About DBFO's

About DBFO

Roads built with Private Capital

History & Objectives
History & Objectives of DBFO projects

General DBFO Policy & DBFO Philosophy
General policy & philosophy of DBFO projects

The Procurement Process
The Procurement process of DBFO projects

Value for Money
An estimate of a projects costs when procured conventionally

Public Sector Comparator & Contingent Schemes
An estimate of a projects costs when procured conventionally & schemes which have not completed their statutory procedures

Penalty Points & Monitoring
Methods for maintaining service levels

Handback
Conditions for return of the asset

Change
Change to the DBFO contracts

Payment Mechanisms - Shadow Toll Payment Mechanism
How DBFO companies get paid

Payment Mechanisms - Availability Payment Mechanism
How DBFO companies get paid

Payment Mechanisms - Active Management Payment Mechanism
How DBFO companies get paid

Datarooms
Information gathered prior to tendering of the DBFO contract

Glossary
A glossary of terminology relating to DBFO's

DBFO Contract Period
Contract period of DBFO projects

Advisors
Advisors of DBFO projects

About DBFO's

History and Objectives

PFI was launched in 1992. It was intended to facilitate closer co-operation between the public and private sectors and introduce private sector skills and disciplines into the delivery and management of projects and services traditionally undertaken by the public sector. The Government is committed to these principles through the Public Private Partnerships (PPP) initiative.

The Agency formally launched its use of PFI to procure a road service on parts of the motorway and trunk road network in August 1994. The Agency's objectives for each DBFO project were:

The first DBFO contracts

Eleven DBFO contracts have been signed and construction is complete on the first eight. The A13 Thames Gateway contract has been transferred to Transport for London and is substantially completed. Construction has commenced on the A1 Darrington to Dishforth contract comprising two upgrading and widening schemes with a capital value of about £245 million. The A249 contract was signed in February 2004 and comprises three improvement schemes with a capital value of about £80 million.

The Highways Agency uses a variety of mechanisms to pay DBFO companies. The first eight contracts primarily used the shadow toll payment mechanism, based on the number of vehicles using the road. The A1 Darrington to Dishforth contract uses the Active Management Payment Mechanism. The A249 contract mainly uses the Active Management Payment Mechanism combined with elements of the Availability Payment Mechanism used on the A13 Thames Gateway DBFO Project.

Under the DBFO method of procuring road improvements and maintenance, value-for-money savings averaging 15 per cent have been delivered. This is borne out by the National Audit Office (NAO) report into the first four DBFO projects published in January 1998.

Reports on the first four DBFO contracts

Following the award of DBFO contracts in 1996; 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.

The NAO report was very positive, emphasising that the process for delivering the first four DBFO projects was well managed by the agency and that value for money was achieved. The NAO concluded that the first four projects alone were likely to deliver savings of about £100 million.

The NAO report 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 that an 8 per cent discount rate be used, rather than a 6 per cent rate.

The NAO report was the subject of a Public Accounts Committee (PAC) hearing. The PAC acknowledged that DBFOs allowed for a productive partnership between the public and private sectors; provided incentives for efficient management; encouraged a commercially minded operating industry; and delivered the environmental and economic benefits of road improvement earlier than would be possible with conventional procurement arrangements.

The PAC report concludes that the four projects can be expected to deliver savings of £99 million. It too focused on the discount rate issue, however, 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.

Publication of NAO report - Scottish Office A74(M)/M74DBFO Project

This report continues to demonstrate that better value for money can be obtained for the taxpayer by procuring road projects through DBFO contracts in appropriate circumstances.

The Highways Agency's DBFO projects have generally achieved even better value for money than the Scottish Office project. In studying the agency's first four DBFO projects, the NAO concluded that they delivered value for money savings of about £100 million compared with conventional procurement.

The NAO's comments on the desirability of moving away from shadow tolls based on usage to a payment based on availability and safety were reflected in the Highways Agency's approach to developing new payment mechanisms i.e. Availability Payment Mechanism for the A13 Thames Gateway contract. The Active Management Payment Mechanism was also developed and used on the A1 Darrington to Dishforth and the A249 Stockbury to Sheerness project.

History and Objectives

General DBFO Policy and DBFO Philosophy

Policy

There is a successful track record of public and private partnerships for trunk roads. We expect that around 25 % by value of current and new major schemes will be procured using private finance contracts, including Design, Build, Finance and Operate (DBFO) contracts. The Highways Agency is also developing new procurement approaches for maintenance so as to introduce long-term maintenance contracts on DBFO lines.

