ACTION TAKEN UNDER DELEGATED POWERS BY OFFICER IN CONSULTATION WITH CABINET MEMBER(S) (EXECUTIVE FUNCTION)

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1 ACTION TAKEN UNDER DELEGATED POWERS BY OFFICER IN CONSULTATION WITH CABINET MEMBER(S) (EECUTIVE FUNCTION) Subject Officer(s) taking decision Cabinet Member(s) Appointment of Financial Advisors for Private Finance Initiative (PFI) Street Lighting Project Head of Highways and Design Borough Treasurer Cabinet Member for Environment and Transport Cabinet Member for Resources Date of decision 3 September 2004 Date decision comes into effect 3 September 2004 Summary Officer Contributors Status (public or exempt) Wards affected Enclosures Reason for exemption from call-in (if appropriate) The report seeks authorisation to appoint the finance firm, Deloitte, to provide specialist financial advice for the procurement of the Private Finance Initiative (PFI) Street Lighting Project. Liam Mckinley, PFI Street Lighting Manager Public with separate exempt section All Wards Appendix A Risk Register N/A Contact for further information: Liam Mckinley, PFI Street Lighting Manager Serial No.HW107

2 1. RELEVANT PREVIOUS DECISIONS 1.1 Cabinet 9 September 2002 Item No.4, Decision No. 3 which approved that various recommended options for financing Street Lighting be progressed. 1.2 Cabinet 20 January 2003 Item No. 12, Decision No. 11 which authorised the Head of Planning, Highways and Design to proceed with an outline business case for the Street Lighting PFI. 2. CORPORATE PRIORITIES AND POLICY CONSIDERATIONS 2.1 The proposed Street Lighting PFI Project forms part of the Local Authority Corporate Plan based on its vision of putting the community first and also part of the Authority s strategic plan incorporating many of the Council s priorities and targets. 2.2 Sustained investment to improve the standards of street lighting and illuminated traffic signs and bollards throughout the borough, through the PFI Street Lighting project, will make a very significant contribution to delivery of the following four out of five corporate priorities and targets as set out in Barnet Council s Corporate Plan 2004/ /08: Tackling Crime Supporting the Vulnerable in the Community Achieving a Cleaner Greener Barnet Repairing Roads and Pavements. 3. RISK MANAGEMENT ISSUES 3.1 Risk assessment is an ongoing process for the duration of this project. Initial risk assessments have been carried out and incorporated into the Risk Register attached at Appendix A. 3.2 I do not consider that the appointment of Deloitte as Financial Advisors for the Street Lighting PFI would raise significant levels of public concern or comment or give rise to policy considerations. 4. FINANCIAL, STAFFING, ICT AND PROPERTY IMPLICATIONS 4.1 All of the PFI Street Lighting project is concerned with financial implications. The appointment of financial advisors forms part of the development costs for this project. The Council has made provision in the revenue budget and Forward Plan for 2005/6 for a PFI development budget of 400,000 to provide external legal, financial and technical support for this project. The financial costs will be paid out of this development budget. 4.2 Deloitte s tendered price for the fixed fee elements of the project total 99,936. Daily and hourly rates have been obtained from the firm as well as the fixed fees costs. It is anticipated that the fixed fee costs will be exceeded if there are protracted negotiations that cause overruns in the proposed timetable. Further detail on the tenderer s submissions is set out in the Background Information. The expenditure will be incurred during 2004/5 and 2005/6. The tendered price from Deloitte is within the estimate allowed for in the development budget of 400,000. Contingency amounts have been built into the project development budget to allow for cost overruns contingent with our risk management strategy. 4.2 There are no staffing, ICT or property implications arising from this appointment. 2

