It was a long time before the deal was done, but last May Birmingham City Council finally handed over maintenance of its highways network to Amey. Mark Hansford visits Britain’s biggest local roads PFI.
So it’s finally happening - the nightmare scenario that local authorities feared. The unpalatable job of announcing savage highways maintenance cuts begins just as stories about rampant, unrepaired potholes caused by another freezing winter start to emerge. The stories - like the potholes - are only going to get worse. It’s inevitable.
Unless, of course, you are Birmingham City Council. It is one of the lucky ones - a local authority where highways funding is ringfenced, highway condition is guaranteed, and gritting the roads won’t cost it a penny more than it planned, regardless of how much it snows or how cold it gets.
Yes, it’s costing it £2.7bn over the next 25 years. But looking at the predicament other local authorities are now in, or the one Birmingham would be in without it, it’s a great result for all concerned.
Long term funding
Birmingham City Council director of highways and resilience John Blakemore certainly thinks so.
“I’m delighted that we secured long-term funding for highway maintenance and management services in Birmingham,” he says. “It gives us the stability and certainty of resources and the long-term, 25-year partnership relationship we have with Amey puts us in a position to provide citizens with the highest quality highway maintenance services using public sector ethos, together with private sector capacity.
Sounds good. But even getting to the starting line wasn’t easy.
“It took seven years in total,” explains Amey project director Mike Notman.
“Its £2.7bn and it’s a lump sum, performance driven price, over 25 years. It made it very difficult to price, which is partly why it took so long to complete. The council needed to get the scope as watertight as it can be, and then get additional PFI credits, which took two or three bites. At the same time we needed to price it accurately and then get six banks to fund £350M of upfront capital expenditure.”
“I’m delighted that we secured long term funding for highway maintenance services in Birmingham”
John Blakemore, Birmingham CC
Getting the banks on board, right in the middle of the banking crisis, was a big challenge. The contract demands a lot of up front capital investment - £350M in the first five years as well as a further £500M over the remaining 20 years - and Amey’s monthly payment, designed to pay off the £2.7bn over the 25-year contract, is loaded against it in the early days.
“On day one we are only getting 60% of the monthly amount needed to see £2.7bn paid to us over 25 years,” he explains. It is then a contract condition that every six months in the first five years that goes up in increments of 4% - but only if targets for that period have been hit.
It is a cunning mechanism to focus the minds of Amey, and one that would certainly make a lending bank ask some pretty searching questions before handing over the cash; particularly as there is plenty to do in that first five-year period.
“There are three aspects effectively,” explains Notman. “There is capex work bringing carriageway and footways up to standard, then we have got to keep the network at those defined, improved standards, and finally we have got to carry out routine operations such as gulley clearance and winter maintenance.”
None of those aspects are to be taken lightly. The capex works includes refurbishing 2,500km of carriageway network, with specified output standards covering strength, residual life, skid resistance and visual condition needing to be achieved over 10 milestone targets at six monthly intervals. Over 4,000km of footway and cycle track are also to be brought up to improved standards, half of the 94,000 street lighting columns within the city will be replaced (see box), three of the city’s road tunnels will be refurbished and all 27 highway structures that have failed the 40t assessment will be brought up to current standards. Amey will even replace all 15 drainage pumping stations within the network.
“There are 1,300 performance indicators here of which 670 demand monthly reporting”
Mike Notman, Amey
The operations and maintenance works are not simple either, coming in at an annual cost of around £40M. These works include inspections of all 800 of Birmingham’s highway bridges, annual carriageway surveys, emergency and reactive maintenance, winter maintenance, gritting and snow clearance.
“There are 1,300 performance indicators here,” adds Notman, “of which 670 demand monthly reporting - and if we don’t achieve the required performance, we don’t achieve our “payment adjustments”.
Pretty tough stuff, which goes some way towards explaining the time it took to reach financial close. “We finally signed the deal on the day of the General Election in May last year. But it was the banks that spent six to nine months before making sure everything was covered.”
The biggest risk - simply because it is the biggest spend - is carriageway refurbishment. A detailed model based on condition surveys was developed to work out the expected spend profile from day one to year 25. The model uses all available condition data, but even that was not enough to reassure the banks. So cautious were they that a subsidiary company Amey Local Governent was set up to actually carry out the work. It is required to have its own cash set aside in case extra work is needed at any given time, protecting the concessionaire and its banks from unexpected cash demands.
But the banks were eventually convinced, and Amey exploded out of the blocks - moving from financial close on 6 May 2010 to service commencement on 7 June.
“We mobilised the contract in an extremely tight timescale,” says Blakemore. “We did it in five weeks and started successfully. We worked extremely closely with Amey at all levels to ensure that we had service continuity and were able to begin the substantive rehabilitation works required during the first five years of the 25-year deal.”
Amey did indeed hit the ground running. The first carriageway surfacing schemes started on day one of the contract and to date around 400,000m2 of carriageway surfacing has been completed. The contract is in full flow, the first six monthly target has been met, and investments and innovations are flooding out.
“We’ve got 25 years now to reap the benefit of investment,” he says. “So we’ve got a brand new vehicle fleet coming, GPS being installed on all trucks, depots are being refurbished and made fit for purpose, and we’re working with Tarmac to use cold recycled material for footway repairs and reduce the amount of material sent to landfill.”
More savings to come
Amey’s pretty sure more savings will also come. “We are only six months in, but we are already looking out for smarter, better ways of doing things - using our position as an end-to-end service provider to design with whole life cost in mind.”
Mind you, it needs them. This winter has already put it over budget when it comes to winter maintenance. “We priced up 25 years of winter maintenance and already this winter we have done three times as much as planned - but it is all part of the lump-sum contract.
Blakemore is also happy that Amey is keeping the local politicians happy - an important job in a city where a third of its councillors face re-election every year.
Amey will replace around 71,000 streetlights over the next 25 years.
New works will incorporate state of the art LED technology enabling a much improved lighting solution.
Half of the city’s 94,000 lighting columns will be replaced in the first five years. At least 24,000 of the remaining street lights will be replaced during the following 15 years beyond the capex period.
“Birmingham will be the first city in the UK to have LED lighting stock, and we are only able to do that because it has got PFI. These lights will never need changing over the 25-year contract - instead of every three to four years currently - and they will use 50% to 60% less power,” says Notman.
To light a street to a defined standard using conventional technology means overlighting initially to allow for natural dimming of the bulbs’ intensity. With LED lights, which can be controlled individually and remotely, this is no longer necessary - they begin life on 80% power, and are turned up as they gradually dim.” More power can also be saved by dimming lights between midnight and 5am when roads are quieter.
Saving power of course saves money, and this goes - chiefly - to the council.