Case Studies: E-39 Klett - Baardshaug

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Project Overview

E-39 1.png
Figure 1: Picture of E-39 Klett Baardshaug

Source: Norwegian Public Roads Administration
Highway in county Sør Trøndelag, Norway
Project Type: Both
Contract duration: 27 years (25 years operational period)
Project Time Line
Project Conceived: 2001
Call for Tender: 2003
Contract Approved (signed): 2003
Financial close: 2003
Other important dates
Opening of motorway: 2005

Introduction

E 39 Klett – Baardshaug in Sør-Trøndelag County is the first PPP project in Norway. The agreement covers a 27 km stretch of the E39 highway between Klett and Baardshaug, some 20 km south of Trondheim in central Norway. The project concerns the construction of a new 22 km section and improvements on the remaining five km. The new route includes a total of 10 km of tunnels and 12 bridges of which the longest is 240m. The up-front (2001) estimated value of the construction element of the contract was NOK 1,000–1,200M (approx. EUR 125–150M). The operating and maintenance costs were estimated at NOK 16M (EUR 2M) per year. The contract for the PPP-project E 39 Klett – Baardshaug was signed in 2003 and the road opened in 2005.

The concessionaire has the responsibility for operating and maintaining the road until 2030.

In the region, E-39 is one of the most important roads. Businesses located along the road have a large need for transportation and operate in sectors such as oil and gas, industry, fish farming and agriculture. An increasing number of the businesses operate internationally and need efficient access to air transport. The nearest airport terminal is Vaernes, approximately 25 km North of Trondheim. The old road had sharp curves, poor visibility and few possibilities for overtaking. Over a three-year period there were more than 80 incidents with personal injuries and four deaths. The traffic growth in the county was approx 1.5% annually, whereas the actual road had a growth rate of 2.5% p.a. The new road is estimated to reduce costs related to accidents, time consumption and logistics by more than NOK 1,000 M.

The information in this paper is provided mainly by the Norwegian Public Roads Administration in the “Information Memorandum PPP-project E39 Klett – Baardshaug” (2001).

The Contracting Authority (Public Party)

The Norwegian Public Roads Administration (Statens Vegvesen) is responsible for the planning, construction and operation of the national and county road networks, vehicle inspection requirements, driver training and licensing. It also grants subsidies for ferry operations. On matters pertaining to national roads, such as the E-39 highway, the Public Roads Administration is under the direction of the Ministry of Transport and Communications. The objective of the Norwegian Public Roads Administration is to develop and maintain a safe, eco-friendly and efficient transport system.

The Concessionaire (Private Party)

The PPP Company, Orkdalsvegen AS, is a special purpose vehicle (SPV) formed jointly between Skanska Infrastructure AV, and John Laing Infrastructure Ltd. Skanska Norway is a key subcontractor with full responsibility for the operation of the road. The project was 100 % financed by Orkdalsvegen AS, and the financing structure is a consortium managed by the Norwegian financial institution Nordea (1% equity, 9 % subordinated loan, 90 % bank loans). Skanska and Laing Roads Ltd. each invested around NOK 73M (EUR 9 M).

Orkdalsvegen's remuneration is based on the road's availability and quality. The Norwegian Public Roads Administration aims to increase safety on the accident prone route. A bonus is therefore also issued if the frequency of accidents is reduced.

The project also provides the opportunity for project sponsors to demonstrate their skills: "We welcome the new procurement form which gives us the possibility to deploy our expertise in the entire process from design and construction to operation and maintenance," said Petter Eiken, President of Selmer Skanska when contract was signed in 2003. "We reduce costs and ensure that the road can be built now even though government funding is not available until later," said Gunnar Lundberg head of the project within Skanska BOT.

