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

Subject PFI Street Lighting – Final Contract Negotiation Revisions

Officer taking decision Head of Environment and Transport

Cabinet Member(s) Leader and Cabinet Member for Resources and Cabinet Member for Environment and Transport

Date of decision 1 June 2006

Summary This report seeks to bring to Members’ attention the minor changes to the PFI project arising from the final negotiations prior to contract close. The potential saving compared to budget set out in paragraph 4.4 will be taken into account in the revenue monitoring and Forward Plan process.

Officer Contributors Mike Freestone, Head of Environment and Transport

Status (public or exempt) Public

Wards affected Borough Wide

Enclosures Appendix A – Affordability Calculation

Reason for exemption from call-in (if appropriate)

N/A

Contact for further information: Liam Mckinley, PFI Project Manager, Street Lighting 020 8359 3032

Serial No. HW149a

1. RELEVANT PREVIOUS DECISIONS 1.1 Cabinet 9 September 2002 decision 3 which instructed that various options for major investments in the Highways and Street Lighting infrastructure be investigated.

1.2 Cabinet 20 January 2003 decision 4 which authorised the Head of Highways and Design to progress the Street Lighting PFI project.

1.3 Cabinet 27 September 2004 decision 9 which authorised the Head of Highways and

Design using delegated powers in consultation with the Cabinet Member for Environment and Transport and the Cabinet Member for Performance, Partnerships and Best Value to:-

• jointly invite short listed bidders to negotiate for the PFI Lighting Services • jointly invite short listed bidders to Best and Final Offers • jointly engage in negotiations with the private sector • report back to Cabinet / Cabinet resources if there is material change to the scope and

nature of the contract • report back to Cabinet / Cabinet resources prior to appointment of Preferred Bidder.

1.4 Delegated Powers Report titled PFI Street Lighting Project – Shortlist for Best and

Final Offers’ dated 28 June 2005, approved by Head of Highways and Design in consultation with Cabinet Member for Environment and Transport and with Cabinet Member for Resources.

1.5 Cabinet 27 October 2005 Decision 1 which appointed David Webster Ltd, part of the ETDE

Group, as Preferred Bidder, subject to a parallel decision to be taken by Enfield on 2 November 2005 and authorised that the Head of Highways and Design to undertake contractual negotiations to financial close.

1.6 Cabinet 3 April 2006 Decision 4 which awarded the contract to Barnet Lighting Services, a

newly formed company jointly owned by David Webster Limited, Mill Group Limited and ETDE (Mill Group Ltd are the equity providers to the new company and ETDE are a subsidiary of the large French construction Company Bougyues), subject to:-

(i) the final terms of the contract being settled to the satisfaction of the Head of Highways and Environment

(ii) a further report being considered by Cabinet Resources should any aspect of the project materially change between now and the Financial Close date of 31st March 2006. (To Note this dated changed to 21st April 2006).

(iii) a parallel decision being taken by Enfield Council, and (iv) Government approval for the Final Business Case for the Project (v) Final Determination report from the Council’s external auditors.

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2. CORPORATE PRIORITIES AND POLICY CONSIDERATIONS 2.1 The Council has developed a clear vision about its priorities and what it wants to achieve

based on “putting the community first” as reflected in the findings from resident surveys. Sustained investment to improve the standards of street lighting and illuminated traffic signs and bollards throughout the Borough, through the proposed PFI Street Lighting project, will make a very significant contribution to delivery of the following key corporate priorities and targets as set out in Barnet Council’s Corporate Plan 2005/06 - 2008/09:

• Tackling Crime • Supporting the Vulnerable in our Community • Achieving a Cleaner Greener Barnet • Repairing Roads and Pavements

3. RISK MANAGEMENT ISSUES 3.1 Throughout the procurement phase the project has been subject to an ongoing and

robust risk management process that sought to identify, evaluate and mitigate all possible risks. In accordance with Prince2 project management methodology a risk management group and a risk register were put in place. The risk management group met on a regular basis and reviewed the risk register, providing regular reports to the Barnet PFI Project Board and the Joint Barnet and Enfield Working Group.

3.2 As part of the Final Business Case to GoL further risk analysis was undertaken looking at

post contract award risks and the management methodologies required to manage these risks. This work is ongoing.

4. FINANCIAL, STAFFING, ICT AND PROPERTY IMPLICATIONS 4.1 The financial implications of the PFI Street Lighting project were last reported to Committee

on 3 April 2006. In that report Members were advised that the Council’s affordability threshold was built up from a combination of :-

• the available street lighting budget, and • PFI Credits of £27.77 m.

