Contact: Tony Stephens, ext 6938

1. Summary

1.1 The following decisions are sought:

(i) That the position be noted with respect to the backlog in the replacement of street lighting columns within the County.

(i) That an 'expression of interest' for a PFI bid should not be pursued at this stage.

2. Reason

2.1 The level of PFI credit required to satisfy the County Council's requirements is judged too great for the £300 million available for distribution.

2.2 The calculated Benefit Cost Ratio (BCR) is relatively low at 1.3:0. It is also believed that taking into account financial 'risk awareness' the BCR could fall even lower to 1.02:1.

2.3 The cost of making a bid would not be insignificant and this is unlikely to be successful.

3. Other Options Considered and Rejected

3.1 To request an immediate increase of £3.7 million per annum from the County Council's revenue budget.

3.2 To continue as at present.

4. Conflicts of Interest Declared by the Decision Maker or a Member or Officer consulted - None.

5. Dispensation granted by the Standards Committee - Not applicable.

6. Reason(s) for the Matter being dealt with if Urgent - Not applicable.

Approved by: ..................................... Date: ....................................

Councillor T K Thornber

Contact: Tony Stephens, ext 6938

1. Summary

1.1 This report discusses the options and makes a recommendation on whether to respond to the Department for Transport (DfT) invitation to authorities to submit a competitive bid for credits to pursue a PFI street lighting project.

2. Background

2.1 The County Council's investment in its street lighting column replacement programme during the last six years has averaged £1 million per year. This is now deemed to be insufficient to cater for the 2,500 columns that had been required to be replaced every year to achieve a 50 year cycle of replacement some 10 years ago.

2.2 Ministers announced in October 2002 that £300 million of PFI credits would be available in 2003/04 for English local authorities to bid against. For 2003/04 and 2004/05 there will be no indicative allocation for street lighting through the LTP process. This does not preclude authorities using resources they control for street lighting replacement. There is at present no long term commitment to use of PFI credits in future years but there is an acknowledgement by Government of a backlog of £1 billion for street lighting replacement which does suggest probable future PFI credits.

2.3 Expressions of interest are required in a specified format by 31 July 2003 and an initial decision by the Department to go forward with an Outline Business Case (OBC) is expected in December 2003.

2.4 The 4Ps (the local government project procurement agency) consider the funding announced could be used to fund 12 urban schemes (average of £25 million PFI credit) or six County Council schemes (average of £50 million PFI credits) or more likely a combination.

2.5 The PFI credit calculation is based on the investment needed to bring the existing stock up to required levels over a five year period depending on previous management of the assets. 4P's advice suggests for a County Council this would equate to a maximum of 50% replacement in the five year period.

2.6 The current street lighting maintenance contract, which includes a revenue based street lighting column replacement element, is with Southern Electric Contracting. The contract which started in April 2002 was for an initial five year term with possible single year extensions up to a maximum of three years depending upon performance; that is a total of eight years.

3. Approach

3.1 The approach is to follow the criteria as set out by the DfT against a number of options defined by the Street Lighting Section, and to carry out an initial appraisal to ascertain whether the County Council at this stage should show an expression of interest.

4. Current Stock, Funding and Replacement

4.1 With regards to current stock:

(i) the County Council owns and maintains approximately 115,000 columns and 14,000 illuminated signs and bollards;

(ii) the vast majority of columns have a 25 year design life; and

(iii) some 50,000 columns, manufactured from steel and concrete, are over 30 years old, and are believed to be situated in poorly lit areas and therefore fail to meet minimum lighting levels.

4.2 Current street lighting funding is as follows:

(i) Maintenance (excluding Illuminated Signs) - £2.3 million

(ii) Replacement (including Design and Supervision) - £1.3 million

(iii) Energy (excluding Illuminated Signs) - £1.3 million.

4.3 On the basis of the current expenditure allocation the cycle would be 117 years, with the 50,000 highlighted in paragraph 4.1 on a 50 year cycle by which time they would have exceeded their life expectancy and this is not seen as sustainable even in the medium term.

5. Options

5.1 Four options have been subjected to appraisal:

(i) continue with the present funding;

(ii) replace the 50,000 columns over 30 years old by a traditional procurement;

(iii) a PFI option covering all service provision with a contract period of 25 years and full replacement over the first five years of the contract; and

(iv) a PFI option covering all service provision with a contract period of 25 years and 50,000 columns replaced over the first five years of the contract met from PFI credits.

