HERTFORDSHIRE COUNTY COUNCIL

HIGHWAYS & TRANSPORT CABINET PANEL

TUESDAY 6 JULY 2010 AT 10.00AM

HIGHWAYS RE-PROCUREMENT 2012

Report of the Director of Environment & Commercial Services

Author: Vince GilbertTel: 01707 356460

Executive Member: Stuart Pile (Highwaysand Transport)

  1. Purpose of the report

1.1This report gives the result of an options appraisal for the re-procurement of contracts for Hertfordshire’s highways service. Critical Success Factors have been identified in conjunction with the Member Advisory Group. A preferred option has been developed, and a strategy to deliver it.

  1. Recommendations

2.1That the Panel endorse an “enhanced framework model” for the contracts delivering the highways service from 1 October 2012, incorporating a single term contract and framework contracts, with a performance regime that rewards high performance with additional opportunities for work.

2.2That the OJEU notice be constructed to permit the potential changes in scope indicated, and the modification of the contracts at a suitable break point (probably four years), to allow for either the introduction of a Managing Agent Contract or for the continuation or termination of the initial arrangements, at the Council’s discretion.

  1. Background

3.1The core Highways contracts underlying the Hertfordshire Highways alliance expire on 30 September 2012 and no further extensions are possible. A project has been under way to re-procure the contracts, under a Project Board sponsored by Rob Smith. A Member Advisory Group comprising Stuart Pile, Teresa Heritage, Frances Button, Stephen Giles-Medhurst and Sharon Taylor has supplied guidance during the development work.

3.2The scale of the service is significant. The 2010/11 combined revenue and capital budget (excluding Street Lighting) summarises as:

Works & Services (Revenue) / Works (CountyCapital) / Works (Non-CountyCapital) / HCC Staff Costs / Total
£27.1M / £39.1M / £18.0M / £7.4M / £91.6M

3.3Street Lighting has been the subject of a separate Review and had been awarded PFI credits under the previous Government. The PFI programme has recently been suspended. It is therefore necessary to plan, at least,forapproximately £5.3M pa of street lighting to be included in this procurement.

3.4Approximately £65M of the non-lighting works and services are provided by the main works contractor (Amey Lafarge JV) and £10M by the professional services provider (Mouchel plc).

3.5HCC staffing establishment at 1 May 2010 was 175, down from 208 in March 2009. The total number of staff including those of Mouchel and Amey Lafarge is approximately 900.

  1. Principles and Critical Success Factors

4.1All options are predicated on “Council for the Future” (C4F)transformation principles, specifically

  • customer self-service through an easy-to-use website, driven by good quality systems holding reliable data
  • further shift of contact from technical officers to the CSC
  • suppliers act “on behalf of HCC”, engaging with customers and Members directly on most issues, preparing relevant reports and standing up for their own performance and reputation
  • HCC staff and suppliers supporting Members in their role under Herts Local, including determining and delivering local works
  • overall technical strategies and core programmes determined and delivered using best available economies of scale
  • further reductions in duplication between HCC and suppliers, and between local and central teams, to give efficiencies.

4.2TheCritical Success Factors (CSFs) for the service are on the next page. They have been drawn up using the Council’s objectives and values, discussions with the Member Advisory Group, experience of delivering the service in the current arrangements, and the principles above.


  1. Options

5.1Six broad options were considered from a longer list of contract structures in use for Highways Services in the UK. The practicality and implications of each have been checked by in-depth consultations with a range of suppliers and with other highway authorities. Following detailed evaluation, two have been brought forward as providing best fit to the CSFs.

5.2Framework Model with enhanced competition

5.2.1The model is set out in Appendix 1. It comprises a number of separate contracts, including a core term contract, a support contract, and several framework contracts. Work under the frameworks will, with exceptions, be on a design and build basis, under an audit regime, to reduce interfaces and internal costs.

5.2.2The special feature is that the suppliers are strongly incentivised to meet the Council’s objectives as assessed through a particularly robust performance management regime incorporating open book accounting, inspecting and paying for actual costs. This introduces a strong element of continuous competition on both price and quality. Our experience, and that of other authorities, is that the performance regime described delivers considerable savings over more traditional arrangements.

5.3Managing Agent Contractor (MAC) with Capable Client

5.3.1This is an ostensibly simpler model in which HCC owns the highways service, but a single Contractor manages the service and its delivery.

5.3.2HCC (potentially with some services outsourced to a support contract as in the framework model) manages the strategic political interface, Transport Asset Management Plan, Local Transport Plan and network strategies and Forwards Works Programme programming, innovation and contract compliance.

5.3.3The contractor provides a ‘one-stop shop’ service for highway management, network management support, member service, customer service and design, construction and maintenance services.

5.3.4This model has similarities to the “thin MAC” as developed by Bedfordshire and Buckinghamshire. The difference is simply to introduce a stronger client, focussing on a combination of “deciding what is done” and performance management. It does inevitably mean more client staff than the ultra-thin clients seen in those two counties – although each has classified as “non-highways” a number of staff which HCC classes as “highways”, for example the development of highways strategies and of urban transport plans.

