South London Street Lighting PFI by lpe53845

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									Safer London:
The South London Street
Lighting PFI Project




Outline Business Case
June 2007




Enquiries to: Martin Bonner
Project Manager
South London Street Lighting PFI Project
Tel: 020 8726 6000
Fax: 020 8760 0871
Email: martin.bonner@croydon.gov.uk
South London Street Lighting PFI Project                                London Boroughs of Croydon and Lewisham




Foreword



For both our boroughs, the re-lighting programme is a priority. Replacing existing street lighting with new,
efficient equipment will be a major step forward. Better lighting will make a significant contribution to
improving road safety and reducing fear of crime. But just as important, the new street lighting is more
environmentally friendly than the installations it replaces – something that is central to the success of the
project and fundamental to the councils’ policies of reducing energy consumption and carbon emissions.

Our street lighting programme is significant in other ways. It provides a clear example of the efficiencies
that can be achieved by working together. It is an approach which has guided this project from the outset
and, with its effectiveness now proven, is an approach we intend to build on: seeking further co-operation
between our two councils and fresh opportunities to highlight this joint venture as a value-for-money
example that puts residents’ needs first.

We commend this project to the Department for Transport and look forward to the new street lighting it
will deliver to a wide area of South London.




Councillor Mike Fisher                                                                    Sir Steve Bullock
Leader of the Council                                                                   Mayor of Lewisham
Croydon Council                                                                          Lewisham Council




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South London Street Lighting PFI Project                                                                 London Boroughs of Croydon and Lewisham




Contents



Section                                                                                                                                              Page
Executive Summary...................................................................................................................................... iii
Background .................................................................................................................................................. 1
Current Condition ......................................................................................................................................... 5
Business Need and Options Appraisal......................................................................................................... 8
Risk Evaluation........................................................................................................................................... 18
Appraisal Summary Tables (AST).............................................................................................................. 20
Key Terms and Conditions ......................................................................................................................... 24
Balance Sheet Treatment (FRS 5) ............................................................................................................. 28
PFI Implementation .................................................................................................................................... 29




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South London Street Lighting PFI Project                                             London Boroughs of Croydon and Lewisham




Executive Summary
The London Boroughs of Croydon and Lewisham (the ‘councils’) believe that good quality lighting delivers
a significant contribution to improving the quality of life in the boroughs by generating a positive night time
environment for the local community. The proposed project provides an opportunity for both councils to
jointly renew and upgrade their infrastructure in order to deliver an efficient, effective service that is
sustainable over the long term. To that end, this Outline Business Case (OBC) has been jointly prepared
and conforms to both councils’ visions of the boroughs.

The councils propose to work together to replace their aged street lighting and deliver a better lighting
service to their residents. The councils expect that, by working together, they will reduce procurement
costs and, by offering a larger project to the market, expect to benefit from economies of scale.

Current Situation
The councils’ current street lighting assets include 41,538 columns 1 ; 5,643 illuminated signs; 2,334
bollards and 667 beacons. A significant proportion of the columns are effectively life-expired and current
levels of illumination from 90% of luminaires are not consistent with European lighting design standards.
Much of the poor lighting is in high crime areas and areas which suffer from a high fear of crime. The
majority of the illuminated signs and bollards are also life-expired and a greater part of the stock requires
standardisation and modernisation.

Required Work
Ninety percent of the existing 41,538 columns need to be replaced (just 10% of the stock is ‘deemed to
comply’) and the total number of columns has to increase by 18%. All bollards, beacons and illuminated
signs require renewal. The improvements will provide a service that meets current European standards.
The level of investment required to achieve this goal has been reviewed by independent technical
advisors and is considered to be reasonable.

Potential Solutions
The councils have examined a number of options as part of a best value service review. The review
identifies that ‘fast track’ replacement is the most attractive solution. This route achieves the highest
benefit to cost ratio (BCR) and the highest non-financial benefits in comparison with other options. The
Net Present Value (NPV) of the economic benefits from reductions in crime and road traffic accidents is
£533m. The BCR achieved is 9.13 based on a prudent 10% reduction in crime and road traffic accidents
during hours of darkness. In this option, all lighting columns currently at the end of their useful life are
replaced and modernised to the appropriate standards in the first five years of an outsource contract.

Benefits of the Work
The proposed project will result in improved performance for street lighting in the boroughs. It will also
deliver better road safety, reductions in crime and the fear of crime and will support the night time
economy across the boroughs. Based on experience of recent street lighting projects in other local
authorities, including the recently completed procurements at other London boroughs, and also taking into
account the additional efficiency savings achievable under a joint scheme, it is anticipated that significant
savings on revenue and capital costs will be made under a holistic approach to streetlighting.


1
    Unless the text makes a clear distinction, throughout the OBC the word ‘column’ refers to a complete lighting unit including
structural support, luminaire, associated control gear and power supply.




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South London Street Lighting PFI Project                                London Boroughs of Croydon and Lewisham


Value for Money
The councils have identified that a Design, Build, Finance and Operate (DBFO) approach, procured under
the Government’s Private Finance Initiative (PFI), demonstrates the potential to deliver Best Value and is
the preferred procurement route. The councils are confident that the proposed PFI project would offer
value for money in comparison with the traditional procurement route.

PFI Credits and Affordability
The councils are seeking a notional credit approval (PFI credits) of £79.5m and officers consider that the
project is affordable, subject to the award of the PFI credits. Members have resolved to allocate the
revenue budgets required to support the step change improvement. The Councils undertake to continue
the real level of revenue funding implicit in the affordability calculations.

Project Delivery
Members’ Support

Both councils have strongly supported the objective of renewing their street lighting infrastructure since
completing their Best Value Reviews (2000 in Croydon, 2004 for Lewisham). Independently the
authorities examined their lighting stock and identified PFI as the preferred financing option. With the
launch of the current funding round, Croydon and Lewisham took the opportunity to work together and
have developed an effective working relationship, both at member and officer level.

Following separate member approvals of both the financial viability of the proposed project and of the
submission of a joint PFI Expression of Interest, the two councils have gone on to agree to the
establishment of a Section 101 joint Committee to oversee and steer the programme. The joint member
committee was approved, with the required delegation of powers, by Croydon on 11th December and by
Lewisham on 22nd December 2006. The joint committee has approved this OBC and the affordability of
the street lighting replacement project.

In both councils there is considerable cross-party support for this project. In Croydon the majority party
has changed between EOI and OBC and yet both parties have supported the project’s objectives. In
Lewisham the elected Mayor continues to give this project full support and the Overview & Scrutiny
Committee also support the project. The joint committee consists of two Conservative (Croydon) and two
Labour (Lewisham) Members. Both Police Borough Commanders have endorsed the project (their letters
of support being included in the EOI).

Output Specification and Key Contract Terms
The councils intend to procure the service in line with the latest guidance available from the Department
for Transport (DfT), 4ps and HM Treasury and the experience of other local authorities who have
successfully procured this type of service. The output specification will reflect this aim. In particular, the
councils intend to utilise the latest 4ps street lighting procurement pack to ensure an efficient and
effective procurement process. The councils are participating in the 4ps street lighting forum to ensure the
project is up to date with the latest market developments and can fully benefit from and contribute to best
practice and advice in this area.

External Advisers
Expert project support is and will be provided through external advisors. Consultants in specialist finance,
legal/procurement and technical aspects of the project have been retained and the councils have
budgeted £1.4m to meet procurement costs.

Financial advisors PricewaterhouseCoopers LLP (PwC) has assisted the councils in conducting the
option appraisal, value for money, public sector comparator, PFI credits and risk transfer assessments.



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South London Street Lighting PFI Project                               London Boroughs of Croydon and Lewisham


Eclipse Partnership has provided technical assistance and validation of the councils’ street lighting
assets. Pinsent Masons has been appointed to provide legal and procurement advice. All three
organisations have impressive experience of the street lighting PFI sector.

The councils have consulted with Government Office for London, Transport for London and the 4ps and
their feedback has been incorporated in this OBC. The project programme indicates commencement of
the new service in Q4 2009, subject to timely approvals from DfT and Project Review Group.

