concerning audit and Scottish devolution, the Scotland Act 1998 provides for the appointment of an Auditor General for Scotland on the nomination of the Scottish Parliament. In due course the Auditor General for Scotland will become responsible for the commissioning of financial and value for money audits across much of the public sector in Scotland, and reporting the results to the Scottish Parliament.

Press Notice 28/99
All enquiries to NAO Press Office:
Tel: + 44 (0) 20 7798 7400

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2d - Welsh Office press notice on the A55 DBFO Project

HYSBYSIAD I'R WASG Y SWYDDFA GYMREIG
PRESS RELEASE WELSH OFFICE

11 January, 1999

PETER HAIN ANNOUNCES CONTRACT FOR DUALLING OF A55 ACROSS ANGLESEY

UK Highways A55 Ltd has been awarded the contract to design, build, finance and operate (DBFO) the A55 extension across Anglesey, Welsh Office Transport Minister Peter Hain announced today.

It is the first roads project solely within Wales to be procured by Private Finance. Work is expected to take about three years and be completed in 2001.

Mr Hain said:

"The importance of this project is reflected in the fact that it was the only scheme exempted from the strategic review of the Welsh trunk road programme,

"The new road will bring a better quality of life to people living and working along the existing A5 on Anglesey and will increase economic prosperity in North West Wales. In particular it will aid the economic regeneration of the island as a whole and Holyhead in particular. It will improve both road safety across Anglesey and communications with the rest of Wales and beyond into Europe."

The project will be:

The additional lengths of existing trunk road have been included in the DBFO project to improve traffic management at the approaches to Britannia and Menai Bridges and allow greater operational flexibility during closures of either bridge for maintenance or in extreme weather.

Notes

UK Highways A55 Ltd is a consortium made up of Laing, Tarmac and Hyder.

The concession period will be for 30 years during which time the contractor will design the new scheme, fund its construction, manage and maintain the network of the roads within the project. In return the Government will pay shadow tolls on a formula based upon the number of vehicles using the road and lane availability. After this time responsibility for the operation and maintenance will revert to the Government.

The concession includes the design and construction of around £100m of new roads and the operation and maintenance of the A5/A55 trunk road between Llandegai and Holyhead.

A historic summary of DBFO projects

Current DBFO projects

List of current DBFO projects

Current DBFO projects

DBFO projects - key dates and durations

Project Tender Issue Date Tender Return Date Invitation of BAFO Date Return of BAFO Date Preferred Bidder Date Award Date
Tranche 1
M1-A1 Lofthouse - Bramham (Kvaerner) 09/01/95 12/06/95 29/09/95 06/10/95 15/10/95 26/03/96
A419/A417 Swindon - Gloucester (RMG) 09/01/95 30/05/95 29/09/95 06/10/95 16/10/95 08/02/96
A1(M) Alconbury - Peterborough (RMG) 09/01/95 22/05/95 29/09/95 06/10/95 16/10/95 08/02/96
A69 Newcastle - Carlisle (Road Link) 09/01/95 05/06/95 29/09/95 10/10/95 17/10/95 12/01/96
Tranche 1A
M40 Denham - Warwick (UK Highways) 14/06/95 30/10/95 26/03/96 03/04/96 24/04/96 08/10/96
A168/A19 Dishford - Tyne Tunnel (Auto Link) 14/06/95 06/11/95 12/04/96 29/04/96 16/05/96 14/10/96
A30/A35 Exeter - Bere Regis (Connect) 14/06/95 13/11/95 19/03/96 03/04/96 23/04/96 24/07/96
A50 Stoke - Derby (Connect) 14/06/95 23/10/95 23/01/96 12/02/96 27/02/96 20/05/96
Welsh Office
A55 Llandegai - Holyhead (UK Highways) 12/11/97 15/04/98 26/06/98 18/09/98 22/10/98 15/12/98
Post Tranche 2
A1 Darrington to Dishforth 27/03/01 27/09/01 02/05/02 29/05/02 23/09/02 13/02/03
A249 Stockbury (M2) to Sheerness 24/07/02 06/12/02 26/03/03 07/04/03 28/04/03 19/02/04

DBFO PROJECTS - KEY DATES & DURATION

View DBFO Projects - key dates & duration table (will open in new window).

