Highways Agency

Executive Summary

In March 2003 the Highways Agency issued a consultation document entitled "Private Finance in Highways Maintenance (PFMAC)" to organisations from the construction industry, Private Finance, local and central government and others interested in either management of maintenance or Private Finance.

The consultation responses were analysed by the Highways Agency, and two stakeholder workshops subsequently arranged on the 11th and 13th June to build upon the issues identified from the earlier consultation feedback. Four discussion topics were identified and adopted at the workshops following the analysis of consultation responses: scope of PFMAC; performance specification; payment mechanism; best value risk allocation.

Scope of PFMAC

In identifying the scope of a PFMAC option it was considered by all parties a shared responsibility should be adopted although the HA would remain as the outward facing "brand" to the public.

The Control Office (CO) function should be closely integrated with the PFMAC and that, in general, responsibility would lie with those activities for which it could control, although this could be altered/increased over time. Furthermore, a consistent approach is required between the existing MAC and proposed PFMAC contracts as the CO is likely to encompass more than one maintenance area.

It was submitted the PFMAC take on the majority of on-road activities although some issues such as 'escorting' and 'education' require further consideration. However, these activities may be a shared responsibility with the full role devolving to PFMAC; the contract would need to accommodate this change. However, on-road and off-road technology equipment and systems are considered an important part of enabling the PFMAC to undertake its duties, and yet whether the PFMAC has responsibility for all equipment remained open to debate.

Delegates were confident of being able to plan, manage and price those schemes identified at tender. The general opinion was not dissimilar for those schemes initiated after tender although it was acknowledged that demonstrating Best Value without some form of competition might be difficult.

The majority of respondents confirmed that the PFMAC should ultimately be involved actively in the implementation of any improvements that would become the responsibility of the PFMAC during the life of the concession.

Some delegates felt the current £5m threshold used to distinguish the Targeted Programme of Improvement (TPI) schemes should be re-evaluated to consider a more favourable threshold of £10m. Scheme type and complexity would also need to be considered in identifying any threshold. One discussion group suggested a threshold of "3m based on EU guidance.

Performance Specification

Delegates agreed that in principle it is right to measure outcomes, however, concerns were raised whether there is sufficient historical data available to set benchmarks and measure performance in the achievement of outcomes.

It was also considered that the proposed outcomes were realistic and valid, although there was much discussion on the appropriateness of the proposed performance measures. In particular there was disagreement whether those measures identified against each outcome promoted the most suitable methods for measurement, e.g. whether safety is best measured by use of figures of Killed or Serious Injury (KSI). There were also particularly strong concerns expressed with regard to the manner in which measures were linked to the payment regime.

One further issue related to the basis of the benchmark and whether this should be external, internal or both. Clarity and robustness of the proposed measures were also identified as important to the success of the PFMAC option as was the ability to compare performance over time, whether in association with other areas or internally. However, it was submitted by some that an holistic view of overall levels of service should be taken into account rather than discrete measures. Identified risks concerning the performance specification included: lack of clarity; reliability of data; failure of measurement system; impact of adjacent schemes on PFMAC performance; changing HA priorities; difficulty in securing investment if linked to payments; potential for lack of control on safety; subjectivity of customer satisfaction.

Payment Mechanism

In principle, respondents considered the payment mechanism could incorporate both financial and points based elements, although it was considered that the variable element of payment in the unitary charge must be bankable and this may have the effect of "dampening" the payment mechanism. Concerns were also raised that a robust outcome-based performance measurement has yet to be finalised.

Further views suggested that outcomes be bonus related, possibly capped, but not subject to penalty deduction if not met, although some were concerned that LNMS outcome measures may be able to vary the PFMAC's revenues and consequently a limit should be imposed to ensure they are bankable. Payment for LNMS therefore may have to be by another method.

Best Value Risk Allocation

Establishing appropriate risk allocations to ensure best value was deemed complex although major risks identified included: inflation, latent defects and change control mechanisms. Issues affecting VfM included: consistency of work and budget certainty; changes and improvement works required; regional contracts not fully supportive of national focus.

In addressing inflationary risks and those related to the condition of the network, periodic reviews were considered as an appropriate method, and could further alleviate difficulties with re-negotiation when planned for at the outset.

Moreover, the PFMAC could suggestively manage latent defect risk at the outset although it was likely that a cost associated with transferring this risk would arise; an alternative view suggested the HA retain the risk at commencement with latent defect risk being transferred to the PFMAC over time.

It was also noted that regular/constant change could present a significant risk to best value. However, given a reasonable notice of proposed changes it was agreed the private sector can often adopt the change economically and as such a policy of 'no surprises' and advance warnings should be operated.

The following were also put forward as positive for risk and best value: build on precedent; limit on exposure (time & value); periodic reviews; cap on profits; business model review; reset risk and return balance; gain / pain share to ensure VFM (open book); scope of contract and reviews are clearly defined at start.

Further suggestions to accommodate the HA's requirement for flexibility included: a pain/gain approach rather than fixed traditional PFI; periodic reviews; comparison with plans (also check annually); "open book" approach and or target cost contracting; robust examination at tender stage; contract re-negotiation process; realistic forward/year-on-year programme (level of service). Some suggested that flexibility was dependent on the level of risk transferred, although the concept of Network Best Value was thought to be workable.

Summary

To be sure of fully maximising potential PFMAC benefits, the HA has decided to extend the timetable to full operational implementation. This will allow appropriate links to other significant developments including the Traffic Manager role, connection to robust performance criteria and risk allocation through positive partnership working. While PFMAC development work continues, a new enhanced MAC will be considered. This will capture and take forward many of the major achievable benefits already evident from the PFMAC including whole life costing attributes, performance specifications and partnership based risk-sharing.