Case Studies: A19 Dishforth DBFO

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Project Overview
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Figure 1: A19 PPP road as part of the area network
A19 Dishforth Project Profile, UK
Project Type: Brownfield
Contract duration: 30 years (including construction period)
Budget: GBP 29,4M (Cost to upgrade to the prescribed standard)
Project Time Line
Tender: 1995;
Contract Award: 14 October 1996;
Construction start: 24 February 1997;
Start of operations: 02 September1998;

Introduction

The A19 project was one of several PFI road projects let in the mid-1990s as part of the government’s Tranche 1A PFIs (Partnership UK, 2009). This tranche was more sophisticated than its predecessors, with scope for the private partner to improve the road through innovation and better service delivery.

The road is 118km in length and consists of 2 and 3 lane carriageways. The project is a DBFO scheme within the existing A19 carriageway alignment. 

The project upgrades and maintains a vital economic link to Tyneside in the North East of England. The areas of Newcastle, Sunderland and Middleborough are major conurbations, and the A19 provides the main link between them. The road required upgrading to meet capacity targets and industrial needs. The project also provides an alternative route to the more important A1(M), which is part of the East Coast route to Scotland.

The Contracting Authority (Public Party)

The government department with controlling responsibility is the Department of Transport. The regulatory body responsible for contractual aspects on behalf of the government is the Highways Agency.

Following the formal inception of road PFIs by the Highways Agency in 1992 - initially for the maintenance and upgrading of existing road infrastructure - the Design, Build, Finance and Operate (DBFO) procurement model was adopted in 1994 (Highways Agency, 2012). The Highways Act 1980 and the New Road and Street Works Act 1991 allow the award of concessions for road infrastructure, and also permit tolling, although this was deemed to be impractical in this case.

As this was a wholly private investment, the Government’s role is that of the regulatory and legislative authority for the project. The Highways Agency has no stake in the special purpose vehicle (SPV).

The Concessionaire (Private Party)

The current owner of the SPV is Sir Robert McAlpine Ltd., although the original consortium included a number of companies. The small size of the project means that, financing could be obtained by the contractor fairly easily. The original bank lenders were CIBC Bank from Canada and IBJ Bank from Japan.

Users

Both domestic and commercial traffic use this road, which links the smaller conurbations in the region. This gives better access to the network and an alternative route to Newcastle and the A1(M).

Key Purpose for PPP Model Selection

Value for money was the main driver for adoption of the PPP solution.

Project Timing

The early 1990s were a period of recession to which this area of the UK was particularly sensitive. The road upgrade was therefore needed to ensure that there was no barrier to the manufacturing base that dominated the area.

The call for tenders was issued in 1995, and the time from initial call to signing of the contract was 15 months.

Project Locality and Market Geography

This project is significant from a local and regional perspective. The road network in this area is dominated by the A1(M) trunk road, and the A19 supports this route by providing additional capacity. The A19 also serves a number of communities within the North East with local traffic needs which cannot be met by the A1(M).

Procurement & Contractual Structure

Tendering

The contract was tendered based on performance objectives and bidders’ requirements for shadow tolls.

Contract Structure

The contract is fully privately financed and covers upgrading works, operations and maintenance. Although the project is a DBFO scheme, the small size of the initial capital investment means that the main emphasis is on the maintenance and operation phases.

Direct tolling was seen as inappropriate (Local government chronicle, 1993), so shadow tolling was used as the mechanism for repayment of the concessionaire. Revenues from shadow tolls are based on vehicle-km travelled, with penalty measures related to availability and safety performance.

The contract period was set at 30 years. This is longer than the estimated break-even period of 20 years needed to recover costs and repay debt, and includes a “cushion” to protect the investor against lower than expected returns if vehicle numbers fail to reach anticipated levels.

The issue of changes to the financial position of the SPV and its shareholders was not explicitly incorporated into the contract, although there are review processes, which give some protection to the government. However there was no provision for the Government to share in any “windfall profits” brought about by refinancing, which as in the case of the M6 Toll led to an enquiry by Parliament.

Risk Allocation

Design and construction risks - Local authorities have explicit funds and responsibilities for improving the roads within their jurisdiction, which includes sections of the network not covered by the DBFO. This restricts the ability of the private partner to make innovative improvements to the network.

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Figure 2. Risk Allocation

The main element of the contract is the maintenance of the road. Maintenance risks are borne mainly by the private partner, but affected by the actions of neighbouring local authorities. Operating risk is complex, as the private sector can gain increased net income when local authorities are assisting with the cost of maintenance.

The use of shadow tolls exposes the concessionaire to traffic risks. However revenues are more than covering costs. Finance is totally privately sourced, with the private partner bearing the whole of the risk.

Changes to the regulatory framework could impact upon the private sector. The government accepts this and indemnifies the private sector against it.

Risk is allocated as depicted in the figure 2.

Performance

The A1 portfolio of road PFI projects has a series of technical requirements related to: Availability; Safety; Compliance with legislation; Environmental constraints.

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Figure 3: Income generation (Bain, 2008)

Between 1996-2006 revenues totalled GBP 136M compared with the initial capital investment of GBP 29.4M. Core requirements have to be achieved on a monthly basis, and there are penalties for failure. The contractual requirements are said to have been always achieved.

The limited availability of other published indicators makes it difficult to evaluate performance from a user perspective, and there is no measure of maintenance performance which is complicated by local highway authorities’ involvement in maintenance schemes.

A series of voluntary performance indicators offered by the private partner – including an incident response indicator - led to an amendment to the contract in 2009.

Financial performance has fluctuated significantly during the project’s 12 years of operation. Revenues were highest in the period 1998 to 2001, then fell considerably between 2001-3. There has been some recovery, but revenues have not yet returned to their 2001 level.

References