Users

The E 39 Klett – Baardshaug had an average traffic ranging from 5,600 to 8,700 vehicles per day in 2000. The Institute for Transportation Economics forecast in connection with the National Transportation Plan 2002–2011 that there would be an annual traffic growth of 1.8% by 2012 and 1.5% thereafter. For comparison, the annual traffic growth on the actual PPP part of the E 39 had been 2.5% on average in the last eight years prior to the tender process. Today the average traffic is approx. 9,000 vehicles per day according to the operator.


Key Purpose for PPP Model Selection

The main reasons for choosing the actual concession model were to allocate roles and responsibilities according to the principles of national road administration and to allocate risk to where it can be most efficiently handled. Consequently the PPP contractor does not handle the road toll. The income from the toll road is collected by the SPV on behalf of the Public Roads Administration. The PPP model is not widely used in Norway, mainly because direct public financing is considered to be more cost effective. PPP has, however, been considered for some infrastructure and building projects. The Norwegian Public Roads Administration states the following:

  • “The Storting (Norwegian Parliament) considered the National Transportation Plan for the period 2002-2011 in February 2001, and decided that three road projects were to be implemented as pilot projects based on a Public Private Partnership model: E39 Klett-Baardshaug, E39 Lyngdal-Flekkefjord and E18 Grimstad-Kristiansand.

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Figure 2: The three pilot PPP projects in Norway

  • In the PPP model the selected PPP company is given full responsibility for designing, constructing, building, financing and operating a road section on behalf of the State for 20-30 years.
  • The Norwegian Public Roads Administration is responsible for planning and the impact assessment of the project, and also controls the quality and performance of the road service.
  • The operating period starts when the road is opened, and the PPP company will be paid an annual compensation during the operating period. The payment is based on incentives and performance against a number of pre-defined criteria incorporated into the payment mechanism in the PPP Contract”.

Project Timing

Serious discussions with respect to the construction of the road began in 2000, when the government prepared the white paper (National Transportation Plan) and decided to test PPP model. Moreover, the old road was in critical condition characterised by poor road safety conditions and increasing traffic.



Project Locality and Market Geography

Being an accident prone motorway close to the third largest city in Norway, which was growing quickly, the Klett- Baardshaug section of the E-39 needed improvement both in standards and capacity. The motorway is in the vicinity of the local airport, and is important to a large number of households and businesses.

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Figure 3: Local map on the E 39 Klett – Baardshaug Road

Procurement and Contractual Structure

Tendering

The PPP contract was awarded following a tender period and negotiations according to the regulations for public procurement. The tender process consisted of several phases and an initial time plan.

The competition for the contract was announced nationally and in the Official Journal of the European Communities (OJEC). The Norwegian Public Roads Administration emphasised the need to identify candidates with the necessary knowledge, experience, capacity and financial strength to complete a project of this type, magnitude and complexity. These requirements were reflected in the pre-qualification questionnaire.

On the basis of the received pre-qualification applications, the Norwegian Public Roads Administration selected four candidates (the stated maximum) who were invited to submit a tender, and potentially negotiate the terms for entering into the PPP contract. After having received the tenders, three bidders were selected for negotiations in the early stages, and two bidders went ahead to the final stage of the negotiations. The Norwegian Public Roads Administration decided to include a best and final offer stage in order to award the contract to the candidate with the most economically advantageous offer considering the complete set of evaluation factors presented in the tender documents.

The list below shows the milestones in the tender procedure:

  • OJEC (Official Journal of the European Communities) advertisement October 2001;
  • Pre-qualification application deadline December 2001;
  • Announcement of pre-qualification / distribution of tender documents February 2002;
  • Tender submission deadline July 2002;
  • Evaluation/negotiations July – December 2002;
  • Contract assignment December 2002/January 2003.

Contract Structure

The road is a public road and part of the state highway network. The State, represented by the Norwegian Public Roads Administration, acts as the public authority according to Norwegian road legislation, in the same way as with other state highways.

