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Since the distribution of goods and services is the lifeblood of a local economy, the effective maintenance and management of urban transport networks is a key priority for cities and local authorities across the UK.With a city’s infrastructure comprising thousands of kilometres of road and tens of thousands of individual traffic signals, bridges, pavements, tunnels, street lights and other items, the scale of this challenge cannot be underestimated.Faced with a requirement to upgrade and maintain the second largest transport infrastructure in the UK, Birmingham City Council (BCC) looked for an efficient and effective means of managing these assets over the long term.The innovative solution chosen was a pioneering 25-year, £2.7 billion Private Finance Initiative (PFI) led by Amey, one of the leading integrated public service providers in the country and funded by the Lloyds Bank Commercial Banking (“Lloyds Bank”) Project Finance team alongside five other commercial banks.
As one of the largest UK cities and home to over a million people, Birmingham relies on 2,500 km of roadway, around 100,000 street lights and over 850 bridges and structures to move people and goods around the city.With a growing population placing increasing demands on an ageing transport infrastructure, BCC planned a major cash injection which would provide a step change in improvements to the highways network and maintain these standards well into the future.Typically highway maintenance is funded on an annual basis within a five year contract, but this can generate uncertainty over the amount of work that can be undertaken and when it will be completed. Instead the BCC looked to develop a Private Finance Initiative (PFI) with a scope and scale previously unseen within the highways industry. This would provide both the funding and operational framework which would:
For BCC it was crucial that they partnered with organisations which have a high level of expertise and a track record for delivery in the PFI arena.
Amey is a leading integrated public services provider which has been involved in the delivery of PFIs since the inception of the concept. As one of the most active and successful highway maintenance contractors in the UK, it has vast experience in driving best value and transforming service provision from short-term reactive activity to a long-term strategic approach.To complement Amey delivery experience, Lloyds Bank played a lead role within the funding group along side other mandated lead arrangers (MLAs). Lloyds Bank is one of the leading investors in PFI and Public Private Partnerships (PPP) having arranged over £30bn of senior debt in over 200 PFI/PPPs, committed £500m of risk capital and it manages a secondary infrastructure equity fund. Together, Amey and Lloyds Bank developed a compelling package which would provide certainty of funding alongside certainty of delivery.Javier Ortigosa, Relationship Director at Lloyds Bank, said: “Whole-life schemes are coming to the fore as they remove the reactive hand-to-mouth nature of funding the maintenance of an ageing transport network.”“The service provider can predict how the assets behave and in turn can accurately model spend requirements over the life of the agreement, thereby providing improved infrastructure, cost certainty and best value to the client,”“Whilst the project was challenging to structure we believe it will act as a useful template for other cities that are looking to modernise their highways infrastructure.”
After closely mapping BCC’s requirements, Amey developed a service delivery plan that would provide sustained highway asset improvements while meeting stringent performance metrics over a 25-year contract period.This includes an initial five year core investment period which will see nearly £300 million of activity to be delivered to meet 6 monthly milestones, including:
Following this initial activity, the contract ensures the infrastructure will be maintained at these improved standards for a further 20 years. This will entail further carriageway and footway improvements together with the replacement of the remaining 50,000 street lights throughout this Lifecycle stage to the value of around £500m. Additionally, routine maintenance and cyclic activities such as drain cleaning, tree maintenance, defect repairs and winter gritting and snow clearance will continue throughout the 25 year contract period.The private funding stream for the PFI was provided by a six-strong club of banks put together by Amey in which Lloyds Bank played a leading role. The club arranged a debt package of around £305 million, comprising senior debt, an equity bridge and a term loan with Lloyds Bank providing £70m of debt and acted as a hedge provider and account bank, security trustee and Agent.In addition Lloyds Bank equity arm provided 1/3 of the investment in its capacity as a project sponsor alongside Amey.With the project securing the backing of Department for Transport, the private sector funding was supported by PFI credits from HM Treasury.Iain Macdonald, Head of Infrastructure Concessions at Lloyds Bank Project Finance team said: “The fact that this deal closed in a changing market climate highlights the strength of the project finance market.”“For an agreement of this length, planning was essential for all parties to get comfortable with the pricing and structure of this deal and, thanks to a water-tight risk framework and whole life costing, we managed to achieve this.”
The project commenced in June 2010 with detailed inspections and surveys of Birmingham’s highways network to map and prioritise the future programme. Amey is continuing to work with BCC’s Highways Service to reduce congestion, minimise disruption and improve safety by feeding into their traffic management strategy whilst liaising with local residents to highlight maintenance priorities in their communities.As well as directly creating 550 jobs, the PFI is committed to using local subcontractors and supply chain partners so that small and medium sized companies in the region also benefit from the contract.Keith Cottrell, Managing Director for Ventures at Amey, said: “This is a transformational project which will bring huge benefits to Birmingham and is a template for how PFIs can be shaped to meet the long-term management requirements of complex urban transport networks.“Working in partnership with the project finance specialists at Lloyds Bank, we’ve been able to develop a structure which not only provides certainty of funding and delivery, but which is closely aligned to the needs of the city and its residents.“The improvements are essential to the future competitiveness of Birmingham and will encourage further inward investment and enterprise, something which all those involved in this groundbreaking PFI are rightly proud of.”Gershon Cohen, Managing Director and Global Head of Project Finance at Lloyds Bank remarked that,” The closure of the Birmingham Highways financing represented another milestone in Lloyds’ involvement in a range of infrastructure projects across the UK, Europe and North America alongside key industry relationships.”
Iain MacDonaldHead of Infrastructure Concessions, Project Finance, Lloyds Bank Commercial Banking+44 (0)207 158 firstname.lastname@example.org