Project Management and Delivery
Both councils have an excellent track record of delivering innovative PPP and PFI projects and will apply
their joint experience to this project to minimise any risks to the outcome. The councils have agreed how
they will work together, with the London Borough of Croydon as the lead council, to procure and manage
the contract. A joint member committee, consisting of two members from each council, has delegated
decision making powers – removing any potential for delay implicit in confirming decisions via two,
separate governing bodies. It will ensure a timely, focussed approach to managing the programme.

The outline project management structure described in this OBC has been discussed with 4ps and takes
account of best practice and lessons learnt from other joint schemes including Newcastle & North
Tyneside and Barnet & Enfield. Both councils are fully committed both politically and financially to this
joint project.

Timetable
 Procurement Stage                                                 Target Date

 OJEU Notice publication                                           January 2007

 Issue information memorandum/PQQ                                  January-March 2007

 Return of PQQ                                                     March 2007

 OBC submission                                                    June 2007

 Project Review Group decision on OBC                              November 2007

 Invitation to Dialogue (ITPD) & Outline Solutions (ISOS) issued   January 2008

 Evaluation of ISOS                                                March 2008

 Invitation to Submit Detailed Solutions (ISDS)                    April 2008

 Call for Final Tenders                                            January 2009

 Contract award after standstill of at least ten days              August 2009

 Contract start date                                               November 2009




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South London Street Lighting PFI Project                                                   London Boroughs of Croydon and Lewisham




Background
Description of the Councils
Croydon and Lewisham are near neighbour South London Boroughs and as such share many of the attributes,
both positive and negative, that are common to this urban context. Both councils realise the importance of
providing adequate and reliable street lighting and anticipate the benefits that such a service delivers in support
of the night time economy; in reducing residents’ fear of crime and by improving road safety. Both councils
appreciate that their current lighting service needs significant improvement and welcome the opportunity that PFI
funding presents to address this short coming.

The joint project is founded on the strong working relationship which has been established between the two
organisations. The councils came together before the Expression of Interest and the spirit and ease of co-
operation has been marked. The joint working and member supervision arrangements established for the project
have already been identified as suitable basis for extending co-operation to other highways and environmental
management functions.

Introduction to Project
The proposed project will replace the existing street lighting and illuminated signs; replace outdated
yellow/orange lighting with the greater rendition of white lighting and generally improve street lighting levels.
Significantly, it will move away from the single ‘brighter-is-better’ objective of current lighting practice to an
installation that improves illumination in the boroughs but which also provides a more flexible/sustainable
solution. It will do this by introducing intelligent management capabilities that benefit both the client and service
management functions and introduce, for the first time, the potential to control illumination levels and, by
extension, optimise energy consumption.

The comprehensive scope of the project covers the management, operation and maintenance of the lighting
stock (including the provision of energy) for a 25 year period. The project encompasses all of the public roads in
the boroughs, barring only those principal routes managed by Transport for London.

The external lighting on council housing estates and in parks/open spaces is also included in this OBC. Both
councils have large housing portfolios and several parks, many of which have public footpaths and cycle routes
running through them. Good quality lighting in parks support the councils’ clean, green and liveable agendas;
encourages healthy activity (increased walking and cycling are central to the Mayor’s London transport strategy);
and reduces crime and the fear of crime.

Overall Objectives
The councils aim to replace their outdated and ageing street lighting in a single project delivered by a single
service provider and managed by a single client function. The project will provide an improved lighting service to
residents, business and visitors. Improved lighting will deliver a number of benefits aligned to the common
objectives of both authorities including:

 Objective                                        Contribution of an improved street lighting service

 Regeneration             Better access to local services and transport will allow for greater public interaction which will, in
 benefits                 turn, have a positive influence on town centres and the wider community.

 Impact on crime          Improved lighting will have a positive impact on fear of crime/public perception of risk in these
                          densely populated districts. There is also an expectation that re-lighting will reduce street crimes
                          via improvements in CCTV and police coverage.


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South London Street Lighting PFI Project                                                  London Boroughs of Croydon and Lewisham



 Objective                                       Contribution of an improved street lighting service

 Improved road            Improved lighting will deliver improved street safety and reduce road traffic accidents across the
 safety                   boroughs.

 Improved efficiency      Replacing and upgrading the current lighting infrastructure will deliver significant efficiency savings
                          in both capital replacement and maintenance terms.

 Greater                  Moving away from the current lighting regime to a more controllable installation will allow for
 sustainability           service management objectives to include sustainability goals for the first time.

The inclusion of intelligent management capabilities is an important element of the replacement project. The
benefits of such a system are significant and diverse (improved service delivery, improved client monitoring,
obviated night time scouting etc) but the main driver is undoubtedly the ability to control the service to ensure
optimum energy efficiency.

An Intelligent Management System (IMS) will allow lighting to be controlled in a way that is not possible with the
current infrastructure. It will allow for lighting levels to be varied and/or lighting to turned off if and when such
steps are required. It will support energy management as an objective and will deliver a more sustainable, less
carbon-polluting service. An IMS will also identify lights which are near to failure (from energy consumption
profiles) which will facilitate change in advance of actual failure and, again, optimise energy use.

The Councils’ Vision
Croydon and Lewisham both aim is to develop boroughs which are safer, healthier, more prosperous and
sustainable and thereby foster locations in which people choose to live, work, visit and socialise.

 Croydon’s Best Value Performance Plan objectives are:
    Safer Streets
 •    Providing a Better Environment
      Retaining Croydon’s Character
      Providing a Sense of Community
      Value for Money.

Renewing street lighting clearly contributes to all of Croydon’s priorities. The 2007/08 Best Value Performance
Plan illustrates Croydon’s commitment to the renewal of street lighting and specifically identifies the replacement
programme as a key contributor in the priority areas of reducing crime and disorder and improving the
environment. The Sustainable Community Strategy 2005-2008 also identifies improving the environment as one
of the priority areas for the borough. It targets attaining European Lighting Standards within the next ten
years as a key success measure for Croydon.

Lewisham has developed a clear vision: to make Lewisham the best place in London to live, work and learn. The
proposed project seeks to achieve a sustained level of investment to improve the standards of street lighting and
illuminated signs throughout the borough.

 Allied to the vision, key objectives set out by the Mayor of Lewisham that are relevant to this project:
      Making Lewisham clean, green and liveable
      Improving safety, security and a visible presence by partnership working to reduce crime
      Strengthening the local economy by gaining resources to regenerate key localities, promoting public transport
      Encouraging active healthy citizens – leisure sporting, learning and creative activities for everyone
      Inspiring efficiency, effectiveness and equity in the delivery of excellent services to the community.

Achievement of these cross cutting objectives is dependent on the concerted action of many agencies.
Lewisham has an effective record of public-public and public-private partnership working to deliver across a


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South London Street Lighting PFI Project                                         London Boroughs of Croydon and Lewisham


spectrum of objectives. One of the main themes of the Lewisham Community Strategy relates to improving the
well being of the people of Lewisham by reducing crime and the fear of crime. Another aims at improving the
public sector performance and delivery in terms of effectiveness, efficiency and sustainability of local public
services and optimising investment in infrastructure. The project aims to achieve reductions in crime and
fear of crime as well as contributing to overall efficiency and effectiveness through investment targeted
at improving street lighting.
Asset Management Plans and Capital Strategy

The councils are currently working in partnership with the boroughs of Bexley, Bromley, Greenwich, Sutton,
Merton, and Kingston to develop a Highways Asset Management Plan. The exercise, which will be concluded
later this year, will result in a common framework document to be tailored and populated by each borough. The
initiative may result in a broadly accepted pan-London format. The work in progress on the plan recognises
investment in street lighting as a key investment priority to deliver the objectives of reducing crime and
fear of crime.
Local Implementation Plan

The Mayor of London’s Transport Strategy recognises the impact improved street lighting can have on
pedestrians, cyclists and those using public transport. By using street lighting to reduce fear of crime, the Mayor
anticipates increased use of public transport and increased willingness to walk and travel by means other than
motor vehicle. Croydon and Lewisham’s Local Implementation Plans (LIPs) – which have been approved by the
Major of London – address these requirements and include emphasis on the boroughs’ intentions to upgrade
street lighting, particularly around local train stations and schools. Lewisham’s Walking Strategy, for example, is
intended to improve pedestrian safety and security, to improve pedestrian facilities and the general pedestrian
environment, particularly making crossing the road easier and safer. This requires safer street and improved
lighting will contribute to an increased sense of public security.
Joint London-wide Transport Initiatives

Areas around public transport nodes are often crime hotspots and, especially in the hours of darkness, people
can be deterred from using good transport services by their fear of crime and antisocial behaviour. Working with
other London boroughs, both jointly and separately, Croydon and Lewisham receive funding to support the
improvement and integration of transport options. Both participate in South East London Transport Strategy
(SELTRANS), London Cycle Network, London Bus Priority Network and other schemes. Summaries of these
funds are contained in the LIPs and LIP funding requests. Improved lighting will contribute to the objectives
of the Mayor of London, TfL and support these transport initiatives. Good quality street lighting is a
critical contributor to greater usage of public transport, cycling and walking, all of which are alternative
transport options favoured by the Mayor of London.

