South Coast Street Lighting PFI Final Business Case

Redacted Version

(information that is commercially sensitive has been removed)

South Coast Street Lighting PFI

Final Business Case

6 November 2009 1

Contents Overview 1. Executive Summary 2. Strategic Case 2.1 Business Strategy 2.2 Drivers for Change 2.3 Description of the Project 2.4 Options 2.5 Risks 2.6 Constraints 2.7 Key Assumptions 2.8 Dependencies 3. Economic Case 3.1 Purpose 3.2 Economic Options 3.3 Economic Options Appraisal 3.4 Benefits Identification 3.5 Not used 3.6 Benefit Cost Ratio 3.7 Assumptions for BCR 3.8 Public Sector Comparator (PSC) Review 4. Commercial Case 4.1 Purpose 4.2 Output Specification 4.3 Procurement Strategy 4.4 Commercial Negotiations and Derogations Table 4.5 Payment Mechanism 4.6 Human Resource Issues 4.7 Service Support 4.8 Contract Management Approach 4.9 Best Value 5. Financial Case 5.1 Purpose 5.2 Funding Arrangements 5.3 Balance Sheet 5.4 Project Affordability 5.5 Value for Money 5.6 Economies of Scale

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6. Project Management 6.1 Introduction and Objectives 6.2 Project Dependencies 6.3 Project Governance, Organisation and Roles 6.4 Project Plan 6.5 Communication and Stakeholder Management 6.6 Project Reporting 6.7 Implementation and Contract Management Annexes

1. DfT Letter – 11 February 2008 2. 3. Council Strategies Overview 4. Risk Matrix 5. Non-Financial Evaluation 6. Appraisal Summary Tables 7. ESA 95 Assessment 8. Council Reports

8a – HCC Cabinet Report 8b – SCC Cabinet Report 8c – WSCC Cabinet Member Report

9. Contract Structure Paper 10. Project Management Arrangements 11. Project Plan 12. Communication Strategy 13. Project Risk Register 14. Call for Final Tender

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Overview On 11 February 2008 the Department for Transport (DfT) wrote to confirm that the South Coast Street Lighting PFI project (a collaboration between Hampshire County Council, Southampton City Council and West Sussex County Council) was authorised to enter procurement subject to two conditions imposed by the Project Review Group (PRG) on 18 December 2007 being met (Annex 1). The PRG conditions related to consideration of a debt funding competition and clarification of the future contract structure. The DfT letter noted that the issue of the debt funding competition had been addressed to the satisfaction of the Department and that the contract structure could be resolved during the procurement but before the Invitation to Submit Detailed Solutions (ISDS) stage. The DfT letter offered central Government revenue support based on PFI credits of £225m and emphasised that the scheme should be developed so that it is affordable within this offer. The South Coast Councils immediately entered procurement under EU competitive dialogue regulations. Six potential bidders had already pre-qualified through the 4p’s PQQ process. Four bidders responded to the Invitation to Submit Outline Solutions and by detailed evaluation one potential bidder was de-selected leaving three bidders to go forward to ISDS. However one of these bidders subsequently withdrew due to their commitment to another street lighting project where they were one of two remaining bidders. Two bidders put forward their ISDS submissions in August 2008, Amey Ventures Ltd and Tay Valley Lighting Since ISDS submission the Councils conducted detailed negotiations with both bidders to the point that all substantive issues were resolved and the Councils submitted a list of derogations with an Interim Final Business Case to DfT and PUK consideration on 3rd February 2009. These were negotiated and revised in the ensuing weeks with both bidders in consultation with PUK and final approval to close competitive dialogue and invite the Call for Final Tenders (CFT) was received on 12th June. In parallel, both bidders were issued with a draft of the CFT on 31st March which included drafts of the project documents. Both bidders were formally informed of the Closure of Dialogue on 12th June and issued with the CFT documents on the same day. A copy can be found at Annex 14. They were given until midday on 17th July to submit their responses. Both bidders submitted their CFT responses by the due date and these were distributed to the joint evaluation teams immediately. Our financial advisors informed the Project Managers that 2 affordable bids had been received and under the terms of the CFT, both bids were fully evaluated

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by Joint teams drawn from appropriate expertise areas in all 3 Councils. Some clarifications had to be sought from both bidders and the responses to those clarifications were taken into account in the evaluation. Qualitative and quantitative evaluation was conducted entirely independently. Evaluation scores were submitted to the Project Support Officer on 14th August and the Joint Project Team met on 18th August to check for consistency and validate the scores. The Joint Project Board met the same day and received a report which recommended the selection of Tay Valley lighting as the Preferred Bidder. In parallel, a Preferred Bidder letter was finalised and engrossed with both Bidders. The Joint Project Board endorsed the outcome of the evaluation and sought Member approvals the following day as previously arranged through individual Council Members Reports. The last of these approvals was received at 1730 on Wednesday 19th August and both bidders informed of the outcome that day. Copies of these reports can be found at Annex 8. The form of derogations approved by PUK and the DfT prior to close of dialogue and publication of the Councils’ Call for Final Tenders on 12 June 2009 are attached at Annex 2. The derogations attached at Annex 2 supersede the form of derogations submitted as part of the Councils’ Interim Final Business Case. As at the date of this Final Business Case the Preferred Bidder has not raised any new derogations. The Councils have also not requested any further derogations to those set out in Annex 2. TVL’s bid falls within the affordability criteria set by the Councils and within the PFI credits provisionally allocated by DfT DfT approval is sought for this Final Business Case by 20th November in order that Financial and Commercial Close can be achieved on 3rd December with Service Commencement to follow after mobilisation in March 2010.

