A130: UK councils now back roads PFI
The A130 Essex road project was ? and still is ? the only The A130
Essex road project was ? and still is ? the only
Design-Build-Finance-Operate (DBFO) UK road project with a local
authority as concession awarder. Its close in October 1999
represents a powerful new tool for councils in gaining approval for
big-ticket building projects. What's more the £104 million ($165
million), 14km, project has gone through against a changing
backdrop of local government finance regulations and an ambivalent
government attitude to road-building schemes.
The A130 work has been the number one highway priority for Essex Council for several years ? although the rules governing local authority PFI emerged in 1996. The council issued an OJEC in November 1996, with the process of whittling down bidders to the best and final offer (BAFO) taking up most of 1997. However, the election of that year led to a moratorium on Treasury approval for projects that continued after the Labour victory in the form of a fresh set of criteria (the new approach to appraisal, or NATA).
Normally road projects are carried out under the auspices of the UK Highways Agency and benefit from explicit government support. In this case Essex had to put its business case to the Treasury and prove not only that the road was good value for money but also that traffic flows would be sufficient. The payment structure is similar to the shadow toll road programmes pursued in Spain and Portugal, albeit with important differences.
These relate by and large to the Capital Finance Regulations imposed on authorities and in force before 1 April 2000, and which test the contract structure for local PFIs. These govern the availability payments paid to the concessionaire and state that these cannot comprise more than 80% of the maximum payments before a breach of contract takes place. Payments therefore increase with traffic flows, an inverse of the normal situation where payment levels decrease within higher bands of traffic use. CountyRoute, however, can offset volume risk through the availability payments.
The eventual winner of the 30-year concession was the Laing Hyder consortium CountyRoute, which reached preferred bidder status in May 1999. CountyRoute beat off bids from Tarmac (now Carillion), Modern Highways and Road Management Group. The concession runs in two phases, the first of which is a 9km northern section near Chelmsford, on which construction has now started, with a later southern route of 6km, towards Southend coming in 2004, subject to approvals. Essex have agreed to shoulder the risk of this not being forthcoming (a decision is expected from the Transport minister this year), although CountyRoute have ensured that the economics of the project are still viable with the single section.
The majority of the scheme is funded by central government in the form of notional credit approvals, with locally raised taxes making up the balance: consolidated into a single financing reserve. The gesture of prudence on the part of Essex is important given that the government funds are not ring-fenced and some lenders have a long memory of past local government funding crises. The consortium takes on the risk of acquiring the necessary land, although this is held on behalf of the council and the purchasers have the necessary legal backing.
CountyRoute was originally advised by BZW, although after its demise West LB, the destination of the majority of the team, was taken on. Because the contract contained stringent deliverability clauses, and was subject to further approvals, a bond financing was ruled out. Dai-Ichi Kangyo, Dresdner Kleinwort Benson and Barclays Capital acted as debt providers for a two-tranche loan with a 25-year tenor. Financial close was reached on October 20 1999, and syndication finished in March. However a final complication ensured that those in the deal kept public details to a minimum.
In May 1999 road protestors entered the site. The additional costs of policing the project ensured that an explicit structure for sharing these costs were included. The costs of specialist personnel for security were apportioned on a sliding scale, with the contractors taking the first part. It has been suggested by some close to the deal that the aims of the protestors were the explicit derailment of financial close rather that strict environmental grievances.
Construction is now under way and the opening of the road is scheduled for 2002. Essex County Council has been sharing its experiences with other councils, and has seen an enthusiastic response from other authorities to the framework. Those involved in the deal stress that a detailed examination of each county council's fiscal policies is essential. Look out, however, for similar structures on the forthcoming Newport and Caerphilly projects in Wales.
The A130 work has been the number one highway priority for Essex Council for several years ? although the rules governing local authority PFI emerged in 1996. The council issued an OJEC in November 1996, with the process of whittling down bidders to the best and final offer (BAFO) taking up most of 1997. However, the election of that year led to a moratorium on Treasury approval for projects that continued after the Labour victory in the form of a fresh set of criteria (the new approach to appraisal, or NATA).
Normally road projects are carried out under the auspices of the UK Highways Agency and benefit from explicit government support. In this case Essex had to put its business case to the Treasury and prove not only that the road was good value for money but also that traffic flows would be sufficient. The payment structure is similar to the shadow toll road programmes pursued in Spain and Portugal, albeit with important differences.
These relate by and large to the Capital Finance Regulations imposed on authorities and in force before 1 April 2000, and which test the contract structure for local PFIs. These govern the availability payments paid to the concessionaire and state that these cannot comprise more than 80% of the maximum payments before a breach of contract takes place. Payments therefore increase with traffic flows, an inverse of the normal situation where payment levels decrease within higher bands of traffic use. CountyRoute, however, can offset volume risk through the availability payments.
The eventual winner of the 30-year concession was the Laing Hyder consortium CountyRoute, which reached preferred bidder status in May 1999. CountyRoute beat off bids from Tarmac (now Carillion), Modern Highways and Road Management Group. The concession runs in two phases, the first of which is a 9km northern section near Chelmsford, on which construction has now started, with a later southern route of 6km, towards Southend coming in 2004, subject to approvals. Essex have agreed to shoulder the risk of this not being forthcoming (a decision is expected from the Transport minister this year), although CountyRoute have ensured that the economics of the project are still viable with the single section.
The majority of the scheme is funded by central government in the form of notional credit approvals, with locally raised taxes making up the balance: consolidated into a single financing reserve. The gesture of prudence on the part of Essex is important given that the government funds are not ring-fenced and some lenders have a long memory of past local government funding crises. The consortium takes on the risk of acquiring the necessary land, although this is held on behalf of the council and the purchasers have the necessary legal backing.
CountyRoute was originally advised by BZW, although after its demise West LB, the destination of the majority of the team, was taken on. Because the contract contained stringent deliverability clauses, and was subject to further approvals, a bond financing was ruled out. Dai-Ichi Kangyo, Dresdner Kleinwort Benson and Barclays Capital acted as debt providers for a two-tranche loan with a 25-year tenor. Financial close was reached on October 20 1999, and syndication finished in March. However a final complication ensured that those in the deal kept public details to a minimum.
In May 1999 road protestors entered the site. The additional costs of policing the project ensured that an explicit structure for sharing these costs were included. The costs of specialist personnel for security were apportioned on a sliding scale, with the contractors taking the first part. It has been suggested by some close to the deal that the aims of the protestors were the explicit derailment of financial close rather that strict environmental grievances.
Construction is now under way and the opening of the road is scheduled for 2002. Essex County Council has been sharing its experiences with other councils, and has seen an enthusiastic response from other authorities to the framework. Those involved in the deal stress that a detailed examination of each county council's fiscal policies is essential. Look out, however, for similar structures on the forthcoming Newport and Caerphilly projects in Wales.
Request a Demo
Interested in IJGlobal? Request a demo to discuss a trial with a member of our team. Talk to the team to explore the value of our asset and transaction databases, our market-leading news, league tables and much more.