Highways Agency - Safe roads, Reliable journeys, Informed travellers

Chapter 1 - Executive summary

1.1 Introduction

The purpose of this case study is to give an overview of the structure of, and process used for, the first Design, Build, Finance and Operate (DBFO) road projects and to show how the DBFO concept is evolving as the Highways Agency (Agency) proceeds with further DBFO projects. The Agency acts on behalf of the Secretary of State for Transport (Secretary of State) as an executive agency of the Department of Transport (Department).

At the time this case study goes to print eight DBFO projects have been brought successfully to financial close. Six further DBFO projects have been announced, and one joint project between the Scottish Office and the Agency is in procurement. In total, the estimated capital value of the road schemes within the DBFO programme is just less than £1.3 billion. The DBFO projects are:

(^* This project is being procured by the Scottish Office, on behalf of the Agency, as part of the M6 DBFO project. The Junction 44 to Guardsmill scheme is subject to completion of the statutory procedure and authorisation by the Secretary of State.)

DBFO Projects

Figure 1.1

The map at Figure 1.1 shows the distribution of DBFO road projects. To the road user there are no significant operational features to distinguish a DBFO road from the rest of the trunk road network. The principal difference is that it is now the private sector, rather than the Agency, which bears most of the risks attached to designing, constructing, financing and operating the road. The Agency pays the private sector for the road service delivered, such payment being linked directly to the number and type of vehicles using the project road, up to an agreed cap.

1.2 History & Objectives Of DBFO Projects

The Department announced in November 1992 that private sector companies might be invited to tender for DBFO road contracts. Some discussion of the DBFO concept was included in the Green Paper, Paying for Better Motorways, which was published in May 1993. The Department carried out further detailed consultation with a number of potential participants in Spring 1994.

The Agency formally launched its use of the Private Finance Initiative (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:

• to ensure that the project road is designed, maintained and operated safely and satisfactorily so as to minimise any adverse impact on the environment and maximise benefit to road users;
• to transfer the appropriate level of risk to the private sector;
• to promote innovation, not only in technical and operational matters, but also in financial and commercial arrangements;
• to foster the development of a private sector road-operating industry in the UK; and
• to minimise the financial contribution required from the public sector.

The service includes assuming responsibility for the operation and maintenance of a length of existing road (where relevant) and ensuring that specified construction scheme(s) along the length of road are constructed and made available for road users. The private sector is subsequently responsible for the operation and maintenance of the new sections of road.

The main benefit of PFI is that, by transferring to the private sector responsibility for designing, constructing, financing and operating road scheme(s), the private sector will consider its obligations as a whole, over the 30-year life of the contract, taking full account of the risks inherent at each stage of the project. (There is, of course, the contractual requirement that the project road will be of economic use for much longer than 30 years and will be handed back to the Agency with a specified life expectancy.) For example, there is a direct relationship between the way a scheme is designed and constructed and its whole-life operational costs. The private sector chooses how to provide the service to the level specified by the Agency. Allocation to the private sector of project risk, which it is capable of managing, leads to an efficient service and a lower whole-life cost for the Agency.

For Agency employees, the introduction of the DBFO programme has resulted in their role changing from procuring the design and construction of a scheme, to compiling the output specification for the road service, reviewing the bidders' proposals for the design and, following contract execution, monitoring performance. In addition, the procurement skills within the Agency have changed as a result of using the negotiated procedure. The review process, in particular, is critical. The Secretary of State cannot delegate his responsibility for providing a safe and efficient road network. The Agency engineers therefore have to satisfy themselves that the bidders' solutions meet the Agency's requirements for a project. It is also vital that the private sector solution ensures that all environmental, safety or other undertakings made by the Agency in relation to a road scheme are honoured.

1.3 Previous Method Of Procurement

The previous method used by the Agency for procuring construction and maintenance of a road was to let contracts for separate tasks. For example, there would be a design agent, a contractor and a maintenance agent. Although each party may have been performing its specified task efficiently, there was insufficient incentive for the parties to collaborate to maximise overall value for money for the Agency, especially in terms of whole-life costs and quality.

The Agency would let a construction contract which required the contractor to build to the Agency's design. (More recently, the Agency has let design and build contracts which link these two functions.) Payment would be made by the Agency on the basis of measured progress in construction. Fixed rates were agreed on the basis of a detailed specification. However, the assumptions on which the contractors gave fixed rates often led to numerous claims. Once a contract was let and the contractor was on site, claims could be made against the Agency for additional costs. For example, claims would be made for unforeseen ground conditions, necessary variations to the works for carriageway and structures or measurement variations. A National Audit Office report stated an average increase of 28%, between tender and out-turn price, based on a sample of 42 road construction contracts each worth over £0.5 million (although a proportion of the cost increase quoted resulted from the Agency's required changes). Increase of this magnitude has a significant effect on Agency budgeting.

One of the objectives of DBFO procurement is to minimise claims by transferring certain risks and responsibilities to the private sector in order to achieve better value for money. As a consequence there are very few circumstances in which the Agency's liabilities under the DBFO contract, agreed at the outset, can be increased.

1.4 Key Messages

The key messages of this case study are:

• DBFO contracts have accelerated the introduction of cost efficiencies, innovative techniques and whole-life cost analysis into the design and construction of road schemes and the operation of roads (although the Agency had started to review these possibilities in the context of traditional methods of procurement).
• The full potential of efficiencies, innovation and whole-life cost analysis inherent in PFI is likely to be fully unlocked only when the private sector is involved in the outline design of the road scheme, which they are then obliged to construct, operate and maintain under a DBFO contract. This requires the private sector to assume some planning risk. Some of the DBFO projects announced introduce the concept of planning risk and will test the proposition that this will deliver better value for money.
• The risk allocation on DBFO contracts has been encouraging. Two areas where transfer of risk to the private sector has delivered good value for money are protestor action and latent defect risk. The Agency will continue to look for risk transfer to ensure that the DBFO contract liabilities remain off-balance sheet.
• DBFO contracts have delivered value for money. Cost savings (compared with the public sector comparator) have ranged from marginal to substantial; for Tranche 1 and 1A DBFO contracts, the average cost saving is 15%.
• Use of a model contract as the basis of negotiation for each DBFO contract saves bidders time in preparing their bids and provides significant efficiencies for the Agency, both in negotiation and in operating the contracts. The updating of the model contract is welcome as it will reflect changes to provisions arising from negotiation.
• Training in negotiation for project teams and dissemination of accumulated knowledge on DBFOs - and PFI generally - within the Agency continues to improve the quality of DBFO projects delivered.
• When devising the payment structure, the contracting body should determine what its objectives are for the service being provided, and the payment mechanism should be designed to incentivise the private sector to achieve those objectives.
• With eight contracts let and expressions of interest received for further projects, it is clear that a road-operating industry is developing. The same consortia (with a few changes in composition) have appeared as bidders on projects within each group.