Highways Agency - Safe roads, Reliable journeys, Informed travellers

Chapter 5 - Learning points

5.1 Payment Structures

One of the main reasons for using shadow tolls was that they offered a workable method of acclimatising the private sector to the concept of payment per vehicle as a precursor to the introduction of user paid toll roads. There are good reasons for paying by usage, as explained in 2.2, and it is not inconsistent with wider Department of Transport aims to reduce the need to travel and optimise the use of the existing network. There is little DBFO Co can do to increase traffic usage. In addition, the way that DBFO Cos have structured their toll levels results in a reduced payment per vehicle in the higher traffic range. Ultimately (because of the zero cap on the top band) additional traffic will not receive a toll payment and the increase in traffic will only result in extra maintenance costs for DBFO Co.

In the absence of overriding policy reasons to link payment to usage, there are benefits to contracting bodies in determining the ultimate objectives for a service (which may predominantly relate to availability or performance) and linking payment to the delivery of a service meeting those objectives. The current lane closure charges and safety performance payments have identified two areas of operational importance to which payment may be linked. Lane availability (together with volume of traffic) is a key factor in journey time reliability, which research has shown to be one of the main criteria by which road users judge performance of a road. In the longer term, the development of route strategies (which are currently being trialed by the Agency with a view to determining the principal performance criteria for individual routes) should assist in determining other areas where financial payments might be linked to performance.

5.2 Opportunities For Innovation

If there is to be more innovation in the method of delivery, bidders must become involved in the outline design of the underlying asset. It is more likely that there will be cost saving in operation if the private sector has designed the asset they are going to operate. All road schemes included in Tranches 1 and 1A had the parameters of the outline design fixed by the made Orders. Although, in theory, DBFO Co could propose alternatives to the Agency's existing design, few bidders exploited the opportunity. Therefore cost savings were solely to be found in the detailed design and value engineering techniques. In addition, as the Agency itself is now using value management and value engineering as part of its design criteria, savings delivered by the private sector on design may reduce in the future and innovation will be the key to future success.

The involvement of the private sector in the planning process is a difficult issue. Some private sector contractors have expressed unwillingness to become involved and do not want to bear the risk that they are committed to provide an asset which, as a result of the planning approval process, may never obtain approval or may have to be delivered in a substantially different form or much later than anticipated. However, the Agency's view is that in order to obtain maximum innovation and value for money the private sector must take some of this risk.

Realistically, transfer of the risk to the private sector will not be instantaneous. An evolutionary approach is being adopted. Familiarisation with the process and the risks involved will be gradual. The DBFO projects now in procurement contain some small schemes (which would not jeopardise the viability of the overall project if unsuccessful at Public Inquiry) which have not started the statutory process, and larger schemes which have almost completed the statutory process and where delay of final approval is the main risk for the private sector. The Agency has avoided including major schemes which are at an early stage in the statutory process because it considers that, at the moment, bidders would be unwilling to assume that degree of risk.

5.3 Output Specification

PFI requires the client to focus on the 'what' rather than the 'how' in relation to service provision. The first DBFO projects came with a high degree of specification stating how the service had to be delivered - in other words the project brief was not a true output specification. Bidders had to conform their design to the scope of the outline design fixed in the made Orders. The Agency's view was that it would not be productive to re-open the planning debate and invite bidders to submit an outline design which would require new Orders.

Some of the DBFO projects currently in procurement contain contingent schemes which have not been through Public Inquiry. These schemes provide the Agency with the opportunity to devise output specifications which align closely with the Agency's own policy objectives for the scheme. It will be DBFO Co's responsibility to flesh out how those objectives are going to be achieved through the design of the scheme and any environmental or other undertakings made by DBFO Co during the statutory process.

5.4 Evaluation

DBFO roads posed an interesting policy issue for the Agency - what service standard should be attached to the private sector's obligation to operate and maintain? The Agency identified the minimum service standards or core requirements, but above that there was discretion for the private sector to offer higher standards. If a bidder offered a higher standard with no additional cost attached, the bid would be attractive. But where the higher standard is offered at a higher cost than other bids there is a dilemma as to how to evaluate the offer.

The Agency's approach is that, provided minimum standards are met, price should be the principal determinant. If prices bid are in the same area, standards offered in excess of the minimum will decide between bids.

5.5 Enforcement

Ensuring that the Agency has adequate remedies to enforce the terms of the DBFO contracts is a key issue. The primary enforcement tool is the penalty points system which is used to signal to the DBFO Co (and their funders) that the Agency believes that they are in breach of a provision of the DBFO contract.

Following non-performance, the DBFO contract also allows the Secretary of State to take remedial action and invoice DBFO Co for the Agency's costs, to set-off payment of those costs and, in certain circumstances, to suspend payment.

If non-performance continues unremedied, ultimately the Agency will have the right to terminate the DBFO contract. This is a significant deterrent to non-performance as it results in the loss by the DBFO Co of future cash flow to repay debt and make equity return. The Agency will keep its remedial and enforcement structure under review in the light of experience on let contracts to ensure that it performs as intended.

5.6 Funder Involvement

Given their significant role, it is not unreasonable that funders, who may be providing 90% or more of the total funds required, should demand a significant input into the terms of the commercial deal. All bidders have had significant discussions with their funders by the time that their Best and Final Offer is made.

On Tranche 1 and 1A projects the most significant input on the terms of the funding and due diligence on the DBFO contract occurred after selection of preferred bidder. At this point timing difficulties have been encountered because funders' due diligence had not commenced at an early enough stage.

As the financial community becomes more familiar with the DBFO contract and technical and traffic issues, the funders' lending decision should become more streamlined.

There has been particular debate over the terms of the Direct Agreement between the Agency and funders. In order to minimise future erosion of the Agency's position, the model Direct Agreement is being reviewed by the Agency and its advisers in the light of their experience on the first eight projects.