4.2 Members were also advised that the cost of the DWL standard bid together with the

contingency sums required for Accruals and Lamp Rating Changes could be met by the Council contribution together with the PFI Grant Support and interest earned on the cumulative surpluses. Details on these costs were set out in the Appendix to that report.

4.3 Minor changes arising from the finalisation of the Interest Swap Rate previously set at

5.5% for the purposes of benchmarking the bids, was confirmed on the day of Financial Close at 4.73%. This has resulted in minor profiling changes to the financial model. The headline figures regarding the costs to the Council were also set out in tabular form in the last report. This table is set out again below – with further columns added to the right hand side of the table showing the effect of the final negotiations, and figures for 2007/08.

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4.4 Table One – Financial Implications 2006/07

Street Lighting Contract £000 (Col 1)

As per Cabinet Report 3rd April ‘06

2006/07

£000(Col 2)

As per Financial Close 21st April ‘06

2006/07

£000(Col3)

Figures for 2007 / ‘08

PFI and related contract costs

BAFO Submission

£2,366m

Reduced by the following

Flat UP bid (£91)

Increase of the UP 50:60 (£21)

£2,254

Additional

Adjustment required to balance surplus £22

First Year Contribution – Appendix A £2,276 (1) £2,039 (1) £2,280 (1)

Additional requirements

Interim service Cost for April 06 £50 (4)

Document Custody Costs £20 (5) £20 (5)

£2,276 £2,109 £2,300

Other Costs

Accruals, De Accruals, Traffic Schemes and Development Works General Note 1

£100 £100 £103

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Re-rating of Lamps

£100 (2)

worse case full year effect

£83 (2) £92 (2)

Electricity Consumption 1 April -30 Sept 06 £200 (3)

Further Saving Identified

Alternative Insurance Package (£13) (6) Included above (6)

Included above (6)

Total Requirement £2,463 £2,492 £2,495

2006/07 Public Lighting Budget (including items in contingency)

£2,626 £2,626 £2,693

Potential Saving £163 £134 £198

Notes relating to the above table: 1. First Year Contribution (Col 1) as per Cabinet Report

(Col 2) as per Financial Close – Appendix A part year 2006/7 (11 months)

(Col 3) as per Financial Close – Appendix A Full Year 2. Re rating of Lamps (Col 1) as per Cabinet Report

(Col 2) Revised estimate of Financial Close - Part year 2006/7 (11 months)

(Col 3) Revised estimate of Financial Close – Full year

3. Electricity Consumption Model at Financial Close excludes electricity costs for April - September 2006 as cheaper to retain the old contract until it is due to be renewed in October 2006.

4. Interim Service Cost Previous models assumed 2006/7 full year

PFI contract did not commence until 30 April 2006, therefore allowance for 11 months PFI contract plus 1 month interim arrangements.

5. Document Custody Costs Additional item to allow for Custodian arrangements to

secure and update the financial model as required by the funders.

6. Alternative Insurance (Col 1) as per Cabinet Report

(Col 2 and 3) included in models produced at Financial close – Appendix A

General Notes:

5i) The projection for accruals, de-accruals, traffic schemes, etc, will be taken as a

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contingency item to be released as incurred and after approval as part of the revenue monitoring reports to Cabinet Resources Committee. The costs in the table excludes the additional costs resulting from increased energy costs as from October 2006 for which there is a separate budget

ii) Appendix A also sets out the required Council budget from year 1 to 25. However these

figures are based on a projected inflation figure of 2.5%. The figures will need to be adjusted to reflect the actual inflation rate during the course of the contract. The Council contribution together with the PFI Grant Support and interest earned on the cumulative surplus will provide the necessary finance to fund the contract. It will be necessary to build these estimated amounts into the Forward Plan over the total life of the contract subject to review as part of the Forward Plan process.

4.5 There is a projected net saving compared to budget arising from this project in line with

that reported to Cabinet on 3 April 2006. The financial implications arising from the figures set out in paragraph 4.4 will be taken into account in the revenue monitoring and Forward Plan process.

4.6 There are no staffing, ICT or property implications arising from this decision. 5. LEGAL ISSUES 5.1 None 6. CONSTITUTIONAL POWERS 6.1 The Council’s Constitution Part 3 paragraph 6 authorises Chief Officers to take decisions

in consultation with a Cabinet Member where it involves an earlier decision of the Cabinet.

7. BACKGROUND INFORMATION 7.1 At the time of writing the previous report for Committee on 3 April 2006 detailed

negotiations were taking place to finalise the outstanding issues. As in all PFI projects these intensive last minute negotiations centred primarily around commercially sensitive issues of importance to the Funders and finalisation of the drafting of the project documentation.

