HAMPSHIRE COUNTY COUNCIL

Decision Report

1. Executive Summary

1.1. The purpose of this report is to define the approvals required by the lawyers acting for the banks providing the private finance for the South Coast Street Lighting Project. Although delegated authority had been given to finalise the contract within the approved limits, that delegation is now over a year old and not sufficiently precise to meet the requirements of the finance providers for the final legal agreements.

2. Contextual information

2.1. The County 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. The PFI covers the investment, maintenance and operation of street lighting over 25 years.

2.2. In November 2008 Cabinet agreed that the Director of Environment, in consultation with the Executive Member for Policy and Resources and the Executive Member for Environment, be authorised to agree the final specification to be included in the final tender and to conclude the procurement, provided it remains within the financial limits previously approved by Cabinet in 2007, and is contained within the operational budgets of the Environment Department.

2.3. On 18 August 2009, following assessment of the final tenders in accordance with the agreed criteria of 70% quality and 30% price, the PFI Joint Project Board recommended that Tay Valley Lighting (TVL) be appointed Preferred Bidder.

2.4. On 19 August 2009 the Director of Environment, in consultation with the Executive Member for Policy and Resources and Executive Member for Environment, approved TVL as Preferred Bidder. This enabled the procurement to move to the final fine tuning of contract documentation and the financial model.

2.5. To finalise the procurement process and to ensure the relevant external legal requirements are met, this report confirms the final financial commitments and details the necessary legal documents and processes to conclude the procurement.

3. Procurement

3.1. All substantive terms of the contract have been agreed, the terms of which are included within (but not limited to):

(i) the Project Agreement;

(ii) the Sub-Contractor Direct Agreement;

(iii) the Senior Lenders Direct Agreement;

(iv) an Agreement to appoint an Independent Certifier to assess the quality of the Contractor's work;

(v) appropriate Collateral Warranties from other second tier sub-contractors; and

(vi) the Custody Agreement

together with other documentation necessary for the completion of the project.

3.2. The financial model has been amended with an updated inventory of equipment and the Final Business Case has been submitted to the Department for Transport (DfT) for approval.

3.3. The Council's Constitution requires that any contract entered into on the Council's behalf in the performance of an Executive function, must be signed by the Head of Legal Services, or any other person authorised by the Head of Legal Services; or such contracts must be made under the Common Seal of the Council and witnessed by the Head of Legal Services (or any other person specifically authorised to sign on his or her behalf). Any contract over a value of £75,000 which is not under seal must be signed by the Head of Legal Services (or any other person authorised by the Head of Legal Services) and one other person also authorised to do so by the Head of Legal Services.

3.4. The Council's constitution further requires that a decision made by the Council, the Executive, a committee or any part of the Council, will be sufficient authority for sealing any document necessary to give effect to the decision. The Common Seal is required to be affixed to those documents which, in the opinion of the Head of Legal Services, should be sealed. The affixing of the Common Seal is required to be witnessed by the Head of Legal Services, or some other person authorised by him or her. Certified copies of the Scheme of Authorisation and List of Authorised Signatories is appended hereto.

4. Finance

4.1. In December 2007 Cabinet approved:

(i) the full commitment of existing budgets of £5.57 million per annum at 2007/08 prices for the duration of the contract term, which now stands at £5.665 million in 2009/10 prices, but excludes the energy budget; and

(ii) a base case maintenance affordability gap of up to £600,000 per annum at 2007/08 prices for the duration of the contract and notes the 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.

4.2. The total budget available to meet PFI costs, including the additional £0.6 million, energy costs and client team staff costs, is £10.014 million.

4.3. The final tender, based on assumed swap rates at financial close, falls within the affordability criteria approved by Cabinet. Even allowing for a potential increase in the final bank swap rates on the day of financial close, it is not anticipated that the additional headroom approved by Cabinet will be required, removing any immediate pressure on the Environment budget. A forward forecast of budget requirements over the longer term, which includes additional streetlights arising from new developments and prospective energy prices, will be included in a final report following financial close.

4.4. PFI credits for the whole South Coast project will be claimed for the full allocation by the DfT (£225 million), of which £121 million will be awarded to Hampshire.

4.5. Due to the nature of street lighting PFI contracts and the timing differences between the PFI grant, which is given in equal instalments through the life of the contract, and the capital investment in the programme which ramps up over the first five years, the accounting arrangements require a "PFI credit reserve" to be established. This will be drawn down over the life of the contract to smooth the impact on the revenue budget. The reserve is anticipated to peak at some £16 million in 2014/15, and will be contractually committed to funding the remaining cost of the project until it is fully utilised in 2034/35.

