PFI/PPP special report: Motorway of the future (M25 widening)

PFI is back on the road following a two-year hiatus. The £4.5bn M25 widening scheme is the largest DBFO contract ever tendered. Ross Pearman looks at the scheme and what bidders need to bring to the party.

Some things in life are certain: you die, receive bills and at some point get stuck in traffic on the M25. However, one lucky consortium has an opportunity to turn at least one of those certainties into a myth if it scoops the UK’s largest-ever roads contract.

The Highways Agency’s (HA) £4.5bn M25 widening DBFO spans 107km of widening works that will be followed by a 30-year maintenance and operation deal of the motorway’s 400km network.

However, the tests to reach the ultimate prize are numerous and will require contractors to think not just about moving earth and laying tarmac, but also how to satisfy Mondeo Man and Mrs 4x4.

The HA has selected its five champions for the quest to win its flagship scheme after announcing its prequalified consortia last month (see box). One champion in particular, Australian bank Macquarie, surprised many in the industry as it jumped through the pre-qualification hoops unscathed without a delivery team on board; but more about that later.

So what next for those ready for the challenge and what does the final prize hold?

Bidders should have recently received the ISOP [invitation to submit outline proposal] documents that will require the teams to submit a 100% quality submission on how to deliver this substantial project. These are expected back next month and will be assessed over the summer.

“During this stage we will be assessing competence and experience of the consortia in these areas and how much comfort we have that those proposals can be delivered out on the network,” says HA procurement director Steve Rowsell.

“There will be no pricing element in this part of the tendering process as it will be a 100% quality submission. The element of quality submission will relate to how well they control costs and manage risk and their approach to pricing and the comfort we, as a client, can get from that.”

Shortlist

At the end of this stage it is expected that two of the five consortia will fall by the wayside as the shortlist is whittled down to three bidders; the HA wants to avoid burdening the industry with excessive bid costs. However, Rowsell concedes that the shortlist could be stretched to four. The issue of full tender documents is expected this autumn.

It is at this part of the process, the invitation to tender stage, where the real investment by interested companies starts, as documents are released to bidders to work up detailed submissions that will have to be submitted in spring 2007. The cost is likely to run into millions of pounds.

Companies will be required to provide detailed pricing on a large chunk of the proposed two-phase widening works, worth £1.5bn, and costings for the 30-year maintenance of the HA’s Area 5 network for the motorway, valued at £3bn (£100m a year) – including the Dartford Crossing.

“At this stage we should be able to get a large chunk of our cost information as bidders should have an idea how much the 30-year maintenance requirements should be,” Rowsell says.

However, on top of this, consortium partners will be expected to get their calculators out for a much more detailed analysis. “The detailed phase is where the price element of the contract comes into play,” says M25 project leader Ken Petch. “Bidders will be expected to provide a fixed price on delivering phase one of the three-year widening works from junctions 16 to 23 and from junction 5 to 7 (52km in total).

“We will also be expecting the consortium to provide a fixed-price tender on the refurbishment of two cut and cover tunnels on the motorway network – the Bell Common Tunnel (470m) near junction 27 and the Hatfield Tunnel (1,150m) on the A1/M section. A lot of refurbishment works needs to take place, including lighting replacement, which falls outside the day-to-day routine maintenance work for the tunnels.”

Bidders will also be expected to explain how they will tackle works on phase 2 of the five-year widening works between junctions 23 and 30 (50km).

“It is still undecided whether this element of the works will be a fixed or target cost contract, this will depend on the success of phase 1,” says Rowsell.

“However, bidders will need to give us confidence on the price that they can deliver the advantages we are looking for. One of the reasons for going for one large DBFO contract rather than a smaller one is that we want to see better value for money in the second phase from the lessons learnt in the first phase.”

Asked why the HA was going down a fixed-price route rather than the usual target-cost approach used on traditional early contractor involvement schemes, Ian Scholey, divisional director for major projects, says: “It is a method we have used on other DBFOs. We have detailed engineering documents and environmental documents on phase one, so we can expect a detailed and accurate submission from bidders. However, there is not as much detail provided for phase 2 and bidders would want to add extra risks into the bid accordingly. This would not provide us with value for money. The fixed-price approach gives us greater flexibility.”

Petch says that although the agency has an idea of the construction programme (see box), it is open to suggestions from bidders. “We are looking for ideas and innovation from bidders and if they can prove that, adjusting the timetable would give added value and benefits, then we would be happy to change the schedule.”

Rowsell adds: “We don’t have a monopoly on the wisdom of this. We look with interest at what bidders propose. One way that the bidders can add their own colour to the programme is by suggesting ways of reducing the eight-year construction phase of the programme. I expect some bidders to reduce this when the proposals come in. However, we would expect bidders to be aware of the statutory process.”

High-quality service

“I think the key message is that as a bidder you have to be aligned with our way of thinking and where we want to go. We want a partner that can deliver a high-quality service to the road user over the next 30 years as the agency turns away from being a road manager to a road operator. If you can’t do this, don’t expect to get much further in the tender process.”

And that high-quality service should mean minimal disruption to traffic. Rowsell points to the widening of the M25 junctions 12 to 15, where lanes were kept open during the working day and regular information given out to drivers. “Some said the traffic management around the roadworks made driving through the affected area better than normal,” he says. “What we want is a good level of service to be delivered during the widening works and we will be having clear constraints on no road closures and that any maintenance outside the required construction activity is avoided.”