7.2 The Committee decision to award the contract to DW Lighting was subject to a number of conditions as set out in paragraph 1.6. Taking these in turn:-

(i) the final terms of the contract being settled to the satisfaction of the Head of

Highways and Environment.

The Head of Highways and Environment can confirm that the final contract terms have been settled to his satisfaction with the final outcome producing a saving in the first full year of the PFI contract above that projected and previously reported to Cabinet Resources Committee.

(ii) a further report being considered by Cabinet Resources should any aspect of the

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project materially change between now and the Financial Close date of 31st March 2006.

Officers can confirm that there has been no material change to the project arising from the last minute negotiations. To note Financial Close was achieved on the 21 April 2006. Further detail on the changes arising from the final negotiations are set out below. (iii) a parallel decision being taken by Enfield Council,

Officers can confirm that a parallel decision was taken by Enfield Council on 22 March 2006. (iv) Government approval for the Final Business Case for the Project Government have approved the final business case and are satisfied that the project is viable and is consistent with the scope, aims and objectives as set out in the Outline Business Case submitted to Government on June 2004. A letter of confirmation dated 19 April 2006 has been received from Government Office for London; they have also confirmed in writing that the PFI credit allocation has been approved. v) Final Determination report from the Council’s external auditors.

The Council’s financial advisors, Deloitte have confirmed to Robson Rhodes the external auditors that the project meets the Treasury’s ‘off balance sheet’ tests. As a result of this and Robson Rhodes carrying out their own due diligence on the project documents, the external auditor has provided a draft final determination report to the satisfaction of GoL and DfT.

Final Negotiation Revisions 7.3 As set out above financial close was achieved on the 21 April 2006. Prior to this

date a number of commercial / financial legal and technical issues were resolved to allow Close to take place. These issues are set out below:

Commercial / Financial Changes

7.4 The commercial and financial issues settled prior to Close included among others:- • Clause 40.12 / (Collateral Warranty/ Parent Company Guarantee)

The Authority agreed to give up its requirement for collateral warranties from Secondary sub contractors provided that the Parent Company guaranteed the Continuing Services under the Authority Sub Contract Direct Agreement. Addleshaws advised the Authorities that this was a favourable comprise and was agreed. • Authority Sub Contract Direct Agreement

7The Authority accepted that in the event of termination should it wish to engage the

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sub contractor to provide Continuing Services then it may be obliged to pay outstanding sums due to the Sub Contractor pursuant to the Direct Agreement Sub – Contract. The Authorities took the view that should it find itself in this position and presented with onerous sub contract costs then it would simply not engage the sub contractor for Continuing Services. This particular issue was agreed as part of a package with other outstanding issues. • Clause 24. (i)(d) (Third Party Claims)

The Insurance provisions contained within the Project Agreement are SOPC (Standardisation of PFI Contracts) compliant. In accordance with this, the Service Provider wanted the reference to ‘third parties’ in the contract drafting deleted so that all uninsured breaches would be subject to the cap of £3 million (SOPC3 wording). The Authorities after taking the appropriate insurance advice agreed this drafting.

• Schedule 6A (Payment Mechanism) Unitary Charge Split Costs The Unitary Charge Split costs contained within the contract represent both the

savings arising from joint procurement but also the additional costs that Barnet would have to pick up as a result of the Enfield contract being terminated. The Spilt costs therefore represent the loss of synergies in relation to SPV operating costs indexed at RPIX and maintenance, operating and lifecycle costs which are indexed at RPIX plus 0.5%.

In the final negotiations the Authority managed to reduce the Unitary Charge Split payments by 5%, and to strip out additional payment for the Independent Certifier. Mitigation procedures were also agreed with regard to the steps that DWL would have to take to find alternative uses for the depot space no longer required as a result of the termination of the Enfield contract.

• Schedule 7A Change Procedure The Service Provider wanted to claim all reasonable and proper costs incurred in

working on a Change Request, even if above the previously agreed Estimated Abortive Costs. The Authorities position was that it wanted the proposed drafting to remain i.e. that the service provider is not reimbursed for the first £500 of costs incurred and that any costs incurred above the estimate are at the Service Providers risk.

The Service Provider eventually agreed to this position as part of the package.

The Service Provider wanted the mark up on materials to be 20% for additional works – the Authority wanted it to remain at 7.5%

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This matter was resolved by the Service Provider providing a Schedules of Rates inclusive of all labour and material costs so that it would not be necessary to carry out additional works on a cost plus basis. It was further agreed that where a rate had not been identified in the schedule but was subsequently found to be necessary a

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new rate would be introduced through the Change Procedure.

