Leeds City Council Neighbourhoods and Housing Department
Swarcliffe HRA PFI Round 1: Final Business Case
July 2004
Swarcliffe HRA PFI Round 1: Final Business Case
LEEDS CITY COUNCIL
SWARCLIFFE HRA PFI ROUND 1 - FINAL BUSINESS CASE
CONTENTS
SECTION PAGE
A COVERING DOCUMENT 3
B OBJECTIVES OF THE SCHEME 5
C FINANCIAL CONSIDERATION & AFFORDABILITY 9
D STAKEHOLDER COMMITMENT 13
E COMPETITION 17
F RISK ALLOCATION AND ACCOUNTING TREATMENT 24
G CONTRACT TERMS AND PAYMENT MECHANISM 28
H STATUTORY PROCESSES/CONSENTS 33
I POST CONTRACT SIGNATURE 35
APPENDICES
A - Risk Matrix B - Public Sector Comparator C - Completed ODPM Model D(i) - Executive Board Report D(ii) - Executive Board Report (Annexes) E - Derogations Schedule
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A COVERING DOCUMENT
1. Detail any differences with OBC
The scheme objectives have not changed, and there have been no substantive changes to the scheme content.
There have been minor changes, which have been notified to ODPM, as follows:- Demolition of properties by Leeds City Council in advance of the contract Decision to demolish rather than refurbish 90 properties on value for money grounds Adjustments to LCC requirements between ITN 1 and 2, to improve value for money and reduce bid price ( detailed at B2) Decision to include only property repairs and maintenance and associated services in the contract on value for money grounds. At OBC stage bids were invited for both the full housing management service and for more limited ‘property’ based services Establishment of Leeds South East Homes in February 2003, which has changed day to day liaison and monitoring arrangements (now a shared responsibility between the Council and the ALMO) and necessitated re-working of Council contributions via the HRA to reflect ALMO Management Fee calculations
2. Detail any differences with other information provided in support of any requested increases in credits
Table 1 summarises changes to the credits required by the project since the OBC for the refurbishment of 1781 properties was submitted in September 1999. The level of PFI Credit required has increased from that estimated in the original OBC due to two main factors: i) more accurate information about capital costs, initially following the bidders’ joint stock condition survey, and then following receipt of bids ii) delays to the projected contract start date – and the resulting tender price inflation.
This can be attributed to the fact that this scheme is a Pathfinder project, so there was much unknown territory – both in terms of cost estimates and procurement timescales.
Detailed submissions tracking the reasons for the changes have previously been provided.
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Table 1 - Changes since the OBC Submission Description Credits Capital Revenue Approved Date Approved Costs Costs Sept 1999 Original OBC submission 17.9m 45.816m 23.3m 08/11/99 Aug 2001 Estimate at ITN issue stage 45.64m 63.954m 40.35m 10/12/01 Revised OBC (increased costs as a result of more accurate estimates from bidders’ stock survey – e.g. structural works, pre-contract demolitions, professional fees, timing and BCIS uplift Costs etc) July 2003 Post ITN2 evaluation stage 70m 109,682m 40,932m 09/09/03 Revised submission to reflect actual bid costs of most economically advantageous bid, and to reflect further BCIS uplift due to revised programme anticipated contract signature - March 2004 Feb 2004 Request for additional credits to 73.5m “ “ 05/05/04 retain cash value of £70m credit following change in subsidy rate at April 2004, and to reflect delays in concluding negotiations with Preferred Bidder – anticipated contract signature – July 2004
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B - OBJECTIVES OF THE PROJECT
1. Does the final scheme meet the objectives set at the outset?
The objectives of the scheme as set out in the original Outline Business Case (OBC) were linked to and informed by the City Council’s Housing Strategy. On a city-wide level, the scheme contributes towards the aim of securing investment in, and managing the demand for social rented housing in the city. The OBC sets out the following key objectives for the scheme:
To address problems of poor housing condition in Swarcliffe; To undertake environmental remodelling to improve the area; To create a safe and secure environment for the estate; To remove unpopular stock and replace it with housing for which there is a demand; To create a better mix of housing and residents to provide a more harmonious and sustainable community; To be based upon comprehensive consultation with the residents of Swarcliffe and those Members of the Council who represent the area.