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1. Executive Summary DfT approval for the South Coast Street Lighting PFI to enter procurement was received in a letter dated 11 February 2008. Since then the procurement has progressed under EU regulations (Competitive Dialogue) and using standard documentation contained in the Local Partnerships (formerly 4ps) Street Lighting Procurement Pack and the Standardisation of PFI Contracts version 4 (SoPC4). This Final Business Case is submitted on the basis that the project remains affordable, represents value for money and that the amount of PFI credits required will not exceed the OBC allocation provisionally awarded in the DfT approval letter. Table 1.1 – Breakdown of PFI credits between each of the Councils Council OBC

£000 Preferred

Bidder £000

Reallocation £000

Hampshire 109,540 120,967 11,427 Southampton 28,533 25,852 -2,681 West Sussex 86,952 78,206 -8,746 Total 225,025 225,025 0 Source: Preferred Bidder updated CFT models The Councils have reviewed their budgets, secured future funding commitment and have assessed where costs are sensitive to inflation, interest rates and energy price risk. The table below shows Councils’ annual contribution and the annual affordability surplus. Table 1.2 – Affordability Headroom

Despite the difficult financial climate the project has attracted bank funding based on a traditional PFI structure at terms consistent with other PFI projects of a similar risk profile. The Preferred Bidder’s funders are at an advanced stage of their due diligence and internal approvals process providing further comfort to the deliverability of the funding arrangements within the target timetable. The economic case remains strong with the final bid achieving the predicted Benefit Cost Ratio of 6.29.

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Negotiations with bidders under competitive dialogue have identified a number of instances where derogations from SoPC4 have been requested. These were approved in consultation with DfT and PUK in June 2009. The final bid has not required any further derogations which are set out in Annex 2. An assessment of project risks and likely risk transfer under the PFI joint procurement option was undertaken at OBC stage by the Councils and their advisors. The transfer of risk agreed by both parties’ mirrors those proposed in Model Documents and are detailed at Annex 4.

The technical solution has been to address two main objectives, firstly to improve lighting standards to reduce crime and accidents and secondly to reduce energy consumption and carbon emissions. This has been achieved in Hampshire and Southampton by providing lighting to European standards on traffic routes important town and city centres and in areas of higher than average crime levels. In lower than average crime areas a “one-for-one” replacement solution has been provided. This will still provide improvement to the existing replaced lighting. As an integral part of this solution remote monitoring will provide variable switching, dimming and energy monitoring. The West Sussex solution has identified five different environmental zones that reflect the different range of needs from large towns to rural villages and to apply appropriate European standards accordingly. Similarly, different dimming and switching regimes have been developed within the environmental zone concept to further reduce energy consumption and carbon emissions. Energy savings envisaged by the Preferred Bidder range from

The Councils’ intention is to conclude the joint procurement by entering into three separate but near identical Project Agreements.

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2. Strategic Case 2.1 Business Strategy

Each of the South Coast Councils have their own strategies and particular objectives to meet local circumstances but there is a clear and common theme to provide safety, security, quality of life, well being and improvement of the environment. Further details of the Councils strategies are set out in Annex 3. Effective and well maintained street lighting provision is seen by the Councils as essential in delivering these objectives, in particular the contribution that this will make to improve the quality of neighbourhoods.

2.2 Drivers for Change Public Perception. Residents and visitors to the areas covered by the South Coast Councils are entitled to expect a reduction in crime, in fear of crime and improved safety for all night time road users. Residents consider that the provision of a good street lighting service is key to the safety and well being of the community. The only way to address this is to invest in and maintain the street lighting asset. One of the key success criteria is to maintain or improve service performance at or above current levels. Local Transport Plans (LTPs). The Councils’ LTPs have a key role to play in delivering the objectives of local transport initiatives. The LTPs of all three Councils promote the provision of safe and reliable public transport networks and good design practice in transport schemes that enhance perceptions of safety such as improved street lighting and CCTV systems. They also aim to reduce congestion, improve accessibility and road safety, reduce pollution and improve the quality of life for residents. The LTPs explicitly recognise that improved street lighting will help to meet these objectives in many ways. Partnerships. The Councils have well established partnerships with their District and Parish Councils, Police Authorities, the Department for Transport and other service providers. In particular all three Councils have Local Area Agreements to address local crime and disorder issues and to reduce accidents on the highway. Efficient street lighting can also help to deliver these objectives. Asset Condition. Recognising the contribution that street lighting can make in delivering the Councils’ objectives is important but detailed analysis is then required to assess the extent to which the existing stock is fulfilling this purpose. There has been investment in street lighting over many years but the age profile and condition of the asset has failed to keep pace with modern requirements.

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The Outline Business Case (OBC) was based on the inventory data set out below. Changes to the inventory occur on a daily basis but the underlying situation remains unchanged.

