Highways Agency - Safe roads, Reliable journeys, Informed travellers

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.