• Custody Agreement

As usual in all PFI contracts there is a requirement to hold the Financial Model in Custody. After negotiation on the process and cost implications it was agreed that the Service Provider would cover the cost of setting up the Custody Agreement and the ongoing costs for removal and replacement would be met jointly by the Service Provider and the Authority.

Legal Issues

7.5 As referred to previously a number of amendments to the documents were agreed during commercial close which required initalizing. These changes are in summary as follows:-

• Clause 26 (Employment Matters – Tupe)

Whilst there are no Tupe implications for Barnet arising at the start of this contract,

TUPE may well apply at the end of the contract. Amendments in the drafting were agreed by the employment lawyers to ensure that the Authority Indemnity in Clause 26.10 of the Project Agreement is as limited as commercially acceptable. Definition of ‘Base Cost’ was inserted at financial close. The definition of New Employees’ was changed to reflect the fact that some employees will be employed by the Sub Contractor. • Schedule 6A (Payment Mechanism) A clause had been inserted in the Payment Mechanism by the Service Provider which would have restricted the way in which payment adjustments are calculated. It effectively meant that there would be no double counting of adjustments across the Performance Standards. There was some robust discussions on this as the Authorities felt this watered down the Payment Mechanism and significantly reduced the application of adjustments for poor performance by the Service Provider. The Service Provider reluctantly agreed to delete this additional clause.

Some other minor drafting changes were made to the Payment Mechanism

• Authority Sub Contract Direct Agreement – Schedule 23 These amendments were made to allow the Authority to be able to make claims

against the Sub –Contractor for poor performance and to resolve conflicts in the drafting. Other changes included:-

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• Clause 2.3 to 2.5 (Service Commencement Date)

The new Service Commencement date agreed for the PFI Contract was 30 April 2006. Both parties agreed the mobilisation period would be limited to two months and would run from the service commencement date. During this period DWL are to commence the service and deliver the performance standards required by the contract. However, it was agreed that during this first 2 month mobilisation period that there would be a relaxation of adjustments under the Payment Mechanism except for Performance Standard One adjustments and those that apply to emergency responses. • Clause 16.21 Traffic Management Act

The drafting set out below was eventually agreed for Clause 16.21.

‘The Service Provider acknowledges that the Authority has duties imposed upon it by the Traffic Management Act 2002 and shall co-operate and liase with the Authority to assist the Authority in discharging its duties under Section 16 of the Traffic Management Act 2002’.

Technical Issues 7.6 A number of drafting changes were made to the Output Specification, which sets out

the eight performance standards that the Service Provider has to adhere to in the delivery of the Service. These were minor drafting changes and included changes in definitions and amendments in the text to ensure there is consistency with other parts of the project documentation.

Amendments were made to the Data Sets which are to form the basis of the Management Information System data base. These allowed some relaxation to the timescales by which the data should be entered into the Management Information System by the Service Provider. This was agreed for practical reasons as some of the data relates to designs and some of this information will only be known when required by the Core Investment Programme from year 1 to 5.

Further drafting changes were also made to the Method Statements. The method statements set out the working practices to be used by the Service Provider in delivering the Service and these changes were primarily to tighten the drafting to make it more enforceable and again to ensure consistency with other parts of the project documentation. Conclusion

7.7 As previously reported the PFI Contract was based on the DWL Standard bid. Whilst this had the dual effect of allowing for a faster procurement time and minimising derogations to the Standard Form it is still a facet of the negotiated procedure that there is more concentrated effort by the Lawyers and in particular the Banks and the Funders in the closing stages and this inevitably leads to last minute changes to be agreed.

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This report has been prepared to provide completeness on the detail of the deal but as can be seen from the detail above none of these amendments in any way materially change the project.

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8. LIST OF BACKGROUND PAPERS 8.1 Previous Reports as set out Above 8.2 PFI Project Management Risk Register 8.6 Any person wishing to inspect the background papers listed above should telephone 020 8359 3032 9. CONSULTATION WITH CABINET MEMBER(S) 9.1 Councillor Michael Freer , Leader and Cabinet member for Resources and Councillor

Mathew Offord, Cabinet Member for Environment and Transport were consulted by email on 30 May 2006. Councillor Freer gave his approval by email on 30 May 2006 and Councillior Offord gave his approval by email on 1 June 2006.

10. OFFICER’S DECISION I authorise the following action - 10.1 That Members note the content of this report and that the financial implications as

set out in Table 1 paragraph 4.4 will be taken into account in the revenue monitoring and Forward Plan process.