Road Safety and Crime
                       Crimes            RTAs     Whilst Lewisham remains the safest inner London borough, half of
                       during           during    its wards have crime-related deprivation and it remains in the worst
 Council              darkness         darkness
                                                  20% nationally. Most street robbery in Lewisham is before 0600
 Croydon               19,271              261    and after 1600 with a peak between 2200 and midnight. TFL
 Lewisham              15,861              252    accident analysis reports show that 28% of all Lewisham’s road
                                                  accidents are ‘dark accidents’ occurring in the hours of darkness
 Total                 35,132              513




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South London Street Lighting PFI Project                                         London Boroughs of Croydon and Lewisham


From 2003 to 2004 the police recorded a 12% increase in reports of criminal damage in Croydon. The north of
the borough experiences higher rates of crime than the south but residents in the south express a higher fear of
crime. TFL reports that 29% of Croydon’s road accidents are ‘dark accidents’. Thirty eight percent of the crimes
in Croydon in 2004/05 occurred in the hours of darkness.

Continuing the roll out of the street lighting programme is one of the measures highlighted in the
boroughs’ Crime Reduction Strategies, and is strongly supported by local Police. The rollout of renewed
lighting will also help to reduce road accidents in the evenings and at night.

Trains and train stations are the places where people feel least safe: a recent GLA report on crime around
railway stations highlighted both Lewisham and East Croydon stations as two of London’s worst. In a 2003
survey, 43% of respondents felt unsafe at night compared with just under 10% who felt unsafe during the day.

Both councils run extensive systems of CCTVs with the Metropolitan Police. The systems are designed
to increase the resident and visitor safety and to assist traffic management. The improved illumination
provided by good quality street lighting is key to the success of the CCTV programme.

Since the Expression of Interest was developed, there has been further consultation with the local Police Crime
Prevention Officers and discussion will continue throughout the development of the detailed lighting plan.
Statistics detailing levels of crime on a street by street basis are being collated currently and will inform the
lighting design for all localities in both boroughs. The crime data identifies streets and areas as “low, moderate
or high” and matches the categorisations set out in EN13201. This process will enable the development of a
robust and efficient lighting plan which will be included in the final release of the contract documentation.

The benefits of improved street lighting are not limited to reduced crime, decreased fear of crime and improved
road safety. It will also have a positive regeneration impact and improve the public realm. It will increase
people’s propensity to walk, cycle and be generally more active after dark, which may lead to health benefits. It
clearly supports the Mayor of London’s safety and accessibility objectives.

Best Value Reviews and Capital Strategy
Croydon completed a Best Value Review of Street Lighting in 2000 that fed into the Audit Commission
assessment of Croydon’s Street Scene in 2003. Lewisham completed a Best Value Review of its highways
management, traffic management, road safety, parking, and transport policy functions in 2004 and this was the
subject of an Audit Commission inspection in 2005. The assessment for both was ‘fair’ with excellent prospects
for improvement. One of the Audit Commission’s recommendations for Lewisham was that the council continue
the focus on infrastructure improvement over the next ten years to improve the condition of roads for residents.
The last two years have seen some investment in street lighting but it has not been possible to commit to a
multi-year forward programme due to uncertainty in the level of future income.

Whilst performance of the existing street lighting service in both councils has been good so far, there is potential
for improvement and significant capital investment is now required for long term sustainability.

Existing Capital Programme
In 2006 Croydon installed just under one thousand new street lights in five areas across the borough. The areas
were selected on the basis of higher crime/fear of crime, poorer road safety and the dictates of the lighting
infrastructure. Lighting in these areas has generally moved from low mounted, 35W SOX orange lighting to 6m
and 8m columns supporting the new, energy efficient white lights which also deliver greatly improved colour
rendition and lighting uniformity levels. This has, in many ways, been a trial project for the lighting that the PFI is
expected to supply and has provided a level of improvement that has attracted very favourable comments.

Since submitting the EOI there has been further capital investment in Lewisham in relighting entire streets where
a significant number of the existing columns were found to be structurally suspect. This has marginally reduced
the number of columns needing replacement. All of the new columns have SON lanterns.

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South London Street Lighting PFI Project                                         London Boroughs of Croydon and Lewisham


Croydon and Lewisham are planning modest investments in the coming year, mostly urgent health and safety
repairs and small but high priority new schemes. Both councils have contingent funds available to address any
problem areas which may emerge. The exception is approximately £100,000 which Lewisham has set aside to
install example schemes: streets lit to differing lighting levels to illustrate the results which the distinct lighting
classes deliver.

Stakeholder consultation
Recent residents’ surveys in both boroughs have shown that over a third of the respondents were not satisfied
with their street lighting. In late 2005, Croydon’s proposals to relight the borough were presented at ten
Neighbourhood Partnership meetings and residents welcomed the street lighting initiative and contributed to the
planned works.

Preliminary meetings have been held with the staff and trades union representatives. Formal consultation will
take place with employees and trade unions following the submission of the OBC. The other key stakeholders
that have been already identified and will be consulted are neighbourhood forums, crime and safety
partnerships. Discussion with the Police has taken place and they are inputting to the lighting plan. In general,
both councils have established processes and protocols for dealing with stakeholder interest in major projects
and these will be utilised fully as the project progresses.




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South London Street Lighting PFI Project                                        London Boroughs of Croydon and Lewisham




Current Condition
Overview
The importance of an accurate inventory as a foundation for the procurement of an outsourced service provider
cannot be overstated. Since the submission of the EOI, the project has taken steps to confirm the basis of the
PFI calculations and confirm the stock databases. Two sets of independent lighting consultants have been
employed to scrutinise the lighting inventories and both have confirmed the accuracy of the databases in the
course of producing EOI and OBC documentation. This section details those activities and describes the stock,
its condition and specifics of the Croydon street lighting infrastructure.

Existing Stock Inventory
The councils’ existing street lighting assets are as follows:

 Lighting Item                                                                       Number

 Columns (inc. bracket units)                                                            41,538

 Bollards                                                                                 2,334

 Illuminated Signs                                                                        5,643

 Beacons & Centre Island Columns                                                           667

 Total Number of Units                                                                   50,182

In addition to the information recorded within the authorities’ street lighting inventories, investigation of the
lighting stock maintained by other council departments is on-going. By the start of the procurement phase, a
definitive strategy for the treatment of these minor categories of lighting will be in place.

The inventories include a small number of heritage units. The councils intend to standardise columns as far as
possible. Any additional costs in respect of heritage columns and lanterns will be borne by the councils.

Age Profile
 Age                       Concrete        Steel                Other            Total                %

 0–20 years                        0               7,122                812              7,934             19%

 20–30 years                       0               9,852                119              9,971             24%

 30+ years                        436              14,237               8,209            22,882            55%

 Age unknown                       0                362                 389               751               2%

 Total                            436              31,573               9,529            41,538            100%


These figures were validated during May and June 2007 by Eclipse Partnership following an extensive
interrogation of each authority’s inventories and the provision of updated data with regards to housing lighting
stock. It has been determined that some 2% of the stock has no valid installation date; these units are primarily
housing stock throughout both authorities. There has been a reduction in columns aged 0-20 years since
submission of EOI following the inventory validations and the time elapsed since the submission of the EOI.