The DBFO concept started life as a precursor and transition to motorway tolling, designed to create a private-sector road-operating industry that took a long-term commercial view and which might manage tolled motorways in the future. Under DBFO, the emphasis rests on the provision of an operating service rather than an asset, over the 30-year life of a contract, with the private sector assuming responsibility for the operation and maintenance of a length of existing road (where appropriate) and for building specified improvement schemes.

The principal benefit of DBFO lies in the increased value for money to the taxpayer of procuring a road service in this way. This is achieved through a combination of transfer of risk and the introduction of private-sector innovations.

Philosophy

The main principles of PPP inherent in DBFO contracts are:

The Transfer of Risk

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.

Value for Money

The Agency will establish whether the proposed levels of payment are justified by the benefits of the Project. Part of the assessment of whether the Project constitutes value for money involves using a public sector comparator which makes allowance for risk transferred.

Managerial Responsibility

The Secretary of State is the Highway Authority for the motorway and trunk road network. The managerial, operational and maintenance responsibility for the Project Road will be undertaken by the DBFO Co.

Payment for Service

The Agency will make payment in relation to the receipt of a service, and payments may be adjusted to reflect the satisfaction of certain performance criteria.

Partnership

The Agency is committed to establishing an effective partnership with the DBFO Co's in particular to ensure co-operative and non-adversarial working practices, well aligned objectives and constructive arrangements for quickly resolving differences.

Private-sector innovation

Transferring many of the risks to the private sector has resulted in increased innovation and efficiency (for example, in matching design and construction with long-term service needs), which has led to significant savings in comparison with traditional procurement methods.

The DBFO concept encourages a productive partnership between the public and private sectors, harnessing private capital and commercial expertise to fund initial construction and long-term maintenance of DBFO roads.

General DBFO Policy and DBFO Philosophy

The Procurement Process

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 typically required to supply information regarding the following:

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 requested to state the amount of DBFO Payments on the basis 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, with criteria to be considered set out in the Tender Invitation Documents. Value for money, which is achieved by minimising cost 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.

The Procurement Process

Value for Money

Under each DBFO Contract the private sector assumes substantial risks, including those relating to designing, building and operating the road. The private sector is reasonably expected to be able to manage these risks 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 procurement process for each scheme was highly competitive gives assurance that the terms obtained were the best obtainable from the market for deals of this type at the time.

Value for Money

Public Sector Comparator and Contingent Schemes

Public Sector Comparator

For each DBFO project, the Agency needs to decide whether the proposed contract offers value for money compared with conventional procurement. To assist in this decision the Agency prepares a Public Sector Comparator (PSC), which 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.

Contingent Schemes

A Contingent Scheme is a National Road Scheme, an improvement scheme or any other scheme in respect of the Project Road which will not have completed the Statutory Process at the time of issue of the Invitation to Tender. For these purposes "Statutory Process" means all steps required by law to make any necessary Line, Side Road, Detrunking and Compulsory Purchase Orders and other Orders in respect of the scheme (including the elapsing of any period for appeal, objection or other challenge and the exhaustion of the applicable procedures in respect of any challenge) and to authorise construction of the scheme and the acquisition of such land as is necessary to construct and operate the scheme. The risks associated with a Contingent Scheme vary depending on the stage in the Statutory Process the scheme has reached at the execution of the Contract.

Public Sector Comparator and Contingent Schemes

Penalty Points and Monitoring

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 have specific threshold triggers and increase 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 DBFO Co for its costs.

Penalty Points and Monitoring

Handback

To ensure that the road is returned in a fit condition for service that will not require major capital maintenance immediately following the end of the contract, specific clauses are put into each contract regarding handback. A required residual life is specified for each element of the project road. For example, at least 85 per cent of the road pavement should have a 10 year residual life on handback. Certain road elements never last that long (for example, cats' eyes) and are required to be replaced before the end of the contract. Though bridges have a design life of 120 years, it is still necessary to demonstrate that most elements of these structures have a residual life of at least 30 years on handback.

Five years prior to handback, detailed inspections of the roads and main structures will be carried out by the Agency and the operator. Likely works needed are noted and remedial action is expected to be taken in accordance with an agreed programme. A similar procedure covering all elements of the project road is carried out 18 months prior to the end of the contract to ensure work has been carried out in accordance with the agreed programme and to assess any other works needed to achieve the required standard at contract termination. During the five year period prior to handback the Agency will deposit 40 per cent of the agreed remedial works costs into ring-fenced accounts upon which only the Agency can draw until contract termination. This money will be used by the Highways Agency to carry out any work that the operator fails to complete. Once the contract ends and all such repairs have been made, any money remaining in the accounts is paid to the operator.

