ANOTTINGHAMSHIRE

POLICE AUTHORITY

PRIVATE FINANCE INITIATIVE

FINAL BUSINESS CASE

VEHICLE SERVICES

MAY 2001

CONTENTS

1.INTRODUCTION…………………………………………………………... 3

2.BACKGROUND…………………………………………………………..3

3.KEY OBJECTIVES …………………………………………………….. 4

4.KEY FEATURES OF THE VEHICLE SERVICES ELEMENT OF

THE PROJECT……………………………………………………….…...4,5,6

5.CONTRACTUAL DETAILS…………………………………………… 6,7,8

6.DEVIATION FROM ORIGINAL BUSINESS CASE (OBC)…………… 8

7.FINANCIAL IMPLICATION…………………………………………… 9,10

8.CONCLUSION………………………………………………………… 10,11

9.RECOMMENDATION………………………………………………… …11

1.INTRODUCTION

1.1On 3 March 2001 the Authority signed the Contract for the accommodation services element of the combined project with Miven Ltd. These services related to the replacement of Nottingham Traffic Wing.

1.2In its letter of 24 April 2001 the Home Office confirmed the level of Notional Credit Approval with which it would support the project. This NCA related to the accommodation services only.

1.3The Final Business Case seeks approval for the vehicles element of the combined PFI project.

1.4This document summarises the position in respect of vehicle services, which form the second part of the combined project which was staggered to let the accommodation deal close first. The reasons for staggering the combined project were set out in the FBC for the accommodation services dated February 2001 and which has previously been submitted to the Home Office and approved.

1.5For information, the section of the accommodation FBC relating to the staggering of the project is attached at Appendix A.

2.BACKGROUND

2.1The Outline Business Case prepared by the Authority in November 1997 set out the options for the project which had been considered by the Authority. These options included the status quo option (PSC1); the traditional procurement option (PSC2); and the PFI option.

2.2Preliminary whole life adjusted costings indicated that the PFI option had the potential to offer the lowest NPV and therefore the capability of offering a solution that represented better Value for Money to both the Police Authority and the Public Sector as a whole.

2.3The OBC was based on a Value-For-Money solution for the combined project. Since the staggering of the two elements it is important to note that both the accommodation and vehicle services have proved Value-For-Money in their own right.

2.4This Final Business Case provides the evidence that the PFI is the appropriate option for securing vehicle services.

3.KEY OBJECTIVES

3.1At the beginning of the project, the Authority identified its Key Objectives for the project. The Key Objectives stated clearly what the Authority intended to achieve and would be revisited, as a marker, during the PFI process. These Key Objectives formed the basis of the Output Specification.

3.2The Key Objectives (previously submitted to the Home Office as part of the accommodation services FBC) are summarised below:-

3.2.1Core Service and Operational Objective

To enable Police Officers to concentrate on core operational activities.

3.2.2Non-Core Services and Partnership Objectives

To offer to the private sector the opportunity to provide services which are considered to be secondary to the Police core operational services.

To seek a partnership with the private sector that takes advantage of private sector expertise in management, commerce and innovation.

3.2.3Financial Objective

To meet the PFI Criteria of Value for Money and Affordability

3.2.4Risk Transfer Objectives

To ensure that the private sector has sufficient ownership, responsibility and control of the project by the transfer to the private sector of the appropriate risk.

3.3It should be noted that nearly four years later the project remains consistent with these Key Objectives.

4.KEY FEATURES OF THE VEHICLE SERVICES ELEMENT OF THE PROJECT

  • A collection and delivery service for repairs and maintenance.
  • Fixed turnaround times for repair and maintenance (including accident damage repair).
  • Saturday servicing of vehicles.
  • Payment for availability of vehicles by way of Driver Slots
  • Usage payment by way of pence-per-mile charges.
  • An ability for the Provider to move vehicles around the County to equalise mileage and ‘smooth’ the capital replacement programme.
  • The Provider to take whole-life risk for vehicles from procurement to disposal.
  • Vehicles to be purchased off the Home Office call-off contract.
  • Key management information (including fuel management) to be provided to the Authority.
  • Mobile Repair Units to provide on-site maintenance and road-side assistance.
  • Vehicles to be serviced to manufacturer’s time and mileage intervals.
  • The Authority to continue to be the registered keeper of the vehicles.
  • Provider Help Desk to be available 365 days per year/24 hours per day (including leap years).
  • Provider workshop to be based at Chilwell. An element of the vehicle services to be sub-contracted.
  • Fuel price risk to be retained by the Authority. The Authority also to remain responsible for fuel bunkers.
  • Self-authorisation of certain repairs up to £100, subject to review.
  • Provider to carry out a basic valet of vehicles on scheduled services.
  • Fair wear and tear parameters agreed.
  • The Authority to retain responsibility for fitting and maintaining radio equipment.
  • The Authority to be liable for rechargeable events, such as accident damage and unfair wear and tear.
  • The Authority to have the right to vary Driver Slots by up to 5% in any one year and 12.5% over any five years.
  • Variations (Mileage): A ‘cap’ and ‘collar’ of 17.5% variance on a base of 7.9 million miles driven across the fleet per annum has been agreed. Where the Authority exceeds the cap/collar a pricing adjustment will take place. Mileage will be reviewed annually.
  • The replacement criteria for vehicles to be at the discretion of the Provider, subject to availability and performance criteria and fair, wear and tear conditions. Also the option to purchase the fleet at the end of the Contract will be subject to the condition of the fleet.
  • Vehicle choice to be at the discretion of the Provider subject to an operational evaluation by a set team of Police Officers.
  • Any excess of the residual value placed by the Provider on vehicles transferred to them by the Authority will be shared 50:50.