DBFO projects - key dates and durations

DBFO projects in the pipeline

Introduction

In a recent speech (spring 2004), Steve Rowsell, the Highways Agency director for procurement, outlined future developments in the delivery of privately funded road schemes in England. Highways Agency's Procurement Strategy stated that the spending plans included in the 10 Year Plan allow for 25% of the additional capital investment in the trunk road and motorway network coming from private finance.

The process

The process

A consultation document, "Improving DBFOs" , was published in 2003. The aims were to:

The document provided an opportunity for the industry to help shape future DBFO procurement and operations. Over 50 responses were received (figure 4.1 shows a breakdown of the types of respondents). Following the consultation, a working group has been established to review the responses and workshops/ dialogues which are taking place with selected respondents.

The three principle messages received from the respondents were that the Agency should work towards:

DBFO projects in the pipeline

NAO and PAC reports into the first four DBFO projects

A summary of the National Audit Office and Public Accounts Committee reports into the first four DBFO projects

General
  1. The first four DBFO projects were selected as pathfinder projects to test the market and to discover the types of project that offer the best value for money. Following the award of contracts in 1996, the National Audit Office (NAO) examined the procurement process and the final contractual arrangements to ascertain whether the process and deals were likely to deliver good value for money.
  2. Generally, the NAO's report, published on 28 January 1998, was positive about the way in which the former Department of Transport and the Highways Agency managed the procurement process. It highlighted that two of the four projects were expected to deliver savings of around 20 per cent compared with conventionally procured alternatives, but that the other two could cost some 7 per cent more. The main criticism was that the agency's analysis of the winning bids overstated the expected savings by £69 million because of the Treasury's advice to use an 8 per cent discount rate. The NAO's view was that a 6 per cent discount rate was more appropriate.
  3. A Public Accounts Committee (PAC) hearing took place on 23 February 1998 which discussed the findings contained in the NAO's report. On the central issue of value for money, PAC report concluded that the four projects could be expected to deliver savings of £99 million. However, it also focused on the discount rate issue and the sensitivity of the analysis to changes in the rate, and drew attention to the fact that two of the projects are likely to have cost the taxpayer £15 million more than had they been procured conventionally.
  4. The key issues, which attracted some media attention when both the NAO and PAC reports were published, are as follows.
The discount rate
  1. The PAC criticised the use of an 8 per cent discount rate rather than a 6 per cent discount rate to appraise the projects. Although it acknowledged that the Highways Agency was acting on Treasury advice, it concluded that, by 'using a discount rate of 8 per cent the agency overstated the value of the savings' and that these savings were 'overstated by £69 million'. The PAC also criticised the agency for not being 'aware of the fact that a small change in the discount rate would have a large impact on the evaluations of these schemes' and expressed dismay 'that officials did not do these calculations in accordance with Treasury's published guidance and draw the results to the attention of Ministers'.
  2. Throughout the period 1994 to 1996, when these projects (and the next four projects) were being procured, 8 per cent was the Treasury's recommended discount rate for appraising both railway and roads investment. The PAC report records that, in using a discount rate of 8 per cent, the agency was acting on the advice of Treasury. The PAC also concluded that, even using a 6 per cent discount rate for comparing the costs of public and private finance options, the value-for-money savings across the four projects were about £100 million. This still represents a significant saving to the taxpayer.
  3. The criticism of the agency's failure to undertake sensitivity tests is unfounded: such tests were carried out by the agency, although the decision to proceed was taken on the basis of the Treasury's recommended rate.
Risk transfer
  1. The PAC concluded that, 'with one major exception, the agency placed the risks inherent in these contracts with the parties best able to manage them and thus promoted good value for money. The exception was the decision to use traffic volumes as a basis for payments to operators'. The PAC's view was that, because traffic risks are notoriously difficult to forecast, 'the Agency has created a risk which is borne by the operators and which can be expected to have increased their costs'. Its conclusion was that 'bidders can be expected to have included a premium in their pricing for taking this risk, which is likely to have reduced the value for money offered by these contracts'.