Existing services The South Coast Councils are currently responsible for nearly a quarter of a million items of streetlighting apparatus as indicated in the following table: Table 2.1 – Current inventory

HCC

SCC

WSCC

TOTAL

Columns and Bracket Mounted Units

129,080

25,359

66,765

221,204

Illuminated Traffic Signs

8,456

2,197

8,478

19,131

Illuminated Bollards

2,500

920

3,339

6,759

TOTAL

140,036

28,476

78,582

247,094

The current levels of investment and maintenance expenditure for 2006/7 (as used in the OBC) are set out below: Table 2.2 – Implementation and investment (2006/07)

HCC

SCC

WSCC

Energy £2,930,000 £713,000 £1,649,000

Maintenance £3,800,000 £1,031,000 £2,196,000

Column replacement £1,785,000 £2,061,000 (see note)

£540,000

Columns replaced 1,600 1,900 500

TOTAL EXPENDITURE £8,515,000 £3,805,000 £4,385,000

Note: The level of investment by SCC in 2006/07 reflects a higher than normal capital replacement programme using prudential borrowing to mitigate stock deterioration and abate the amount of PFI credits required. Overall this level of investment and maintenance by the three Councils has proved insufficient to prevent a decline in the condition of the lighting network and resulted in a backlog of investment and lighting levels below

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British and European standards. As a result, a high proportion of the apparatus on the network is in excess of 30 years old and comparisons with national figures are shown below: Table 2.3 – Comparison with national figures

HCC

SCC

WSCC

National Average

30 years old +

42%

48%

37%

31%

This clearly indicates that individually and collectively the percentage of apparatus over 30 years old is higher than the national average of 31%. (Source: DfT 2003 survey) Each Council has separate contracts in place to provide maintenance, emergency and non- urgent response and for the replacement of columns. Details of existing contracts and the expiry dates of these contracts are set out below. Table 2.4 – Current contracts and expiry dates

HCC

SCC

(note 1)

WSCC

Contractor

SEC

Colas

Solve

Expiry date

March 2010

September

2010

July 2010

(provisional)

DLO

NA

In house

NA

Expiry Date

NA

Ongoing

NA

Energy

EON

N Power

N Power

Expiry date

March 2013

September

2012

September

2012 Others

NA

Mott

Macdonald

NA

Expiry Date

NA

September

2010

NA

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Note 1- SCC has a direct labour force of 11 staff responsible for routine maintenance and response tasks. 2.3 Description of the Project

The basic premise of the project since the original Expression of Interest has remained unchanged. The three Councils have an aging street lighting stock and need significant investment to replace columns, lanterns and other illuminated apparatus. In addition the Councils believe that the project offers the opportunity to ensure that street lighting services are as sustainable and carbon efficient as possible. A long term contract to maintain and manage the network will achieve a cost effective and sustainable service. The Councils have used the standard documentation in the Local Partnerships street lighting procurement pack but adapted it where necessary to reflect service developments. Further commentary on the detail of the Output Specification is set out in paragraph 4.2.

2.4 Options The South Coast Councils collectively undertook a detailed and comprehensive financial and non-financial analysis of the range of service delivery and procurement options available. The options examined in the Outline Business Case were as follows:

• Do Nothing – no renewal programme and only reactive maintenance of existing stock.

• Do Minimum – provide sufficient investment to seek to sustain

delivery of the current service in the medium term

• Partial Replacement – introduce investment to replace a significant proportion of the outdated and worst performing lighting infrastructure.

• Fast Track Replacement – a fast track investment to bring the

whole of the lighting infrastructure up to appropriate lighting design standards

• Full Replacement – replacement of the entire stock within a five

year period.

The analysis demonstrated that the ‘fast track replacement’ clearly provided the most attractive solution as it achieved the highest ‘Benefit Cost Ratio (BCR)’ and the highest non-financial benefits in comparison with other options. The NPV of the economic benefits from reduction in crime and road traffic accidents was calculated at £1,257m and the BCR was 6.54.

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Preferred Procurement Route. Having identified a preferred investment option, the Councils then evaluated different service delivery models to identify the optimum procurement route to achieve successful delivery. The procurement options/service delivery models considered were:

• Traditional financing – a public sector comparator

• Consortia with other public bodies

• Design Build Finance Operate PFI – single Council

• Design Build Finance Operate PFI – joint Council procurement The Councils, in conjunction with their advisors, developed models for these 4 options on the basis of market intelligence gained from up to date market soundings and recent similar private finance projects to simulate the approach likely to be adopted by private sector providers. The service delivery options were evaluated using a consistent evaluation framework against the following criteria:

• Ability to attract investment • Affordability • Time-scale to delivery • Vires • Potential for innovation • Procurement costs • Bankability

The full results of this evaluation are set out in Annex 5 but the outcome was to demonstrate that a Design Build Finance Operate PFI procurement involving the three Councils was the preferred service delivery route.