5.3.5The justification is that the extra client resource (whether in-house or procured from a specialist contract manager) is set up to have very strong commercial and performance skills, and access to the main contractor’s books and those of his subcontractors. The extra investment in turn should deliver what the framework contracts in the other model are there to achieve: true downward pressure on cost and upward pressure on performance, with overall better outcomes. As before, it does mean differently skilled staff than we have now, deploying relatively scarce commercial skills.

5.4Client Side Structure

5.4.1Both models are likely to involve changes to the functions and structure of the HCC “client”. These changes will necessarily be developed with bidders during the Competitive Dialogue process (see section 9.2 below).

5.4.2The options include transfers of functions between HCC and suppliers, and the reduction of duplication. Should these be confirmed, consultation with Unison wouldtake place.

  1. Implications for Service

6.1The Council’s objectives, the financial climate, technical developments (particularly in information systems and methods of serving the customer), and customer expectations, are all likely to continue changing over the life of the contract. The contracts which need to be procured will need to be sufficiently flexible to accommodate such developments.

6.2The continuing development of

  • Herts Local,
  • intelligent transport systems,
  • information systems, and
  • transforming the customer journey

will all have a particular influence on the service over the next twelve months. We propose that, with MAG as a reference group, we work with the C4F projects and with the bidders in Competitive Dialogue (see section 9 below) to ensure that the service from October 2012

  • continues to give Members straightforward contact and liaison points for casework and for all matters within the service generally
  • supports Members in their strategic and local roles, particularly under

Herts Local as it evolves

  • provides up-to-date, reliable information to Members, travellers and the general public through the easiest and most economical channels
  • satisfies high proportions of direct public contact, service and information requests to easy-to-use web facilities, with the majority of other public contacts being fulfilled by the first telephone contact
  • is performance managed and incentivised against both objective technical and VfM criteria, and public perceptions of quality and customer service
  • minimises duplication of staff between HCC and suppliers, and forces suppliers to be answerable direct to Members and public for good and poor service alike

6.3The first and second points, covering support to Members, are integral to the way that Hertfordshire will deliver the service after 2012. They are also points on which it is difficult for a bidder to appreciate what will be required, and for the council to understand and evaluate the bidder’s proposals, from an exchange of documents alone. It is proposed to deal with them in competitive dialogue so that proposals and processes are understood, tested, and captured ready for implementation on Day 1 of the contracts. The MAG will be closely involved.

  1. Evaluation and comparison

7.1Each model was scored between 0 (not delivered) and 4 (delivered to the full) for each CSF. The weighting of the CSFs for scoring purposes followed the simple scheme

Fundamental / Requirement / 3
Important / Feature to be included / 2
Advantageous / Not essential if objective can be achieved otherwise / 1

7.2The scoresfor the two “best” models come out as:

CSF / Framework (enhanced competition) / MAC with capable client / Weight
1 / 12 / 12 / Fundamental
2 / 2 / 3 / Advantageous
3 / 12 / 12 / Fundamental
4 / 6 / 6 / Important
5 / 6 / 6 / Important
6 / 4 / 4 / Important
Total / 42 / 43
% / 81% / 83% / of “perfect” score

7.3The risk profile of the MAC – its achievability – is however an obstacle to going directly to it. Evidence from Hertfordshire’s own experience, very strongly confirmed elsewhere, is that the least controllable major risk in procuring a highways term contract is that the performance and culture of the suppliers will not match the expectations created at tender stage.

  1. Collaboration and Scope

8.1All District and Borough Councils within Hertfordshire have been offered the opportunity to engage with the re-procurement exercise. A number have done so, indicating their willingness to consider using the eventual contract arrangements for some or all of their own work. Work continues to get definite commitments.

8.2The East of England Directors of Environment & Transport (EEDET) are sponsoring work to establish the case for regional collaboration in the procurement of some highways services, either for general schemes (up to £5M in value) or for specialist services. The framework arrangement lends itself to regional procurement, which could offer economies of scale to Hertfordshire. Work continues to establish the commitment of other authorities. The decision about whether to join in any regional collaboration will need to be taken in summer or autumn 2011. For some (but not all) services within the highways procurement, the scale of Hertfordshire’s business is likely to yield good prices in the market regardless of whether or not the contract is a regional one.

8.3Although this procurement project has been designed around the highways service, there is thepotential to include related services currently delivered within the Environment and Commercial Services Department. We have however evaluated with Property colleagues an option to combine the highways and property service procurements, and concluded that there are no real synergies and no benefits to be gained: with the very real risk of restricting competition to large multidisciplinary firms.

8.4The OJEU Notice for the term contract will be carefully constructed to allow for these options to be exercised whenever the Council requires them.

  1. Implementation Strategy

9.1Evolution of models

9.1.1Under the Procurement Regulations, the maximum term for any framework contract is four years, after which it has to be re-tendered. Term contracts can be of any length. 7-10 year contracts (and longer) are necessary to allow an economical period to recover the large investment in vehicles, systems and mobilisation that a supplier makes in each contract.

