Case Studies: M6 Toll (BNRR)

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Project Overview
M6 1.png
Figure 1: M6 Toll route (BBC.co.uk, 2003)
The BNRR M6 Toll, UK
Project Type: Both
Contract duration: 53 years
Budget: GBP 900 M (Asset value as described by the main equity holder. Construction costs were calculated as GBP 485M (M6 Toll, 2008))
Project Time Line
Project conceived: 1980;
Public Inquiry: 1988;
Decision to use PPP financing: 1989;
Tender: 1990;
Contract award: 1992;
Second Inquiry: 1994;
Legal challenge: 1997;
Start of operations: 2003.

Introduction

The M6 Toll (also known as the Birmingham Northern Relief Road) opened in 2003 as the UK’s first tolled motorway. The premise of using a PPP was decided at a very early stage and the BNRR was an entirely private DBFO, although the government provided funding for network connections to the M42.

The motorway was conceived in 1980 to relieve congestion on the existing M6 motorway hub in Birmingham, and to service local residential areas and business development. The scheme also supported integration into the wider European network for commercial traffic. The existing M6 motorway was in need of investment and its position as the main arterial route between the south, midlands and north west of England meant that the volume of traffic would soon outstrip its capacity. Alternative routes were required to provide the additional capacity needed. The original M6 motorway remains in operation as a free parallel alternative route a few miles to the south of the M6 Toll motorway.

The scheme was originally conceived as a traditional publicly-procured road 43km in length. During an inquiry held in 1988, objections into the public road scheme were investigated. The outcome of this inquiry was not disclosed as in the following year the UK government decided to use the road as an initial trial for a private finance initiative (PFI) (University College London, 2011).

The government at the time encouraged the use of DBFO and the solution of tolling was seen as acceptable. However the proposed scheme was not received favourably from a user and society stakeholder perspective. This meant that the process of developing the road took approximately 23 years from the original proposal submitted in 1980 to the opening in 2003.

The Contracting Authority (Public Party)

The government department with controlling responsibility for the project is the Department of Transport. The regulatory body responsible for contractual aspects on behalf of the government is the Highways Agency. This is responsible for the management of the main road infrastructure in England. The Highways Agency monitors and reports on performance, manages alternative routes (including the M6) and promotes competition.

The tolling agreement is covered by two laws: the Highways Act 1980 and the New Road and Street Works Act 1991 (Butcher, 2010). This has eliminated the need for specific legislation on a project-by-project basis. The Acts laid out the framework for concession agreements between the government and private groups to design, construct and operate “special roads”.

The Concessionaire (Private Party)

The private partner is called Midland Expressway Ltd. (MEL). The principal equity holder within the SPV is Macquarie Infrastructure Group. In 2008 the M6 Toll project represented 30% of the asset value of the equity holder’s portfolio (M6 Toll, 2008).

The historical investment structure of the project differs greatly from the present position. The original concession was held by a consortium of Trafalgar House (Kvaerner) and Italstat (Autostrade). The Kvaerner share passed to Macquarie when Kvaerner was restructured in 1999. Macquarie then bought out the Autostrade share when the project was refinanced in 2006.

The refinancing was a contentious issue for the public sector as it released a large amount of money for the equity provider. The short-term banks loans, which financed the original construction work were replaced with a debt instrument that schedules payments of principal and interest so that they correspond more closely to future toll revenues. The previous GBP 620m debt facility was replaced with loans of GBP 1.03bn and new rate swaps secured against MEL itself. The new loans are due to be paid off in 2015, but have already allowed funds of GBP 392m to be released to Macquarie as the owner of the project.

Construction was carried out under contract to the SPV by a group of companies known as CAMBBA. This relationship was not without issues, and led to disputes between the SPV and its construction sub-contractor.

The SPV has a high degree of autonomy in how it sets the levels of tolls. The frequency and percentage of toll changes are outlined in the agreement, but there is no mechanism for review by the public sector to reflect changed social and macro-economic conditions. This means that the SPV is allowed to increase tariffs even in a period of economic decline.

Monitoring of performance is carried out by the SPV and the data are then shared with the public sector agency. This means that value perception can be distorted, and that the public agency has to utilise other measures to obtain a good overall picture of usage of the road; these include measuring traffic flows on routes under the agency’s direct control (M6) and the feeder network. Transparency is poor, as communications with other stakeholder groups must be agreed between the SPV and the public sector agency. The private partner is driven by long term considerations. It is developing the market but also waiting for the government to create a more mature market to which it can provide services.

Users

The road is for the use of private and commercial road traffic. The domestic market is made up of private car journeys predominantly from the north west of the country to the main corridor to the south. These journeys fall into two groups: leisure travel and journeys to work or on business. The commercial market is for the transport of goods between manufacturers, distributers and purchasers. The present economic climate in the UK has reduced traffic by 10% (Macquarie general report, 2011).