2.5 Risks

An assessment of project risks and likely risk transfer under the PFI joint procurement option was undertaken at OBC stage by the Councils and their advisors. Throughout project development and the competitive dialogue negotiations, the aim of the Councils was to transfer to the private sector those risks that the private sector is best placed to manage effectively. Risk management was therefore an important focus of competitive dialogue with all Bidders. A high level risk register showing which party will be responsible for managing each of the most significant risks has been included at Annex 4. The prevailing principle is that value for money is optimised where the Service Provider is allocated those risks which it is best placed to manage effectively, for example in terms of reducing the probability of occurrence or through mitigating the impact of those risks that do occur. The Councils have negotiated a position so that we only retain

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those risks which we are able to manage more cost effectively than the Service Provider, for example where risk is only transferable at a premium cost. Where the Councils and the Service Provider can mitigate risk most effectively by working together then that risk has been shared. A particular issue has been the decision of the Councils to retain the procurement of energy in house as they consider that this approach will achieve the most competitive unit costs. The Councils have undertaken sensitivity analysis on the effects of energy price inflation and accept the usual PFI convention that energy price risk is retained by the Councils. The Service Provider will assume consumption risk in accordance with their forecast energy consumption received as part of their successful bid. However the energy consumption forecasts will be subject to adjustment due to Council instructions to change lighting levels by dimming, part night lighting or other service requirements during the term of the contract. This acknowledges that lighting levels may change during the term of the contract. The means by which Hampshire and Southampton will control and vary light levels, energy consumption and carbon emissions will be by the Remote Monitoring and Management System to be installed as an integral part of the Capital Investment Programme. This is new technology not previously deployed on this scale but all risk of installation and operation remains with the Service Provider.

2.6 Constraints At the time that the OBC was approved by the Department for Transport in February 2008 the street lighting market was regarded as mature and well defined with healthy competition and good access to funding. There were few constraints to procurement at that time. However although many aspects of the procurement have progressed satisfactorily a number of issues have also emerged to constrain the procurement process. The Government’s Carbon Reduction Commitment initiative and concerns about global warming have led the Councils to reconsider certain aspects of their service specification. More recently the volatility of the financial markets has raised some concerns about project funding. These issues are explained more fully in other sections of this Final Business Case.

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2.7 Key Assumptions The OBC was based upon a range of technical and financial assumptions which evolved into the bidders assumptions at ISDS. Bidders were required to indicate all their key assumptions at Call for Final Tender and these assumptions were assessed by the Councils technical and financial advisors and where necessary benchmarked against prevailing market conditions. The assumptions used by the bidders are as follows:

• Swap rates at 4.25% • Margins based on bank terms provided (on market) • Indexation at 2.5% • Interest on council revenue balances at 4% • Energy prices at 9p per kWH

2.8 Dependencies

All projects have a number of dependencies that must be identified and resolved. The street lighting sector is no exception and a number of key dependencies were anticipated at an early stage in the procurement process.

2.8.1 A robust and affordable technical solution relies upon the availability and accuracy of comprehensive inventory data and the service requirements must be absolutely clear to the bidders.

2.8.2 The project must remain within the overall affordability envelope both in terms of the PFI credits awarded and the amount the Councils can afford. The Councils have agreed their affordability parameters.

2.8.3 The procurement shall be conducted under competitive dialogue rules and competition must be maintained on a fair and equitable basis.

2.8.4 The project requires good governance, good project management and adequate resources and external advice to achieve its objectives.

2.8.5 The project shall wherever possible use standard documentation. All of these issues have been addressed and the competitive dialogue process has ensured that when the Councils’ issued the Call for Final Tender there was no misunderstanding about the Councils’ service requirements or their affordability thresholds.

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3. Economic Case 3.1 Purpose

The purpose of the economic case is to demonstrate that the level of investment proposed is justified in terms of its overall benefit to the economy in financial and non-financial terms. This ratio of benefits to costs is assessed by the completion of Appraisal Summary Tables (ASTs) in accordance with guidance published in the Methodology for Multi Modal Studies.

3.2 Economic Options Each of the service delivery options set out in Para. 2.4 above were evaluated on a range of criteria set out in Para. 3.3 below. The only exception was the ‘do nothing’ option which had already been discounted as an unsustainable solution.

3.3 Economic Options Appraisal The non-financial appraisal was carried out on the basis of a subjective analysis of the contribution that each of the options would make to the service delivery objectives as follows:

• the provision of modern lighting levels • a safe and sustainable infrastructure • deliver and sustain high quality service standards • value for money and best value principles • contribution to corporate aims and objectives • the time-scale for achieving these objectives

Examples of the non-financial benefits taken into account were:

• improvement in perception of safety and security in the streets at night by reducing the fear of crime

• increased leisure and commercial activity after dark to improve the vitality of the Councils

• encouraging walking, cycling and the use of public transport as alternatives to the private car

• development of safer routes to schools • creation of quality environment for the local people, business

and tourism • fostering community regeneration.

The results of the non-financial evaluation are set out in Annex 5.

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The ASTs analyse the impact of the project into a number of categories: Environment - Noise - Local Air Quality - Landscape - Biodiversity - Heritage - Water Safety - Accidents - Crime - Personal safety Economy - Journey times and vehicle operating costs - Cost - Journey time reliability - Regeneration Accessibility - pedestrians and others - access to public transport - community severance Integration For the majority of these categories the assessment is whether the project has a positive or negative effect and whether it is a major or minor effect. However for accidents and crime a calculation is carried out to value on a statistical basis the economic benefit of improved night time safety. The AST table is shown at Annex 6. A separate analysis considered the benefits in respect of reduction in road accidents and street crime for each of the three Councils against the Net Present Value (NPV) of the costs during the five year Core Investment Programme. This analysis provides the Benefit Cost Ratio (BCR) of the project.