5. Service Specification

5.1. The service specification approved by Cabinet in November 2008, was:

(i) replace lighting in most locations with white fluorescent lamps;

(ii) replace lighting on a `1 for 1' basis with lighting levels at or below the low pressure sodium lamps currently in place in low crime, residential areas;

(iii) specify the installation of remote monitoring equipment on all street lighting columns, with discretion to switch to dimming equipment if the early phases of commissioning show that performance is unsatisfactory and that this cannot be resolved; and

(iv) normally to dim lamps in low crime, residential areas, at midnight by 25% in the first instance.

5.2. The specification agreed with Tay Valley Lighting incorporates the requirements above. A comprehensive remote monitoring and management system which enables the dimming of lanterns and alteration of lighting times remotely, is specified in the contract without discretion for a fall back arrangement, and performance failure is subject to contractual deductions without a limit. This reflects a strong commitment by the contractor to resolve any technical issues.

5.3. One key outcome for the project, based on the above specification, is reduced energy consumption for street lighting. After the completion of the five year investment programme, energy consumption will fall by up to 15% over the baseline, making a significant contribution to the Carbon Reduction Commitment.

6. Conclusions

6.1. The results of the evaluation identified TVL as the Preferred Bidder, whose final bid complied with the requirements as detailed in the service specifications and affordability criteria agreed by Cabinet.

6.2. Final fine tuning of the contract documentation has now been completed, together with a revised financial model, and the Final Business Case has been submitted to the DfT.

6.3. Subject to the approval of the DfT, the contract can be entered into with anticipated service commencement in March 2010.

7. Recommendations

7.1. That the Cabinet note that the Final Business Case has been submitted to the Department for Transport for approval.

7.2. That the contract be awarded to Tay Valley Lighting (Hampshire) Limited*, the special purpose company of Tay Valley Lighting consortium, for the design, installation, operation and maintenance of street lighting within the Hampshire County Council area for a period of 25 years, in accordance with the terms of an agreement (the Project Agreement) to be entered into between Hampshire County Council and Tay Valley Lighting (Hampshire) Limited and, in connection therewith, subject to:

(i) Department for Transport approval of the Final Business Case; and

(ii) the County Treasurer, or the Head of Finance, Environment Department, being satisfied the final price based on the prevailing swap rates on the day of financial close falls within the affordability limit of the Council of £10.014 million as detailed in paragraph 4.2. of the report.

(*Tay Valley Lighting (Hampshire) Limited is a limited company and wholly owned subsidiary of Scottish and Southern Energy Plc. The Tay Valley Lighting consortium members are Scottish and Southern Energy Plc, Southern Electric Contracting Limited, Nationwide Commercial and Lloyds TSB.)

7.3. That the Head of Legal Services, or any other person authorised by him as certified in Appendix 1, be authorised to give final approval to the completion of the project, including but not by way of limitation, the terms of the following:

(i) the Project Agreement;

(ii) the Sub-Contractor Direct Agreement;

(iii) the Senior Lenders Direct Agreement;

(iv) an Agreement to appoint an Independent Certifier to assess the quality of the Contractor's work;

(v) appropriate Collateral Warranties from other second tier sub-contractors; and

(vi) the Custody Agreement

together with any other documentation ancillary or additional to the above necessary for the completion of the project.

7.4. That the County Treasurer (or in his absence the Deputy County Treasurer) as the statutory officer under section 151 of the Local Government Act 1972 be authorised to sign any necessary certificates under the Local Government (Contracts) Act 1997 in relation to this transaction.

7.5. That the execution of all necessary agreements be approved by affixing the Council's common seal and/or signature (in accordance with the Council Constitution) and that the Head of Legal Services (or any other officer authorised by the Head of Legal Services) take any necessary further action to complete the Project, including any final amendments to the Project Documents, and give effect to Members' resolutions and delegated decisions referred to in the report.

7.6. That following financial close and before the commencement of the contract, a final report be made to Cabinet on the project, including the financial implications over the life of the contract.

CORPORATE OR LEGAL INFORMATION:

Links to the Corporate Strategy

Other Significant Links

IMPACT ASSESSMENTS:

1. Equalities Impact Assessment:

1.1. Equalities issues have been considered. The PFI project will improve lighting in areas with above average crime levels. These are more frequent in areas of deprivation. The improvement in the visual quality will help more vulnerable users to feel safer because it will be easier to recognise faces.

2. Impact on Crime and Disorder:

2.1. These proposals will have a positive impact on crime and disorder with increased lighting in high crime areas and a general improvement with "white" light in all other areas.

3. Climate Change:

a) How does what is being proposed impact on our carbon footprint / energy consumption?

The proposal has a very positive impact with an anticipated decrease in energy consumption of 15% after the five year core investment period. Further opportunities with remote monitoring and methods of working are included in the contract to minimise travel and the overall carbon footprint of the service.

b) How does what is being proposed consider the need to adapt to climate change, and be resilient to its longer term impacts?

The provision of new energy efficient equipment will be resilient to climate change over the longer term.

Appendix 1

Scheme of Authorisation

List of Authorised Signatories