Other stake holders with an input into the performance of the project, and on whom the project has a bearing, include Midland Regeneration, a government regional organization tasked with improving the economic situation in the Midlands, and local authorities with a statutory responsibility to maintain the road infrastructure in their areas. Although MEL holds the concession and is responsible for maintenance, it is still the responsibility of the elected authorities to ensure that the road is fit for purpose.

Key Purpose for PPP Model Selection

The reasons for introducing a PPP structure were largely political. The government at the time was carrying out a review of the assets in public ownership and privatizing large swathes of these assets such as utilities.

The M6 Toll was therefore a test-bed for reducing the direct cost to government of operating and maintaining infrastructure which could be better and more efficiently managed by the private sector. The main objective was reducing the cost to the Treasury budget. Utilizing private sector expertise can provide better service, but was not the prime motivator.

Project Timing

The existing M6 was struggling with capacity constraints and was in need of development and maintenance. A case for the construction of the new road had been made prior to the government decision to build it as a PPP.

During the 1980s there was a recession in the UK, and a further recessionary period took place in the late 1990s, both of which coincided with the project’s time line:

1984– Government opens to public scrutiny its first proposal for the scheme (still a public sector project);

1988– Due to public objections to the scheme a first Public Inquiry takes place;

1990– Project is tendered as a PPP;

1992- Contract is awarded to the winning bidder;

1994– Second Inquiry as the controversial concession agreement goes ahead;

1997– Legal challenges are launched by the Alliance Against the Birmingham Northern Relief Road;

1999- All legal challenges are cleared ( High Court case no: CO/4553/98).

The construction and start of operations for the scheme occurred during a period when the economy was stable and there was confidence in economic growth.

Project Locality and Market Geography

The project is of regional importance, and is part of the wider national motorway network focused on the Midlands region of England. It is in effect a by-pass, and so does not directly connect any conurbations of significant interest. Birmingham has always been seen as the intersection between road networks in the north and south of the country, with its famed “Spaghetti Junction”, and the M6 Toll provides an alternative route through this intersection.

Procurement & Contractual Structure

Tendering

Innovation was encouraged by the government and led to a variety of options from the bidding parties. The design of the road was left open to the bidders to decide, as well as the tolling system (toll levels, and variations by vehicle type and tolling period - weekdays/ weekends etc).

Although the process was not originally intended to be a competitive dialogue, the diversity of the tenders meant that a numerical analysis of the bids was impossible and a more subjective analysis had to be used to evaluate the proposed schemes. There were three bidders:

  • BNRR Ltd : Tarmac Construction & Balfour Beatty;
  • Midlands Parkway: Alfred McAlpine Construction, RM Douglas Construction, Manufacturers Hanover Bank and the French toll road operator Cofiroute;
  • Midland Expressway (MEL): Trafalgar House Construction and the Italian toll road operator Italstat (later to become Macquarie Infrastructure Group and Autostrade).

From these, MEL emerged as the favored service provider.

Contract Structure

The concessionaire has the right and obligation to carry out the design, construction and completion of the works, and financing, operation and maintenance of the project facilities, together with associated Motorway Service Areas, during the concession period. It is expected to do this at its own cost and risk, without recourse to Government funds or guarantees.

The concessionaire may, if it thinks fit, improve the project facilities subject to the provisions of the Concession Agreement. (Section 2.1, Concession Agreement v3)

Risk Allocation

The schedules attached to the contract are very prescriptive, including the levels of management to be employed and the monitoring procedures for compliance throughout the concession period (The Secretary of State for Transport, 2000). The Government retains the right to change the concession in the event that the operator cannot fulfill its obligations.

The repayment method is based on direct tolls. The government originally considered toll reviews every twelve months; however Section 2.2.2.2 of the concession agreement specifies that tolls are to be reviewed on a six- monthly cycle. The toll charges are to ensure that the project is self-financed. The recipient of the revenues is the SPV. The Government also pays an availability fee to the private partner as set out in Schedule 8 of the concession agreement.

Design and construction risks - Section 2.1 of the concession agreement states that design, construction and operation, including maintenance, is at the concessionaire’s own cost and risk, without the aid of government funds or guarantees. However Section 27.3 states that the Government will bear the risk of claims made by the concessionaire and its associates with regard to changes made by public bodies during the design and construction phase. Operating risk is borne largely by the SPV. The Government remains the regulatory authority for the whole of the network, and all normal regulations relating to road construction and operation apply to this scheme. Finally, the concessionaire must indemnify the government against any third party claims by users of the road.

Risk is allocated as depicted in figure 2 below.