3.4 Benefits Identification The value of the benefits arising from the scheme are calculated on the basis of night time accidents and crime statistics for each of the Councils. An estimate is then made for each Council about the percentage reduction in accidents or crime that can be achieved by improved lighting. The cost of an accident is based on Table 4c of the Highways Economic Note No.1 (2005). Similarly different costs are also attributed to different types and categories of night time crime.

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The methodology and calculations used in the OBC are set out in paras 3.6 and 3.7 below. The models have been re-run based on project cost information provided by the bidders at ISDS stage and the results are reported in para 3.6 below. The Councils do not consider that the overall benefits to be derived from the scheme have altered significantly from the OBC. The targeting of investment towards main traffic routes, town centres and higher crime areas will still achieve the fundamental objective of reducing accidents, crime and fear of crime. Nevertheless a sensitivity has been run assuming a 5% reduction in the benefits.

3.5 Not used

3.6 Benefit Cost Ratio

3.7 Assumptions for BCR Accident Crime Savings Savings % % Hampshire County Council 15 15 Southampton City Council 20 20 West Sussex County Council 15 15 In a sensitivity check all of the above values were reduced by 5%.

3.8 Public Sector Comparator (PSC) Review The Councils have re-examined the PSC submitted with the OBC and have reached the view that little has changed from the original assumptions and that the conclusion that the DBFO PFI represents better value for money than the PSC remains intact.

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4. Commercial Case 4.1 Purpose

This section of the Final Business Case outlines the commercial principles affecting the procurement, how they have been addressed and the position on key commercial issues. The Councils have used standard documentation wherever possible whether derived from the Standardisation of PFI Contracts Version 4 (SoPC4) or the Local Partnerships Street Lighting Procurement pack.

4.2 Output Specification The Output Specification in the Local Partnerships Street Lighting Procurement pack was based upon a London Borough. Inevitably some changes have been necessary to reflect the different characteristics of two large and partly rural Counties. Since the OBC was approved there has been an increasing emphasis on the Government’s carbon reduction commitment and the approval in November 2008 of the Climate Change Act with its aim to improve carbon management and help the transition towards a low carbon economy in the UK. The Councils have responded positively to this initiative by, in the first place ensuring that only solutions that utilise the more energy efficient technology is considered and secondly by re-assessing service requirements and trying to find a balance between improved lighting and energy efficiency. This assessment has been informed by consultation studies, surveys and trials of different lighting options. The outcome of this assessment has been to target investment more specifically in those areas of the greatest need. Typically this means main traffic routes, town centres and areas with higher than average crime. In residential areas with lower crime rates there is less justification for maintaining higher lighting levels. Hampshire and Southampton have developed this theme by specifying European standards designs where there is the greatest need and providing one for one replacement where there is a lesser need. In West Sussex five environmental zones have been identified that also take into consideration volumes of pedestrian and vehicular use as well as the rural/urban nature of the environment. European standards have been applied throughout according to designated environmental zone. The studies, surveys and trials have also indicated that there is potentially an opportunity to dim or switch off lighting during off peak

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hours. West Sussex County Council have been doing this for a number of years and both Hampshire County Council and Southampton City Council wish to undertake further trials and have the capability to change their lighting levels in future years. One of the best ways to achieve this service flexibility is to introduce remote monitoring equipment with the facility to adjust lighting levels as required without a physical visit to the apparatus. Southampton City Council specified remote monitoring in their OBC and Hampshire County Council also determined that this would be a desirable and affordable option and it has been incorporated in the final bid. West Sussex County Council has developed its existing arrangements for part night lighting into a range of part night, all night and all night dimmed solutions to fulfil their carbon reduction commitment. The Preferred Bidder percentage predictions for energy savings by year six of the contract are

4.3 Procurement Strategy The procurement has been conducted strictly in compliance with European Union procurement regulations. This has involved a competitive dialogue process to the point where the Councils have selected a Preferred Bidder and are able to quickly progress to financial and commercial close without the need for anything other than clarifying and confirming commitments.

4.4 Commercial Negotiations and Derogations Table During competitive dialogue commercial negotiations with the Preferred Bidder gave rise to a number of derogation issues. The derogations (which have been approved by PUK and/or the DfT) are set out in Annex 2. For ease of reference please note that:

• Annex 2a contains the generic derogations table setting out the amendments proposed by the Councils to SoPC4 positions in the Model Contract; and

• Annex 2b contains the Tay Valley Lighting consortium

derogations table setting out the amendments that the Preferred Bidder requested to the SoPC4 positions set out in the form of Contract prepared by the Councils during competitive dialogue.

Following the closure of competitive dialogue and the submission of the Call for Final Tender, the Preferred Bidder has not (as at the date of this FBC) requested additional derogations. In accordance with the requirements of the Public Contracts Regulations 2006, the Councils

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have completed clarifying and confirming commitments in respect of the Tay Valley Lighting consortium’s proposals. The Councils do not expect the Preferred Bidder to raise further SoPC4 related derogations prior to Financial Close. The Councils confirm that they have not and do not intend to request any further SoPC4 related derogations prior to Financial Close.