These objectives remain unchanged and, during development of the project, they have been developed further to produce the following more detailed project aims, all of which will be met:
1. To deliver major physical regeneration improvements to the Swarcliffe estate by making provision for refurbishment and maintenance of Council homes and for remodelling and redevelopment of designated development sites to create a sustainable community and local housing market; 2. to support key objectives of the Community Plan for Swarcliffe aimed at physical, social and economic regeneration of the area; 3. to achieve an affordable solution which gives good value for money, through the Private Finance Initiative; 4. to use the opportunity offered by the Private Finance Initiative contract and the availability of surplus Council land to lever in additional private sector investment into the regeneration of the estate, and to promote complementary regeneration initiatives; 5. to contribute to achieving the Decent Homes Standard in Council owned stock by the Government target date of 2010, by ensuring that all homes within the Swarcliffe estate comply by the target date; 6. to address problems of poor housing condition in Swarcliffe by refurbishing Council homes to the standards required by the Output Specification; 7. to create a more harmonious and sustainable community by addressing mismatches in housing supply and demand through selective demolition and disposal of sites for redevelopment; 8. to boost current and long term demand for housing in the area by improving retained Council stock and ensuring new homes for sale and social renting are provided; 9. to ensure that refurbishments are carried out with the minimum of disruption to tenants and residents, so that in most instances tenants can remain in situ during the carrying out of the works; 5 Swarcliffe FBC Final Draft 300704 (002).doc 02-03-18 Swarcliffe HRA PFI Round 1: Final Business Case
10. to ensure refurbishment standards comply with relevant British Standards, legislation and Good Industry practice, including consideration of efficiency and sustainability; 11. to undertake environmental remodelling and improvements which will create a safe and secure and more attractive environment and which will contribute to reductions in crime and fear of crime; 12. to improve open spaces and increase provision of play areas; 13. to improve permeability and access by changes to the layout of highways and footpaths in compliance with planning and highways requirements; 14. to ensure that improvements are carried out to the neighbourhood centre area to improve amenities and facilities for residents; 15. to secure ongoing Facilities Management of the Council dwellings to ensure they are available and fit for purpose at all times, and maintained at the improved standard for the duration of the contract; 16. to ensure improvements to the required standards are carried out to all Council dwellings and the surrounding environment in phases over a five to seven year period ready for full service commencement from 2011.
2. Is the scheme essentially that originally approved by ODPM? If not, have Ministers approved the changes?
The scheme is essentially the same as that originally submitted to the then DETR in September 1999. As stated above, the objectives of the project have not changed. The method of delivery for refurbishment and services to Council homes via a PFI contract with a PFI Operator has remained the same, as have the key elements of the scheme. Separate Development Agreements will be entered into with the selected consortium partners and developers of the surplus sites to ensure the delivery of the comprehensive physical regeneration of the estate.
There have been relatively minor adjustments to the scheme during the procurement period, principally to improve value for money, which are detailed below. The Council also carried out some demolition of vacant properties to help retain resident support during the long lead in period prior to contract start, and to deal with the significant problem of continuing to manage empty, surplus homes.
The three bids received against the original ITN requirements were all considerably higher than had been expected, bearing in mind the revised estimates based on the bidders’ survey. The ODPM were alerted to the fact that the bids were unaffordable and the Council discussed the bids and the ITN with bidders in order to establish the main areas of risk pricing and how savings could be made.
A number of changes were then made to the Council’s requirements to improve value for money and reduce risk pricing. These are as follows:
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Heading ITN1 Requirements ITN2 Requirements
Energy achieve rating of SAP 70 minimum relaxed to SAP55 minimum with a Efficiency mean of SAP64 (to bring into line with HECA or Home Energy Conservation Act (1995)) Handback all elements in the properties have a requirement removed - although standard further 5 year life beyond the end of properties will still be above the the contract (in essence spending decency standard on the last day of the additional funds in years 25-30 contract replacing things that will not last until year 35). Focal Point must be installed/replaced in all Existing fires only to be replaced. No Fires - properties new installations required. Baths / Both bath and shower facilities to be Showers only to be replaced where Showers provided to all properties existing (baths still required in all properties) Grounds and Full grounds and estate maintenance Slightly relaxed Output Specification Estate to be provided. requirements Maintenance
The costs of some properties previously identified for refurbishment also seemed high in the original bids. Bidders were invited to submit alternative proposals for replacement with new build via a registered Social Landlord. Following further tenant consultation, the decision was taken to demolish, rather than refurbish, a 60 unit high rise block (Elmet Towers) and 30 low rise flats, as the new build proposals were better value for money. The above changes were notified to ODPM in submissions related to requests for additional credits, the most recent of which was submitted in July 2003. Following this, an offer of £70m credits was made in September 2003, based on refurbishment of 1659 properties.
Since the OBC was approved, the Council has established six Arms Length Management Organisations to undertake housing management functions on its behalf. The project area falls solely within the wider area covered by Leeds South East Homes. The contract will be with the Council, as will the principal monitoring functions. LSEH, rather than the Council, will be responsible for some monitoring functions once the project is operational.