  2. Traffic volume risk is not new, but the risk has traditionally been borne by the public sector. The relative simplicity of payments related primarily to the use of the road was the best method available at the time the first contracts were developed. It also accorded with the then policy objective of encouraging the development of a road-operating industry. While there may be a cost to be paid for transferring traffic volume risk to the DBFO companies, the value-for-money savings achieved were between £99 million and £168 million (depending on the discount rate applied).
  3. The PAC's suggestions reflect the subsequent development of the payment mechanism to focus more on the availability of the road, as introduced on the A13 Thames Gateway DBFO project.
Selection of bidders
  1. The PAC expressed puzzlement at the choice of tenderers and the related decisions not to overload any bidding group by broadening the number of tenderers for the first pathfinder projects. The PAC did 'not see the point of ranking consortia at the pre-qualification stage, if those rankings are to be ignored', and described the agency as being 'on dangerous ground' as a consequence of not selecting the best-qualified bidders to tender for two of the four projects.
  2. Pre-qualification submissions were received from 17 consortia, of which 12 were assessed as meeting the criteria to proceed to tender stage. These were ranked in accordance with the published criteria. Tenders were being invited for four projects simultaneously, so it was desirable not to overload any bidding group and no consortium was invited to bid for more than two of the four projects. Where possible, tender lists also reflected the preferences expressed by pre-qualifying consortia. This enabled more bidders to be involved in the process, which at the time was also desirable to further the policy objective of encouraging a private-sector road-operating industry.
  3. It is unlikely that the particular circumstances at the time the first pathfinder projects were tendered will be repeated. In future, where individual DBFO projects are tendered, the rankings at pre-qualification stage are likely to be the key criteria for determining the companies selected to bid. For example, bidders for the A13 Thames Gateway project were selected on the basis of their pre-qualification rankings.
The costs of advisers
  1. The PAC was 'concerned at the escalation in the cost of advisers, from the original limit of just under £1 million to a final cost of more than £8 million. The agency has now paid for its expensive policy advice and the development of a model contract. We therefore expect them to drive a much tougher bargain with its advisers in future.'
  2. The £8.3 million spent on legal, financial and technical advisers covers the development and delivery of the first eight projects and not just the four considered in detail in the PAC report. This is just over £1 million per project, or 1.5 per cent of the total capital value of these projects. The significant savings achieved by DBFOs are unlikely to have been deliverable without the contribution played by the external advisers.
  3. The PAC report implies an overspend in excess of £7 million on advisers' fees. The agency provided detailed evidence to the PAC on advisers' budgets and costs, which is reproduced in Appendix 1 of the PAC's report. The total annual budgets and outturn figures are also recorded in Figure 9 of the NAO's report. These show there was an overspend of £103,000 (about 4 per cent) on a budget of £2.60 million in 1994/95 and an underspend of £540,000 (about 9 per cent) on a budget of £6.12 million in 1995/96. The problem appears to be that the PAC interpreted the fee cap to be the budget whereas the fee cap was an internal cost control mechanism which ensured that rigorous progress and financial control of the policy development costs were exercised.
Innovation
  1. The PAC recognised that the bidders were given freedom to produce innovative detailed designs, but expressed some concern that the agency did not do enough to encourage greater innovation in other areas.
  2. All the projects had completed the statutory procedures (including consideration by an independent inspector at a public inquiry) and the agency had to ensure that the core requirements of the contract reflected the commitments given at those public inquiries. It was not possible, therefore, to give the private sector the greater degree of freedom to produce more innovative solutions. The agency recognises the PAC's concerns about the need to minimise other constraints to innovation for bidders and has reduced its core requirements for subsequent tenders. The agency is also learning from the innovative ideas introduced on DBFO projects and, where appropriate, applying those in conventionally procured projects.
NAO and PAC reports into the first four DBFO projects

Questions and answers

The Policy

Is paying over 30 years similar to a credit card transaction and therefore more expensive?