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South London Street Lighting PFI Project                                       London Boroughs of Croydon and Lewisham



Accuracy of Data
The full inventory of Croydon’s street lights was initially compiled in 2001 by SEEBoard Contracting (now EDF
Energy Contracting). Lewisham records its inventory on an in-house database. Both councils have a high
degree of confidence in the accuracy of their databases and have undertaken extensive work to test validity of
inventory within the last eighteen months.

The Croydon inventory has been updated by a mapping survey conducted by EDF Contracting. An in-house
check of 5% of the inventory was completed in January 2006: of the 2,000 columns and signs surveyed, only
three omissions were identified. Lewisham commissioned Electrical Testing Ltd in 2001 to examine the entire
inventory of columns for structural and electrical integrity and assessment of residual life. The next round of
structural testing is scheduled to begin in June 2007.

Since the submission of the EOI detailed due diligence of both authorities’ lighting inventories has been
conducted. The inventories have been sampled and the mechanisms for updating following changes to
infrastructure have been verified by specialists from the Eclipse Partnership. Croydon’s inventory has been
further validated, again by Eclipse, with a 5.5% site survey (2,300 units). The databases maintained by both
authorities are accurate and describe the assets in place in the boroughs’ streets.

Technical and Maintenance Problems with the Current Service
Almost 70% of Croydon’s street lights, bollards and illuminated signs are connected to a dedicated street lighting
power supply. The circuit dates from the early twentieth century and was originally developed by the local
authority. It is a switched network which creates problems when daytime street works encounter an apparently
‘dead’ cable. The network’s fabric is aged and vulnerable to breakdown. It is difficult and expensive to maintain.

On-going improvement of the lighting service is now severely restricted by the capital implications of abandoning
this dedicated cable network. The investment required to deliver a ‘step improvement’ in the infrastructure has
restricted maintenance work to above-ground improvements with little column replacement. The focus has been
limited to urgent health and safety repairs and lantern or knock-down replacements. Although, lighting has been
improved in many districts, connections to the old street lighting network have remained. EDF (the current
owners of the network) and Croydon’s technical advisors both advocate the planned abandonment of the
network: this objective is of such significance that can only be supported by a PFI funded project

All of the units at Lewisham are connected to the public electricity supply. Twenty percent of the installations are
of modern design but the remainder are reaching the end of their useful lives and do not comply with modern
standards of illumination. Many of the modern units are accident replacements and cannot be incorporated into
new lighting layouts. It has been Lewisham’s policy, as it is in Croydon, to replace low pressure sodium lanterns
with high pressure ones and thereby improve lighting levels without replacing the columns.

Overall, 90% of the combined column stock of the two councils does not meet current design standards.

Safety Problems
Structural testing of columns should take place at least once in every twelve years – and every six years for
columns over thirty years old – as per Institution of Lighting Engineers guidelines. It is recommended that
electrical testing takes place on a six year rotation. Apart from specific programmes (eg 2005 works on the
testing of the borough’s concrete columns) Croydon has not generally adopted these guidelines and the detailed
condition of the electrical circuitry and structural integrity of the borough’s columns is unconfirmed.

Lewisham began structural testing of the oldest columns in 2001 and inspections are due again in June 2007.
Formerly, electrical inspections coincided with the three year re-lamping cycle. However the re-lamping policy
has now been altered so that of lamps now burn to failure, largely on economic grounds to assist in funding
failing lamp columns. In view of this, the electrical condition of the equipment has some history but does not
cover the entire inventory.
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South London Street Lighting PFI Project                                       London Boroughs of Croydon and Lewisham


Design Standards
Across both boroughs the existing street lighting infrastructure is inconsistent. There is a poorly defined
hierarchy of lighting levels and there is little conformance to lighting standards. For most of the equipment,
maintenance is no longer cost effective. Many lighting units require short term replacement due the absence of a
consistent inspection and preventative maintenance regime.

New, standard-conformant lighting will allow the authorities to correlate the needs of individual streets with
appropriate lighting levels. Thus for main and distributor roads (traffic routes) lighting levels will be determined
by the speed classification of the road and 24 hour traffic flow figures. For residential and minor distributor roads
(subsidiary roads) lighting levels will be designed in accordance with crime statistics, traffic flow information,
environmental zone classification and the type of light source to be adopted.

Utilising the flexibility of the EN13201 standard, lighting levels on subsidiary roads can be reduced in
classification by the introduction of white light sources without a loss of light perception: white light delivers
better definition and colour recognition. It also enhances CCTV operations. Croydon and Lewisham intend to
use white lighting to reduce the overall number of columns required on subsidiary roads.

All white light luminaires utilise electronic control gear. Electronic controls run the lamps at a constant voltage,
even where there are (minor) mains power fluctuations. This regulation of the lamp voltage increases the
stability and reliability of the lamp and therefore provides for an extended lamp life. It enables the lamps to run
for a greater number of burning hours with far less failures. The net effect is a reduction in energy consumption
and CO2 emissions.

Electronic gear also allows greater control of the installed lighting. Lighting can be varied in intensity and, if
required, turned off. Linking this capability to an Intelligent Management System will create a flexible installation
that can be managed to achieve the objectives of reduced energy consumption and minimised carbon pollution.

The visual appearance of the columns in daytime is also a major consideration. Designs will be simple and
unobtrusive and, to ensure consistency with the local street scene, all columns (including the traffic route
columns) will be painted black.

Budget Commitment
The councils’ current spending on street lighting is summarised below.

                          2002/2003        2003/2004   2004/2005       2005/2006       2006/2007        2007/2008
    Croydon (£’000)         actual           actual      actual          actual          actual          budget
    Maintenance               1,112           1,104         978           1,044            1,015             916
                                                                                                 2
    Energy                      405            372          398             515            937               633
    Total Revenue             1,517           1,476       1,376           1,559            1,952           1,549
    Total Capital               103              –            –           1,000                –             400
                          2002/2003        2003/2004   2004/2005       2005/2006       2006/2007        2007/2008
    Lewisham £’000          actual           actual      actual          actual          actual          budget
    Maintenance                 616            717          743             803             816              910
    Energy                      281            239          240             492             575              479
    Total Revenue               897            956          983           1,295           1,391            1,389
    Total Capital                  –             –          500             500             137              100

The table demonstrates that whilst there has been a low level of capital spending on street lighting in early
years, each council has increased expenditure recently as part of a planned programme of replacement. The
proposed PFI project will accelerate the achievement of the planned benefits of the replacement programme.

2
  In 2006/07 Croydon Council provided EDF Energy with a revised Connection Agreement that identified the need for a
significant energy bill adjustment.

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South London Street Lighting PFI Project                                         London Boroughs of Croydon and Lewisham




Business Need and Options Appraisal
Introduction
The councils have undertaken a detailed and comprehensive analysis of a range of service delivery and
procurement options. The review was based on best practice options appraisal guidance from the 4ps and DfT
including the New Approach to Appraisal (NATA). The councils have assessed of all the costs and benefits of
each proposal across the Department’s five criteria of environment, safety, economy, accessibility and
integration. This section describes the process of option appraisal with reference to the councils’ strategic aims
and identifies a preferred way forward.

Aims
In developing the councils’ approach to appraisal of different project options, the borough identified the following
purpose of good street lighting:

    to provide safe pedestrian and vehicular traffic movements. Academic studies have shown that good street
    lighting can save up to 30% of night-time accidents

    to reduce the risk of vehicular accident with attendant risk of personal injury and property damage

    to promote public safety, including the deterrence of offences against the person, burglary and car crime

    to reduce the fear of crime and engender a feeling of well-being in the use of the street at night.

    to reverse urban decay and perceptions of environmental neglect.