4.5 Payment Mechanism

The negotiated Payment Mechanism follows the Local Partnerships Street Lighting Procurement Pack example. Adjustment values have been calibrated where appropriate to reflect either the size of the contract or the relative importance of certain issues but there are no significant departures from the standard form. The Councils have agreed a robust payment mechanism with the bidder through dialogue, with a level of deductions for availability and performance failures acceptable to the contractor, banks and sub contractors. The deductions regime is, however, realistic in relation to anticipated performance levels and does not introduce any “hair triggers” which would make it impossible for a contractor to improve performance prior to their contract being terminated. One area has required new drafting in respect of the remote monitoring and management system for Hampshire County Council and Southampton City Council. This drafting has followed principles applying in other parts of the Payment Mechanism but acknowledges that remote monitoring has not previously been implemented on such a large scale. The proposals are designed to achieve an equitable distribution of risk, whilst incentivising the contractor to deliver the service to the required standards.

4.6 Human Resource Issues A number of existing Council staff and, in the case of Southampton City Council from an existing contractor (Colas), will potentially transfer to the new Service Provider under TUPE Regulations. For Hampshire County Council this will be no more than 1 or 2 Council staff; for Southampton City Council there may be up to 11 Council staff affected and up to 3 existing contractor staff affected; but for West Sussex it is not anticipated that any staff will transfer. The TUPE Regulations set out the process and requirements for how the transfer of the contracts of employment of the eligible staff to the new Service Provider will be dealt with , but certain rights to membership of an occupational pension scheme do not transfer under the TUPE Regulations. Therefore, in accordance with the HM Treasury Guidance - A Fair Deal for Staff Pensions, the Councils are ensuring

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that the contractor will seek admission body status to the Local Government Pension Scheme to allow the eligible Council staff that transfer to remain members of the Local Government Pension Scheme but where such status is not obtained or ceases to be held by the contractor, they will be obliged to provide pension arrangements which have been certified as being broadly comparable to the Local Government Pension Scheme by the Government Actuary's Department.

4.7 Service Support

The future success of the service is likely to be influenced by the way that the new Service Provider engages and interacts with the public and other stakeholders. The Councils have been explicit in their requirements in terms of public consultation, works notifications and customer care. Performance targets and the Payment Mechanism reflect the importance of this aspect of the service.

4.8 Contract Management Approach

Each of the Councils have examined their approach to contract management after Service Commencement. The Councils commissioned an independent report to examine future client structures and the experience of other Councils with operational PFI schemes. The overall conclusion of this report was to endorse the Local Partnerships guidance of four distinct roles: - contract manager - service performance manager - communications and customer service - administrative support The report also stressed the need to ensure that there are sufficient resources to undertake the monitoring role and that enough technical expertise is retained for this to be an effective check especially during the five year investment period at the start of the scheme. A further recommendation was to acknowledge the significant development pressure on each of the Councils and to ensure that an expert design capability is retained to work with the Service Provider.

The Councils have endorsed the recommendations of this report and set up contract management structures accordingly. The Councils have completed recruitment processes to ensure staff are in post before contract signature, during mobilisation and to be effective at Service Commencement.

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4.9 Best Value The South Coast Councils have adopted the drafting in Schedule 11 of the Local Partnerships Street Lighting Procurement Pack which places an obligation on the Service Provider to draw up a Comprehensive Area Assessment Plan (CAA Plan) if in the reasonable opinion of the Council the results of the Comprehensive Performance Assessment discloses that the provision, performance or delivery of the service may be more efficient, effective or economic.

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5. Financial Case 5.1 Purpose

This section looks at the affordability of the project and the Councils commitment to fund their obligations. - Budget Profile All three Councils have identified their budget requirement based on the priced bids received at Call for Final Tender (CFT). The analysis recognises financial obligations throughout the 25 year term of the contract and in particular where the costs are sensitive to risk in terms of inflation, interest rates or energy costs. - Budget Arrangements Council’s budget on an annual basis but a 25 year long term PFI contract requires a commitment to funding throughout that period. The Councils have taken reports to their Members confirming this funding commitment. (see Annex 8)

5.2 Funding Arrangements The Preferred Bidder’s funding proposal is based on a 90:10 debt:equity structure typical of a PFI structure. Funding is to be provided by a ‘club’ of LloydsTSB and Nationwide. The global banking crisis has made access to funds to finance PFI schemes more difficult since mid 2008 and a number of potential funders have withdrawn from the PFI debt funding market. However the proposed ‘club’ arrangements appear to reflect current market trends and the limited appetite for risk of individual lenders. Meetings with the banks prior to the CFT indicated that the three separate contracts approach is favoured in terms of securing funds and that the street lighting market still represents a good credit risk. This is the basis upon which the funding arrangements are proceeding. Whilst banks may have limited liquidity the firm indications are that there would be no benefit in delaying the procurement until a future date when the financial sector stabilises and that this project can reach financial close on competitive terms without the funding markets representing an insurmountable obstacle. The Councils, with assistance from its Advisors, continue to monitor the PFI loan market and have reserved the right to run a Preferred

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Bidder Debt Funding Competition if this appears likely to yield more favourable terms than offered by the Preferred Bidder’s funders. Funding terms committed by the Preferred Bidder’s funders received in June 2009 remain in line with terms on projects of similar risk. Consequently the Councils do not envisage that a Preferred Bidder Debt Funding Competition would be required at this stage. The Council understands from the Preferred Bidder that funders are at an advanced stage of their due diligence and internal approvals process providing further comfort to the deliverability of the funding arrangements within the target timetable.