LSEH will also retain responsibility for provision of tenancy management services on the Council’s behalf, as they offer better value for money than the PFI contractor. At Outline Business Case stage the Council agreed to subject both the full housing management service and a more limited repair and maintenance service package to competition (confirmed in letter to DETR dated 19th October 1999). At ITN stage the Council invited Mandatory bids for property management services only. Bidders were also given the opportunity to submit First Variant bids for the full housing management service, including tenancy management. All bidders submitted both Mandatory and First Variant bids.
Following full evaluation, and a Value for Money assessment of the proposed costs of the Preferred Bidder against those of LSEH for delivering Tenancy Management services, the Mandatory bid was selected. The basis for making the decision is in accordance with the (then) DETR’s requirements, and the commitment given by the Council at OBC stage. The following property management services will transfer to the PFI Operator, being the service package upon which the OBC, subsequent credits submissions and FBC costs are based: 7 Swarcliffe FBC Final Draft 300704 (002).doc 02-03-18 Swarcliffe HRA PFI Round 1: Final Business Case
responsive repairs and maintenance planned, programmed and cyclical maintenance repairs to empty properties (voids) care-taking and cleaning estates and grounds maintenance associated IT, tenant and resident consultation and liaison services
3. Does the scheme reflect the preferred option identified at OBC stage? If not, what are the reasons for this? Have Ministers approved any changes?
Five options for different combinations of retention and refurbishment, with selective demolition of surplus housing, stock were considered at OBC stage and consulted upon. The preferred option, to achieve long term sustainability, was based on:
demolition of 675 flats in 9 MSF blocks, 168 maisonettes, 100 walk-up flats and 6 flats over garages; two MSF blocks (Sherburn Court and Elmet Towers) remaining; all remaining stock to be comprehensively refurbished.
Apart from the decision to demolish Elmet Towers and some low-rise flats (as discussed under B2 above) the final scheme closely reflects the preferred option identified at OBC stage.
4. Have significant changes been notified to and approved by PRG?
There have been no significant changes to the objectives or scope of the scheme. The changes highlighted under B2 were notified to ODPM via copies of Project Board reports and in submissions relating to requests for additional credits, details of which were passed to PRG for approval.
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C – FINANCIAL CONSIDERATIONS & AFFORDABILITY/COST REDUCTION
1. Has the authority confirmed that the project offers value for money?
Development of the PSC The Council has prepared a Public Sector Comparator (PSC) which takes into account the following Treasury Taskforce guidance:
Policy Statement No 2 “Public Sector Comparators and Value for Money” “Appraisal and Evaluation in Central Government” (the “Green Book”)
The PSC for the Final Business Case is based on the Project objectives set out at OBC stage. The PSC includes an assessment of the value of risks transferred to the private sector. A copy of the PSC is attached at Appendix B.
The updated PSC represents the cost to the public sector of directly supplying the services required by the Output Specification through conventional procurement. It therefore, represents the cost to the public sector of refurbishing and maintaining the dwellings of the Swarcliffe estate for a 30-year period. The PSC also assumes a construction period extending over the first five years of the contract, consistent with the bidder’s proposals.
The table below summarises the results of the PSC. The estimated cost of the public sector completing the contract is £107.2m. Current Green Book guidance of discounting the cashflows at 3.5% has been used.
Table 2 - PSC Costs Net Present Value (at 3.5% real) £m Capital costs 67.6 Revenue costs 29.2 Total unadjusted PSC 96.8 Risk adjustment 10.4 Total risk adjusted PSC 107.2
2. What percentage of value for money has been realised against the PSC?
A comparison of the PSC is made against the NPV of the unitary charges of the preferred bidder. The NPV of the unitary charges is £105.6m. The analysis therefore illustrates that the PFI bid is better value that the PSC by £1.6m or 1.5%. This analysis has been completed at a discount rate of 3.5% as per current treasury guidance.
The analysis was also completed at the ITN stage of the contract. Guidance at this stage dictated that the analysis be completed at a 6% discount rate. The NPV for the PSC was £88m compared to the £79m of the preferred bidder.
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3. What non-financial benefits have been achieved?
The non-financial benefits have been enhanced by the inclusion of surplus sites for redevelopment as part of the overall opportunity for which bids were invited. Substantial additional private sector investment has been levered in to the estate, and the development sites have provided opportunities to secure additional environmental and amenity improvements linked to planning consents.
A summary of the non-financial benefits of the scheme is set out below:
A more diverse mix of properties and tenures will be created through a programme of demolition of unpopular local authority homes and the building of new affordable homes for rent and private homes for sale. This will achieve improved housing stock, which is both more cohesive and representative of need.
