Birmingham City Council’s 25-year PFI road maintenance contract could collapse, the council has acknowledged, as the search begins for a new sub-contractor for the remaining 14 years.
Birmingham entered into the £2.3bn highways management and maintenance contract in 2010 with special purpose vehicle Amey Birmingham Highways Ltd (ABHL). Amey Local Government (Amey LG), the main sub-contractor for the contract, became embroiled in a lengthy performance dispute with the council, which ended with the council winning a legal case at the Court of Appeal in 2018.
Last summer Amey reached an agreement with stakeholders to terminate its involvement in the PF contract, paying £215m to do so – £160m in 2019 and £55m over the next six years.
The shareholders in the Birmingham Highways Ltd (BHL) SPV are now Equitix and Pensions Infrastructure Platform Ltd. Under the terms of the settlement with Amey, BHL is required to have a new sub-contractor in place by next June to deliver a revised PFI contract up to 2035.
As an interim arrangement, BHL has replaced Amey LG with Kier Highways (LTT 07 Feb). Kier has signed an industry standard contract, not a PFI contract, because of the interim nature of the appointment.
Since April, Kier has been providing inspections, routine and reactive maintenance, winter maintenance and street lighting replacement. Tarmac is providing interim programmed surface maintenance work, and PTS is providing interim carriageway and footway condition surveys.
Domenic de Bechi, the council’s PFI contract manager, told councillors this month: “There clearly remain a number of challenges to procure and deliver a revised PFI contract, not least the uncertain market environment at present.
“Despite the fact that a future contract is likely to be worth around £1bn and will run for 14 years, it is clear that changes will be required to the existing contract to attract bidders.
“Whilst there was little truth in many of the media stories that have circulated regarding the financial adjustments for non-performance to which Amey were subjected, Amey did suffer significant losses.”
de Bechi said Covid-19 had “added a further complication” to the procurement of a new sub-contractor, noting that the pandemic had prompted companies to focus on existing work.
“It is uncertain what impact this will have on the ability of bidders to undertake due diligence and put bids together.
“Tendering a contract during significant market uncertainty can be expected to lead to exaggerated risk pricing. Whether reasonable value for money can be obtained for the council in these circumstances must remain under question.”
He added: “Ultimately, in the event that a PFI contract that is acceptable to all parties cannot be re-procured, the PFI contract is likely to end. BHL will cease to exist and money left in the company (principally, settlement payments to date from Amey) will be paid to BHL’s creditors in order of priority, starting with the outstanding lending of the banks, debt to the council and then other creditors.”
In the event of the PFI ending, Birmingham will also lose the £51.9m a year PFI grant from the Government. The council would revert to its revenue budget plus capital spending bid under the local transport plan.
Birmingham and BHL are amending the PFI contract to make it more attractive to bidders, and to improve recognised weaknesses, such as regarding programmed surfacing works.
The business case for the revised contract must be approved by the DfT and Treasury in order to release the PFI credits. “PFI credit will not be increased, although if the revised contract does not deliver a similar level of capital investment it is possible that PFI credit could be reduced,” said de Bechi.
The PFI core investment period was expected to last five years, ending in 2015, but the programme has suffered huge slippage. BHL is under contract to deliver £50m of surfacing schemes during 2020 and 2021. “This investment will not, however, complete the level of investment that the council expected under the PFI contract,” said de Bechi. “Further work on surfacing will still be required by a long-term replacement sub-contractor to complete the anticipated investment, probably at least three further years.”
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