No. We are paying for a high quality road service which over 30 years is expected to deliver better value for money than conventional forms of procurement.

But can payment over 30 years represent value for money (VFM)?

Yes. The NAO concluded in its report on the first 4 DBFOs that the Agency can be expected to deliver VFM savings of about £100m. First 8 projects delivered average savings of 15 per cent.

A major principle of DBFO contracts is that the risk is placed with the party who is best placed to manage and deal with it as this provides best value for money. The private sector is reasonably expected to be able to assume and manage a wide range of the risks associated with designing, building and operating a road better than the public sector under traditional methods of procurement. The placing of risk appropriately in this way is likely to provide better value for money than placing risks with those not well able to manage them. The fact that the DBFO procurement process for each scheme has taken care to identify and allocate risks through a highly competitive process gives assurance that the contract terms were the best obtainable from the market for deals of this type at the time.

What risks are transferred?

DBFO contracts transfer a range of risks, including outturn cost of construction, future maintenance and level of traffic. Efficient risk management underlies VFM.

The allocation of risk and reward between the contracting parties should be clearly defined and private sector returns should be genuinely subject to risk. The DBFO Co will be expected to assume the majority of the risks associated with the design, construction, maintenance, operation and financing of the Project. These risks will include the risks of construction and maintenance to time and to budget and making whole life cost judgements.

What if the DBFO company performs poorly?

Remedies are available in the contract to ensure that the DBFO company's performance improves.

One of the main operational issues for the Agency is how to ensure that the DBFO Co complies with the terms of the DBFO contract, post-award. Under the terms of the DBFO contract the Agency appoints representatives to monitor the construction, operation and maintenance carried out by the DBFO Co to ensure that it complies with its contractual obligations.

The DBFO contracts contain a penalty point mechanism, which attributes points, for failure to perform under the contract. The allocation of penalty points has specific threshold triggers and increased monitoring requirements. Once a specified number of penalty points has been exceeded, the Agency has the right to terminate the contract. The Agency also has a number of other remedies arising from non-performance, including the right to remedy any default and invoice the DBFO Co for its costs.

Who regulates the DBFO Co under the Contract?

DBFO roads remain part of trunk road and motorway network and hence the Secretary of State remains the Highway Authority and will ensure that standards are met. (Also, see above)

Will DBFOs inhibit change?

No. Contracts make provision for technical or commercial change. The DBFO contracts represent the Agency's current approach on how to meet the demands on each project road. Over each 30 year contract period however, circumstances will change and the Agency therefore has reserved the right to change the service specification during the contract period, because it retains responsibility for strategic management of the whole network. To do this, a change procedure is required within each contract. Bidders however will not enter into an agreement where the Agency can change the specification at extra, unanticipated cost to them. The solution is that the DBFO contract contains scope for possible changes required by the Agency, and for a method of adjusting the payment mechanism to allow for changes in costs or effects on traffic flow.

What are the user benefits?

Bidders judge the best long-term value in their construction proposals to minimise the need for repairs. Less long-term maintenance means less disruption to traffic - good news for road users.

Why is the Government allowing profit-led private companies, with no regard for public opinion, to take over road building?

No. Traditional procurement uses private contractors. DBFO contracts extends the principle of private sector management skills but does not bring in private sector ownership.

How long between the ITT and the Contract award date?

Experience of the DBFO tendering process to date has shown that we can expect a contract to be awarded some 11 to 16 months after inviting tenders, subject to bidders submitting well-thought-out tenders that represent value for money.