10.2 That there will be a projected net saving of £134,000 in 2006/7 and £198,000 in

2007/8 10.3 That there are no material changes to the PFI Contract arising from the final

negotiations. Signed

Mike Freestone Mike Freestone, Head of Environment

and Transport

Date 1 June 2006

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Appendix A

BARNET STREET LIGHTING PFIAffordability calculation APPENDIX A

Annual Annuity 2,235,068

ANNUITY METHODGrant Council

BarnetTotal Unitary Surplus / Interest on Cumulative

Year Support Resources Resources Charge Deficit Average SurplusContribution + Energy Balance

£ £ £ £ £ £ £ £

INPUTS1 2,141,195 0 2,038,690 4,179,885 2,493,307 1,686,578 29,515 1,716,093

PFI Credit (£) 27,775,000 2 2,235,068 0 2,279,626 4,514,694 3,629,875 884,819 75,548 2,676,460Pool Rate 6.3% 3 2,235,068 0 2,336,617 4,571,685 4,137,359 434,325 101,277 3,212,062Inflation 2.5% 4 2,235,068 0 2,395,032 4,630,100 4,704,965 -74,865 111,112 3,248,309Interest on 'Overpayments' 3.5% 5 2,235,068 0 2,454,908 4,689,976 5,357,297 -667,321 102,013 2,683,000Scaling Factor 100% 6 2,235,068 0 2,516,281 4,751,348 5,262,448 -511,099 84,961 2,256,862Project Length (Years) 25 7 2,235,068 0 2,579,188 4,814,255 5,204,622 -390,366 72,159 1,938,654First Year Adjustment Grant Support 0.958 8 2,235,068 0 2,643,667 4,878,735 5,237,625 -358,890 61,572 1,641,337First Year Adjustment Revenue 0.917 9 2,235,068 0 2,709,759 4,944,827 5,271,714 -326,887 51,726 1,366,176LBB 05/06 Budget 0 10 2,235,068 0 2,777,503 5,012,571 5,306,922 -294,351 42,665 1,114,490LBB 06/07 Budget 0 11 2,235,068 0 2,846,941 5,082,008 5,343,283 -261,275 34,435 887,650Sinking Fund year 1-18 2,224,025 12 2,235,068 0 2,918,114 5,153,182 5,380,808 -227,626 27,084 687,109Sinking Fund year 19 to 26 2,158,789 13 2,235,068 0 2,991,067 5,226,135 5,419,584 -193,450 20,663 514,323

14 2,235,068 0 3,065,844 5,300,911 5,459,625 -158,713 15,224 370,833Headline UC 4,301 15 2,235,068 0 3,142,490 5,377,558 5,500,968 -123,410 10,819 258,242

16 2,235,068 0 3,221,052 5,456,120 5,543,654 -87,535 7,507 178,21417 2,235,068 0 3,301,578 5,536,646 5,587,725 -51,079 5,344 132,47918 2,235,068 0 3,384,118 5,619,186 5,633,222 -14,037 4,391 122,83319 2,235,068 0 3,366,974 5,602,041 5,680,191 -78,149 2,932 47,61620 2,235,068 0 3,451,148 5,686,216 5,728,659 -42,443 924 6,09721 2,235,068 0 3,537,427 5,772,495 5,778,688 -6,193 105 822 2,235,068 0 3,625,862 5,860,930 5,830,343 30,587 536 31,13123 2,235,068 0 3,716,509 5,951,577 5,883,658 67,919 2,278 101,32824 2,235,068 0 3,809,422 6,044,489 5,927,089 117,401 5,601 224,33025 2,235,068 0 3,904,657 6,139,725 5,967,741 171,984 10,861 407,17526 93,873 0 333,523 427,396 841,574 -414,178 7,003 0

UC INPUTS

UC Energy payments Total Payments1 2,195 298 2,493,3072 2,989 641 3,629,8753 3,439 698 4,137,3594 3,947 758 4,704,9655 4,534 823 5,357,2976 4,391 871 5,262,4487 4,301 904 5,204,6228 4,301 937 5,237,6259 4,301 971 5,271,714

10 4,301 1,006 5,306,92211 4,301 1,042 5,343,28312 4,301 1,080 5,380,80813 4,301 1,119 5,419,58414 4,301 1,159 5,459,62515 4,301 1,200 5,500,96816 4,301 1,243 5,543,65417 4,301 1,287 5,587,72518 4,301 1,332 5,633,22219 4,301 1,379 5,680,19120 4,301 1,428 5,728,65921 4,301 1,478 5,778,68822 4,301 1,529 5,830,34323 4,301 1,583 5,883,65824 4,301 1,626 5,927,08925 4,301 1,667 5,967,74126 699 142 841,574