5.3 Balance Sheet At OBC stage the Councils obtained an external accounting opinion based on Technical Note No 1 (Revised) ‘How to account for PFI transactions’ which indicated the project would be off each of the Councils’ balance sheets. The requirements have since changed and the Councils have assessed the three projects in their own accounts under International Financial Reporting Standards (‘IFRS’) with the conclusion they will now become on balance sheet. In addition the project has been assessed against the European System of Accounts 1995 guidance (‘ESA95’) and has concluded the Department should not record an asset for National Accounts purposes, and there is no requirement to score PFI credits to the Department’s capital budget. A full copy of the ESA95 assessment is attached at Annex 7.

The District Auditor for each Council has been kept informed.

5.4 Project Affordability Bidders were provided with an ‘affordability envelope’ at both ISDS and CFT and responded with proposals within that envelope. During competitive dialogue a great deal of clarification has ensued to verify that the solutions will achieve the Output Specification and remain affordable. The Councils’ main criteria for affordability have been to:

• remain within the DfT’s PFI credit limit, to ensure that the annual unitary charge to each Council is within budget; and

• mitigate energy consumption and energy cost. The Preferred Bidder CFT model updated for certain changes to the inventory remains inside of this affordability envelope and PFI credit limit.

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The Councils have also undertaken sensitivity testing on the retained financial risks after contract signature for example on changes in RPIx, interest earned on cash balances derived from Government revenue grant payments and fluctuations in energy costs. Table 1.2 above shows the Councils’ annual contribution and the annual affordability surplus. The table is repeated here for convenience

Table 5.1 – Affordability Headroom

5.5 Value for Money

At the OBC stage of the project the Councils assessed the value for money of the scheme through the application of HM Treasury guidance and in accordance with this undertook both a qualitative and quantitative value for money assessment. The Councils completed the ‘HM Treasury Quantitative Evaluation Spreadsheet’. The Councils do not consider there to have been any material change in assumptions for the Public Sector Comparator and therefore consider the results of the assessment to be valid.

The Street Lighting PFI market is established and well understood by bidders and funders. The Competitive Dialogue process has been followed to select the Preferred Bidder. The project has received substantial market interest throughout the process from credible bidders in the sector, and was able to take through two strong competing bids from ISDS to CFT.

Table 1.1 above (repeated below for convenience) compares the PFI credits awarded at the OBC stage to the equivalent value from the Preferred Bidder, calculated for each Council in line with the capital expenditure within the 3 financial models. Whilst the total is in line with the OBC allocation to the South Coast project, the distribution between authorities has changed. This has arisen because the capital costs in the final tenders were distributed between the Councils differently to the assumptions in the OBC, and the DfT is now asked to make the final PFI credit awards in line with this revised allocation.

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Table 5.2 – Breakdown of PFI credits between each of the Councils Council OBC

£000 Preferred Bidder

£000 Reallocation

£000 Hampshire 109,540 120,967 11,427 Southampton 28,533 25,852 -2,681 West Sussex 86,952 78,206 -8,746 Total 225,025 225,025 0 Source: Preferred Bidder updated CFT models

This reallocation of PFI credits has been presented to and agreed by the Executive Directors from each Council. The Councils are therefore confident that the final bid offers value for money.

5.6 Economies of Scale

The overall quantum of the South Coast street lighting project has made the contract attractive to the two major private sector bidders who were invited to submit final tenders. At the ISDS stage of the procurement the Councils asked the bidders to provide an estimate of the economies of scale likely to be achieved should a single contract be awarded rather than three separate contracts. None of the bidders could demonstrate that significant savings could be realised and that remains the situation. The Councils have achieved significant savings during the procurement phase by commissioning single technical, legal and financial advisors Compared to the average advisor fees provided by Local Partnerships, the South Coast project is forecast to save some £2,656m in procurement costs (see Table 5.3 below for details). However, there is also an overhead associated with the complexity of a joint procurement. Nevertheless this process has also provided an opportunity for knowledge sharing and skills transfer to achieve better outcomes than might have been achieved by individual Councils.

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Table 5.3 Advisors Fees

Local Partnerships

(Quoted average per

project) £000

Total cost if 3 separate projects

£000

South Coast estimate for 3 Councils

£000

Forecast procurement

efficiency £000

Legal advisors

750 2,250 900 1,350

Financial advisors

500 1,500 625 875

Technical advisors

200 600 169 431

Advisor Total Fees

1,450 4,350 1,694 2,656

Similarly bidders will have reduced costs in comparison to three separate procurements but for them also there is also an overhead associated with managing the expectations of three Councils. Modest economies of scale will ultimately be achieved on Service Provider management costs and overheads but operationally the wide geographical area and overall size of the project means that savings on personnel and equipment may be more difficult to realise.

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6. Project Management 6.1 Introduction and Objectives

The clear outcome of the option appraisal that demonstrated that a DBFO PFI procurement between Hampshire County Council, Southampton City Council and West Sussex County Council was the most effective service delivery and procurement route represented a challenge in terms of project management and governance. Each Council has similar aims and objectives but needed sufficient representation and sovereignty to ensure that local needs were identified and addressed. Structures and arrangements were put in place, as described below, to provide a workable framework for a joint procurement and these have proved to be robust and have worked successfully throughout the procurement.

