Case Studies: M-25 London Orbital, U.K.

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Project Overview

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Figure 1: M-25 London orbital, U.K.

Source-. Briggs, A. and Drewett, D. (2007)
M-25 London orbital, United Kingdom
Project Type: Greenfield
Type of Project Financing: Private co-financing
Contract duration: 30 years
Budget: 900 Mil GBP (Construction cost)
Project Time Line
2006: Date Project conceived
2008: Call for tender
Feb. 2009: Contract signed
20 May2009: Financial Close
May 2012: Original project completion time
January 2013: Project extension
December 2014: Expected full completion


Introduction

The M25 motorway or London Orbital motorway forms a 125-mile orbital route some 20 miles from the centre of London that almost encircles Greater London, England, in the United Kingdom. The Dartford Crossing, two tunnels and a bridge crossing the river Thames at Dartford, complete the loop.

A narrower concept was first mooted early in the 20th century as part of the plan to build four ring roads around London. A few sections, based on the abandoned London Ring ways plan, were constructed in the early 1970s and completed in 1986.

The M25 is the major route around London, carrying international traffic between entry points and the rest of Great Britain. It also forms the hub of the English motorway system, and serves as a commuter route for local traffic. It is one of the busiest links of the British motorway network: 196,000 vehicles were recorded on a busy day near London Heathrow Airport in 2003 and the western half experienced an average daily flow of 147,000 vehicles in 2007.

In May 2009, the Agency signed a 30-year private finance contract with “Connect Plus”. The contract requires “Connect Plus” to widen two sections of the M25 (approximately 40 miles), and to refurbish the Hatfield Tunnel. “Connect Plus” must also operate and maintain the M25, including the Dartford Crossing, plus 125 miles of connecting roads at junctions. It is also required to design a solution for congestion for two further sections of the M25 (approximately 25 miles). The contract has a present value cost (2009) of £3.4 billion. Of this total, the widening of the initial sections has a present value construction cost of £900 million and delivers £2.3 billion present value benefits. However, the nominal contract value over the 30-year contract period is £6.2 billion.

The Contracting Authority (Public Party)

The Contracting Authority is the Regulatory authority Highways Agency. The project is included in the PFI Programme.

The Concessioner (Private Party)

Connect Plus, a consortium of Skanska, Balfour Beatty, Atkins and Egis Projects, was formed to deliver the contract services on behalf of the Highways Agency. Within the PFI contract, Balfour Beatty and Skanska share 50% each for the Construction Joint Venture; whereas for the O&M Joint Venture, Balfour Beatty holds 52.5% of the contract, whilst Atkins and Egis share 32.5% and 15%, respectively.

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Figure 2: Organisations involved in the contract

Sources of Financing

The financing structure of the project consisted of commercial bank debt provided by a 16-bank club deal for £700 million, EIB credits for £400 million and shareholder equity for £200 million. Part of the EIB participation was backed by an additional commercial bank facility for £215 million provided as EIB guarantees, whilst the remaining £185 million consisted of EIB structured finance facility.

In total, there were £1.1 billion senior debt loan facilities, which represented about 85% of the total financing.

Users

The project users are private and commercial user/vehicles. The primary aims of the project, in the view of users, were to (Highways Agency, 2012):

  • Allow traffic to flow more smoothly, resulting in fewer accidents.
  • See a noticeable reduction in road noise in most places immediately after completion and noticeable change in traffic noise levels over the long term due to the new lower-noise road surface.
  • Provide improved drainage, resulting in better water quality and safer roads.
  • Provide new modern "cut-off" lighting, which meets the level needed for a four-lane motorway while minimising the effect on adjacent properties.

Key Purpose for PPP Model Selection

From the Contacting Authority’s point of view, the main purposes for the use of PFI contract were to:

  • Relieve congestion and improve reliability through securing a private sector partner to widen the M25.
  • Get value for money from private participation and best outcomes in terms of use of public funds.
  • Obtain financing at market rates during the difficult financing conditions in early 2009.

The Agency considered that a single private finance contract would be advantageous for the construction and the operation of the M25, because, during:

  • Construction – contractors could achieve efficiency by using the same arrangements, such as appointing subcontractors for all sections and learn lessons for later sections. A single private finance contract could also reduce the risk of delays on earlier contracts causing delays on later contracts (reduction of interface risk).
  • Operation – a single company responsible for the M25 would have easier interactions with third parties such as the emergency services, and the opportunity to make operating efficiencies.