Academic studies suggest a positive link between modern, standard-conformant lighting and reductions in road
traffic accidents and incidents of crime. Good public lighting will work in achieving these effects by:

    clearly lighting the environment

    affording recognition of others in the vicinity, including facial recognition and identification of colours, e.g. of
    cars and clothing

    to engender a feeling of safety and well-being, and to minimise fear of the night-time environment.

People will feel more confident and be active on the streets at night. This will reinforce the confidence of others
and increase the general feeling of safety in public areas at night.

Technical Annex E contains Assessment Summary Tables which show how and to what degree these aims can
be met by the various options under consideration.




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South London Street Lighting PFI Project                                                 London Boroughs of Croydon and Lewisham



Service Delivery Options Considered
The councils have examined a number of options as part of a best value service review to seek to improve the
contribution the street lighting and traffic signage service makes to key corporate strategies and objectives. The
review was based on best practice options appraisal guidance from the 4ps.

Meetings were held as part of the evaluation process with the leading members, senior officers and other
internal stakeholders. These meetings were held to identify objectives for the service, to define options for
appraisal and to undertake initial appraisal evaluations. Each of the options was developed in the context of:

    the councils’ corporate strategies, service objectives and likely wider benefits associated with improved
    lighting and signing to the appropriate European Standards

    the need to deliver value for money and provide best value in service delivery

    the results of non-destructive testing surveys used to help to evaluate the future capital needs of the street
    lighting service and the likely levels of investment required

    the likely service costs and risks associated with different investment approaches

    DfT, 4ps and HM Treasury guidance on option appraisal for the purpose of business case appraisal.

Five options were initially identified and appraised as set out in the section below:

 Option                     Description

 Do Nothing                 No renewal programme and only reactive maintenance of existing stock

 Do Minimum                 Introduce additional investment to seek to sustain delivery of the current service in the medium
                            term

 Partial Replacement        Introduce investment to replace a significant proportion of the outdated and worst performing
                            lighting infrastructure

 Fast Track                 A fast track investment to bring the whole of the lighting infrastructure up to appropriate modern
 Replacement                lighting design standards

 Full Replacement           Replacement of the entire stock within a five year period

The costs of each of these options have been developed on the basis of the assumptions included within Annex
C Service Delivery Alternatives. The options were developed in the context of public sector based estimates and
benefits were calculated using relevant Department for Transport (DfT) and 4ps guidance.

Assessment of the Options
Do Nothing

The Do Nothing approach has not been considered further as it fails to address any of the key weaknesses
identified in existing service provision, nor will it achieve any of the service improvements being sought in the
proposed scheme. It will therefore prevent the councils from meeting their statutory and strategic obligations.
Do Minimum

In this option, existing levels of service expenditure are maintained with additional capital investment over
budget levels at £100,000 per annum at current prices for the next 25 years. There will be no uplift in column
numbers. Whilst this option has been thoroughly evaluated, it is unlikely to be feasible because:

    it fails to meet the councils’ objectives in providing street lighting services as large numbers of columns will
    in time be removed as they became structurally unsound and it is unlikely that sufficient funds will be
    available to replace all those removed


June 2007                                                                                                                        9
South London Street Lighting PFI Project                                       London Boroughs of Croydon and Lewisham


    it leads to increased risks to road users and the councils

    it would not always be possible to predict when structural or electrical failures would occur

    increasing service costs and lower service standards as lighting levels drop and columns and traffic signs
    deteriorate. Maintenance and repair activity would become increasingly reactive and more inefficient.

However, this option does provide a benchmark from which to compare other options and judge affordability.
Partial Replacement

In this option, 50% of the columns requiring replacement will be replaced and modernised to the appropriate
European standards within five years. The remaining stock will be replaced as part of a lifecycle replacement
programme over the following 20 years.

Based on evidence collected through extensive lighting surveys within the councils, an uplift ratio of around 18%
is estimated for those units replaced in the first five years. This option would require the removal of 18,839
columns and the installation of 22,185 new columns during a five-year capital programme. In addition, 2,822 of
the councils’ signs, 1,095 bollards and 334 beacons are to be replaced.
Fast Track Replacement

In this option, all lighting infrastructure currently at the end of its useful life is replaced and modernised to the
relevant European standards within five years. Other lighting infrastructure is replaced during the 25 year period
as and when it reaches the end of its life.

Based on an uplift ratio of around 18% for those units replaced, this option would require the replacement of
37,677 existing columns and the installation of 6,692 additional columns during a five-year capital programme. In
addition, 5,643 signs, 2,190 bollards and 667 bollards are to be replaced.

It is anticipated that efficiencies would be available as the programme introduces modern lighting equipment with
lower whole life costs and reduced inefficiency. However, maintenance cost reductions are offset by an increase
in column numbers. Efficiencies have been based on the councils’ confident knowledge of their inventory,
supplemented by guidance from their advisers through market actual experience in relation to other public
lighting procurement processes and accounted for in the capital costs. The councils have also taken into
account local circumstances and are confident that such savings can be achieved through the installation of a
modern appropriate level of lighting.

Energy costs would be expected to increase pro-rata with the increase in column numbers and changing energy
sources gradually phased in over five years. Conversely, however, financial benefit would be expected through
exploiting the open market for the sale of energy. Client costs and insurance costs are assumed constant over
the life of the project.
Full Replacement

In this option, all lighting infrastructure is replaced and modernised to the appropriate European standards within
five years. This option would require the removal of 48,230 existing columns and installation of 6,692
new/additional columns. In addition, all of the councils’ existing illuminated and non-illuminated traffic signs
requiring replacement would be replaced. Other costs are estimated as described for Fast Track Replacement
option above.

Non-Financial Evaluation
The non-financial evaluation was carried on the basis of a subjective analysis of the contribution that each of the
options would make to the minimum service delivery criteria outlined above. The higher the score, the better the
performance of that option against the minimum service delivery criteria. Each option was appraised against the
following project objectives:



June 2007                                                                                                          10
South London Street Lighting PFI Project                                        London Boroughs of Croydon and Lewisham


    the provision of relevant lighting levels and signage standards throughout the boroughs

    the provision of a safe, sustainable and high quality public lighting infrastructure

    the achievement of better value for money / compliance with best value

    improving the contribution the service makes to the boroughs’ corporate aims, strategic and operational
    service objectives

    the achievement of the above objectives in a short time-scale.

These criteria are consistent with the Boroughs’ aims in delivering this project. Examples of the non-financial
benefits that are taken into account include:

    improvements in the perception of safety and security in the streets at night by reducing the fear of crime

    increased leisure and commercial activity after dark which can improve the vitality of the borough

    encouragement for walking, cycling, and the use of public transport as alternatives to the private car

    development of safer routes to school

    creation of a quality environment for the local people, business and tourism

    fostering community regeneration.

The results of the non-financial appraisal are set out in Annex B and are summarised in the table below:

                                              Non Financial
 Option
                                              (Maximum 50)

 Do Minimum                                        10

 Partial Replacement                               21

 Fast Track Replacement                            45

 Full Replacement                                  43


Financial Evaluation
Financial models have been prepared for four of the investment options based upon the likely indicative costs.
The models cover service expenditure at current costs excluding inflation over 25 years and these are
discounted to a net present value using a 3.5% discount rate to facilitate a straightforward comparison of the
different options available. These models distinguish between the costs of lighting improvements, maintenance
and energy costs. Detailed financial models are provided in Annex A.