A safer and more secure environment is to be achieved through a range of physical improvements including the closing of alleyways and removal of underpasses.
Improved vehicle and pedestrian access across the area will be achieved particularly through the connecting of dead end streets to a new circular road, and the creation of over twenty new ‘home zones’.
Three new play areas will be created offering a diverse selection of interactive equipment to cover a range of age groups. Other enhanced amenities to promote cohesion and good health will be the creation of a 5km trim trail around the estate, which will also include nine pieces of specialist sports equipment.
A programme of tree planting and landscaping across the area will create a more attractive and aesthetically pleasing environment.
The redeveloped retail & commercial centre will also incorporate a new neighbourhood plaza to create a natural focal centre for the estate, which will also include seating.
The combined impact of the range of specific improvements should increase demand for the area and enhance its ‘lettability’, create a more stable and sustainable community and halt and reverse the decline of the area. There has already been a significant reduction in empty homes, and increased demand for Council properties.
In addition to the favourable comparison of the PFI scheme costs against the PSC, the Council also considers that the PFI scheme offers greater certainty and a guaranteed level of service to residents for the whole of the 30-year contract term. In particular there are clearly defined and enforceable performance standards and requirements set out in the Output Specification and Payment Mechanism. These ensures that any lapse in service delivery will result in deductions from the Unitary Charge, thus incentivising the PFI Operator to continue to deliver services to the highest level.
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4. Does the PSC include lifecycle costs and the cost of risks to be transferred to the private sector and reflect the same level of service as the bids?
In order to provide a risk adjusted PSC the Council undertook a detailed risk analysis. The risk matrix is attached as Appendix A. The analysis involved:
a complete review of the risk matrix developed at ITN stage assessment of the potential cost of each risk identification of the probable occurrence of each risk inclusion of these risks into the total NPV of the PSC
The approach taken has been to price the PSC to cover the services that will be undertaken by the operator, at the level of service required by the output specification over the period of the contract.
5. Has the authority demonstrated that the project is affordable?
A copy of the completed ODPM Model is attached at Appendix C. The ODPM model calculates a credit requirement of £70m but, as established in previous correspondence with the ODPM, this does not fully reflect the capital and financing costs of the scheme. The ODPM have agreed to support certain of these costs and have approved a credit of £73.5m. The affordability position for the Authority over the life of the contract is summarised below:
Table 4 - Project Cashflows Total nominal cashflows over the life of the project £m
Bidder - Annual Unitary Charge 255
To be resourced by: Income from PFI credit 171 LCC HRA budgets 53 Additional LCC budget contribution 24 Interest accruing on LCC balances 12 Total resources £255 Annualised gap/(surplus)
Members have approved expenditure of up to £260m (see Appendix D Executive Board report). This is to ensure that there is provision to meet shifts in the BCIS tender price index and/or SWAP rates , both of which are outside the Council’s control and could affect the price between now and financial close.
The unitary payment will be subject to annual indexation at RPIX. The proportion of the AUP to be indexed is 60%. The affordability model incorporates this indexation together with the appropriate uplift in revenue budgets.
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Table 4 illustrates that the project is affordable with the current resources and inflation assumptions. If inflation were to change then impact on the annual cashflows of the Authority would be as set out in Table 5 (below).
Table 5 - Inflation Sensitivity LCC Additional Annual Contribution \ (Surplus) Required (per annum £k) 2.0% £(136)k 2.5% (current assumption) £0m 3.0% £130k 3.5% £254k
The Authority understands that it must sign up to these potential shortfalls and its Executive Board approved the project on this basis at its meeting on the 21st July 2004, and has identified sources of funding to ensure that it can resource the contribution it has to make.
6. Were any assets transferred to the private sector and if so how has this affected the annual charge
Under a separate Development Agreement, land has been sold to the preferred bidder for the development of social and private housing. The full sale price of £2.676m has been netted off the bidders capital costs, resulting in a decrease in the Unitary Charge. Best Consideration has been achieved on the selling price of the land.
It has also been agreed to lease the estate’s garages to the PFI Operator for the 30-year contract period. The income stream of garage income has also been transferred over to the preferred bidder. The income over the life of the project is £1.3m. The income has been netted off the revenue costs of the preferred bidder who then bears the risk for the sustainability of the income stream over the life of the concession.
Given that the garage units require significant investment and that the revenue stream may not be sustainable with the increased level of parking within the area, the Authority feels that transferring the income stream represents good value.
