Welcome to Public Information Session

IW Highways PFI
16 June 2011
Edward Giles Stuart Love Jay Jayasundara

Purpose
To explain
What is Highways PFI How it is funded What are the benefits

Timescales

Answer your questions

What is PFI?
Private Finance Initiative (PFI) Private funding for delivering public services A means by which
Private sector makes capital investment in a public asset front up Private sector provides service over life time of contract Public sector makes service payments over the project

lifetime
Performance rewarded through Service payments -linked

to quality & minimising disruption

What is included in the PFI?

What is included in the PFI?

Publicly maintained Highway Network Refurbishment capital works over 7 years Roads, bridges, footways, retaining walls, lighting, street furniture, traffic signs, CCTV, drainage schemes, 17 major capital schemes, car parks, new highway depot, cycle ways

Life cycle maintenance capital works over 18 years Maintaining upgraded assets to standard
Routine maintenance over 25 years Street cleansing, grass cutting, hedge trimming, ornamental planters, cleaning bus shelters, signs, street lighting Operating highway network over 25 years Winter maintenance; energy payment; attending road traffic accidents; emergencies (flooding..); operations of CCTV; traffic lights; car park ticketing machines; removal of animal carcasses

How is PFI Funded?

Government Grant For Capital works - 260m NPV (Cash over 25yrs 487m) Biggest ever Grant not a loan Council Contribution For Maintenance & Operations Maximum 8.3m in first year Not new money Simply transfer of current spend on Routine Maintenance & Operating Highway Network

260m Govt Grant + IWC Contribution = Project Cost Final Cost of IWC Contribution, expected to be around 1m to 1.5m less finalised in November 2012 Hence, 8.3m is upper end of IWC contribution Total Investment just under 0.8bn over 25 years.

Where is 8.3m currently spent?

IWCs Statutory Responsibility - maintenance & operation

Employs over 70 staff in area within PFI scope salary, accommodation, overheads
Contracts for street cleansing, winter maintenance, street lighting energy, lighting maintenance, CCTV 24 hr operation, traffic lights, grass cutting, planters, hedge trimming Cleaning of signs, bus shelters, street furniture, attending road traffic accidents, animal carcasses, highway trees, trees adjacent to highways..

Emergencies, flooding, supporting special events, festive decorations

Road space allocation for Statutory Undertakers, NRSWA, collection of fines, administering licences skips, scaffolds, hoarding, oversailing Temporary traffic orders, highway support to planning application, unauthorised attachments, A boards Condition surveys of the highway network, safety inspections, bridge inspections

Customer inquiries, FoI requests, government statistics responses, insurance claims

Local Employment opportunities

Civil Engineers & designers Technicians site setting out, quality control, supervision, inspection, geologists.. Environmentalists pollution control, flora & fauna, drainage, archaeologists, tree & grass maintenance, water, carbon Lighting/electrical engineers & technicians Admin IT experts, Accountants, Quality controllers,

Ground workers, kerb layers, machine operators, masons, painters, drainage workers
Concrete/black top technicians

Immediate Supply chain aggregate industry, transport industry

Wider supply chain hotels, farm products, local shops,

Climate projections for 2020

Summer rainfall: -10%

Winter rainfall: +10%

Summer temperature:+1-2C

These projections show us the future we need to avoid, and the future we need to plan for Hilary Benn Source: UK Climate Impacts Programme

Carbon & Water

Carbon Footprint & Water Footprint Tool to measure usage Modeling Embedded & Consumed

Isle of Wight predicted to be an area of significant water scarcity by 2025

30% of water already sourced from mainland

Bidders bid total carbon & Water likely to be consumed in construction & operations Bid evaluated as part of selection process Winning bidders Carbon & Water locked into contract Required to report carbon & Water consumption annually If consumption exceed bid penalty applies Key drivers significant incentive to locally source material, reduce transport, max recycling, reduce energy consumption

First ever bid model in a PFI Contract

Practical delivery of Eco Island theme

Street lighting & Energy

Major contributor to Carbon footprint - incentive to change to an efficient lighting system Proposed LED lighting replacement in the early CIP years Central Management system providing ability to reduce lighting levels, vary on/off times, turn off lights, detect faults remotely, integrate with other remote control system Housed in single control room with CCTV - ability to increase lighting when an incident happens Incentives to reduce energy consumption & lighting cost by 50% or more

Lots of innovation in this area

Flexibility post contract

Refinancing Best Value Reviews Future changes to technology, innovation, efficiencies gain share 75:25 in Authoritys favour 3rd Party income 75:25 in Authoritys favour

Fully priced works schedule

Requirement for market testing

External competition

Will I see any difference?