Detailed evaluation of the financial and non-financial consequences has been undertaken of each of these
options. The financial appraisals in each case are based on a 25 year concession period, and have been
prepared in accordance with the latest guidance from the Treasury, DfT and the 4ps. The table below
summarises the results of the financial analysis:

                                                        Do             Partial                             Full
 (All NPVs at 3.5% real)                   Unit                                        Fast Track
                                                     Minimum        Replacement                        Replacement
                                                          69,343          110,155          134,231           154,707
 Total Costs (excluding risk) – NPV *      £’000

 Existing Columns Replaced in first                           260          19,719           39,437            50,108
                                           Nos.
 five years

 New columns installed in first five                          260          23,065           46,129            56,800
                                           Nos.
 years (Uplift)

 Capital cost (NPV) *                      £’000           1,576           46,542           70,520            84,888



June 2007                                                                                                           11
South London Street Lighting PFI Project                                              London Boroughs of Croydon and Lewisham


                                                           Do            Partial                                 Full
 (All NPVs at 3.5% real)                    Unit                                            Fast Track
                                                        Minimum       Replacement                            Replacement
                                                               542            31,925              63,851            63,851
 Road Traffic Accident Benefits (NPV)      £’000
                                                             3,983           234,502             469,005           469,005
 Crime Benefits (NPV)                      £’000
                                                             4,526           266,428             532,855           532,855
 Total Benefits (NPV)                      £’000

 Column Investment Cost (NPV, incl.                          1,541            39,105              58,344            72,359
                                           £’000
 lifecycle) *

 Benefit: Cost Ratio at 10% reduction                          2.94                 6.81             9.13              7.36


* includes optimum bias at 2.28%

Preferred Investment Solution
From this analysis the ‘fast track’ investment option appears to be the most attractive solution as it achieves the
highest BCR and also the highest non-financial benefits in comparison with other options. The NPV of the
economic benefits from reductions in crime and road traffic accidents for the preferred option is £533m. The
BCR achieved is 9.13. When only the difference between the Preferred Option and Do Minimum benefits and
costs are considered, a BCR of 9.30 applies for the Preferred Option.

Choice of Service Delivery Route
Having identified a preferred investment option, the councils have evaluated the following service delivery
models to seek to identify the optimum procurement route to achieve its delivery:

    traditional procurement (the public sector comparator)

    joint venture

    outsourcing

    PFI DBFO

An evaluation of the service delivery alternatives is contained in Annex D.

The service delivery options were evaluated using a consistent evaluation framework including:

    ability to attract investment in the lighting and traffic sign infrastructure

    affordability

    time-scale to delivery

    vires

    anticipated procurement costs

    bankability

To assist this process, the councils in conjunction with their advisers, developed models on the basis of market
intelligence gained from recent, similar private finance projects to simulate the approach likely to be adopted by
private sector providers. Following this appraisal process the councils identified that the DBFO PFI approach
appeared to show the potential to deliver best value and is the preferred procurement route.




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South London Street Lighting PFI Project                                       London Boroughs of Croydon and Lewisham



Financial Model Assumptions
In order to ensure that this option offers value for money, is affordable and viable, the councils have completed a
detailed financial appraisal of the preferred option using private sector funding assumptions. This has been
developed based on the knowledge and experience of other public lighting PFI projects. The assumptions that
have been used in the financial appraisal are stated in Annex A.

Market Views
The councils’ advisers have been involved in several similar PFI schemes, many of which have now reached
financial close and a few others are at Best and Final Offer (BAFO) stage. They indicate that, given recent
experience of PFI procurements in London and across the country, there is likely to be strong commercial
interest in the joint street lighting project. The councils have also discussed the delivery of this type of project
with Croydon’s existing street lighting contractors, EDF Energy, and with DWL, Balfour Beatty and others, all of
whom are involved in street lighting PFI projects. The feedback received has confirmed advisers’ market
intelligence. The 4ps held a bidders conference in July 2006 and is in regular contact with existing market
players and expected new entrants: 4ps confirm that there is very strong interest in the Croydon and Lewisham
project.

Furthermore, 4ps has now concluded the centralised PQQ for the fifteen councils operating in the current PFI
funding round. This work has identified that five organisations have expressed an interest in the Croydon and
Lewisham project. The organisations are: Amey UK Ltd, Balfour Beatty Group Ltd, David Webster Ltd, Scottish
& Southern Energy plc and Skanska Laing Consortium.

Value for Money
The option appraisal process demonstrates that the best option for taking the scheme forward is a DBFO PFI.
The councils have assessed the value for money (VfM) of the scheme through the application of HM Treasury
guidance and in accordance with this have undertaken both a qualitative and quantitative VfM assessment. In
undertaking this, the councils have also incorporated the requirements of the Green Book which requires an
upward adjustment to the Public Sector Comparator to recognise that tax amounts have been included in the
DBFO PFI model that will be paid back to HM Treasury.

Qualitative Assessment
The qualitative element of the VfM appraisal seeks to answer a series of questions, which address whether the
proposed project is Viable, Desirable and Achievable.

    Viability – investment objectives and desired outcomes need to be translatable into outputs that can be
    contracted for, measured and agreed. Viability considers the ability to achieve a flexible contract with the
    private sector to overcome strategic and regulatory issues.

    Desirability – high quality services can be achieved through appropriate risk management arrangements,
    reflected in performance and payment mechanisms. Desirability considers whether sufficient benefits can be
    achieved to outweigh a higher cost of capital.

    Achievability – the procurement process can be complex and involve significant resources. Is a PFI
    procurement programme achievable given the clients capability and ability to deliver and the attractiveness
    of the project to the market?

The detailed qualitative assessment against each of these criteria is attached in Annex D. Having undertaken
this exercise, the councils are confident that the proposed scheme is viable, desirable and achievable.




June 2007                                                                                                          13
South London Street Lighting PFI Project                                      London Boroughs of Croydon and Lewisham


Quantitative Assessment
The councils’ limited capital resources are unlikely to be sufficient to enable the scheme to be funded through a
traditional procurement process. To demonstrate the VfM achieved through the PFI, the council has compared
the PFI option with a PSC using guidance from HM Treasury, the DfT and 4ps. The PSC has been constructed
using information supplied by the council’s internal technical team and technical advisors. This has included data
regarding:

    inventory of the scheme by category

    cost per unit for each category

    inflation assumptions

    capital and lifecycle replacement profiles, and

    assessment of optimism bias.

In using the Treasury VfM model a pre-optimism bias adjustment of 2.28% has been included. This has been
calculated in conjunction with the council’s technical and financial advisors and captures the difference, which
may be experienced in prices between the start of a project and financial close. Further details on the calculation
are provided in Annex D.

In November 2006 the councils held a risk workshop to quantify the value of risk, which will transfer to the
private sector. This analysis has enabled the councils to identify the optimum allocation of project risks and to
reflect the cost of managing these risks within the financial analysis of different options. A comprehensive
analysis of the risks inherent in the project has been undertaken as part of this OBC. This has drawn on
guidance from the 4ps and identifies some 239 risks, grouped into the following areas:

    development

    authorisation

    design

    installation

    finance

    commissioning, and

    operations.

Having identified these project risks an analysis of the impact cost, probability of occurrence and time
discounting factor has been arrived at for each risk.

The workshop was attended by the councils’ technical team and facilitated by the councils’ financial and
technical advisors. The results of the workshop were used to generate the post FBC optimism bias values for
the Treasury VfM model. This resulted in an overall risk adjustment of 28.9%. This value has been inserted as
appropriate into the Treasury model.

Annex D includes full results of the quantitative assessment, including an analysis of indifference points. The
base case (which assumes an IRR of 15%) demonstrates that the DBFO PFI offers value for money of 16.62%.
This supports the councils’ overall view that the proposed project represents good value for money in qualitative
terms and quantitative terms.




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South London Street Lighting PFI Project                                      London Boroughs of Croydon and Lewisham



Affordability
To address the two authority nature of the Croydon and Lewisham re-lighting programme, the two councils have
created a joint member committee. Whilst this grouping met in a shadow capacity in earlier months, the first
formal meeting of the Member committee occurred on 19th June 2007. The first action of the committee has
been the approval of the OBC and its financial implications. Under its delegated authority, from both parent
councils, the members have explicitly committed to the affordability of the project, subject to the award of PFI
credits and as described in this OBC. [Both councils separately approved the affordability of the project prior to
the EOI stage; at the same time both agreed to a joint project and the establishment of a joint committee.]

When the project submitted the EOI in early 2006, it requested a credit total of £58.3m. In March 2006, and
again in March 2007, EDF (the DNO for both boroughs) announced significant increases in service connection
charges: on both occasions prices were inflated by 30% per annum.