What is the effect on statutory procedures?

The Secretary of State for the DfT remains the statutory highways authority throughout the period of the DBFO contract and the situation regarding statutory requirements including planning applications will remain unchanged. The Highways Agency's main role is to monitor the performance of the DBFO company, taking appropriate action to ensure that any expressed local concerns are addressed.

What will be the environmental impact of the contract?

The DfT, via the Highways Agency, does carefully and properly maintain trees and shrubs planted as part of new highways schemes. The work itself is normally carried out by agents. These include Forest Enterprise England (an agency of the Forestry Commission); local authorities; or private-sector consultants, as appropriate. On DBFO contracts it is a requirement that the successful contractor puts similar maintenance arrangements in place.

Which third parties will the DBFO Co's have to liaise with?

The DBFO company is required to liaise with the local highway authorities, emergency services and others as part of their obligations under the contract. In addition, the Secretary of State for the DfT remains the statutory highway authority. The Highways Agency's main role is to monitor the performance of the DBFO company, taking appropriate action as necessary, to ensure that any expressed local concerns are addressed.


In carrying out its responsibilities, a DBFO company is required to liaise with existing and adjoining local authorities and ensure that their operation and maintenance procedures are compatible with those which will continue to apply on roads adjoining the project road.

Do Shadow Toll Payments encourage DBFO Co's to generate increased levels of traffic?

We do not accept the argument that payments to operators related to use will act as an incentive to generate traffic. Operators will not be able to offer direct incentives to encourage additional journeys on the project road. The incentive is for the DBFO company to operate the road at maximum efficiency and safety with a minimum of time when lanes are out of use. This is in the interest of road users and the efficiency of the trunk road network.

Shadow tolls from the government, linked to usage of the road, provide an incentive for efficient management. Beyond this incentive, the DBFO company is not able to influence the growth of traffic using the road and sustainable development policies are not undermined.

The payment mechanism does not increase traffic volumes. DBFO companies have a very limited influence over road usage, and payments are capped for traffic volumes above a certain level. The incentive is for the DBFO company to manage and maintain the project road well enough so that it operates at maximum efficiency.

The NAO has criticised the Agency for using a Shadow Toll based payment mechanism. What has happened since the NAO report?

As acknowledged by the NAO, the Highways Agency was already developing a new mechanism before the reports were published. This new mechanism was used for the first time for the A13 Thames Gateway project in East London. A minimum of 70 per cent of income paid to the private sector will relate to their performance in keeping the road, footways and cycle ways available to users. The private sector will also receive some volume related payments for long vehicles (HGVs, buses and coaches), and the payment mechanism also includes payments related to the safety record of the project road.

Other payment mechanisms

Further payment mechanisms were devised for the A1 Darrington to Dishforth DBFO contract and the A249 DBFO contract in North Kent. These incorporate incentives for the private sector to deliver a service in tune with the government's objective of reducing congestion. Active Management Payment Mechanism.

The procurement process - how are projects awarded?

Prequalification - A contract notice is published by the Agency in the Official Journal of the European communities inviting requests from interested parties ("candidates") to prequalify with a view to later being invited to tender for a DBFO Contract in respect of the Project. The prequalification document provides additional information and describes the procedure ("prequalification") for selection of candidates with whom the Agency wishes to invite to tender and enter into negotiations. It should be read in conjunction with the Public Works Contract (Negotiated Procedure) Notice published in the Official Journal. The Agency will wish to be satisfied that each candidate selected to tender for the project has the appropriate qualities and resources available to it, to undertake the tasks required of the DBFO Co. Candidates are selected in accordance with the negotiated procedure and are required to supply standard corporate information.