5.CONTRACTUAL DETAILS

5.1The Legal Provisions relating to the Project are set down in a comprehensive agreement (“the Contract”) between the Nottinghamshire Police Authority (“the Authority”) and Miven Limited (“the Provider”). Although the project was started before the arrival of significant guidance on PFI, the contract reflects the principles and many of the provisions of the Treasury Task Force Guidance. The Contract defines clearly and in-depth the rights and obligations of both the Provider and the Authority throughout the proposed contractual term of twenty-five years.

5.2The contract varies slightly from Treasure guidance in the following:-

i)Excusing Causes: The contract allows for excusing causes where the Authority is in breach of the contract, or it has hindered or obstructed the Provider in carrying out the services.

ii)Retendering procedures have been agreed in greater detail than that contained in guidance.

5.3A key objective of the Contract is to reflect the long-term nature of the relationship. Examples of this are clauses that govern the procedures and liabilities for costs should changes in law affect the Services, and should changes to the Services be requested by the Authority. Other key provisions include:

  • A certificate will be issued under the LGCA in favour of the project Company Bank.
  • If completion is delayed by more than 3 months from the due date of 1 November 2001 liquidated damages at the rate of £10,000 per week will be payable to the Authority, subject to any delays caused by Relief, Compensation or Force Majeure Events.
  • The Authority have a right to “Step-in” in extreme circumstances to perform elements of the services to maintain its policing duties and responsibilities.
  • Provisions for five yearly repricing and a requirement to assist in “Best Value” activities.
  • The contract may be terminated in the event of a serious default by either party in which case Compensation on Termination will be payable in accordance with TTF Guidance and the Authority will have rights to exercise an option to take over the vehicles and the Chilwell Workshop. However, it should be noted that there is no cross termination between this contract and the accommodation services contract. Therefore termination on the property element will not automatically lead to termination on the vehicle side (and vice versa).
  • There are no TUPE transfers of any employees of the Authority.
  • The Provider will have (residual value) risk of both vehicles and the Chilwell Workshop.
  • There will be a six month ‘honeymoon’ for both sides from the commencement of services whereby the Provider will not be subject to financial penalties or termination points; neither will the Authority be liable for certain rechargeable events.
  • There will be a Financiers Direct Agreement permitting step-in with BA/CA Asset Finance Ltd.
  • The Authority has warranted certain information, for instance that vehicles have been serviced in accordance with manufacturer’s intervals and specification. In addition, the age profile of the fleet is warranted. If, at fleet transfer, the fleet is found not to have been serviced properly or is older than previously warranted, a price adjustment will be made.
  • Security of the vehicles will be provided by way of a chattel mortgage. The funders will have the first charge over the mortgage with the Authority effectively having a right of first refusal in the event of termination.
  • McBains Investment Management, who are co-owners of the accommodation SPV, will be taking a 10% share in the vehicle SPV.

5.4The contract allows for the early detection and reporting of any problems in providing the services, principally by way of self-monitoring. The Payment Mechanism ensures that vehicle availability and performance are precisely monitored and are as detailed in the Output Specification. The Provider will have a rectification period prior to financial penalties being levied. Where the relevant matter is not put right within this time period, financial penalties will be levied at a qualified level.

5.5Ultimately, continual failure may lead to termination of the contract for breach, though the parties have the right to make a reference to expert determination where agreement cannot be reached in key areas.

6.DEVIATION FROM ORIGINAL BUSINESS CASE (OBC)

6.1Where the FBC deviates from the OBC is in the following:-

i)Supply of Vehicle Fuel

The original intention was for the Provider to take fuel supply risk. This was included in the OBC. The Provider would be responsible for the procurement of fuel and would also take over responsibility for the current fuel bunkers of the Authority. However, in discussion with bidders, at the Invitation to Negotiate stage, they were reluctant to take on either the fuel price risk or the Health and Safety implications with regard to the fuel bunkers.

