Archived decisions

HAMPSHIRE COUNTY COUNCIL

Decision Report :

EXECUTIVE SUMMARY

1) Summary of Decision Area:

1.1. The Council is procuring the replacement of a substantial part of its street lighting stock through a joint Private Finance Initiative (PFI) with West Sussex County Council and Southampton City Council. A PFI covers the investment, maintenance and operation of street lighting over 25 years. This decision determines the key components of the final specification to be included in the call for final tenders.

1.2. Subject to the procurement cost being within the terms previously agreed by Cabinet in March 2007, delegated authority is sought to finalise the terms and conclude the procurement.

1.3. A key element of the decision is the replacement of lighting in residential areas on a `1 for 1' basis, except on key traffic routes and where crime is a problem. This more targeted approach to increasing lighting levels will maximise value for money and reduce the carbon footprint.

2) Issues Covered in Report:

2.1. The implications of the procurement process.

2.2. Affordability.

2.3. Carbon impacts.

2.4. The risks and benefits of alternative technologies to dim lights.

3) Recommendations:

MAIN REPORT

1) Purpose of the Report:

1.1. To report progress on the street lighting Private Finance Initiative (PFI) and to advise Members of changes to the service specification in response to the Carbon Reduction Commitment and carbon trading requirements. The report also seeks to put in place arrangements to conclude the procurement and appoint a Preferred Bidder.

2) Background:

2.1. 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.

2.2. 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.

2.3. 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.

2.4. After a lengthy evaluation period the DfT awarded £225 million of PFI credits (a type of Government grant) on 11 February 2008 for a joint procurement between the three Councils.

2.5. The PFI scheme represents a 25 year contract. Investment will be targeted to the first five years of the contract with an obligation to maintain all apparatus for the remaining 20 years of the contract. The Service Provider will also have an obligation to hand back apparatus with a defined residual life.

2.6. After DfT approval the Councils immediately entered into a joint procurement process under EU competitive dialogue rules and selected three pre-qualified bidders to submit priced bids, although one of the bidders subsequently withdrew.

2.7. The procurement has continued with two bidders and priced bids were received on 28 August 2008. Under the EU competitive dialogue process these submissions are effectively preliminary bids to inform and progress a detailed analysis and discussion about the proposals leading to a Call for Final Tender (CFT) when all substantive issues have been resolved.

2.8. EU procurement rules require that bids can only be `fined tuned' after CFT and that therefore any significant issues of specification, definition or affordability must be resolved before final bids are requested.

2.9. Both bidders have submitted proposals that are potentially both deliverable and affordable. The details of these proposals are commercially sensitive but there are a number of issues that will require Member consideration before CFT.

3) The Economic Case for Investment:

3.1. The OBC followed DfT guidelines and was prepared on an economic case justified on the basis that increased lighting levels across the network would reduce night-time road accidents, crime and fear of crime. This demonstrated an economic return on the investment of 6.54 times the value of the capital works programme. This ratio between economic benefit and costs is the key factor in allocating DfT resources.

3.2. Since the OBC was submitted in March 2007 the Government has initiated plans for a Carbon Reduction Commitment Scheme and proposals for carbon trading as reported to Cabinet in March 2008. These proposals have led to a rethink in terms of future street lighting provision and a range of trials, surveys, consultation and research has been undertaken to balance the economic case for enhanced lighting with the carbon reduction obligations.

3.3. It is not anticipated that the changes to the service specification set out below will prejudice the overall economic case. The DfT has been kept fully informed.

4) Affordability:

4.1. In December 2007 the Cabinet approved various parameters for the procurement to proceed. This included a commitment to maintain the existing budget of £5.57 million per annum at 2007/08 prices for the 25 year duration of the contract term.

4.2. The Cabinet also approved 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 noted a possible increase in 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.

4.3. The financial details of the bids must remain confidential at this stage but both bidders have been provided with the Council's affordability parameters and the amount of Government grant available. Both bids are expected to be within these financial limits subject to the County Council's final specification and their final offer at CFT.

5) Energy Consumption:

5.1. The Original Business Case predicted a significant increase in lighting columns to achieve higher lighting levels and consequently, despite improved lantern efficiency, this could have represented an increase in energy consumption of approximately 30%.

5.2. However since the OBC was submitted there have been a number of initiatives on carbon reduction and carbon trading that has necessitated a review of the proposals to mitigate the increase in energy consumption.

5.3. This exercise has been informed by research and surveys that have enabled the service requirements to be targeted to the areas where improved lighting can achieve the greatest benefits without significantly increasing overall energy consumption. Public support for lighting to be dimmed after midnight is generally high although some prefer more extended hours at weekends and younger respondents prefer higher lighting levels after midnight.