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D – STAKEHOLDER COMMITMENT
1. Have Members formally approved the signing of the contract, or approved delegation to sign?
A report was taken to the Executive Board of the Council on 21st July 2004 seeking formal approval to proceed to contractual and financial close of this project. Approval was granted subject to: approval of the Final Business Case (FBC) by the Deputy Chief Executive; approval of the Final Business Case (FBC) by the ODPM; a positive accounting determination on the transaction; receipt of S 27 consent from the Secretary of State; the Deputy Chief Executive (or in his absence the Chief Executive) being satisfied that the project remains within the affordability constraints set out in an appendix to the Executive Board report, which identifies potential Council contributions of up to £24m over the lifetime of the project.
A copy of the report is attached at Appendix D.
2. Has the scheme got tenants involved and has the local authority got their support?
Consultation with residents and tenants in the Swarcliffe area has been extensive. Tenants and residents have generally been very supportive of the provisions of the scheme through its development. A summary of consultation that has taken place is given below:
Developing the Community Plan and Outline Business Case:
During 1999, consultants worked with the Council in Swarcliffe to conduct the biggest local consultation exercise that the then Housing Services had ever undertaken, the purpose of which was to develop the Community Plan. The consultation exercise consisted of:
A 400-household door to door survey; interviews with Community Groups and agencies; A programme of publicity and newsletters; A programme of focus groups and workshops; Involvement of local tenants and residents groups in consultation exercises.
The events attracted almost 1,000 people and the views expressed informed development of the Community Plan and the Outline Business Case. Specifically, the preferred option for the Council’s stock in the area was selected taking into account residents’ views.
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Tenant and Resident Consultation:
Every home within the PPFI boundary is represented by one of three residents associations. Each association having regular meetings, with the local populous invited. Officers from the Council and/or LSEH have regularly attended these meetings with a view to updating local people regarding the project.
A local Community Forum also meets regularly. These are open meetings attended by service providers and residents. Project team officers have attended each meeting to give an update.
Tenants’ Core Group
A core group of tenants representing each association and each part of the estate were involved in the preparation of the Output Specification and in agreeing service standards.
This group, with elected Members, received detailed presentations from each bidder after ITN submission, and had an opportunity to question bidders directly on their proposals.
Tenant and resident representatives were invited, but did not wish to have further involvement in bid evaluation or the selection process.
Newsletters
The Swarcliffe, Stanks & Dennils Community Newsletter has been sent to every home within the PFI boundary on a quarterly basis. Although used by community groups and other agencies, it was primarily established to highlight key milestones in the PFI procurement.
Ad-hoc, single sided newsletters have been sent to every home whenever a special event, forum or roadshow was due to take place.
Newsletters are now being produced by both LSEH and by Yorkshire Transformations.
Project Office
A local project office was set up on the estate to act as a focus for local people up to preferred bidder selection. The office was open to the public to call in for further information on the scheme. Two members of staff were on hand at any given time to discuss proposals and answer enquiries. The preferred bidder, rather than the Council, now operates a local base.
Roadshows
An extensive resident consultation event took place in August 2002, prior to selection of the preferred partner. Presentations were given and proposals shown by each of the then three bidders, namely Bidder B, Pheonix and the successful bidder Yorkshire Transformations.
In order to cover the whole area, the roadshows were based in four separate geographical locations over four days. Every household was invited and encouraged to attend by means of a newsletter. For those unable to attend the road shows, the community newsletter was delivered shortly afterwards outlining the proposals with an insert to feedback to the Council with comments.
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Following selection of the preferred bidder, Yorkshire Transformations have taken a more prominent role, to begin to build a relationship with the community.
Open Day
Every household was invited to an open day held on the Saturday 4th October 2003 at St Gregory's Youth and Adult Centre. The open day was an opportunity for residents to look in more details at the proposals from Yorkshire Transformations. Over 400 people attended the day, each were encouraged to complete a questionnaire with their views on the scheme.
Show Home
Yorkshire Transformations purchased and refurbished a show home, which has been open twice a week since spring 2004. Tenants can see examples of typical improvements and speak to consortium staff to get their queries answered first hand.
Section 27 consultation
In addition to the above consultation which has been carried out throughout the project’s development and procurement, specific consultation has been undertaken before applying for consent to delegate housing management under S27 of the Housing Act 1985
This involved writing to all tenants, once the main elements of the scheme were agreed with the preferred bidder, explaining the key elements of the scheme and how tenants will be affected. Tenants were given the opportunity to comment on the proposals. Only one response was received from tenants as a result of this exercise. The response expressed concerns that the Council could be tied into a 30 year contract with a contractor who might perform poorly.
The Council considers that the provisions of the Payment Mechanism, linked to the standards set out in the Output Specification, provide a robust method of performance monitoring and management which will ensure satisfactory performance.
