Archived decisions

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

1. Summary

1.1 This report addresses a request from the Department for Transport (DfT) for a full and unambiguous commitment to the affordability ramifications of the proposed Street Lighting Private Finance Initiative (PFI) before it will give funding approval.

1.2 Securing Government funding for the street lighting project will address a backlog of maintenance and provide new investment that will improve lighting standards and make a significant contribution to reducing road accidents, crime and fear of crime.

2. Recommendations

2.1 That the Cabinet approves the procurement budget of £1.1 million.

2.2 That the Cabinet approves the full commitment of existing budgets of £5.57 million per annum at 2007/08 prices for the duration of the contract term.

2.3 That the Cabinet approves the funding of the base case maintenance affordability gap of up to £600,000 per annum at 2007/08 prices for the duration of the project term and also notes a possible increased energy consumption of up to 15 million kilowatt hours amounting to approximately £1.2 million per annum at current prices, which would need to be contained within the overall operational budgets of the Environment Department. The base case assumes that the project will be off-Balance Sheet under Financial Reporting Standard 5.

2.4 That the Cabinet notes the intention of the Department of Communities and Local Government to introduce Regulations to ensure that in the event that Private Finance Initiative schemes become on-Balance Sheet transactions that it has no effect on the charge to the revenue account.

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 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 submit an Outline Business Case (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 which 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 On 26 March 2007 the Cabinet approved the submission of a joint OBC with the other two Councils. The report to the Cabinet provided details of future financial commitments and financial risks associated with the project.

3.4 The OBC was duly submitted on 30 March 2007 and has been at the DfT for evaluation since then.

3.5 The DfT acknowledges that the evaluation process has taken longer than originally intended due to the Comprehensive Spending Review. However, the project is now being progressed through its internal Investment Committee, Ministerial approval and HM Treasury Project Review Group (PRG) consent.

3.6 The DfT has already raised a number of questions about the OBC during its evaluation process but wrote on 9 November 2007 requesting, as a condition of project approval, that the Council should record a `full unambiguous commitment' to the project. It provided some drafting suggested by the Public Private Partnership Programme, the local government procurement specialists.

3.7 Indications are that, subject to approval of the suggested recommendation or that the process of achieving approval is in train, the project will receive PRG approval on 18 December 2007 and can immediately proceed to procurement.

4. Explanation of Recommendations

4.1 Funding has been identified within the Environment Service cash limits to meet the estimated procurement costs of the project from inception in 2006/07 through to contract commencement in 2009/10. An overall amount of £1.1 million is provided to meet the costs of external legal, financial and technical advisers as well as the salary, overheads and costs of the Project Director and direct project support. The nature and complexity of PFI contracts requires experienced external advice in partnership with internal resource.

4.2 The financial support for PFI projects provided by the DfT is broadly intended to meet borrowing costs incurred by the Service Provider in financing the investment programme. It is estimated that the County Council element of the total capital to be invested by the Service Provider is approximately £118 million. The estimate of the cost of proposed new streetlights is sensitive to price inflation in this sector at around 5%-6% per annum at present. Delay, however caused, would therefore potentially increase costs by approximately £0.5 million per month, although there is some tolerance within the estimate and the project scope to absorb additional costs.

4.3 The element of the charge relating to maintenance and running costs is still the responsibility of the authority and the DfT expects to see an acknowledgement of future financial commitment. As there will be a greater number of columns and a full cyclical maintenance programme, these costs may be higher than the existing budget provision. The DfT therefore seeks an assurance that the Council will maintain existing budget levels and meet any annual affordability gap.

4.4 The affordability gap for maintenance is estimated at £600,000 per annum from 2009/10 onwards, assuming that the existing budgets of £5.57 million are maintained at 2007/08 levels and based on the current areas under street lighting (new development adds around 1% per annum to the street lighting stock).

4.5 Maintenance payments are equalised out over the term of the contract but will be adjusted each year for any increase in the Retail Price Index and additional stock added to the inventory due to new development.

4.6 In addition, the standard form of PFI contract requires the Council to retain energy price risk but for the Service Provider to take usage or volume risk. In this situation the Council is likely to continue to procure energy, although despite the new equipment being more energy efficient, the overall consumption is likely to increase.

4.7 At present energy consumption is forecast to increase from approximately 45 million kilowatts per annum to approximately 60 million kilowatts per annum. At prices prevailing in March 2007 this was expected to represent an additional cost of £150,000 per annum per year as lights are added to the network up to an additional £750,000 per annum when the works are completed. This calculation assumed a price of five pence per kilowatt hour but based on recent price trends is now too low. An additional one pence per unit would add £600,000 per annum to the total energy bill after the investment programme is complete. However the risk of energy price increases will remain irrespective of the PFI project, so only a quarter of this is attributable to the increased street lighting levels. Current energy prices are between seven pence and eight pence, so that the additional cost of 15 million kilowatt hours would be between £1.05 million and £1.2 million per annum to be contained within the Environment budget.

4.8 The objective of the contract will be to provide incentives to the service provider to save energy and introduce more energy efficient apparatus, but also provides an opportunity for the Council to review service requirements and mitigate energy consumption by introducing more innovative or appropriate lighting standards in some areas. In the past street lighting maintenance and energy increases have been funded from the column replacement programme. However under PFI this option is no longer available and an alternative source of funding will be required either from within other Environment Department operational budgets or by adjusting the service specification as described above.

4.9 Recent changes in the application of International Financial Reporting Standards potentially mean that PFI transactions that were previously regarded as `off Balance Sheet', meaning that private sector borrowing did not count as public sector debt, may become `on Balance Sheet' from 2009/10 onwards. This would imply that borrowing by the service provider to finance the investment programme would score as if it were local authority debt for the purposes of calculating Minimum Revenue Provision (MRP - an amount an authority must set aside to repay debt) and for prudential indicators (a measure of an authority's credit limit). These amounts will be off-set by the Government grant provided to service debt under the PFI credit methodology but there is a timing mis-match throughout the contract between the amount of MRP required and the amount of grant received.

4.10 To address this anomaly the Department of Communities and Local Government has issued draft Regulations for consultation that would match MRP to the amount of borrowing repaid to the service provider each year, effectively removing this mis-match. On the assumption that these draft Regulations will be implemented the Council will not incur any additional financial cost but will need to continue to monitor, quantify and report on any emerging implications of the proposed changes.

5. Impact Assessments

5.1 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 replace and improve the existing lighting stock. There will be some disruption and traffic management will be required while work is in progress. Lighting will be more effective in being directed onto the roads and footways but overall energy consumption will increase. National evidence shows that good street lighting reduces crime, fear of crime and road accidents.

6. Conclusion

6.1 The DfT is on the verge of approving a major investment decision to support the replacement of a large proportion of the County Council street lighting stock but has requested an assurance that the Council's financial obligations and commitment are fully understood, including the ramifications of recent proposals arising from International Financial Reporting Standards. Confirmation of previous Cabinet decisions, updated for the latest information should help to expedite the DfT approval.

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