3 5. COMMENTS, IF ANY, OF THE COUNCIL S STATUTORY OFFICERS (Head of Paid Service, Chief Finance Officer, Monitoring Officer) 5.1 None. 6. BACKGROUND INFORMATION 6.1 All PFI Street lighting projects to date have been procured under the European Union Procurement Regulations using the negotiated procedure. The hallmark of all signed deals to date have been the extent of the in depth and involved negotiations between the private and public sectors prior to financial close. Expert financial advice is therefore required to protect the Council s position with regard to this contract. 6.2 In the appointment of the financial advisors, Deloitte, the Council have followed the relevant government guidance from the 4P s. The 4P s are a government body that were set up to assist Local Authorities in procuring PFI projects. Relevant guidance for similar type of projects published by the 4P s includes, Five Steps to Appointment and Management of Advisors and the Street Lighting Procurement Pack. 6.3 Tenders were invited from a total of six firms from the 4P s select list. A financial brief, conditions of contract and a comprehensive methodology and pricing format was drawn up and sent to each of the six firms. The Council required each of the bidders to provide fixed fee costs for each of the key project stages as well as daily and hourly rates. The Council in this approach endeavoured to obtain clarity and certainty with regard to tender prices. See exempt report. 6.3 Disappointingly, only two out of the six invited firms submitted tenders. The firms that did not tender, cited conflicts of interest and lack of resources, as an explanation. The two firms that did tender were assessed across a range of previously agreed criteria and subsequently invited to interview. The interview panel consisted of the Borough Treasurer, Head of Highways and Design, Borough Treasurer s Head of Finance for Environment and the PFI Project Manager. 6.4 Officers were satisfied that both of the firms invited to interview were capable of carrying out the service. In the initial assessment the companies were evaluated against price and methodology of work, their approach, experience and ability. 6.5 Totalled prices against each of the key stages were as follows: 1. a Deloitte 99,936 - based on 63 days 2. b 86,310 - based on 68.5 days Full identity of Firm b is given in the exempt report. 6.7 Evaluation details see exempt report 6.8 Evaluation details see exempt report 6.9 Evaluation details see exempt report 6.10 Evaluation details see exempt report 6.11 Evaluation details see exempt report 6.12 Taking all the factors into consideration, the application of the scoring mechanism from both the first and second rounds clearly demonstrated that the Deloitte bid was much better value for money with a combined score of 83% against a combined Firm b score of 50% out of a 100% Deloitte are recognised nationally as one of the leading firms of financial advisors having extensive experience across both the public and private sectors in Leisure, Transport, Education, Health, Defence and most relevant for this appointment, Street Lighting. Deloitte 3

4 provided financial advice through to financial close on the first path finder, street lighting project to be signed in the UK, for Brent and on a number of others including, Walsall, Stoke on Trent City Council, Staffordshire, Newcastle upon Tyne and North Tyneside Councils. Deloitte has worked closely with all government departments including the 4P s on street lighting matters. Deloitte have also worked closely with Addleshaw s, recently selected by this Council as their Legal Advisors, on the Stoke street lighting project, which is generally regarded as one of the most innovative and best value for money street lighting projects signed to date In conclusion, given what is set out above the interview panel therefore considered that the contract for the provision of financial services should be awarded to Deloitte. 7. LIST OF BACKGROUND PAPERS 7.1 Invitation to Tender. 7.2 Any person wishing to inspect the background papers listed above should telephone CONSULTATION WITH CABINET MEMBER(S) 8.1 Councillor Matthew Offord, Cabinet Member for Environment and Transport, and Councillor Anthony Finn Cabinet Member for Resources have been consulted and support the recommendations. Both gave their replies by dated 31 August OFFICER S DECISION I authorise the following action: 9.1 To accept the most economically advantageous tender from Deloitte in the sum of 99,936 and authorise their appointment to provide financial support for the PFI Street Lighting Project, subject to completion of documentation in a form approved by the Borough Solicitor. 9.2 That the Heads of Services concerned report regularly to the Cabinet Members for Environment and Resources on progress of the project and the costs. Signed Mike Freestone Mike Freestone, Head of Highways and Design Date 1 September 2004 Signed Clive Medlam Clive Medlam, Borough Treasurer Date 3 September

5 APPENDI A RISK LOG Proj ect nam e PFI STREET LIGHTING PROJECT Rele ase Draft Live Document Date: May PRI NC E2 Author: Liam Mckinley Owner: Client: Document Number: RL1 - LMCK London Borough of Barnet

6 Document History Doc ume nt Loc atio n This document has evolved from risk workshops carried out for the development of the Expression of Interest and Outline Business Case documents. The source of the document will be found in the Project File Revi sion Hist ory Date of next revision: Ongoing Revision date Previous revision date Summary of Changes Changes marked App rova ls This document requires the following approvals. Signed approval forms are filed in the project files. Name Signature Title Date of Issue Version Distr ibuti on This document has been distributed to: Name Title Date of Issue Version 6