5.4. At present, energy consumption for County Council owned lights is just above 47,000 mWh and costs the Council just under £4 million per annum. Preliminary analysis of the bids indicates that the 30% predicted increase in energy consumption in the outline business case has been largely mitigated by the more targeted approach to increasing lighting levels and the use of energy efficient lamps. Dimming lights after midnight, in residential areas with below average crime levels, contributes to the reduction in energy use. Based on 36w PLL lamps with 25% dimming, the overall impact on energy consumption is around 1.5%. This rises to 2.5% if the dimming level is set at a higher 40% level. An even higher energy saving option would be to specify 24w lamps. These would reduce energy by 7% and if these were dimmed by 25% at midnight a further 1% saving could be anticipated. However this is a lighting level that may be below the threshold of public acceptability, at least at this time. The Council would have to meet the full expense of reverting to a higher lighting standard if this level of reduction proved unacceptable. The carbon savings are more certain than financial savings longer term, since electricity suppliers may vary their tariff if dimming becomes widespread, because the reduction occurs when power station baseline supply exceeds demand.

6) Service Specification:

6.1. To achieve the reduction in predicted energy consumption the bidders were instructed to design their proposals to only increase lighting levels in accordance with the outline business plan in those areas susceptible to crime above the UK average, on major traffic routes and in town centres. In addition bidders were encouraged to offer technical lighting solutions that provide whiter light to give better face and colour recognition and improve the feeling of safety.

6.2. It is proposed to continue the introduction of reflective traffic signs and to convert bollards to LED or solar powered energy sources.

6.3. Bidders were also asked to provide apparatus that has the ability to dim or adjust lighting levels and lighting times. This is regarded as an opportunity to provide future flexibility to lighting regimes. It is unlikely that the requirement for lighting levels will remain unchanged for the 25 years of the contract. Unfortunately there has been little demand for this technology until recently and product development is not as well advanced as the Council would wish. Nevertheless future flexibility is regarded as an important service requirement.

6.4. A further service enhancement would be the ability to monitor and adjust lights remotely from a control room rather than by visual inspection or a site visit to adjust settings. This would allow dimming variations over time in response to public views and also allow a response to incidents, such as an emergency situation or festive activities. This option is also being explored but once again the technology is not yet fully proven. Both bidders have submitted proposals but have sought to pass the risk of failure back to the Council. Through the competitive dialogue process, a risk sharing approach is being sought, together with an option to revert to the more basic dimming technology if early phases installed prove unsatisfactory despite remediation attempts. This unusual arrangement will need to be tested with the Department for Transport.

7) The Procurement Process and Timetable:

7.1. The procurement is being conducted under EU competitive dialogue rules. The rules are prescriptive but the key characteristic at this stage of the procurement is that all substantive points of principle must be resolved with both bidders before CFT. This is intended to avoid changes in scope or price after the preferred bidder is selected and while genuine competition still exists.

7.2. The EU rules protect the client but also represent an overhead in negotiating contract terms with two bidders who may have a different approach to contract delivery, price and risk allocation.

7.3. Detailed technical proposals and a price were received on 28 August 2008. Bids are currently being evaluated and an intensive period of competitive dialogue with both bidders is ongoing. The intention is to resolve all substantive issues by the end of November 2008 and to close the competitive dialogue process for bidders to submit their final bid in December 2008. Bids will then be re-evaluated with the intention of announcing the Preferred Bidder in March 2009. The contract would be signed in June 2009 and Service Commencement is programmed for Autumn 2009.

7.4. The key aspects of the street lighting specification can be settled at this stage, but the final details to be included in the call for final tenders will only be resolved at the very end of the competitive dialogue process. These will vary for each bidder, based on their variant bids submitted at the end of August as modified by the competitive dialogue process. Commercial confidentiality is a critical dimension of this procurement process, which is considerably more complex than conventional procurement, even of major contracts, due to the nature of PFI contracts and the joint procurement across three Councils. It is therefore proposed that the Director of Environment, in consultation with the Executive Members for Policy and Resources and Environment, be given delegated powers to agree any outstanding issues and accept a final bid within the parameters of affordability previously agreed and the service specification set out in this report.

7.5. The DfT will confirm its funding approval in parallel with this process. The main approval criteria are achievement of the economic case, that the funding requirement does not exceed the amount of grant awarded, that the scheme is affordable to the Council, provides value for money and is deliverable and close to the standard form of PFI contract and risk transfer. There are also a substantial number of other criteria which have to be satisfied.

7.6. This represents a challenging programme and it is impossible to rule out the chance of slippage. However the timetable is being actively managed and the delegation arrangements provide some flexibility if this becomes necessary.

8) Joint Procurement:

8.1. The entire procurement process has been a collaboration between Hampshire County Council, Southampton City Council and West Sussex County Council. Governance protocols have been put in place to facilitate these arrangements.

8.2. Cost savings have been achieved through the joint commissioning of external legal, financial, technical and insurance advisers and there have also been savings for the private sector bidders. The overall value of the economies of scale is still being assessed based on the bids received.

8.3. At the end of the procurement it is envisaged that each Council will have its own discrete contract but with the same Service provider.