Following engagement with EDF, the councils are confident that future price increases will not be as significant
and will not have such a marked impact on the capital cost of works in these urban districts. However, wider
discussion – which has included DFT – has indicated that it is prudent to revise the total credit figure sought to
meet the increased costs. Therefore this Outline Business Case requests a higher level of PFI support than was
the case at EOI.

The councils are seeking a notional credit approval (PFI credits) of £79.5 million. This is based on the £80.6
million (NPV) capital cost of the ‘Fast Track’ option (delivered through the PFI) for the first five years and
reduced by the £1.1 million (NPV) of capital costs of a prudent Do Minimum. Capital costs consist of both the
capital cost of columns to be installed together with development costs. This has been calculated using relevant
4ps guidance and is shown in the financial model in Annex A. Financial models have been produced that allow
each of the councils to see their own required commitment to the joint project and Members from both councils
have acknowledged that there is a need to provide for any shortfall through revenue budgets. The councils
undertake to continue the real level of revenue funding implicit in the affordability calculations.

Growth items will be dealt with in the contract by a change mechanism to account for additional lengths of
highway adopted, which add to the number of lighting points maintained. The councils’ SSA would also be
expected to increase in view of the greater length of highway, so this is not considered to be an issue for
affordability.

The adoption of new highways will not affect the capital requirements as the new lights are provided as part of
the capital cost of a highway scheme or by a developer as part of an agreement under the Highways Act (1980).

Third Party Income
The potential for the generation of third party revenues is limited. The financial models have included third party
revenues due to the councils totalling around £100,000 per annum. This level of income is considered prudent
and supported by street lighting PFI projects being undertaken elsewhere. The councils will be actively
considering third party income opportunities as part of the PFI procurement process to ensure that the councils
achieve significant value for money as part of the proposed project.

Financial Model Sensitivities
The financial models have been prepared using a number of assumptions, full details of which are provided in
Annex A. These assumptions have been based on the most accurate information currently available to the
councils however, the councils are aware that changes in these underlying assumptions could occur prior to
financial close of the contract. Therefore, a range of sensitivities have been run on a selection of these
assumptions to asses the potential impact on the costs of the project. The following table summarises the results
of the sensitivities run:



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South London Street Lighting PFI Project                                       London Boroughs of Croydon and Lewisham


                                                                                      Total Annual Cost to the
 Sensitivity Description
                                                                                     councils (Nov 2009 Prices)*

 Base Case                                                                                     £5.64m

 LIBOR Increases by 1.0%                                                                       £5.98m

 Capital Cost of Columns Increase by 10%                                                       £6.17m

 Maintenance, depot and contract management costs Increase by 10%                              £5.87m

 RSG PFI Credit Annuity Grant Interest Rate decreases from 6.0% to 5.9%                        £5.69m

 Energy Price Increases by 1p per kWh                                                          £6.36m

 Optimism bias of 2.28% included on all costs**                                                £5.86m

* Under each sensitivity the councils have assumed that there is no movement in the PFI Credits of £79.5m on
which this OBC has been produced.

** In undertaking its option appraisal and VfM assessment, the council has included an optimism bias
adjustment on the PSC of 2.28%. An adjustment was not made for optimism bias in calculating the level of PFI
credits for the council.

Bankability
The bankability model consists of a financial model for a theoretical private sector service provider. The detailed
assumptions and outputs drawn from the model are included in Annex A. The reported blended equity IRR
(nominal) of 15% is believed to be acceptable to equity funders for these types of projects and the initial
indications are that the interest cover and debt service ratios shown by the model are likely to be bankable in the
private sector although there are a number of refinements and sensitivities which will be explored as the project
moves forward to confirm this view.

Vires
The Local Government (Contracts) Act 1997 provides clarification of local authority powers and confirms that an
authority may discharge its functions using assets or services provided under the terms of a contract. The Act
provides a procedure whereby an authority can certify particular kinds of contract and the parties to it cannot
then contest the validity of the contract in a legal action. The Act preserves the taxpayers’ and auditors’ right to
challenge.

London Borough of Croydon and London Borough of Lewisham are the highway authorities for all roads in their
respective boroughs, except for the Transport for London managed major traffic routes. Both authorities are
responsible for the housing and open space land within their boundaries and have similar responsibilities for the
street lighting positioned within these areas.

Section 97 of the Highways Act 1980 specifically enables a local highway authority to provide lighting for any
highway, or proposed highway, for which they are, or will be, highway authority. This section also includes the
power to contract with energy suppliers, construct and maintain such lamp posts and other works as the
borough considers necessary and to alter or remove such works as appropriate.




June 2007                                                                                                          16
South London Street Lighting PFI Project                                                London Boroughs of Croydon and Lewisham


Project risks
The councils acknowledge that there may be risks that are relevant to the procurement itself. The key risks are
summarised below, together with the mitigation actions that it considers necessary. These however are only an
extract from the more extensive project risk register (see Annex K).

 Risk                                       Mitigation actions

                                            Joint governance arrangements to minimise the risk of separation. Two project
 Separation of the councils
                                            sponsors in accord & project team united

                                            The OBC, and the data that underpins it, are robust. External advisors are in
 OBC fails to gain approval
                                            place. 4ps guidance and project training is being followed

 Insufficient commercial interest           Continue to engage potential bidders and promote positive aspects of the project

                                            Undertake gateway reviews and re-programme where necessary – continue to
 Slippage in timetable
                                            plan and monitor through out the project

 Inadequate management information          Detailed due diligence at OBC stage

                                            Monitor. Include an Intelligent Mgmt System to allow for control of energy
 Fluctuations in energy prices
                                            consumption

 Impact of competitive dialogue             Use 4ps and external advisors expertise


Benchmarking of Financial Model Costs
The information included within the councils’ financial models has been sourced from the internal lighting teams
and external technical advisors. The shadow PFI bid costs are derived from applying efficiencies based on
knowledge of other similar schemes that have achieved financial close or are at preferred bidder stage.

The costs that were input into the PFI bid were then benchmarked against known costs in other similar projects
that have achieved financial close or are at preferred bidder stage to ensure robustness. The benchmarking
analysis has been illustrated in the table below:

Benchmarking of shadow PFI bid costs
        NPV @3.5% (£’000)                       Benchmark        Benchmark         OBC (PFI)                Notes
                                                  Range           Average
                                                                                                 Capital costs per column are
                                                                                                 higher due to the existence
        Capital Costs per column
 A                                              £778 - 1,184         £985             £1,456     of the “private cable
        (excluding development costs)                                                            network” replacement with
                                                                                                 additional trenching costs.

 B      Replacement Costs                        As above          As above        As above

        Operating and Energy Costs                                                               These are the average
        (including contract management,                                                          operating costs per column
 C                                               £82 - 105            £94              £80
        depot and SPV Costs) – 25 year                                                           included within the business
                                                                                                 case.
        average per column (real at 2006)

 D      Third Party Revenues                                                      See below
                                                                                                 Energy consumption lower
                                                                                                 due to extensive use of
        Energy Consumption per column
 E                                             393 - 601kWh         505kWh          366kWh       electronic equipment thus
        (per kWh)                                                                                reducing energy
                                                                                                 consumption significantly.

Benchmark figures are provided by the 4ps.

As mentioned previously, the councils have taken a prudent view and assumed that £100,000 third party income
will be generated in each year of the contract.

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South London Street Lighting PFI Project                                         London Boroughs of Croydon and Lewisham




Risk Evaluation
In order to fully assess the value for money of different service delivery options the councils have developed an
understanding of the cost of managing each of the ‘risks’ associated with this project. This analysis has enabled
the councils to identify the optimum allocation of project risks and to reflect the cost of managing these risks
within the financial analysis of different options.

A comprehensive analysis of the risks inherent in the project has been undertaken as part of this Outline
Business Case. This has drawn on guidance from the 4ps and identifies some 239 risks, grouped into the
following areas:

    development

    authorisation

    design

    installation

    finance

    commissioning

    operations.

Having identified these project risks an analysis of the impact cost, probability of occurrence and time
discounting factor has been arrived at for each risk.

