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How Birmingham Highways new PFI Contract has changed

How Birmingham Highways new PFI Contract has changed

Since June 2019 Birmingham City Council (BCC) and Birmingham Highways Limited (BHL), the special purpose vehicle owned by Equitix and PIP Infrastructure Investments, have been working in close collaboration to restructure the £2.7bn Birmingham Highways PFI contract.

The overarching commercial principles they used when restructuring the contract were: simplicity, prioritisation, efficiency, marketability, and affordability. These have been reflected in the new contract which went out for tender on 14th February 2020 (UK Find a Tender Contract Notice, ref: 2022/S 000-004207). The new contract includes the following major changes:

1. Reduced length


The first major change is the length of the contract. Unlike a traditional PFI which range around 25 to 30 years, the restructured contract is only 12 years in length. The contract covers the period from April 2023 to June 2035, with full services commencing in September 2023 after a period of mobilisation. This shorter length makes the contract unique allowing the successful bidder to gain from the benefits of PFI structure but more efficient priorities as the contract is based on the realities of the current market and does not need to build in a variety of rigid conditions to predict what the service provider and authority will need in three decades.

2. Altered risk allocation

The risk allocation has been adjusted in various ways when compared to the original PFI. Notably, the surfacing condition risk has changed. The carriageway condition is the responsibility of the Operating Sub-Contractor and in short includes what condition can be achieved for a budget over 12 year period including handback.

For example, the footway condition is an “Authority risk” and a fixed amount will be allocated with schemes prescribed for delivery (a schedule of rates from the Operating Sub-Contractor is a bid deliverable). This risk allocation is on the principle that carriageway condition risk can be calculated and is better sitting with the private sector who are better placed to manage the risk whereas the footway risk is better with the Authority as it avoids unnecessary risk pricing due to the complexity and variability of footway surfacing.

Another change is structures, bridges and tunnels with the inclusion of a shared arrangement whereby the Operating Sub-Contractor only has the risk of reinstatement works up to a capped amount and routine maintenance responsibilities whilst all capital works and programmed maintenance remains the risk of the Authority.

The operation, maintenance and management risk remains largely with the Operating Sub-Contractor. However, a simplified Output Specification and more appropriate Performance Regime/Payment Mechanism make this element of the contract clearer, easier to price and administer.

Stakeholders who helped shape the new contract and attended the supplier days recognise that the market has changed with respect to limits of liability and financial exposure. Therefore, BHL and BCC are amending the original PFI to suit what is more reflective of current industry practice.

3. Simplification of performance measures

Keeping simplicity, prioritisation and efficiency front of mind when simplifying the Output Specification, Performance Regime and Payment Mechanism, BHL and BCC have reduced their Key Performance Indicators(KPIs) to 169 as opposed to over 600 that were in the original PFI contract.

This has been further simplified down to a total of 24 “Priority Performance Targets” have been defined. These now only cover the most critical and safety related performance requirements to be efficient. For example, for traffic signs the subcontractor will have to ensure no Traffic Signal Controller is >20 years old at the end of each Contract Year. Failure to comply will incur deductions and/or accrue Service Failure Points.

A total of 145 Routine Performance Targets” have been defined, which cover other requirements of the service delivery and are proposed in a way that optimises and aligns with how the Operating Sub-Contractor will deliver the services.

4. Creation of a Dispute Avoidance Board (DAB)

A fast-track dispute resolution mechanism has been included to ensure any issues are resolved quickly and efficiently. Part of this is a new the introduction of a DAB intended to facilitate the early resolution of disputes, in particular those of a technical nature.

The DAB would have three independent members appointed by the agreement of BHL, BCC and the Operating Sub-Contractor. It is anticipated that the DAB would potentially meet quarterly to understand any issues affecting the delivery of Services and to provide its view on any disputes/issues referred to it.

5. New Contractual Governance Structures

In addition to the DAB a new technical arbitration panel and Highways Oversight Board (HOB) have been created to meet quarterly or as required.

The technical arbitration panel will provide the necessary support in advance of the DAB and allow the parties to undertake necessary levels of technical analysis. The HOB is an additional layer of project governance, including representatives from BHL, BCC and the Operating Sub-Contractor who are not involved on a day-to-day basis, instead leading on strategic matters.

The HOB is an essential addition to governance to ensure strategic oversight for the project and engagement at a senior level across project stakeholders. The HOB will help maintain and steer the right culture from the top down and direct strategy as applicable. The HOB, as well as other layers of project governance, will help optimise collaboration and in turn facilitate a better delivery for Birmingham.

These five major changes demonstrate the lessons BCC and BHL have learned from the original PFI and issue with Amey. They also are based on the data gathered during the interim phase of service delivery, specifically the Management Information System (MIS) implemented in the interim period. The MIS will allow for a data led procurement process and give bidders sufficient information to undertake due diligence.

The whole tender process has been structured over a period of nine months to provide bidders with the opportunity to actively participate in dialogue too. Therefore, allowing detailed reviews, analysis and changes to be made to the new contract as currently proposed.

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