The UK's third road PPP project to close in 2009 fought its way through months of financial and procurement challenges as it progressed along the bumpy road from tender launch to financial close.

The Carlisle Northern Development Route (CNDR) contract was first brought to market in early 2004 and then retendered in the summer of 2007 after coming up against a range of obstacles from floods to archaeological finds and environmental concerns.

Then, despite the lead MLA pulling out of the deal [Projects Database]  as the credit crunch tightened, new lenders were brought in - resulting in three commercial banks providing a £90 million (US$146.5m) debt package.

In a tight market and after several setbacks, the banks did not have to rely on European Investment Bank (EIB) or HM Treasury's Infrastructure Finance Unit (TIFU) to get the deal away.

Background

The A595 is the main road in north west Cumbria that plugs in to the arterial to Scotland (the A74) and the main road to north-east England (A69).

One of the key motivators for this  project was congestion reduction in the centre of Carlisle. It was deemed necessary to provide an alternative route for this traffic to keep it away from the centre - and brought about plans for a new five-mile single carriageway to the west of the city.

CNDR was also seen as supporting existing commercial activity, providing access to Kingmoor Park business and industrial park. It would also assist in the development of a viable intermodal freight terminal at Kingmoor by improving accessibility.

The transport proposals for Carlisle evolved from a major review of transport strategies carried out in 1996. This involved attitude surveys and multi-modal modelling to identify a range of schemes and measures that were designed to cap traffic flow levels at 2000 levels by 2005.

A further study, incorporating new guidelines, was undertaken in 1999, which re-assessed the proposed transport strategy both with and without the CNDR against a "do-nothing" and an enhanced public transport option.

The results confirmed the previously identified transport strategy, together with the CNDR, to be the optimum strategy for Carlisle.

The council first considered the PFI route in 1997 and a first draft of the outline business case (OBC) was submitted to Government Office North West in September 1999.

The council submitted a final OBC to the Department for Transport, Local Government and the Regions (DTLR) in February 2002 and conditional support for PFI funding was awarded to the council in September 2002.

Procurement Process

The council launched the project in February 2004 with a notice on the Official Journal of the European Union (OJEU). The council announced a shortlist of four bidders, selected from six qualifying bids in May 2004 after a pre-qualification process and invitation to submit outline proposals.

The four selected bidders were:

• Connect CNDR - Balfour Beatty
• Morgan Sindall Investments
• Sir Robert McAlpine
• Vinci Investments

At the end of October 2004, a new planning application for the scheme was submitted to seek approval for minor changes, amendments to the existing permission and to extend the period for which the permission was valid.

Before any decision on the application could be made, the major Carlisle flood event in January 2005 led to a requirement for a Flood Risk Assessment (FRA) to be prepared at the request of the Environment Agency. In addition, the discovery of remains of Hadrian's Wall led to changes being made.

Both these issues led to considerable delays and the council received a fresh planning submission in April 2006.

In March 2005, following the ITN process, bids for the project were submitted by all four bidders and a detailed evaluation of the bids then got underway.

Throughout 2005 and 2006 dialogue continued with the DfT on key issues including Treasury requirements for standardisation of PFI contracts and the level of PFI funding support that would be made available.

In February 2006 the council made a detailed submission to DfT for additional PFI funding. In parallel, dialogue continued with the DfT in respect of a reappraisal of the CNDR scheme which was necessary because of the need for additional funding.

In November 2006, ministers formally approved PFI credits of up to £142.8 million for the project.  Final approval to seek bids was granted by the Treasury-led Project Review Group (PRG) in May 2007 and bids were submitted by August 2007.

New tenders were received on 31 August 2007 and Connect CNDR was named preferred bidder in November 2007.

In August 2008 a discovery of a great crested newt colony led to a further delay to the start of work and in February 2009 a Stone Age site was discovered during surveying work.

Financial close was finally achieved on 15 July 2009.

Project Details

Cumbria County Council set out to develop a five-mile north-western bypass of Carlisle to replace the existing A595 through the city and reduce congestion on the city's roads.

Building CNDR involves constructing three bridges, a new crossing over the River Eden - the original design for the new bridge and the surrounding area had to be amended following the Carlisle floods. The route will also have cycle ways along its entire length.

Balfour Beatty's wholly-owned subsidiary Connect CNDR will be responsible for the design and construction of an 8.25km two-way single carriageway road from the M6 Junction 44 to the A595 south west of Carlisle and the management, operation and ongoing investment over the 30-year concession in 150km of other existing roads in Cumbria.

Cumbria County Council worked with a wide range of organisations, including Natural England, English Heritage and the Environment Agency to get the plans right and everything possible has been done to safeguard the environment and wildlife in the area, including otters in the River Eden.

Eversheds was legal adviser to the sponsor, while financial advice and modelling was provided by the Balfour Beatty in-house team. Tods Murray acted as legal adviser to the lenders, Arup provided technical and traffic advice, JLT was insurance adviser, while Operis provided the model audit. Pinsent Masons provided legal advice to the authority, along with KPMG as its financial adviser.

Financing

The £90 million (US$146.5m) debt package on CNDR includes an £11 million (US$17.9m) equity bridge loan (EBL) that will be retired by Balfour Beatty after construction. As with the senior debt, the EBL is divided equally among the three lenders.

The debt providers are:

• Barclays - £30 million (US$48.8m)
• National Australia Bank (NAB) - £30 million (US$48.8m)
• SMBC - £30 million (US$48.8m)

Financial challenges included the original backer Dexia withdrawing from the deal when the credit crunch came into full swing, and in June IJ News reported that Helaba  exited the deal.

The senior debt pricing starts at Libor +275bp during construction, rising to 280bp in operation and then up to 300bp after the first 10 years of the 28-year tenor.

There are no cash sweeps or further incentives to refinance, as cropped up on the M25 [Case Study]. The deal has an element of traffic risk, and is not pure availability payment-based like the M25.

Despite the many challenges the project has faced over the years, HM Treasury's Infrastructure Finance Unit (TIFU) and the European Investment Bank (EIB) were not required to help get the deal away.

Construction work started immediately after closing and will last for three years.

Conclusion

Cumbria County Council was keen to progress this priority scheme to financial close. The project was seen as an essential part of the economic development of the area, with the route acting as a relief road for Carlisle and connecting the Kingmoor Park to the main road arterials. The business and retail park now plans to expand.

After a range of setbacks - flooding, redesigning, archaeological finds and environmental issues - the project was severely delayed. After more pressing concerns, such as the impact of the credit crunch and raising finance in a tight market, the deal finally got away.

As the number of greenfield road PPP projects dwindle in the UK, the focus has shifted more towards highways maintenance and streetlighting PFIs.

Deals like the M80, M25 and CNDR have been in the pipeline for years, but were priority schemes and had sufficient support to drive them towards financial close despite constrained lending conditions.