Handback

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, needed to reserve 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 was required within each contract.

Bidders however would not enter into an agreement where there was the possibility of the Agency changing the specification at extra, unanticipated cost to them. The solution was for the DBFO contract to contain scope for possible changes required by the Agency, and for the method of adjusting the payment mechanism to allow for the change in costs or effects on traffic flow.

The main changes that the Agency can require are:

The party raising the change identifies the change in costs and/or traffic. Generally, the effect of the change, either on its own or cumulatively with other change costs, must exceed a specified threshold before the toll revision mechanism is operated. If the changes or the issue of whether the threshold has been exceeded cannot be agreed they are referred to a disputes resolution process. The revised costs and/or change in anticipated revenues, caused by a change in traffic, are put into the financial model of the project to establish a revised Net Present Value (NPV) of net cash flow. Adjustment is then made to future toll levels (either up or down) to ensure that the NPV of net cash flow is the same as before the eligible change.

Change

Payment Mechanisms - Shadow Toll Payment Mechanism

The Highways Agency pays each DBFO Co an amount, which is based on the number and type of vehicles using the road, with adjustments made for lane closure and safety performance. These are known as shadow tolls as opposed to real tolls, as payment for usage is made by the Highways Agency rather than by the road user. The payment mechanism was structured to meet Government policy objectives for the trunk road network and PFI requirements, and incorporates payment based on:

Usage/demand

Shadow toll payments are made per vehicle using a kilometre of the project road, in accordance with the tolling structure and increase over time in accordance with an indexation formula. Different payments are due for traffic within different traffic bands and dependant on the length of the vehicle.

Availability of Service

Where the project road consists of an existing stretch of road with one or more construction schemes along its length, then shadow toll payments will be made at a reduced level representing the cost and operation for the existing road.

Performance

Two elements form the basis of performance payments:

Safety performance payments - The DBFO Co is encouraged to suggest safety improvement schemes with incentives for improving safety on the Project Road. If approved, the DBFO Co constructs and pays for the scheme and is recompensed by receiving 25% of the economic cost of each personal injury accident avoided in the following five year period.

Lane closure charges - a deduction is made from the toll payment when lanes are closed. The size of the deduction is dependant upon the number of lanes closed, the duration of the closure, and the expected traffic at the time of the closure. Lane closures charges are only made for closures within the control of the DBFO Co.

Payment Mechanisms - Shadow Toll Payment Mechanism

Payment Mechanisms - Availability Payment Mechanism

This form of payment mechanism was used specifically for the A13 Thames Gateway DBFO Project due to its urban characteristics. The mechanism was refined in order to achieve policy objectives and to improve the incentives on the DBFO Co to optimise the availability of road space and generally to take steps to improve the level of service to the public. Under this mechanism payments would be based on:

Availability - payments to the DBFO Company will take account of the number of available carriageway lanes. Payments will depend on the time of the day; e.g. payments for keeping the road available during peak hours will be higher than the payments for off-peak hours. This method of making payments is an incentive for the DBFO Company to manage their maintenance programme to avoid disruption to road users at busy times. There are also separate payments for footway and cycleway availability. The DBFO Company will address the needs of the non-motorised user.

HGV/Bus 'shadow' tolls - 'shadow' tolls for heavy goods vehicles and public transport give priority to effectively managing HGVs and public transport while providing no incentive to increase car commuting.

Safety payment mechanism - incentives will be further developed to reduce accident rates.

Bus journey time reliability - the DBFO Company will be encouraged to keep bus lanes available, during their hours of operation, to assist in the reliability of bus journey times.

Payment Mechanisms - Availability Payment Mechanism

Payment Mechanisms - Active Management Payment Mechanism

Introduction

Contracts

The mechanism was developed for the A1 Darrington to Dishforth project, and has also been used for the A249 Stockbury to Sheerness project where it also combines some elements of the Availability Payment Mechanism used on the A13 project. Both of these HA projects are currently at construction stage.