Upgrading the Islands roads

What are the time scales?

Initial Design
6 months

Detail Design
10 months

Refinement
5 months

Final Tender
6 months

Preferred Bidder Mobilisation

5 months November 2012 April 2013 5 months

December 2011

October 2010

May/June 2012

July 2011

What the Critics say?

Critics Rigid contracts
Actions to address Build in provision to change contract; ascertain cost of making change up front

Excessive profits Introduce sharing of refinancing gains in the future; Fixed cost (except inflation) market from refinancing test future costs; build in best value reviews Private sector Contractors operational efficiencies greater cannot borrow than additional cost of borrowing cheaper Cost of borrowing Contractor Fixes borrowing rate for the 25 years unknown for
contractor Loss of member Write in reporting/ approval controls in control contract; make reporting transparent

What the Supporters say?

Supporting Efficient Why?

Payments linked to performance; tasks combined removing conflicts; no overlapping contracts; efficient planning; modern technology

Price certainty Fixed price contract provides cost certainty; only variable is inflation - common to any procurement Effective No Service No Payment; Delivery delivery measured by performance targets; failure leads to loss of income big incentive Better public Payments link to service leads to improvements in the service public receives service

Excessive profits secondary markets

Radio 4 programme 14 June Treasury Select Committee & Public Accounts Committee hearings Back ground funding structure of contractor Mix of Debt & Equity = typically 15 to 20% equity around 20m Debt terms based on best borrowing deals at contract Equity what the shareholders invest accept both risks & rewards Internal Rate of Return determines profit they expect 10% to 15% If contract performs well share price goes up If share price goes up shareholder may want to sell their shares Question should they be entitled to sell shares & make profit?

Share price increase when performance exceeds expectations

Gains typically through aggregation mainly FM, hospital types of contracts

Refinancing to manage share of gains in Debt financing

IWC Contract will deal with Equity side gain without destroying incentives for improving performance

How is IWC dealing with PFI?

30 months of detailed contract planning, negotiations before award of contract

Comprehensive asset base and condition strong basis for contractors to bid on significant work done to build this data
Allocation of 7.6m of funding to plan, prepare & manage procurement buying expertise where appropriate Dedicated team - building in-house capability & capacity for the future

What are the benefits?

One stop shop refurbishment, maintenance & operations

Refurbishment of the existing public highway network to current standards roads, structure, cycleway, lighting, control room, street scene retaining the heritage Life cycle maintenance of refurbished network for 18 years Hand back network in specified condition with residual life (typically 8 10 years minimum) at end of 25 years Operate & maintain highway network to higher standard Carry out routine maintenance to maintain safety of the network A new depot & Central Control Room housing CCTV, Traffic signal, Yar Bridge controls purchase land, build & handback Creation of apprenticeships & training schemes for next generation Island wide employment opportunity between 100 to 500 jobs Economic regeneration - 0.8bn worth of investment economic benefit could be many times over

Significant up-skilling of Island Contractors & opportunity to deliver services

Key features

Summary

260m non-repayable only way to get huge investment

Council contribution same as what we spend now with potential for savings Council no borrowing no repayment of any form Fixed price contract Service payments linked to inflation Significant opportunity to create construction industry on the Island Massive regeneration opportunity for next generation

If no Highways PFI Piecemeal patching & mending Opportunity for greater efficiency missed Opportunity for potential savings missed Further public sector spend reduction-road closures inevitable

Our Contacts

Email:
Highways-pfi@iow.gov.uk Website: http://www.iwight.com/highways-pfi

Any Questions?

The Highways PFI is the single largest engineering project the Island has ever committed to

www.iwight.com