5.2 Each option will be appraised by a benefit to cost ratio (BCR). The ratio compares the benefits of the scheme that can be expressed in financial terms with the cost of the scheme. The benefits that can be expressed in financial terms are reductions in crime and accident levels. For example a BCR of 2:1 would indicate that the scheme generates financial benefits twice as great as its costs. The costs and their benefits compared in the BCR are expressed as Net Present Values (NPVs). NPVs take into account the time value of money. All cash flows during the period of the scheme are expressed at the value they would hold today. Future cash flows are `discounted' at the Treasury discount rate of 3.5%.

In addition both PFI options will calculate an estimated required PFI credit.

No analysis of sources of funding for additional expenditure has been undertaken at this stage, although two of the four options will require funding by the County Council.

5.3 The 'benefits' mentioned in 5.2 above are derived from the potential savings that might reasonably be expected through the saving to the community at large from reductions in night time injury accidents (5% to 15%) and crime (up to 20%) in urban areas. It can also provide a demonstrative improvement to the streetscene and increase community pride and social interaction.

5.4 It is also worth mentioning at this point that there is a fifth option concerning the possible financing of the replacement programme through a suitable private contractor. For example, Scottish and Southern Energy have available the funding, but the main difficulties of such a project are existing procurement procedures and the County Council's ability to borrow the necessary funds to service the contract. This would be a long term contract with the County Council remaining in control. However, this option is not available at present.

6. Appraisal

Option 1: Continue As Present

6.1 The option to continue as present would have an NPV cost (over 25 years for comparison with PFI options) of £64 million with a benefit cost ratio of 0.93:1.

Option 2: Traditional Procurement

6.2 The second option is to substantially increase funding for planned replacement during the next 10 years to replace the initial 50,000 columns (£5 million per annum) due to age and standard of lighting. After that period replacement would reduce to 2,500 columns (£2.5 million per annum) per year for the remaining 15 years.

6.3 To take this option would require significant additional funding over the 25 year period and sources of funding would need to be identified. This is the traditional procurement route. The management and maintenance of the stock would remain with the County Council .

6.4 The NPV cost of this option over the 25 year period is £131 million with a benefit cost ratio of 1.30:1.

Option 3: PFI with Full Replacement in Five Years

6.5 The first PFI option shows the impact of a 100% replacement by way of a PFI credit over five years. The NPV cost would be £152 million with a benefit cost ratio of 1.30:1. In addition the PFI credit requirement would be in the region of £106 million, which would be 35% of the overall available funding. 4P's advice is that the level of support for asset replacement would be more likely to be in the range of 40%-50% replacement.

6.6 It is unlikely that the DfT would release such a large proportion of its fund to one project, particularly with the resulting benefit cost ratio.

Option 4: PFI Replacement of 50,000 columns in Five Years

6.7 The second PFI option would look to use PFI credits over a five year period to replace the 50,000 columns mentioned in Option 2. The remainder of the planned replacement would be during the remaining 20 years of the contract but would not be part of the DfT PFI funding package and the cost would be met by the authority. This would require £2.5 million investment from the authority from Year 6 onwards.

6.8 The NPV cost would be £138 million with a benefit cost ratio of 1.44:1 and a PFI credit in the region of £41 million. This option would require the authority to fund planned replacement from Year 6 onwards, and would require additional sources of funding to be found.

Evaluation

6.9 Bearing in mind that this is a competitive process it is necessary to consider the chances of success in comparison with other likely bids. The following issues need to be considered in relation to the BCR:

(i) officially the ratio for a PFI scheme needs to be more than 1:1;

(ii) 4P guidance suggests that some BCRs for Street Lighting projects may be in the region of 4:1;

(iii) one County Council scheme has been rejected on the basis of a low ratio score (1.15:1); and

(iv) 6 to 12 schemes likely to be funded from the available PFI credits.

6.10 In addition, the estimates being modelled are cost estimates and experience has shown these may not equate to bids received later in the process, which include provision for current market conditions, the market capacity, views by the private sector on risk and the funders view on the project. Some recent PFI projects have shown that financiers are 'RISK AVERSE' and as such will increase prices to take into account their view on the risks of the project. Sensitivity to testing shows a 50% increase on costs (not unreasonable in the current climate) would bring the ratio down to 1.02:1.

7. Other Factors to Consider Relating to PFI

7.1 There are also a number of issues relating to PFI which need to be highlighted, these can be classified broadly as advantages and disadvantages.

7.2 Advantages:

(i) the only current means of Central Government funding for street lighting replacement;

(ii) a means of replacing a sizeable proportion of the lighting stock in a short period;

(iii) private sector investment;

(iv) operational benefits of a performance related payment structure;

(v) incentivises the private sector to provide a whole life service; and

(vi) one contractual arrangement for the whole service.