7 RISK MANAGEMENT Introduction The risk management processes set out below are an integral part of the wider management structures set out in the Project Initiation Document designed to deliver this project in a controlled and efficient manner. An ongoing process of effective and co-ordinated risk identification systems are vital to the success of this project. This process has already been initiated as part of the development of the project in compiling the Expression of Interest Document, (June 03) and the Outline Business Case (May 04). A number of risk workshops were held by Deloitte and Derek Rogers Associates and Council Project Officers to assist in the preparation of these documents. A range of risks involving design, construction, implementation, financing and operation of the project were identified, evaluated in terms of probability of occurrence, impact and cost. In compiling the Public Sector Comparator for the OBC the costs of the risks have been subject to sensitivity testing and optimism bias, designed to provide for a margin of error. Risk Management Strategy Those identified risks have been incorporated into this Risk Management Strategy to ensure that the risks are managed as effectively and efficiently as possible. The aim of the strategy is to ensure that the project objectives are met and to protect against the chance of something adverse happening that will have a negative impact on the achievement of these objectives. The risk management strategy is the systematic application of management policies, procedures and practices to the tasks of establishing the context, identifying, analysing, evaluating, treating, monitoring and communicating risk to ensure that: The project objectives are defined and agreed The risks threatening those objectives are identified, analysed and evaluated Decisions to control those risks are identified, implemented and monitored The risk management process is effectively communicated to the internal and external stakeholders, and, Ensure systems and processes are in place to minimise risk. As set out in the PID adequate and effective communication is recognised by Officers as a fundamental pre requisite to the management of risk, with a robust structure of governance and controls assurance to assess and minimise the risk of untoward events through the appropriate placement of accountability and responsibility. Risk Approach Set out below is the approach that the Council is taking to manage and control the project risks. Overview of Approach to Risk Assess broad Identify relevant risks 7 Assess broad

8 Risk Allocation Matrix The guiding principle in the determination of risk allocation is to place risk with those best placed to manage it. The objective is to achieve the optimum risk transfer point the equilibrium point between risk transfer and value for money. The following table sets out the principal risks associated with this PFI Project. The table indicates which risks, in the Council s view, should be borne by the Authority, borne by the Bidder and those risk which should be shared between the Council and the Bidder, as part of the Project Agreement. RISK AUTHORITY BIDDER SHARED I DESIGN & INSTALLATION II New investment in assets throughout the life of the Project Agreement for existing inventory Specification variation Crime areas, accident blackspots, traffic changes, conservation areas and signs, in areas which are subject to relighting in the Initial Asset Renewal Programme (to meet the output specification) Specification variation Crime areas, accident blackspots, traffic changes, conservation areas and signs, in areas not subject to relighting and in all areas after the Initial Asset Renewal Programme (to meet the output specification) Service works on the Regional Electricity Company (REC) distribution network Delays in commissioning new equipment Delays or inability to install and/or redevelop as expected due to planning delays or refusals Compensation Events - delay - cost Relief Events - delay - cost OPERATION OF FACILITIES & SERVICES Force majeure (narrow definition) Latent defects in existing stock Insufficient investment to reduce operational costs Escalation of general operational costs Escalation of maintenance & repair cost Failure of installations to keep up with current technology Failure to meet performance/quality standards Changes of law which are the responsibility of the Authority (e.g. relating to PFI) General legislative change not involving Capital Expenditure (e.g. relating to Streetworks, Health & Safety, British Standards, Construction Design and Maintenance Regulations (CDM), Institution of Electrical Engineers (IEE) Wiring Regulations BS

9 * III General legislative change involving Capital Expenditure Damage to persons or property Relief Events - delay - cost Energy continuity of supply Electrical Testing Requirement (under IEE regulations and Electricity at Work Acts) Failure to meet specified lighting level in defined areas of difficulty (e.g. tree-lined roads, conservation areas)* Failure to meet specified lighting level Operation and maintenance of private cabling Liability in respect of data supplied in the bidding process (e.g. inventory error or omissions) Obsolescence/non-availability of critical spare parts IT Failure of connection to Authority or Performance Measuring systems Damage or disruption to Authority infrastructure and facilities Poor management of sub-contractors or Bidder's own staff Health and Safety regarding contractors and subcontractors providing services Surge in operational requirements due to local/national disaster not constitutive force majeure Pilfering/loss of equipment Other insurable loss Required reduction in staff numbers TUPE costs higher than anticipated Termination due to government intervention Failure to meet energy efficiency targets Actual cost of materials/labour/energy Industrial action by Authority staff/authority related Other industrial action Liquidation of sub-contractors Liability for negligence in the performance of the services Facilities operationally inefficient Insurance Cost overruns for new equipment FINANCING Interest rate changes Tax rate and regulation changes (including relating to Capital Allowances) not affecting the Authority VAT changes not affecting the Authority Exchange rate changes * Indexation* Bidder runs at a loss Income generation not meeting target New investment in income generation schemes to maintain performance Future funding requirement for additional works/changes Availability of funds * Receipt of income from other sources* 9

10 IV POST PROJECT AGREEMENT Post-termination cost of transferring installations to the Authority and replacement of the Bidder Indicates that the Authority s view is provisional, subject to discussion and clarification. 10