9.1.2However, the consequences of being locked in to a long contract with a supplier who is not performing as well as promised are serious. Competitive Dialogue and performance management are designed to reduce that risk, but they will not eliminate it. The crucial test comes in the first couple of years of the new contract.

9.1.3Once the whole service has been turned into a MAC, it is difficult to reverse the change should performance or value for money not be as promised.Confidence is considerably increased once the contractor is known and both the performance regime and open-book accounting are well established.

9.1.4The recommended implementation strategy is therefore to evolve the contracts, taking the biggest element of potential savings early and keeping the Council’s options open to proceed further as experience and circumstances dictate.

  1. Adopt a “framework model” strategy in which
  • The client sets up a strong commercial and performance management capability, as a main priority
  • The work opportunities given to each supplier depend on performance in both service and value for money
  • The main term contract has an option, exercisable after (say) 2 years of the contract, to break it at 4 years (to match the framework contracts). At that point the council can choose at its sole discretion between three options: to terminate the term contract (and re-procure), to continue it unchanged with frameworks in parallel, or to develop it into a MAC
  1. Review performance after 1 and 2 years
  1. On the basis of performance, the council’s developing objectives for the service, and market conditions at the time, choose which option to pursue.

9.1.5The potential change in scope and volume of work will need to be clearly set out in the original OJEU notice for the term contract and framework contracts, and in procurement documents.

9.2Procurement Processes

9.2.1Previous highways contracts have been procured on the basis that HCC would design the service, fully specify its requirements and use conventional tendering procedures,currently known as the Restricted route. In view of the costs of procurement, this is still the preferred method for straightforward contracts such as the framework agreements.

9.2.2The Competitive Dialogue (CD) process was not available when the current contracts were procured. It would enable us to rethink and re-shape the service progressively developing proposals with the private sector that place risk where it is best managed, meet HCC objectives, and are affordable. The core term contract has a potential value of between £35m pa (£70m in the MAC) giving a total value of between £350m and £700m over the anticipated ten year contract term, big enough to justify a CD procurement.

9.2.3HCC now has experience of CD on a number of procurements including Shared Managed Services and Waste. We have been visiting other authorities to gather experience on minimising the cost and time involved, by careful preparation and by selecting the subjects to be discussed in depth.

  1. Financial Implications

10.1Service post 2012

10.1.1Hard data by which to assess current tender prices is commercially confidential and not available to HCC. Anecdotal evidence is that this is a “good” time for a client to come to the market,. Actual cost levels are difficult to predict two and a half years out from start of worksbecause prices can become volatile as the market readjusts to the economy, inflation and the cost of borrowing.

10.1.2We have been able to analyse the known effects of competition and other forms of cost and performance management, along with typical staffing requirements experienced in other authorities. With around 85% of current costs being supplier payments, the determining factor of cost-effectiveness is the degree of pressure that can be appliedon suppliers, by introducing competition and by managing out the opportunity to adopt “defensive maintenance” and other risk-averse solutions with HCC’s money. In the last three years, we have acquired experience of the degree of cost change that can result from increasing attention to these areas.

10.1.3The numbers are not robust and make significant assumptions, but our expectation is that, on the same market rates, the enhanced framework model would generate savings of about 18% on the current model. The MAC with capable client does not carry the same costs of running and re-procuring framework contracts, and the projected savings level is around 19%. These potential savings have been put forward within the suite of IPP and C4F savings initiatives.

10.1.4In both cases, the level of savings is dependent on HCC allocating enough skilled staff to the management of its suppliers.

10.2Costs of Procurement

10.2.1The total direct costs to procure the core term contract and the suite of framework contracts are estimated at £953,000, covering the costs of external advisers and of staff to backfill HCC staff seconded full-time. The costs are spread across the three financial years 2010/11 to 2012/13. £280,000 of this has already been allowed for being the estimated costs of the restricted procurement process. The balance of £673,000 could be met from funds held for the development of highways systems and will be included in a future report to cabinet on transformation.

10.2.2The level of resources is derived from the most economical practice we have found while discussing CD for highways services with other authorities who have done it. The £673,000“extra” cost of CD represents just under 0.2% of the estimated value of the core term contract over its ten year life. The authorities we have spoken with assert that they have saved a minimum of 1% of contract value by pursuing CD as opposed to traditional methods.

  1. Property Implications

11.1The Highways service is currently delivered from four dedicated offices, in Watford, St Albans, Welwyn Garden City and Stevenage. The lease on the St Albans office expires in December 2010 and it is planned to accommodate operations in Highways House at Welwyn Garden City. With the exception of the new Stevenage office (occupied November 2009), these offices are provided through the existing contract. HCC’s right to use them ceases on 30 September 2012.

11.2There is a break clause in the lease for Hertford House in Stevenage, applying at 28 November 2012.

11.3The recommended contract structure will significantly reduce the amount of office accommodation that will berequired for the client and main providers’ staff. Its provision will be a subject for discussion in Competitive Dialogue. One of the possibilities to be explored will be accommodating the highways service (including some supply partners) within the main HCC property portfolio.