Archived decisions

Contact: Trevor Wallis, tel 023 9244 6510 email: [email protected]

1. Summary

1.1 This report explains the latest position on the proposed Street Lighting Private Finance Initiative (PFI), seeks approval to submit the Outline Business Case (OBC) and provides an overview of project milestones and process with a forecast of future financial obligations.

1.2 Addressing the backlog of maintenance and providing new investment in the street lighting stock and improving lighting standards will make a significant contribution to reducing road accidents, crime and fear of crime.

2. Recommendation

That approval be given to the submission of an Outline Business Case to the Department for Transport in respect of the proposed Street Lighting Private Finance Initiative.

3. Background

3.1 On 23 January 2006 the Cabinet authorised the Director of Environment to prepare and return an Expression of Interest to the Department for Transport (DfT) seeking PFI funding to renew and upgrade the street lighting stock.

3.2 In July 2006 the County Council was informed that the Minister would like the authority to prepare an OBC to support the proposals. The Minister also requested the authority to examine the opportunities for joint working with Southampton City Council and West Sussex County Council who had also submitted bids. The Minister was aware that joint working had demonstrated efficiency savings on two other signed street lighting contracts and in other service areas.

3.3 The original date for submission of the OBC was fixed at 31 January 2007, although the DfT has subsequently granted a dispensation to those authorities exploring joint working arrangements up to 31 May 2007.

However the joint Hampshire, Southampton and West Sussex proposal is sufficiently well-developed to submit an OBC before the end of March 2007. The OBC must demonstrate the need for investment, a well-developed technical and financial analysis, strong project management arrangements and evidence of deliverability.

3.4 Since the Minister's announcement a lot of detailed work has been commissioned by the three Councils to explore the implications of joint working, and a report on the Governance Arrangements was approved by the Cabinet in November 2006. The exercise has demonstrated savings in procurement costs but it is less clear at this stage which contract structure will provide the most cost-effective arrangement. This may not be evident until priced bids are received from the private sector.

3.5 The Hampshire element of the OBC identifies a requirement to replace, provide or upgrade approximately 90,000 lighting units, increasing the current number of items of apparatus on the network from 140,000 to approximately 160,000. This would require a capital investment of approximately £114 million between April 2009 and March 2014. The numbers include some District, Parish and Town Council lights where they have indicated a wish to participate in the project.

3.6 The capital cost of £114 million represents a significant increase over the sum of £92 million estimated to be required at Expression of Interest stage. The new figure is the result of a more extensive technical evaluation by external advisers and by benchmarking unit costs against similar projects, either currently in procurement or recently signed. The advice of all external advisers is to seek the additional PFI credits required without compromising the integrity of the project specification or prejudicing the benefit cost ratio derived from the reduction in night-time accidents or crime. There are also increases affecting Southampton and West Sussex and a number of other authorities also requesting street lighting funds in this bidding round.

3.7 The DfT will therefore be requested through the OBC to provide a Government grant in the form of PFI credits sufficient to meet the private sector borrowing costs based on this level of investment. The grant will be paid into a Sinking Fund to meet the County Council's financial obligations over the 25 year term of the proposed contract.

3.8 The contract will transfer most of the risks and rewards of asset ownership to the service provider, and the County Council will meet maintenance and lifecycle costs through an inflation indexed annual sum payable to the service provider; inevitably because there will be additional apparatus on the network maintenance and lifecycle costs will increase. This is estimated to be approximately an additional £600,000 per annum from 2009-10 onwards. However it is likely that some increases in unit costs would have arisen under a traditional procurement due to cost pressures within the industry on labour and material costs.

3.9 It is proposed that the participation of Districts, Parishes and Town Councils is conditional upon them accepting the liability for energy and maintenance costs throughout the contract term. The details will need to be agreed with each District, Parish and Town Council but, in the event that lighting is improved to adoption standard, it is proposed that the County Council will accept responsibility for the lights at the end of the contract. It is difficult to predict at this stage whether any or all of this discretionary lighting will be brought up to adoption standard. At present the Districts, Parishes and Town Councils expected to participate in the scheme own about 6,000 lighting columns, but bringing lights up to adoption standard could almost double this number.