A separate application for S27 consent to delegate housing management services will be submitted shortly.
3. Have all other stakeholders agreed to the scheme? a) ALMO
Leeds South East Homes (the ALMO in whose area this project lies) has been fully involved in the development of this project since the ALMO was established in February 2003. The ALMO has been responsible for consultation with tenants, leaseholders and residents during this time.
LSEH officers, and a PFI Sub-Group, which is chaired by the Chair of LSEH Board, have agreed the following:-
the financial contributions to be made by the ALMO towards the cost of the scheme ( ie sums which will not be included in their Management Fee, but which will instead contribute to the Unitary Charge). the detailed arrangements for day to day liaison between LSEH, the Council and the PFI operator
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respective roles and responsibilities for monitoring the contract during the service period.
An information report will be presented to the full Board at its next meeting. b) Leaseholders
Leaseholders have been kept updated throughout the development of the project. The consultation methods highlighted above in D1 have included leaseholders.
In addition to the above, the following letters have been targeted specifically at leaseholders:
Update - December 2003 setting out what PFI is and what it means for Leaseholders, Formal consultation in accordance with the Service Charges (Consultation Requirements) (England) Regulations 2003). A letter was sent on 22nd July to leaseholders and relevant Tenant and Resident Associations. This gave details of anticipated works required to leasehold properties as well as estimated timescales and costs. It also gave leaseholders the opportunity to submit their views to the Council within a ‘Relevant Period’. The Relevant Period ends on 9th August 2004 and any responses received will be duly considered.
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E – COMPETITION
1. What was the extent of competition at: a) OJEC
Before the OBC was approved a process of Soft Market Testing was undertaken. This involved holding discussions with a range of prospective PFI participants: building companies, property managers and financiers. This process helped to inform the development of the OBC and was also useful in helping to raise awareness, within the industry, of the potential bidding opportunity afforded by this project.
After approval of the OBC the opportunity to bid for the project was formally notified in the Official Journal of the European Communities (OJEC).
Those organisations that expressed an interest in bidding for the scheme were sent an Information Memorandum and asked to complete a set of Pre-Qualification Questionnaires (PQQs). During the OJEC notice period an open day was held with bidders to answer any queries and clarify the bidding requirements.
Seven submissions were received by the 18th August 2000 deadline. There were no late submissions. Three of the submissions were incomplete and were therefore not considered further.
The remaining four submissions were assessed using the criteria described below. All were comprehensive and well prepared. The criteria used by the assessors were:
i. Experience of PFI What experience the consortium members have of PFI or similar projects involving the public sector (in its widest context).
ii. Funding To what extent does the lead bidder (and funder) demonstrate the ability to put in place a robust funding package for the project?
iii. Management and Organisational Structure To what extent do consortium members show the ability through existing or proposed management structures, partnerships and sub-contracting arrangements to deliver all the elements of the project in a robust manner and to timescales envisaged.
iv. Tenant Involvement Experience/ability to manage tenant issues, including tenant involvement, over the life of the contract.
v. Housing Refurbishment and Regeneration Experience Consortium members’ experience of large-scale refurbishment/regeneration projects, particularly works to occupied dwellings.
vi. Best Value Are the consortium members able to assist the Council in its Best Value duty by their
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quality/continuous improvement systems.
vii.Partnering What relevant partnering experience do the consortium partners have?
Whilst each of the four bidders had relatively stronger and weaker elements in their submissions, their overall scores were similar. The assessment team therefore did not wish to exclude one of the four on the basis of their PQQ response. The firms who appeared of equal merit for further consideration were headed by:
Lead Bidder Assessors’ Score Maximum Possible (total) Score Babcock and Brown Properties Ltd 37.04 66 Carillion Private Finance Ltd (Bidder 33.83 66 B) London Finance Group Ltd (Bidder 37.08 66 C) John Mowlem & Company plc 35.73 66 (Yorkshire Transformations)
These four were deemed to be fully compliant with the Council’s requirements potentially capable of bidding for and delivering the project. These four consortia were then invited to submit bids at the ITN stage.
b) ITN
ITN documents were sent out to four bidders. One of the bidders immediately withdrew. Three bids were received from the Yorkshire Transformations, Bidder B and Bidder C consortia. Bids were evaluated by specialist teams with each team looking at a different element of the three bids, as set out below:
Legal Financial Technical Service delivery Regeneration and related outcomes Master plan
The reports of each team were brought to a main evaluation panel comprising the team leaders, and chaired by the Project Manager. The main evaluation panel agreed final overall scores, and identified specific bid strengths and weaknesses.