The concessionaire assumes full responsibility for design, construction, financing and operation of the road. The operation period is 25 years after the construction is completed. The PPP company has general responsibility for the availability and safety of the road, and for environmental and aesthetic standards. Details relating to functional requirements, performance and quality standards, which ensure the public authority’s overall objectives are met, are specified in the contact.

Payment mechanism

The concessionaire’s remuneration is based on the road's availability and quality. The Norwegian Public Roads Administration emphasised increased safety on the accident-prone route, and a bonus was therefore incorporated into the contract according to the reduction in the frequency of accidents.

Availability Payments are a measure of the availability of the road to the traveling public, and reward the private contractor for designing a high quality road that needs little maintenance, and for ensuring that the maintenance is programmed to avoid busy and congested times. The payment is linked to the output specifications for the road, including the required standards of performance and its operation. Availability payments are divided between different sections of the road, and standards are set for road conditions (e.g. skid resistance) below which the road will be deemed to be non-available.

Payments for operations and maintenance: The performance of the private contractor in operating the road is measured in several ways. One such measure is the operational performance and maintenance of the road, which includes the cleanliness of the road and surrounding areas, road surface tests, and the time taken to replace broken assets (e.g. traffic signs), clear snow or salt the road. These measures ensure that the operation, design and maintenance of the road are kept up to a high standard. The performance of the private contractor in operating the E 39 road is also measured by monitoring the operation of key systems on the road such as lighting, air quality and safety systems.

Safety Payments: It is a key objective of the Norwegian Public Roads Administration that the safety record of the E 39 road should be of a high standard. A share of the payments for the new road is, therefore, linked to the annual number of personal injury accidents and how this relates to pre-determined targets levels. The target level for the Norwegian Public Roads Administration is set by reference to experience on other similar roads and to Norwegian road safety targets. It is envisaged that the safety payment will be a ‘bonus’ payment to the contractor for improved safety performance on the E 39 road.

Traffic Payments: The State is responsible for the traffic risk in the project and traffic forecasts have been developed. The PPP company may receive compensation for wear of the road if HGV (Heavy Goods Vehicle) traffic exceeds a certain level above the specified traffic forecasts.

Risk Allocation

Risk allocation is illustrated in the detailed risk matrix below. In addition, the private sector is also responsible for the following risks and respective costs:

  • Cost of compliance with all general changes in legislation and statutory requirements;
  • Changes in scope of service specifications for operations and maintenance by the SPV;
  • Cost overruns for operations, maintenance and service specifications;
  • Damage to infrastructure;
  • Latent defects on both road sections (old and new);
  • Adverse weather conditions.

The public sector is responsible for changes in the scope of service specifications by the Norwegian Public Roads Administration during the operations stage.

Finally, both parties share the cost of latent defects beyond the end of the contract. In general, the state bears the risk for pre contract award issues, whereas the PPP company bears the risk for post contract award preparations. The risk elements concerning land acquisition are complex and have been partly defined as a joint responsibility of the parties. The risk elements in design, financing, construction and operation lie mainly with the contractor; however there are elements that the state can more suitably handle, and these are allocated to the public sector.

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Figure 4: Risk allocation

Performance

The project has so far been shown to reduce number of accidents and improve the technical condition of the road. This is in line with the state’s requirements and the objectives defined in the contract. Furthermore the project is sufficiently profitable for the SPV to pay dividends to its owners. So far, the project has met the main objectives of both contractual parties.

References

  • St. prp. Nr. 83 (2000 – 2001)
  • Information Memorandum PPP-project E39 Klett – Baardshaug
  • Norwegian National Transportation Plan 2002 - 2011
  • S. Bjørberg, B. Fredrik Kristiansen, L. Graham, A.Temeljotov Salaj, 2014, E-39 Klett-Baardshaug, in A. Roumboutsos, S. Farrell and K. Verhoest, COST Action TU1001 – Public Private Partnerships in Transport: Trends & Theory: 2014 Discussion Series: Country Profiles & Case Studies, ISBN 978-88-6922-009-8