Project Timing

According to the House of Commons (2011), the UK Government commissioned consultants to produce a long-term sustainable strategy for tackling congestion on the M25 in 2000. The Government announced its intention to proceed with widening in July 2003 and the Highway Agency’s initial 2004 timetable anticipated construction starting in May 2007. This was subsequently revised to May 2008, following consultation with industry and a decision to widen the motorway using private finance. In May 2009, nine years after the start of the project, the Highways Agency signed a 30-year private finance contract with “Connect Plus” for widening two sections of the M25 motorway, and maintaining the entire 125 mile length of the motorway, including the Dartford Crossing, and 125 miles of connecting roads and motorways. The timescales of construction of the project are listed in Table 1:

Table 1: Construction timescales

Activity Date
Publish Environmental Statement Autumn 2010
Site clearance From September 2012
Installation of new concrete barrier in central reservation Late 2012
Start of Works May 2013
Completion of work to upgrade the Central Reservation Barrier Mid-July 2013
Completion of Traffic Management Switch Early August 2013
Installation of first new Gantry Mid-September 2013
Completion 30 April 2014

Source: Highways England (2010)

Project Locality and Market Geography

The M25 project forms a boundary with the Greater London Authority. The M25 is a vital route for freight, commuter and tourist traffic. Linking with the M2 and M20, it provides a gateway to and from the continent via Eurotunnel and Dover.

The London Orbital Multi Model Study (ORBIT), published in 2002, was tasked with addressing the problems of the M25 motorway and the orbital transport corridor around London. The study concluded that if current trends were to continue, traffic levels would increase and all users, including those essential to the economy, would suffer increasing congestion and unreliable journey times. The ORBIT report recommended that most of the dual 3 lane sections of the M25 should generally be widened to dual 4 lanes (Highways England, 2010).

Procurement & Contractual Structure

Tendering

The Agency ran a generally effective and competitive procurement for the widening tender advertised in 2005. There was, however, some slippage in the time schedule (National Audit Office 2010). The tendering was carried out in a two stage procedure, with 5 bidders submitting tenders in the first stage, shortlisted to 3 bidders during the negotiation phase.

The Agency prequalified five potential bidders, and then reduced these to the following three consortia in October 2006:

  • ALF – Amey, Laing O’Rourke and FerrovialAgroman;
  • Connect Plus – Balfour Beatty, Skanska, Atkins, and Egis; and
  • FLOW – Vinci, Laing Roads, Carillion, and Costain.

The Agency selected Connect Plus as Provisional Preferred Bidder (announced in May 2008). The duration of the project assignment procedure was 42 months (from contract advertisement in November 2005 to award in May 2009).

Contract Structure

The contract structure was based on the availability model, with active management. The Private Provision of the contract consisted of:

  • Design
  • Build/ construct
  • Operate/ Manage
  • Maintain

The Public Authority Provision (activities not transferred) of the contract consisted of, Design and Finance. The contract included renegotiation clauses but no guarantees. There is a contract review clause, as an alternative to termination, allowing the Agency to renegotiate the contract if it radically changes its requirements.

Risk Allocation

The risk allocation scheme is depicted in Figure 3.

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Figure 3: Risk allocation

Performance

Performance indicators were explicitly mentioned in the contract and are related to (Highways Agency 2012; Nick Harding 2007):

  • Lane Availability
  • Route Performance
  • Condition Criteria
  • Safety Performance
  • Proactive Management

With regard to achieving project goals:

  • Reliability was improved fully in line with expectations or even more.
  • Availability was fully in line with expectations or even more.
  • Maintenance costs are fully in line with expectations.
  • Safety was improved fully in line with expectations or even more.
  • Security incidents are within expected range.
  • User Satisfaction: More than 50% of end users are satisfied.

The project was completed on time and within budget. However, there are some criticisms about the initial delays from project inception (in 2000) to contract signing (in 2009). According to the House of Commons (2011), the initial project delays exposed the project to the 2008 credit crisis, resulting in further delays and higher financing costs. These costs were attributed to changes of design standards generating impact on investment costs. Finally, actual traffic and revenues are in line with forecast, while network usage has increased after the project implementation.

Project Outcomes

The general level of the project's perceived success is high, particularly with regard to reduction in congestion and improvements in safety standards. In addition, travel cost and reliability improvements are fully in line with or have exceeded expectations. Finally, the project has also resulted in less pollution and other environmental impacts (e.g. reduction in noise levels).

References

  • Briggs, A. and Drewett, D. (2007). Contribution of PPP to enhance transport infrastructure – the UK experience. Highways Agency
  • Highways Agency (2012). DBFO Background contract information
  • Highways England, (2011), M-25, Available via: http://www.highways.gov.uk/our-road-network/our-network/key-roads/m25/
  • House of Commons (2011). M25 Private Finance Contract. Committee of Public Accounts, Nineteenth Report of Session 2010–11. The Stationary Office Limited, London. Available via: http://www.publications.parliament.uk/pa/cm201011/cmselect/cmpubacc/651/651.pdf
  • National Audit Office (2010). Procurement of the M25private finance contract. Highways Agency
  • Nick Harding (2007): Performance Measures in PPP Contracts. Presentation at TRB Third International Conference on Performance Measurement
  • Press articles.
  • www.connectplusm25.co.uk/