The three bids were evaluated using the above main criteria, and a clearly set out methodology of scoring and weighting. Following ITN1 evaluation, the bids of Yorkshire Transformations and Bidder B were very close in overall score (although YTL’s bid was lower). The Bidder C consortium scored third on both overall score and on price.
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All bids were significantly above the Council’s affordability threshold and so, in consultation with the bidders, the Authority identified some amendments to the scheme which it was hoped would result in significant cost savings.
The revised scheme was then subject to a further Invitation to Negotiate process (ITN2 - equivalent to Best and Final Offer stage). The main changes to the scheme requirements between ITN 1 and ITN2 are covered in B2, above.
The ITN2 process again resulted in the return of three bids. Following evaluation of ITN2 bids Yorkshire Transformations and Bidder B were again very close. Bidder C were again the third placed bidder, with a significant gap between themselves and the two leading bidders. A decision was made in December 2002 to deselect the Bidder C consortium and continue negotiations with Yorkshire Transformations and Bidder B. Final scores are shown below.
Scores Maximum Yorkshire Bidder B Bidder C score Transformations
Regeneration 18% 10.17% 9.78% 8.19% Financial 20% 9.20% 8.40% 7.20% Legal 10% 5.07% 5.02% 5.82% Technical Dwellings Mand 24% 17.53% 17.60% 13.40% Variant 22% 16.06% N/A 12.26% Technical Demolition 1% 0.81% 0.77% 0.75% Technical Decant & 1% 0.84% 0.76% 0.64% Access plan Service delivery Mand 21% 13.60% 14.15% 5.69% Variant 23% 14.04% N/A 4.77% Master Plan 5% 3.57% 3.96% 2.61% 100% Mandatory Bid Total 60.79% 60.44% 44.30% Variant Bid Total 59.76% N/A 42.24%
c) Selection of preferred bidder
Before moving to appoint a Preferred Bidder the Council continued the parallel negotiations with Yorkshire Transformation Ltd and Bidder B. The Project Team met with both bidders to challenge high costs and obtain further information and explanations where it was unclear what the bidder was offering, or where costs were higher than expected. The objective was to be clear what the Council would be receiving and to drive down specific costs and the overall bid price.
A summary of some of the main points for negotiation on each bid is set out below:
BIDDER B BID i. No Variant Bid proposal at ITN2(they were unable to secure another service provider following the withdrawal of Sanctuary Housing Association from the consortium),
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ii. Services proposals - bid was non-compliant in relation to the Void Property repairs (mention of Variation orders for works that they should have included costs in the contract). iii. Legal – Project Agreement ‘mark up’ unclear. Statements like ‘they would like to discuss this clause with the Council once selected as preferred bidder’ were used. Council was not happy to wait until Preferred Bidder to discuss these clauses. iv. Financial - Bid was not priced on the Payment Mechanism as issued with the ITN. The bidder priced on reduced KPI’s, multipliers, ratchets and caps, reduced deductions and reduced reporting requirements that required significant amounts of negotiation. v. Technical - Bathrooms and Kitchen replacement not proposed until years 15 to 20. Gas supply included with a cost to the tenants via a service charge. No major structural repairs for the Wates properties included in the capital costs. vi. Programme and Master Planning of the scheme are in accordance with the documents.
YORKSHIRE TRANSFORMATIONS BID i. Services - Some of the amendments made to the documents in order to generate savings did not produce the level of saving expected following discussions with bidders. ii. Regeneration - One site will require redesign. Contractor stated they require freehold of the development sites prior to construction of new housing. Council position is that sites will be released only under license to protect the council against a developer not proceeding with the new developments and ‘banking the land’ iii. Legal - large number of mark-ups made negotiation difficult. The big issues were therefore resolved whilst there are still two contractors involved and before a preferred bidder is selected. iv. Financial - Bid includes statements that the ALMO structure could impact on price; insurance costs provisional at this stage; more detailed surveys required at preferred bidder stage could increase costs; amendments to the refinancing provisions required. v. Technical - Gaps in the structural works proposed, notably on the Wates property archetype. When questioned the bidder confirmed that costs have been included to enable the Wates properties maintained at the full availability standard for 30 years. Latent defects insurance can only be obtained for 12 years and this will be subject to a more detailed survey. YTL stated a more detailed survey would only be carried out by the preferred bidder. This raised the likelihood of price shift unless the issue was resolved before preferred bidder. vi. Programme - More discussion on the programme and decanting proposals on the Elmet towers site.
The Council sought further clarification on these points from both bidders. During the negotiations the Bidder B consortium’s original service provider, Sanctuary Housing, left the consortium. Bidder B engaged a new partner, who were unwilling to respond to clarifications and required amendments to the service delivery proposals. The responses from Bidder B lacked detail, making it difficult to progress negotiations. It was therefore not possible for 20 Swarcliffe FBC Final Draft 300704 (002).doc 02-03-18 Swarcliffe HRA PFI Round 1: Final Business Case
Bidder B to improve their commercial position and concerns relating to high cost areas still remained.