9) Evaluation Criteria:

9.1. The selection of the preferred bidder must be based upon robust and transparent criteria with the quality of the submission weighted against the cost of the bid.

9.2. The detailed evaluation framework has to be published before the Call for Final Tenders. The Joint Member Task Force has taken the view that the balance between price and quality scoring should remain at 30:70 and the detailed evaluation framework developed for the ISDS stage will be reviewed in the light of the submissions and once the competitive dialogue process is near to completion.

10) Council Retained Risk:

10.1. Under PFI schemes the risk of scheme design, installation, maintenance and cost overruns is retained by the Service Provider. However, some price risks remain with the Council because it is a risk that the Service Provider cannot manage or price for over 25 years.

10.2. In particular the Council will be responsible for cost inflation in line with the retail price index in respect of that element of the cost that relates to operational costs. Typically this element is about 50% of the overall price.

10.3. The Council will also be responsible for energy price risk. The Service Provider will accept consumption risk based on the apparatus installed but cannot predict energy cost volatility. At present it is also anticipated that the Council will remain responsible for procuring energy.

10.4. At contract signature the Service Provider will secure a loan to finance its investment programme at a fixed interest rate. Potential funders will bid their financial terms to inform the CFT price. The rates offered are normally held firm for a fixed period, but in times of market volatility there is a risk that rates may increase before CFT or that the offer will expire before contract signature and need to be re-bid. In either case the Council may be exposed to risk of an interest rate increase (or decrease).

10.5. Additions to the asset (such as for new developments), variations from the contractors' standard components or variations to the lighting standard will all fall to the Council (or third parties). Standard rates will be specified to cover instances which can be anticipated and evaluated, but some events or changes will need to be negotiated with the contractor.

10.6. Where a contractor is not the local electricity network operator (DNO), contractors cannot guarantee speed of repair standards which require an electrical repair because this is outside their control. Although a national protocol for DNOs has recently been established, there is no sanction if the operator does not comply. The risk is that during the investment period, both the new and old columns may remain in place for a period awaiting connection. During the maintenance only part of the contract, a light remains out until repaired. Performance for such repairs in Hampshire is better than some other areas of the country, including in West Sussex. Unless a waiving of performance standards is allowed in these circumstances, anticipated penalty charges are likely to be built into the contract price. However, this pricing risk must be weighed against the perception of poor performance going unpenalised and the possibility that pressure for change on regulators and the industry will result.

11) Client Management:

11.1. PFI contracts are complex. A high volume of investment will take place in the first five years of the contract period. After that there is a 20 year maintenance regime. Throughout the contract period there are well defined Performance Standards to be achieved with a predominantly financial remedy for any performance failure in the form of a reduced payment to the Service Provider. Other remedies exist for more serious failures to achieve contract compliance.

11.2. Monitoring and supervision of the PFI contract therefore requires an effective Client Management team. The size of client is likely to be similar, but this will potentially comprise a different balance of skills from the existing street lighting team. Proposals for the new team are currently being finalised, with the intention of shadow arrangements being in place from around February 2009. Staffing during the Core Investment Period will need to be at a higher level, to oversee the approval of designs and managing the customer interface. The scale of activity during the core investment period will also have knock on implications for the Area Offices which coordinate all street works.

11.3. Some of the existing functions and duties of staff may become the responsibility of the new Service Provider. In these circumstances a number of staff may be affected by the Transfer of Undertakings (Protection of Employment) Regulations where the principal purpose of their work transfers to the new provider.

12) Consideration of Options:

12.1. This report represents the culmination of a long procurement process of almost four years from the approval of the original Expression of Interest through to Service Commencement.

12.2. Realistically the PFI has been the only way of accessing Government funding to replace a deteriorating street lighting stock. No other funding option is cost effective in comparison to PFI.

13) Conclusions:

13.1. The street lighting PFI procurement is progressing well.

13.2. The challenge of emerging Government policy on carbon reduction and carbon trading has been addressed by changes to the service specification without affecting the overall integrity of the scheme.

13.3. The EU competitive dialogue rules provide protection to the client but require the resolution of all substantive issues while there are still two active bidders.

13.4. The bids received at the Detailed Submission stage as clarified through the competitive dialogue process give confidence that the major procurement can be completed within the financial limits previously set by the Cabinet, within the PFI credits available and without the previously anticipated increase of 30% in energy consumption.

13.5. The Cabinet will need to weigh the benefits of flexibility against the risks of adopting remote monitoring technology, which is not yet in operation on any scale. The recommendation is to pursue it but with an option to revert to more proven technology for dimming if experience of the early installation phase suggests that risk is too high.

14) Recommendations

Please see the Executive Summary for the recommendations.

1786Rpt/298/TW

CORPORATE OR LEGAL INFORMATION:

IMPACT ASSESSMENTS

(i) Equalities Impact Assessment

There are higher lighting targets in higher crime areas.

(ii) Impact on Crime and Disorder

See section 3 of the report.

(iii) Impact on Climate Change

See section 5 of the report.