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Wed May 18 2022

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Five ways Birmingham Highways PFI contract has changed

8 Mar Birmingham City Council and Birmingham Highways Limited are seeking a contractor for the £2.7bn Birmingham Highways PFI contract – but it is not the same deal on which Amey came unstuck.

It is not the same deal that Amey had – lessons have been learned
It is not the same deal that Amey had – lessons have been learned

Amey had to pay Birmingham City Council £215m in 2019 to get out of its long-term money-losing contract. Since then, the council and Birmingham Highways Limited have been working to restructure the private finance initiative (PFI) contract.

Birmingham Highways Limited (BHL) is a special purpose vehicle (SPV) between joint shareholders Equitix and PIP Infrastructure Investments. While Birmingham City Council is the ultimate client, as the highway authority, BHL was Amey’s client and the client for whoever replaces Amey. Kier has been looking after Birmingham’s roads on an interim basis but the procurement process has begun for a long-term replacement as operating subcontractor.

BHL is keen to point out that the new contract is not the same as the old one.

The overarching principles used to restructure the contract, BHL says, were: simplicity, prioritisation, efficiency, marketability, and affordability. These have been reflected in the new contract which went out for tender on 14th February 2020 (UK Find a Tender Contract Notice, ref: 2022/S 000-004207).

The new contract includes five key changes:

1.         Reduced length

Unlike a traditional PFI which range around 25 to 30 years, the restructured Birmingham Highways contract is only 12 years in length. The contract covers the period from April 2023 to June 2035, with full services commencing in September 2023 after a period of mobilisation. This shorter length allows the successful bidder to gain from the benefits of PFI structure but more efficient priorities, BHL says, because the contract is based on the realities of the current market and does not need to build in a variety of rigid conditions to predict what the service provider and authority will need in three decades.

2.         Altered risk allocation

The risk allocation has been adjusted. Notably, the surfacing condition risk has changed. The carriageway condition is the responsibility of the operating subcontractor and includes what condition can be achieved for a budget over 12 year period including handback.

For example, the footway condition is an “authority risk” and a fixed amount will be allocated with schemes prescribed for delivery (a schedule of rates from the operating subcontractor is a bid deliverable). This risk allocation is on the principle that carriageway condition risk can be calculated and is better sitting with the private sector who are better placed to manage the risk whereas the footway risk is better with the authority as it avoids unnecessary risk pricing due to the complexity and variability of footway surfacing.

Another change is structures, bridges and tunnels, with the inclusion of a shared arrangement whereby the operating subcontractor only has the risk of reinstatement works up to a capped amount and routine maintenance responsibilities while all capital works and programmed maintenance remain the risk of the authority.

The operation, maintenance and management risk remains largely with the operating subcontractor. However, a simplified output specification and more appropriate performance regime/payment mechanism make this element of the contract clearer, easier to price and administer, BHL says.

Stakeholders who attended the supplier days helped shape the new contract.

3.         Simplification of performance measures

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To simplify the output specification, performance regime and payment mechanism, the key performance indicators (KPIs) have been reduced from more than 600 in the original Amey contract to 169.

This has been further simplified down to a total of 24 priority performance targets. These cover only the most critical performance requirements to be efficient. For example, for traffic signs the subcontractor will have to ensure no traffic signal controller is more than 20 years old at the end of each contract year. Failure to comply will incur deductions and/or accrue service failure points.

A total of 145 routine performance targets have been defined, which cover other requirements of the service delivery and are proposed in a way that optimises and aligns with how the operating subcontractor will deliver the services.

4.         Creation of a dispute avoidance board (DAB)

A fast-track dispute resolution mechanism has been included to resolve any issues quickly. The DAB will have three independent members appointed by the agreement of BHL, the city council and the operating subcontractor. It is anticipated that the DAB might meet quarterly to understand any issues affecting the delivery of services and to provide its view on any disputes/issues referred to it. 

5.         New contractual governance structures

In addition to the DAB a new technical arbitration panel and highways oversight board (HOB) have been created to meet quarterly or as required.

The technical arbitration panel will provide the necessary support in advance of the DAB and allow the parties to undertake necessary levels of technical analysis. The HOB is an additional layer of project governance, including representatives from BHL, the council and the operating subcontractor who are not involved on a day-to-day basis, instead leading on strategic matters.

The HOB has been added to improve strategic oversight for the project and engagement at a senior level across project stakeholders. The HOB will help maintain and steer the right culture from the top down and direct strategy as applicable. The HOB, as well as other layers of project governance, will help optimise collaboration and in turn facilitate a better delivery for Birmingham.

These five changes demonstrate the lessons learned from the original PFI and issues with Amey, BHL says. They also are based on data gathered during the interim phase of service delivery, specifically the management information system (MIS) implemented in the interim period. The MIS will allow for a data led procurement process and give bidders sufficient information to undertake due diligence.

The whole tender process has been structured over a period of nine months to provide bidders with the opportunity to participate in dialogue, thus allowing further changes to be made to the new contract as currently proposed.

The contract notice (UK Find a Tender Contract Notice, ref: 2022/S 000-004207) is live and access to the procurement portal can be obtained through contacting Michael Murray (mmurray@equitix.co.uk). The portal includes the selection questionnaire, descriptive document, draft invitation to participate in dialogue and draft contract documents. The deadline to submit a selection questionnaire to qualify for the tender stage is 25th March 2022.

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