Greater progress was made in negotiations with YTL, who responded quickly to clarifications and firmed up a number of key areas such as payment mechanism, technical issues, financial issues and housing management and legal issues. This resulted in an increased evaluation score, pushing YTL further in front of Bidder B in the final evaluation, prior to selection of Preferred Bidder. Further meetings were therefore held with YTL to resolve remaining key issues.
A conditional Preferred Bidder Letter was issued to Yorkshire Transformation Ltd in May 2003. This letter set out a number of the key commercial terms to which the Council required YTL to sign-up before the Council could confirm Preferred Bidder status. Following negotiations the Preferred Bidder letter was signed by Yorkshire Transformations in September 2003.
Upon selection of preferred bidder the Bidder B Consortium was retained as a reserve.
2. Why was the preferred bid selected over other bids and traditional procurement: a) in quantitative terms, bids compared to PSC
1.0 Competition Comparison & Evaluation
Table 6 - Competition Comparison £m YTL Bidder B Bidder C ITN 1 ITN 2 ITN 1 ITN 2 ITN 1 ITN 2 Capital Cost 41 38 74 61 95 75 Operating Costs 171* 164 171 168 241 188 Taxation 7 5 10 8 13 13 Funding 53 42 105 81 107 99 TOTAL 272 249 360 318 456 375 NPV 86 79 120 102 142 118 * YTL’s ITN1 Operating Costs shown here have been corrected after an error was identified and corrected (£20m had been omitted from their SPV Costs)
Table 6 illustrates a comparison of the bid price of the preferred bidder, YTL against the two competitors of Bidder B and Bidder C. Two ITN rounds were held and both Bidder B and Bidder C made significant price reductions. Despite these reductions, neither bidder was able to compete with the price of YTL. The outcome at the ITN2 stage was that the bid price of YTL was 29% lower than that of Bidder B and 49% lower than Bidder C.
A comparison of the bids was also made against the PSC. Section C2 illustrates that at a discount rate of 6% (then current Green Book guidance) the NPV of the PSC was £88m. This analysis illustrated that the preferred bidder represented better VFM than the PSC.
The Authority’s financial advisors, Deloitte, also undertook a qualitative analysis. The analysis covered deliverability, robustness and payment mechanism conditions. The analysis is shown at Table 7 and illustrates that the YTL consortium scored highest out of all bidders.
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Table 7: Scoring of Qualitative Financial Evaluation Criteria Evaluation Criterion YTL Bidder B Bidder C DELIVERABILITY - Adequacy of available finance 3 3 3 - Terms and conditions 1 2 2 attaching to the finance - Degree of commitment of 2 2.5 2 financing ROBUSTNESS - Risk mitigation (qualitative 2 2 2 assessment) and robustness of project company - Assessment of likely 1.5 1.5 1 sustainability of price CONDITIONS ATTACHING TO 2 1.5 1 PAYMENT MECHANISM OVERALL SCORE 2.3 2.1 1.8 Key: 1 = unacceptable; 2 = mostly acceptable; 3 = acceptable; 4 = good solution; 5 = excellent
2.0 Price Negotiation
After the initial ITN 1 submission, bidders were requested to enter a second round of bidding. The analysis at table 6 illustrates the deductions negotiated in the bids between the two bidding rounds. Bidder C put forward bid reductions of £81m, Bidder B £42m and the preferred bidder, YTL £23m. Although the preferred bidder showed the smallest bid reduction between the two bid stages, the bid was still the lowest received.
YTL were appointed as preferred bidder in September 2003. At the preferred bidder appointment stage, agreement was reached on how to hold the price through to financial close. These agreements included:
Capital cost increases to be linked to BCIS building cost inflation, Facilities Management costs to be increased in line with RPIx, Bid set-up costs to be limited to £20k per month, Key model outputs such as IRR, senior debt margin, cover ratios and gearing to be fixed at preferred bidder stage.
After the preferred bidder appointment, work continued on price negotiations on a numbers of key areas. These areas included -
Insurance costs – The bid price included an estimated cost of providing the required cover. The authority subsequently opted to retain terrorism risk to improve value for money, as it considered the risk low. Some consideration was given to self-insurance, but this has not been pursued due to uncertainties as to whether it is a viable option. The preferred bidder
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has recently provided two firm quotations, the second of which ( along with details of the bidder's proposals) has been submitted for ODPM and Treasury consideration by the Council.
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