What the mechanism covers

Basis of congestion management payment

Payment Mechanisms - Active Management Payment Mechanism

Datarooms

A DBFO Dataroom is a repository of historic information, specific to each project road and utilised by both project teams and tendering parties during the DBFO procurement process. Introduced during 1995 as a hard copy data facility for each scheme, datarooms host all currently available scheme information and typically include new and existing road, environmental, traffic, structural and statutory undertakers data.

On average, a Dataroom is made up of approximately 4000 documents ranging from letters, faxes and reports through to survey data, large scale drawings and in some cases video information. Tenderers are invited to view the documentation that they may wish to consider when preparing their tender and can request copies of specific documentation if required.

More recently, and through a desire to provide a cost effective, portable, intelligent and environmentally friendly dissemination solution, datarooms have been produced electronically through the use of Optical Character Recognition (OCR) scanning and are issued on CD-ROM at the start of the tender period.

Datarooms

Glossary

Conventionally financed/Traditionally procured roads

A road construction contract in which the Agency pay the contractor as the works are progressed. Such projects are fully paid for on completion. Maintenance is dealt with in separate contracts.

Core (technical) requirements

Technical details which must be satisfied by the design and construction and the operation and maintenance to meet the Secretary of State's requirements in the contract

Cost of capital

The interest rate at which an organisation is able to raise funds.

Discount rate

The percentage rate applied to cash flows to enable comparisons to be made between payments made at different times. The rate quantifies the extent to which a sum of money is worth more to the Government today than the same amount in a year's time.

Force majeure

Events over which the parties to the contract have little control, but which could have serious impacts on the contracts. These include war, rebellion, nuclear explosion, earthquakes, pressure waves from aircraft.

Latent/inherent defect

A defect in the existing road which had not been detected before the contract was signed.

Output specification

Specified aspect of the Agency's service requirements or performance specification, for which the Agency set minimum quality standards to be met by bids

Planning risk

The risk that delays or increases in costs could occur due to procedures in the planning process, such as Public Inquiry.

Private Finance Initiative principles

As they apply to Design, Build, Finance and Operate contracts, these are that: the allocation of risk and reward should be clearly defined and private sector returns should be genuinely subject to risk; and the contracts should represent value for money, taking into account the benefits of transferring risk to the private sector and the cost of that transfer.

Protester action

The risk of delay and increased costs due to disruption during the construction phase by anti-road protesters.

Public sector comparator

An estimate of what the project would cost if traditional procurement methods were used. This was used to determine whether private finance offered better value for money than traditional procurement.

Reserve bidder

Second place short-listed bidder after Best and Final Offer stage. Reserve bidders were invited by the Agency to keep their bid on the table in order to maintain competitive pressure on the provisional preferred bidder.

Risk transfer

The passing of risk normally borne by the Agency to the road operator.

Sensitivity test

Test of the impact on value for money of bids of changes in key assumptions underlying the Agency's main value for money assessment.

Shadow toll

Amount paid by the Agency to the road operator for each vehicle kilometre travelled on the operator's roads.

Statutory risk

The risk that the law will be changed in a way which specifically affects the operation of the service - for example the introduction of user paid tolls. The risk of general changes in law is borne by the operators as a normal business risk.

Traffic measurement

Counting the volume and type of traffic using the operator's roads in order to calculate the amount of shadow tolls payable by the Agency for each period.

Whole life approach

Taking a view of the construction, operation and maintenance of the road project over the 30 year period. Under traditional procurement the whole life cost is borne by the Agency; in Design, Build, Finance and Operate contracts this is passed to the operator.

Glossary

DBFO Contract Period

The DBFO contract period is for 30 years from the commencement date. The period was selected because finance for this type of project generally has a maximum repayment period of around 20 years and the payment mechanisms had to be structured to allow repayment of debt over a similar timescale (making allowance for a reduced payment stream in the initial years until the road scheme(s) are completed and a 'buffer' period after anticipated debt repayment in the event that cash flows are less than, or come on stream later than, anticipated). Since 30 years is currently beyond the range of conventional debt, the choice of period also encouraged financial innovation, use of alternative sources of funding and the possibility of re-financing after the completion of construction, all of which can provide financial benefits to the Agency. It was also important that the contract period was sufficiently long to allow DBFO Co to apply whole-life costing to the project road.

DBFO Contract Period

Advisors

Since 1994, the Highways Agency has made extensive use of external advisers for the provision of technical, legal and financial advice. Appointed through competition, the Highways Agency's current advisers are:

Technical: Halcrow Group Ltd

Legal: Denton Wilde Sapte

Financial: Pricewaterhouse Coopers

Advisors