Tender - in order to initiate the tendering process, the Agency sends to Tenderers a set of tender invitation documents (the "tender invitation documents"), including a draft of the DBFO contract (the "draft agreement"). The tender invitation documents set out the Agency's position regarding the definition of obligations and the allocation of risk. Tenderers are required to submit a tender on that basis (the "Standard Bid"). The Agency will also consider variant bids subject to compliance with the specified requirements (a "variant bid").

At tender stage a substantial amount of information is made available to the Tenderers, including any existing design information. For early DBFO Projects, this information was provided by way of dataroom document facilities, but more recently have been provided to Tenderers at the start of the tender period on CD-ROM. Tenderers are required to propose their own designs for the Project, and are encouraged to incorporate innovative ideas which deliver good value for money for the Agency. During the tender period, Tenderers are required to agree, in principle, with the Agency any significant departures from standard, outline proposals for structures and any proposals for new or alternative standards.

In addition to their technical proposals, Tenderers are required, in their Standard Bid, to stipulate the amount of DBFO Payments, which they propose on the basis of the obligations and allocation of risk as set out in cash flow projections, which include forecast cost, revenue data and financing proposals.

Tenderers are also encouraged to propose alternative obligations or allocations of risk as Variant Bids. They are required to state the effects on DBFO Payments of such Variant Bids, with the same level of detail defined as that of the Standard Bid.

Negotiation - The Agency negotiates with Tenderers to refine and finalise the definition of obligations, the allocation of risk and the attendant payments to be included in the DBFO Contract. At the conclusion of the negotiations the Agency selects the successful Tenderer (the "DBFO Co") on the basis of the most economically advantageous tender.

Award - DBFO Contracts are awarded under the negotiated procedure applicable to Public Works Contract Regulations 1991 (SI 1991/2680) ("the Regulations"), which implement the EC Works Directive (93/37/EEC). The basis for the award of a DBFO Contract will be the most economically advantageous bid against the criteria set out in the Tender Invitation Documents. Value for money, which is achieved by minimising cost while maintaining the required service levels and allocating risk to the party (Public or Private Sector) best able to manage it, is a key factor in the Agency's evaluation of Tenders.

Public sector comparator

Public sector comparator - To ensure that each potential DBFO project satisfies the twin tasks of value for money and optional risk transfer, the Agency prepares a Public Sector Comparator (PSC) before deciding whether to invite bids for projects under DBFO conditions.

For each DBFO project, the Agency needs to decide whether the proposed contract offers value for money compared with conventional procurement. A Public Sector Comparator is calculated by costing what the public sector would have had to pay to procure the construction of the relevant schemes and the operation and maintenance of the project road over 30 years by traditional means. The calculation includes an assessment of the risk resting with the Agency under conventional procurement.

The Agency prepares an assessment of Net Present Value (NPV) of the PSC, and compares this with the NPV of the projected payment under the DBFO contract (although the Agency has also to take into account other value for money considerations, which may not be quantifiable but may be significant, for example, environmental considerations or other policy objectives). Taking into account all these considerations, the Agency's Accounting Officer (the Agency's Chief Executive, who is answerable to Parliament for the Agency's commitments) needs to be satisfied that value for money is best achieved by means of the DBFO contract.

Questions and answers

Net present value ranges

Project NPV Range
Tranche 1 Projects
A1(M) £138m to £165m
M1/A1 £186m to £281m
A419/A417 £106m to £124m
A69 £58m to £66m
Tranche 1A Projects
A19 £125m to £149m
A30/A35 £129m to £158m
A50 £58m to £72m
M40 £155m to £210m
Post Tranche 2 Projects
A1DD £200m to £295m
A249 £100.5m
Net present value ranges