The Authority will therefore continue to order and pay for fuel and maintain the fuel bunkers. The Provider will be responsible for installing and maintaining a fully networked fuel management system which will download information on fuel usage per vehicle to the Authority on a regular basis.

Supply of fuel is therefore excluded from the FBC.

(ii)The OBC was based on the assumption that there would be no residual value of vehicles at the end of the Contract and that ownership of these assets would revert to the Provider. However, in negotiations with the bidder, it has been agreed that the Authority will have the option of whether to purchase the vehicles or not. If the Authority exercises the option the vehicles will be sold at net book value subject to their condition.

7.FINANCIAL IMPLICATIONS

7.1BALANCE SHEET TREATMENT

7.1.1The Authority has commissioned a review of the scheme by PricewaterhouseCoopers in respect of the balance sheet treatment.

7.1.2The conclusions of PWC are as follows:-

  • The existing vehicle fleet should be accounted for as a ‘sale and operating leaseback’ arrangement. The fair value of the existing fleet should be set up as a prepayment and amortised over the contract term (or, if it is shorter, the period during which reduced rentals are chargeable). The difference between the carrying value and the fair value should be recognised as a profit or loss on disposal;
  • The contract can be viewed as a series of individual vehicle leases;
  • Those vehicles which are purchased and replaced during the contract term should be accounted for as an operating lease;
  • Those vehicles which are purchased during the contract term but are not subsequently replaced should be accounted for as a finance lease when the vehicles are purchased. Assuming that the Authority exercise their full allowance under the ‘step down’ arrangement, there will be approximately 210 vehicles at the end of the contract term. The future capital impact for the Authority will therefore depend on the timing of these purchases, presumably during the last five years of the contract. We note, however, that the Accounting Standards Board has recently issued a discussion paper on Leases which is likely to change the way in which such transactions are accounted for in the future.

7.2PUBLIC SECTOR COMPARATOR

7.2.1The OBC originally projected a total NPV for the PFI funded solution of £37.763 million (including fuel supply) over a 25 year life span. The scope was later changed to remove the supply of fuel which altered the OBC NPV to £29.341 million. This was on the assumption of a discount rate of 9.18% (6% real, inflation 3%) and base date of May 1998, base input costs were assumed to be 1993 prices inflated to May 1998 prices.

7.2.2The PSC solution (and key assumptions) remains consistent with the OBC. The adjustments that have been made are:-

  • Uplifted base input costs to 1 April 2000 prices;
  • Revised discount rate of 8.65 % ( 6% real, 2.5% inflation);
  • Revised base date is 1 April 2000; and
  • Inclusion of amendments to Output Specification for the building to be

Secure by Design.

7.2.3The revised PSC is £28.816 million.

7.2.4The NPV for the preferred bidder model is £28.775 million. The model is at current prices; base date is assumed to be 1 April 2000; interest rate assumption set at 5.75%; cashflows assumed to occur at the middle of the period; and discounted at real discount rate of 8.65% ( 6% real, inflation 2.5%).

7.2.5The SPV price represents a Value for Money solution for the provision of the

Vehicle Services. The SPV solution is 0.1% cheaper.

7.2.6The only changes we envisage to the model between the submission of the FBC and financial close is to reflect any change in the interest rates.

7.3AFFORDABILITY

7.3.1Based on 1 November 2001 date for commencement of Services, the total NCA now being sought is £14.846 million, refer Appendix B for calculation. This represents 45% of the total NPV PFI charges discounted at 7.5% and inflated by 2.5%.

7.3.2The original approval at OBC was for £16.1 million. Since the OBC submission, the change is due to:-

  • Change in the Discount Rate from 8.8% to 7.5% per annum
  • Change in the assumed Inflation Rate from 3% to 2.5% per annum

7.3.3The Authority has reviewed the implications of the PFI charge and confirms that the unitary charge is affordable with the above NCA support.

8.CONCLUSION

8.1Negotiations with the Preferred Bidder in respect of Vehicle Services have now ended and the Principal Agreement has been completed, save for minor drafting.

8.2A copy of the Principal Agreement is attached.

8.3The deliverability of Vehicle Services via the Private Finance Initiative represents a Value-for-Money solution when compared to the Public Sector Comparator and the level of calculated NCA means that the project is also affordable for the Authority.

8.4The Police Authority has delegated authority to the Chairman, Vice-chairs, Chief Constable, the Clerk and the Treasurer to the Police Authority to close the deal on the vehicle services element. Delegated authorisation has now been received.

8.5The Authority is now working to timetable which will enable Contractual and Financial Close by the end of May 2001.

9.RECOMMENDATION

9.1The Authority recommends that the Home Office approves the Final Business Case for the VEHICLE SERVICES part of the deal to enable the Authority to complete Contractual and Financial Close on VEHICLE SERVICES by the end of May 2001.

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