7.3 Disadvantages:

(i) uncertainty of the market and funders in relation to PFI;

(ii) the capacity of the private sector to meet the demand as a result of the suggested Government investment;

(iii) the uncertainty of the bidding process both in terms of the initial bidding process and the OBC process;

(iv) the up front procurement costs with no guarantee of success (estimated at £40k for the OBC and £400k up to financial close);

(v) affordability of subsequent bids (a current issue);

(vi) loss of flexibility for the authority relating to:

(a) assessing future priorities

(b) budget decisions

(c) contract management;

(vii) possible staffing issues (TUPE);

(viii) the cost of early termination of existing contracts and loss of goodwill;

(ix) possible uncertainty relating to the management of risk (which could impact on bids or a reduced output specification to meet the requirements of funders); and

(x) replacement strategy at the end of the PFI.

7.4 There is also a question over the present trend to frontload PFI credits into the first five years. This seems to suit the private sector in terms of removing risk but may not suit the requirements of the local authority which may need a more even asset replacement programme which is more in line with the Staffordshire approach (ie a longer term replacement spread evenly over the life of the PFI project - 25 years). However at this stage a `Staffordshire style' bid is not being encouraged.

8. Conclusions

8.1 The following can be concluded relating to making a bid for PFI credits:

(i) future use of PFI credits for street lighting replacement in future years is uncertain. However given the Government's acceptance of a shortfall of £1 billion there is likely to be funding available for street lighting replacement in some form;

(ii) a maximum of between 6 to 12 schemes could be initially funded hence bidding will be a competitive process;

(iii) a full PFI replacement over 5 years (Option 3) would lead to a PFI credit requirement of approximately £106 million which is 35% of the overall national allocation. It is unlikely the DfT would want to use such a large proportion on one scheme. 4P's advice is a maximum PFI credit calculation for a County Council is likely to equate to 50% replacement in a five year period. This bid would be unsuccessful in terms of the amount of PFI credit required and the quantity of columns to be replaced;

(iv) a PFI replacement of 50,000 columns in the first 5 years (Option 4) would:

(a) require a PFI credit of approximately £41 million

(b) show a benefit cost ratio of 1.44:1, although a 50% increase in the bids (which is not unreasonable in the current climate) would bring the ratio down to 1.02:1

(c) require the County Council to fund replacement from Year 6 onwards (£2.5 million per annum);

(v) the ratio would be low in a competitive process, particularly in relation to urban areas and actual bids received, and may be less than the department is looking for in its assessment; and

(vi) given the Council's resulting BCR it would be unlikely that the bid would rate as high against competing bids from other authorities given a likely range of 6/12 successful bids.

8.2 There are a number of advantages and disadvantages relating to making a PFI bid which can be summarised as:

Advantages

(i) the only current means of Central Government funding;

(ii) a means of replacing a large proportion of stock in the short term; and

(iii) private sector investment.

Disadvantages

(i) uncertainty of the bidding process (with cost implications), the market, funders, the management of risk, affordability of bids;

(ii) capacity of the private sector;

(iii) loss of flexibility for the authority; and

(iv) a PFI approach may be more appealing if the asset replacement was evenly spread over a longer period.

8.3 In overall terms there is a funding shortfall for street lighting column replacement which needs to be addressed. One method would be to ring- fence funding from the LTP or Revenue to deal with this problem, whilst another might be to enter into a partnership with a private sector company which would fund the replacement of the infrastructure. However, both these options would require funding from within the County Council which is not currently available for this service.

8.4 If the Government feels that PFI is the way forward and if the criteria are relaxed the Council could consider a bid in future years.

8.5 The County Council could also continue as at present but in the certain knowledge that there is a major funding problem looming. Evidence given to the Parliamentary Select Committee by the All Party Lighting Group (APLG), County Surveyors' Society (CSS) and the Institution of Lighting Engineers (LIE) indicated that the failure to maintain street lights can have serious consequences, such as the serious injury to a woman in Westminster when a column collapsed.

8.6 The present backlog for columns over 30 years old is estimated at £50 million and whilst the present £1.3 million programme will, in part, address the problem, a more sustained programme of replacement is required over the next two to 12 years.

8.7 Generally, lighting authorities do not believe that the PFI approach to funding column replacement is the most suitable or cost effective method of dealing with this maintenance backlog.

Recommendations

1. That the position be noted with respect to the backlog in the replacement of street lighting columns within the county.

2. That an `expression of interest' for a PFI bid should not be pursued at this stage.

8115/ALS