DBFOs per cent of the core and existing HA networks

Project Length km Length miles % of existing network (4,642 miles) See Note 1 % of agreed core network (4,167 miles) See Note 1
Awarded Projects
A1M 21 13 0.28 % 0.31 %
M1-A1 30 18 0.39 % 0.43 %
A419/A417 52 32 0.69 % 0.77 %
A69 84 52 1.12 % 1.25 %
A19 118 73 1.57 % 1.75 %
A30/A35 102 63 1.36 % 1.51 %
A50 57 35 0.75 % 0.84 %
M40 122 76 1.64 % 1.82 %
SubTotal 586 362 7.79 % 8.68 %
Projects currently in progress
A1 DD 53 33 0.71 % 0.79 %
A249 17 11 0.23 % 0.26 %
SubTotal 70 44 0.94 % 1.05 %
Total 656 406 8.74 % 9.74 %

Note 1: The figures for the existing network and the agreed core network have been extracted from Highways Agency Pavement Management System (HAPMS) on the 14/10/04.

DBFOs per cent of the core and existing HA networks

Parliamentary questions and answers

Introduction

The following is a selection of DBFO-related parliamentary questions dealt with since the inception of DBFO contracts:

Parliamentary questions and answers

Value for money savings for DBFO projects and PSC explanation

This information was supplied to the Environment and Transport Regional Affairs Committee - Transport Sub-Committee on 16th July 1998 as supplementary information.

Project Public Sector Comparator (See Note 1)(£m) Winning DBFO Bid(£m) Value for Money(£m) Percentage Saving
M1-A1 344 232 112 32.6%
A1(M) 204 154 50 24.5%
A419/A417 123 112 11 8.9
A69 57 62 (-5) +8.7%
M40 276 182 94 34.1%
A19 177 136 41 23.3%
A50/A564 77 67 10 13.0%
A30/A35 149 148 1 0.7%
A1DD 245 203 42 17.14%
A249 98 100 (-2) +2.04%
Total 1750 1396 354 20.23%

The result of the comparison between the public sector comparator and the winning DBFO bid were calculated using an 8 per cent real discount rate, which was the Treasury's recommended rate for assessing road projects when these contracts were awarded in 1996. The Highways Agency undertook sensitivity tests to assess the impact of different discount rates. The effect of using a 6 per cent real discount rate (which then became the recommended rate for assessing road projects), reduces the total saving to about £229 million (14.4 per cent). The advice in Her Majesty's Treasury (HMT) book entitled "Appraisal and Evaluation in Central Government" (The Green Book) has now been revised and the discount rate reduced to 3.5%.

Note 1: A Public Sector Comparator (PSC) is a benchmark against which value for money, in undertaking projects under the PFI, are assessed. The PSCs used by, for example the Highways Agency, are cost estimates for a notional project that has the same scope, outputs and timing as the PFI project. Costs are compared over the whole life of the contract and therefore include the operational/maintenance costs as well as the construction and financing costs. The PSC differs from the PFI project in that it is assumed to be undertaken under a traditional procurement route, resulting in greater risk being retained by the public sector, the costs of which are estimated in the PSC.

Value for money savings for DBFO projects and PSC explanation

Discount rate explanation

Introduction

Under DBFO contracts, the private sector assumes substantial risks, including those relating to designing, building and operating the roads. Generally, the private sector is expected to be able to manage these risks better than the public sector, thereby providing better value for money.

A highly competitive procurement process helps ensure that the agreed terms are the best on the market at the time.

Cost-benefit analysis: general

  1. Cost-benefit analysis is an appraisal technique for assessing the value for money of planned investment. It is used where the yardstick of profitability is inappropriate because the product to be delivered is not something that can be bought or sold. Roads are an example of a non-tradeable product because users do not pay directly for using them and there is no revenue from improvements to roads to be set against the costs of these improvements.
  2. Almost any capital investment project (including roads) results in a sequence of costs followed by a stream of benefits. These costs and benefits need to be compared to arrive at a view of the overall worth of the project. These costs and benefits cannot simply be added together as if they had all occurred simultaneously because, both individually and corporately, we place different values on the same cost or benefit according to when it occurs. In overly simplistic terms, a pound today is worth more than a pound in a year's time even if there is no inflation.
  3. To deal with this issue in economic and project appraisal terms, the costs and benefits in different years are transformed to their "present values" by the process of discounting to a common year. Discounting involves the notion of charging interest against a project, rather than paying interest to an investor who would earn compound interest on a sum invested over a period of time. Any sum, whether it is a cost at the start or benefit years later, can be reduced to its present value by multiplying it by a discount factor. The Net Present Value (NPV) of a project is the difference between the discounted benefits and costs. Where the net return is positive this represents a sound economic case for investment or, where several options are being considered, that with the highest net return represents the best investment option.
  4. Cost-benefit analysis has been applied to the appraisal of trunk road investments since the 1960's to ascertain whether the planned investment represents good value for money.