3.10 In the standard form of PFI contract the risk allocation for energy is for the Council to retain price risk but the service provider to take usage or volume risk. In this situation the County Council is therefore likely to retain responsibility for procuring energy but, although the new equipment is more energy efficient, the overall consumption will also increase. Energy consumption is forecast to increase from approximately 45 million kilowatts per annum to approximately 60 million kilowatts per annum. At current prices this would be an incremental step up of about £150,000 per annum as lights are added to an extra total of £750,000 in the first full year (2014-15) after the investment programme is completed. These calculations assume a price of 5 pence per kilowatt but energy prices remain volatile, which is why the service provider will not accept a risk it cannot control or manage.

3.11 The objective of the contract will be to incentivise the service provider to save energy and introduce more energy efficient apparatus. Bidders will be asked to offer innovative technical solutions and to consider the potential implications for either dimming lights or switching lights off in certain non-sensitive areas at off-peak times.

3.12 It should be noted that at the time the Expression of Interest was submitted it was predicted that the revenue consequences of the scheme would be broadly cost-neutral. However, as set out above, after reappraising the technical proposals in a lot more detail and benchmarking the unit costs for maintenance and lifecycle intervention, it is no longer possible to be so optimistic.

3.13 Although the revenue consequences are significant, the proposal averts the need for any capital investment in the existing street lighting stock for 25 years and transfers the liability for repairs, maintenance, insurance claims, etc to the service provider. However, new street lighting schemes are not included within the contract and would have to be accrued to it separately. Similarly, if any lighting is removed it would be taken from the contract.

3.14 Street lighting PFIs are now regarded as a mature market with in excess of 20 contractors of sufficient experience and capacity to provide a robust procurement. The joint project for the three Councils is expected to generate a keen and competitive response. However, there cannot be absolute certainty that this will be the case as bidders become more selective. Soft market testing has demonstrated a high level of private sector interest but a number of projects will all be entering procurement in a similar timescale and potential bidders will make commercial decisions about the resources they will be prepared to dedicate to different schemes. The Project Team is seeking to mitigate this risk by preparing a well-developed presentation to the market when given the go ahead to enter procurement.

3.15 After submission of the OBC the next important date is project approval by HM Treasury's Project Review Group which is scheduled for July 2007. This approval would allow the project to proceed to procurement under EU competitive dialogue rules. This bidding process would allow the County Council to make a final decision on contract terms and conditions in late 2008 for service commencement in April 2009.

3.16 In terms of the overall project risk matrix, the highest rated risk remains whether the scheme will receive approval from the DfT or whether this process encounters any delay. This risk is being managed by regular dialogue and meetings with the DfT to update the Department on progress and the issues that are arising. The DfT is aware that any delay to the project will potentially add significantly to capital costs.

3.17 On 8 February 2007 the Environment and Transportation Policy Review Committee held a Scrutiny Workshop to consider the street lighting project. The notes and recommendations of that meeting are attached.

4. Impact Assessments

4.1 Detailed impact assessments have not been carried out, but there will be a major programme of works undertaken affecting many areas of the county in order to provide improved lighting standards. There will be some disruption and traffic management will be required while works are carried out. Lighting will be more effective in being directed onto the roads and footways but overall energy consumption will increase. There is evidence to suggest good street lighting reduces road accidents, crime and fear of crime.

5. Conclusion

5.1 The Department for Transport Private Finance Initiative provides a potential source of funding to be invested in the provision of street lighting with financing costs effectively met by Government grant provided through PFI credits. Capital costs have increased from £92 million to £114 million but there is still a strong case supporting the investment in terms of providing a safer and more secure environment. The scheme can make a major contribution to the Corporate Strategy.

5.2 Additional apparatus on the network and a general rise in maintenance costs will result in increased revenue costs of approximately £600,000 per annum from 2009-10 onwards and a step up year by year of energy costs to an extra £750,000 per annum in 2014-15 when the investment programme is complete. The County Council will retain the risk on energy price changes.

5.3 Access to Department for Transport funding requires the submission of an Outline Business Case demonstrating the need and deliverability of the project.

1290Rpt/TW