6.2 Project Dependencies A key project issue and a condition of Project Review Group consent on 18 December 2007 was resolution of the contract structure issue. At the start of the procurement the issue of whether one joint contract or three separate contracts was the best option was left open dependent upon the response from the private sector bidders. However this consultation did not demonstrate a clear preference for either option and a detailed paper was commissioned from the Councils’ external legal advisers, Bevan Brittan. The report (Annex 9) analysed the advantages and disadvantages of the contract options and recommended that the Councils should run a single procurement and negotiation process with an objective to achieve three separate but near identical Project Agreements with the same Service Provider. This recommendation was endorsed by the Members Joint Task Force on 20 March 2008 and subsequently by each Council individually. Bidders responded positively to this outcome. In particular they provided bids that ‘stand alone’ for each Council without any cross dependency if in the worst case one (or more) contract was to fail. There was no indication from either bidder that this diminished the value of the economies of scale but instead reflected their confidence that each contract will succeed and may be easier to manage and administer on an individual Council basis.

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6.3 Project Governance, Organisation and Roles

The Councils have recognised that effective governance and strong project management is essential for project delivery. Through consultation between the three Councils a governance structure was drawn up as illustrated in Annex 10 and underpinned by a Joint Working Agreement setting out the roles and responsibilities of each tier within the governance structure. In particular the Joint Task Force of Members has been established to provide the political oversight and direction for the project although it is to the individual Cabinet Members (one from each Council) that the approval of key decisions has been directed. The Executive Director for Customers and Communities at West Sussex County Council, Kieran Stigant, has been appointed as the Joint Project Executive and has taken a personal role in overseeing successful project delivery. There is close liaison with his counterparts at Hampshire County Council and Southampton City Council. The overall project has a full time Project Director, appointed by Hampshire County Council, with considerable PFI experience in the transport, education and personal social services sectors. This role has subsequently been taken on by the Deputy Project Director who has been involved in the procurement since its inception. The current Project Director is supported by two Project Managers for Southampton City Council and Hampshire County Council and internal resource in the specialist areas of technical, legal, financial, procurement, human resources, IT, environment and project support. In addition the Councils have appointed Atkins as external technical advisers, Bevan Brittan as legal advisers and Deloitte to provide financial advice. Other advisers on issues such as contract management, pensions and environmental impact have been commissioned as required. Information and experience has also been gained from Local Partnerships and other Councils with either operational street lighting projects or in procurement. Throughout the procurement, the Councils have conducted business with bidders on a fair and equitable basis. All information, save where specifically agreed as being commercially confidential, has been shared will all bidders in the competition. All relevant documentation, including inventory data and the audit trail is managed through a central electronic database. This arrangement has worked well and has been supported by the exchange of clarification notes which are fully auditable. Meetings have been minuted and equal opportunities for discussions have been afforded to all bidders.

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6.4 Project Plan Annex 11 sets out a high level summary of the overall project plan. This is supported by a detailed Gantt chart identifying separate tasks for each member or sub group of the Project Team, target dates and project milestones.

6.5 Communication and Stakeholder Management A copy of the Communication Strategy is provided at Annex 12. The principle of the Communication Strategy is to identify all potential stakeholders and make timely and appropriate contact in the context of the overall project plan.

6.6 Project Reporting As set out above in para 6.3 a robust project structure has been put in place with appropriate decision making authority and levels of delegation to ensure timely project delivery. The Project Team and Project Board meet regularly. Meetings of the Members’ Joint Task Force are scheduled as required around key dates in the project timetable but are also sufficiently flexible to be convened at short notice if the need arises. Key political decisions by Cabinet or Executive Members are planned in advance recognising the lead time required for consultation and publication of reports. In particular the Councils noted that under competitive dialogue all significant political decisions on scope, structure and affordability must be made before dialogue was closed and while two bidders were still in competition. The outcome of the evaluation was, following endorsement by the Joint Project Board presented to Members of each Council for their final approval (Relevant reports are provided at Annex 8).

6.7 Implementation and Contract Management Implementation of the Project. Following Financial and Commercial Close, a period of 100 calendar days has been allowed in the project timetable for mobilisation. During this period the new Service Provider will recruit and train staff, provide a depot, design schemes and refine the works programme. The Preferred Bidder has provided detailed mobilisation plans, acknowledging that time is short and that back office issues such as IT interfaces can take as long to sort out as on site operational issues. Contract Management. The future contract management arrangements are set out in paragraph 4.8. Close liaison between the Service Provider and the client is seen as a fundamental requirement

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of a successful 25 year partnership as envisaged in the Project Agreement. Risk Management Strategy. The focus of the risk management strategy will change after Financial Close as procurement risk falls away and is replaced by the risks associated with mobilisation and in terms of service delivery. These risks have been identified and appropriate risk mitigation measures are in place. A copy of the current project risk register is attached at Annex 13. Benefits Realisation Plan. A Benefits Realisation Plan will be produced in conjunction with the Preferred Bidder. The BRP will form part of the wider Benefits Management Strategy of each Council which, using benefits profiles will track the reduction in crime and road traffic accidents delivered as a result of this project. The Councils have baseline data which will allow them to track these benefits. Project Review and Evaluation. A Project Review and Evaluation is planned to be undertaken at or near Service Commencement.