M6 2.png

Figure 2: Risk Allocation

Performance

The performance criteria for the ex-ante evaluation of the project are laid out in the form of a Public Sector Comparator, which was heavily influenced by Government’s desire to adopt a Private Finance Initiative (PFI) solution. The ex-post evaluation took the form of a Post Opening Project Evaluation (POPE) report carried out by the regulatory authority after five years of operation.

The performance measures used were:

  • Traffic volumes, which are measured over time and compared against the alternative free route;
  • Strategic screen lines – impacts on other roads in the network;
  • Journey times;
  • Vehicle usage – types and volumes of commercial and private users;
  • Safety trends – accidents on the toll road and the reduction of accidents on the M6 and nearby A-class roads;
  • Environmental impacts – noise & air quality, landscape, biodiversity, heritage and water quality.

There is no evidence to suggest that these KPIs are measured as part of the contract, and there are no penalties for non-compliance. There is, however, an availability payment linked to the road being accessible to users.

The POPE report carried out in 2007 by the Highways Agency (Highways Agency, 2009) indicates that the project is a success based on the following criteria:

  • Alternative to the existing M6 – it provides an alternative offering faster journey times and greater reliability;
  • Relief to the existing network- there has been a reduction in journey times on the M6;
  • Journey time reliability – there is greater consistency of journey times on the original network;
  • Reduction in traffic volumes on local routes- the “A” roads in the area have smaller traffic flows;
  • Local transport infrastructure improvements;
  • Integration into the wider network.

However figures released since then show that traffic on the original road (M6) has now increased to near the level experienced before the opening of the M6 Toll. Only 50% of the M6 Toll’s capacity of 70,000 vehicles per day is being used, and revenues are 7% lower than expected. The PPP has not made a profit since commencement.

A number of issues have become apparent that suggest the M6 Toll is under performing. Usage in the first three months after opening was 45,000 vehicles per day (www.parliment.uk 2005). However vehicle numbers for 2011 were on average only 35,000 per day, bringing an income of GBP 56M for the operator and a loss of GBP 41M (www.ITV.com 2012).

The parallel M6 road was congested during much of the early life of the M6 Toll road, which made the toll route beneficial in respect of journey times, with a saving of up to 40 minutes per journey in peak periods. This advantage was further compounded by reconstruction works on the M6 to increase its capacity. Since these road works have been completed, the existing M6 offers a better alternative to potential users of the toll route.

A number of issues concerning revenue streams have become apparent, of which users’ aversion to paying tolls is perhaps the most important; many now plan their journeys to avoid peak times. Other factors affecting traffic and revenues have been lower disposable incomes of users; inflation; fuel cost increases; fewer employment opportunities, resulting in less need to travel. The SPV is innovating to address these issues through the following actions: increases to toll fees to minimise the income deficit; introduction of new ways to pay (contactless cards); provision of faster traffic lanes.

Critical success factors identified in connection with this project are: maintenance; reliability; micro economic improvements in the surrounding region; increased capacity of the network; private sector participation and continuing commitment from the private sector provider; technology: investment in alternative payment and construction methods; reduction in environmental impact through innovation in design and the use of materials.

References

  • C. Liyanage, C.Boles, 2013, M6 Toll (BNRR), In Roumboutsos, A., Farrell, S., Liyanage, C. L. and Macário, R, COST Action TU1001 Public Private Partnerships in Transport: Trends & Theory P3T3, 2013 Discussion Papers Part II Case Studies, ΙSBN 978-88-97781-61-5, COST Office, Brussels available at http://www.ppptransport.eu
  • A One Integrated Highway Services. (2012). About area 14. Retrieved 09 12, 2012, from A One: http://www.aone.uk.com/File/ourprojects.asp
  • Bain, R. (2008). PRIVATE FINANCE RATES OF RETURN:EVIDENCE FROM THE UK’S PFI ROADS SECTOR. University of Leeds, Institute for Transport Studies. Leeds UK: RB Consult Ltd.
  • BBC.co.uk. (2003, 12 9). M6 Toll road opens. Retrieved 09 2012, from BBC News Online: http://news.bbc.co.uk/1/hi/england/staffordshire/3298789.stm
  • Butcher, L. (2010). Roads: tolls. London UK: House of Commons Library.
  • HA knowledge Centre. (2012). A brief history of our roads. Retrieved 08 05, 2012, from Highways Agency Website: http://www.highways.gov.uk/knowledge/1813.aspx
  • Highways Agency. (2012). DBFO payment mechanisms. Retrieved 07 21, 2012, from Highways Agency Government website: http://www.highways.gov.uk/roads/33513.aspx
  • Highways Agency. (2012, 08 10). DBFO -Value in Roads. Retrieved 08 29, 2012, from The National Archives: http://webarchive.nationalarchives.gov.uk

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