Lane availability plays a large part of the payment mechanism that will see the consortium partners rewarded for their efforts. This is followed by the condition of the asset, such as rutting and ride quality, and performance measures such as safety, journey time reliability and incident clear-up.

The HA is reluctant to say too much about bids received to date, but Petch says: “We had a high level of submissions from our prequalified consortia, which exceeded the thresholds required. We have a good competition on our hands.”

Delivery team

And what about Macquarie’s approach to the bidding without a delivery team on board? “Macquarie has worked with us on the M6 toll scheme and delivered it early through a very strong joint venture. The firm has delivered and has experience on delivering high-profile projects,” says Rowsell. “However, now we are looking to see through the ISOP stage at how its capability and experience will be developed.

“It, and other bidders, have to give us the confidence in their ability and our decision to go through a single, large DBFO scheme. Even a contractor-led consortium will have about 80% of the work provided through a supply chain that has yet to be determined.”

The M25 widening will be different from previous HA DBFOs. “The process to get the consortium on board is shorter and we can get it in earlier than normal,” says Rowsell. “Traditionally we would have needed to go through the public inquiry phase before awarding the contract.

“In this case, we have been able to get the consortium on board earlier without all the statutory procedures in place. It makes bidding for the scheme cheaper for the industry, something we are conscious of. As part of this awareness, we are also doing away with the BAFO stage, which can be time-consuming and costly.

“On top of this we will be having a funding competition after contract award, so all the financing doesn’t need to be in place. This is also different from how DBFOs have been traditionally procured.”

But are the bean counters in the Treasury behind the HA on this scheme? “The Treasury knows we can deliver large projects effectively,” says Rowsell. “We have been keeping it well informed at every stage in working up this project and we have a sound business case. We will be updating it as the tender programme moves along.” So is that 100% support? “Yes,” he replies.

Olympic challenge

Another challenge facing the scheme, and one a little more outside the HA’s control, is the Olympics. “We require bidders to plan around the Olympic Games when submitting their tenders,” says Petch. “They must take it into account. We need to have a fixed, forward programme as widening is scheduled to take place in the north-east quadrant at the same time as the Olympics. The last thing we would want to do is to impede the event.”

Perhaps a bigger concern is the pressure the Olympics will cause on the industry’s capacity. “There will be a lot of construction activity in the South East at that time, but you have to take into account that a lot of projects will be coming to a close, such as the Channel Tunnel Rail Link, White City and T5,” says Rowsell. “However, there are projects such as the Olympics, the M25 and possibly Crossrail starting up at the same time.

“About 40% of Olympics construction activity is infrastructure, the rest is building works. We are working with the government to look at the construction demands over the next five to 10 years as part of the Kelly working group, headed by the Office of Government Commerce. The aim is to draw up a programme of intended works so the industry can manage its resources. However, the industry believes the resource issue around the time of the Olympics will be manageable.”

Reputation

The stakes are high on this contract, with everything from balance sheets to reputation at stake; a lesson that the Wembley project team is fast discovering. But the rewards are also high, and the HA is basing the success of the M25 on whether or not it rolls out another multi-billion pound widening contract for the M6. The consultation on this is being undertaken with the Department for Transport.

Rowsell summarises: “This is one of the most famous road networks in the world. Cock this up and you won’t get much work elsewhere.”

Project factfile

• Project: widening and maintenance and operation of the M25 motorway.
• Value: £4.5bn (£1.5bn widening works / £3bn maintenance works valued at £100m per year over 30 years).
• Duration: 30 years.
• Client: Highways Agency.
• Works: 107km of widening works and the maintenance and operation of 400km Area 5 network, including Dartford-Thurrock crossing.
• Widening works start: 2008.
• Construction period: about eight years.

Prequalified bidders

• Amey, Laing O'Rourke and Ferrovial Agroman.
• CircuLON (Fluor and Transurban),
• Connect Plus (Balfour Beatty Capital Projects, Skanska Infrastructure Developments, Atkins and Egis Projects).
• FLOW (Vinci Concessions, Autoroutes Du Sud De La France, Laing Roads, Carillion Construction, Costain Engineering and Construction).
• Macquarie Motorway Group (Macquarie European Infrastrucutre).

Project timetable

• April: ISOP docuements released.
• June: outlined proposals due in.
• Autumn: three shortlisted bidders selected and detailed tender documents released.
• 2007: (December) provisional preferred bidder announced. (Oct/December) Funding completion conducted.
• 2008: work starts on site.
• 2016: widening works complete.
• 2038: concesssion period ends.

Contractor views

Alan Kay, major civils operations director, Costain: "If we are successful, there is a large amount of continuous construction work that will be open to us. The continuity is important. We are in a good position to win the works and we have a lot of experience in widening works that we can bring to the table such as junction 10 to 13 on the M1."

Herve LeCaignec, bid director, FLOW: "The major challenges will be: managing the widening activities while minimising disruption to a heavily trafficked, strategic route. Due to the scale of the scheme, it will need an experienced, competent consortia with financial backing to support the scale of obligations being taken on. Inheriting 400km of existing highway and its associated structures will bring complex long-term lifecycle responsiblilities and delivering the operational flexibility that the Highways Agency seeks."

[Contract Journal, 4 May 2006]