Discount rate

  1. The basis of DBFO contracts is that the Highways Agency pays for an all-inclusive road service over a long period, typically 30 years. To evaluate the private sector bids against each other, and also against the public sector comparator (see below), it is necessary to calculate the Net Present Value of these payments.
  2. On advice from Her Majesty's Treasury (HMT) book entitled "Appraisal and Evaluation in Central Government" (The Green Book) between 1989 and 1997, the former Department of Transport and the Highways Agency used 8 per cent a year in real terms as the discount rate for investment appraisal of publicly financed roads. HMT also decided that a real discount rate of 8 per cent a year should be used to appraise private sector bids for DBFO road projects, and in preparing the pubic sector comparator.
  3. The main criticism in the Public Accounts Committee (PAC) report into the first four DBFO road projects was the use of a discount rate of 8 per cent rather than 6 per cent to appraise the projects. In their view this led to the savings from delivering the projects as a public- private partnership (PPP) being overstated by about £69 million.
  4. In February 1997, a year before the NAO and PAC reports were published, HMT issued new guidance on the choice of discount rate for appraising both conventionally funded and DBFO road projects. This recommended the use of a 6 per cent real discount rate and that is the rate, which was used in preparing the public sector comparator and assessing the bids for the A13 Thames Gateway DBFO.
  5. The advice in the HMT "Green Book" has now been revised and the discount rate reduced to 3.5%.

Public-sector comparator

  1. To ensure the bids satisfy the twin tests of delivering value for money and optimal risk transfer, the Agency prepares a public sector comparator before deciding whether to invite bids for DBFO projects. It is prepared by costing what the Agency estimates it would have had to pay to procure the construction of the relevant road schemes and all the operation and maintenance of the project road over 30 years by traditional means.
  2. The process is detailed in the NAO report into the first four DBFO projects (The Private Finance Initiative: The First Four Design, Build, Finance and Operate Roads Contracts). In summary, the Agency prepares an assessment of the Net Present Value of the public sector comparator, and compares this with the Net Present Value of the projected payment under the DBFO contract.
Discount rate explanation

Useful documents and how to obtain them

General website addresses

Government Office set up to modernise and improve Government procurement:
Office of Government Commerce

Auditors appointed by Parliament to audit Government:
National Audit Office (NAO)

Specific DBFO Documents

Audit Report on the first four DBFO projects (A1(M), M1-A1, A417/A419 and A69):
NAO Report (The Private Finance Initiative: The First Four Design, Build, Finance and Operate Roads Contracts)

The first of the three linked consultations in respect of developing new and/or improving the existing, procurement and contracting policies:
Improving DBFOs, a Consultation Document, December 2002

A case study on the first eight DBFO road contracts and their development:
DBFO - Value in Roads

Public Accounts Committee scrutinises all Government expenditure and the Public Accounts - Forty- Seventh Report published on 10th of June 1998 is linked below:
Public Accounts Office (PAC) Reports

Prequalification Document for the A249 Stockbury (M2) to Sheerness DBFO Project:
A249 Stockbury (M2) to Sheerness

Prequalification Document for the A1 Darrington to Dishforth DBFO Project:
A1 Darrington to Dishforth DBFO

Prequalification Document for the M25 DBFO Project: M25 DBFO

Useful documents and how to obtain them