For the fast track replacement option, an analysis of which party, the councils or private sector partner, can best
manage each risk under a DBFO delivery has then been performed. When the view is that a risk can best be
managed by the private sector that risk has been allocated to the private sector, and when the public sector is
likely to be better placed to manage the risk it has been allocated to the public sector. When both parties
working together can best mitigate the risk, it has been shared between them.

The expected value of the risks to be allocated to the private sector under the DBFO PFI procurement model,
but retained by the public sector under the PSC model, has been added to the base cost of the PSC to give a
true comparison of the costs of the two procurement routes.

The actual transfer under a DBFO arrangement of those risks allocated to the private supplier will be embodied
in the contract though a payment mechanism which is subject to deductions for:

    availability of lighting to a standard that equals or betters the prescribed intervention level

    service delivery performance, proportion of lights working as planned at night, quality of lighting and service
    responsiveness.

    target performance levels will be demanding to ensure that the risks identified as being borne by the private
    sector are actually transferred to them.

The risk of cost and time over-run during the Core Investment Period (CIP) is borne by the private sector
partner. The payment stream will incorporate deductions for failure to comply with the agreed construction
programme.




June 2007                                                                                                            18
South London Street Lighting PFI Project                                     London Boroughs of Croydon and Lewisham


The payment mechanism will provide for unitary payments to the PFI supplier to increase by pre-agreed
amounts over the CIP as the standards of lighting improve in response to the investment thus affecting the
transfer of time and cost overruns during the CIP to the contractor. It will also allow for increases in the area
covered by the contract (as new roads are constructed for example) through a change mechanism in the
contract.

A number of performance standards will be identified and deductions made from unitary payments for failures to
achieve the specified standard in each category, thus giving effect to the allocation of operational risks
incorporated in the risk register and ensuring overall a significant risk transfer to the private sector.

The councils are confident, from knowledge of other schemes and of the private sector market that the proposed
risk transfer is practical and provides a sound basis for the initial bids. The PFI procurement process is a
negotiated process and bidders may suggest changes in the allocation of some of the risks to achieve better
value for money. The councils will consider and evaluate such suggestions as they arise during the negotiations.
The financial and risk models have been designed to support the negotiations by facilitating such re-evaluations.




June 2007                                                                                                        19
South London Street Lighting PFI Project                                       London Boroughs of Croydon and Lewisham




Appraisal Summary Tables (AST)
The DfT requires the completion of Assessment Summary Tables (ASTs) to assist in the evaluation of street
lighting OBCs seeking support under the Private Finance Initiative. Guidance on completing AST analysis is
contained in the Guidance on the Methodology for Multi Modal Studies (GOMMS).

The fast track replacement option is the best scoring option with a benefit to cost ratio of 9.13. This underlines
the value of the preferred scheme compared with the other options and the positive community value associated
with investment in this service.

The ASTs are included within Annex E and the results of the appraisal are summarised in the table below:

Assessment Summary Table (£’000’s)
                                                       Do            Partial                              Full
 (All NPVs at 3.5% real)                   Unit                                      Fast Track
                                                    Minimum       Replacement                         Replacement
                                                         69,343         110,155           134,231           154,707
 Total Costs (excluding risk) – NPV *      £’000

 Existing Columns Replaced in first                        260            19,719           39,437            50,108
                                           Nos.
 five years

 New columns installed in first five                       260            23,065           46,129            56,800
                                           Nos.
 years (Uplift)
                                                          1,576           46,542           70,520            84,888
 Capital cost (NPV) *                      £’000
                                                           542            31,925           63,851            63,851
 Road Traffic Accident Benefits (NPV)      £’000
                                                          3,983         234,502           469,005           469,005
 Crime Benefits (NPV)                      £’000
                                                          4,526         266,428           532,855           532,855
 Total Benefits (NPV)                      £’000

 Column Investment Cost (NPV, incl.                       1,541           39,105           58,344            72,359
                                           £’000
 lifecycle) *

 Benefit: Cost Ratio at 10% reduction                      2.94             6.81              9.13              7.36


* includes optimum bias at 2.28%

Environment
The modernisation of street lighting will have a beneficial effect on the environment by bringing about a
reduction in “sky-glow” and other forms of light pollution as well as indirect beneficial effects by reducing
congestion through increased use of public transport. It has been estimated that 35% to 50% of all light pollution
is caused by roadway lighting. This has been a particular problem within the London Boroughs of Croydon and
Lewisham given the age profile of the lighting stock and will be substantially reduced under the preferred option.

Prima facie, there is a risk that increasing the number of street lights in the boroughs will increase the volume of
CO2 emissions. Both councils have moved away from traditional practice of equating good service only with
increased numbers of street lights. Increased cognisance of environmental impact means that project will
attempt to limit CO2 increase by:

    using modern energy efficient equipment

    designing and monitoring a lighting plan which prevents ‘over lighting’ by optimising the installed lighting for
    particular districts and individual roads

    implementing an Intelligent Management System to optimise energy consumption.


June 2007                                                                                                          20
South London Street Lighting PFI Project                                          London Boroughs of Croydon and Lewisham


In the technical Annex E ASTs indicates the environmental effect each option is predicted to have.

Innovation
Via the output specification bidders will be encouraged to develop an economical and sustainable lighting
solution for the project. They will be encouraged to utilise the latest technologies currently in the market place
and to adopt innovation when and wherever it benefits the project.

Should new and sustainable technologies appear in the market during the term of the project (eg viable LED
lighting), they will be evaluated through an innovation mechanism and if found viable may be implemented into
the project with resultant savings shared between the service provider and the authorities. Innovation meetings
will be held at six monthly intervals throughout the term of the project. Throughout the project the objective will
be to innovate through “kit rather than connections”: ie wherever feasible innovation will focus on equipment that
does not require an electrical connection to operate (for example reflective bollards, solar powered road signs).

Safety
Nationally, there is evidence that good street lighting can reduce night-time road accidents by between 15% and
35% (source: Institution of Lighting Engineers, also TRL reports 586 and 929).

The latest analysis of cost benefit ratios of reduced night-time accidents is contained in the DfT’s Highway
Economic Note No.1 2004 (Valuation of the Benefits of Prevention of Road Accidents and Casualties), this
document indicates that the average cost of night-time accidents on urban roads is £91,610 (at 2005 prices).

The above figures include lost output, medical and ambulance costs, human costs, police and insurance
administration costs and damage to property.

Whilst it is difficult to estimate actual reductions in road traffic accidents that will occur as a result of modernising
street lighting, a prudent estimate would be 10% for the current road network. This approach reflects the
research undertaken on the relationship between lighting and road traffic accidents.

Safety in the Community – Crime and fear of crime
A significant benefit of improved lighting is the reduction it brings about in night-time crime and in fear of crime.
The most extensive research on the link between lighting levels and crime has been conducted by the Institute
of Criminology, University of Cambridge (Dr Kate Painter). Her recent work includes studies at Dudley and
Stoke-on-Trent where the changes in crime, disorder, fear, quality of life and night-time use were compared for
12 months following the upgrade of lighting levels to the European standard (EN13201). The same comparisons
were made in adjacent and control areas where lighting remained unchanged. The studies suggested that the
incidence of crimes in re-lit areas can fall substantially.

Research suggests a reduction in crime rates attributable to improved lighting can be as high as 25% or more.
Croydon and Lewisham have taken a reasonable approach and assumed a 10% reduction in night-time crime as
a result of replacing and improving the local street lighting.

A further dimension to be considered is that recorded crime is only a fraction of the total crime that is actually
committed. In undertaking their calculations, the councils have utilised data within the Home Office online report
30/05 (The economic and social costs of crime against individuals and households 2003/04) which provides
multipliers for different categories of crime to take into account crime which is unrecorded. The councils have
used these multipliers in their calculations. By comparison, if unrecorded crime is not included in the analysis, a
BCR of 4.77 is applicable to the preferred option.

The BCR of 9.13 (in the AST above) includes an assumed 10% crime and road traffic accident reduction – this is
deemed to be prudent. Different percentage assumptions for the fast track replacement option have been
calculated to show their impact on the BCR and are summarised as follows:


June 2007                                                                                                             21
South London Street Lighting PFI Project                                        London Boroughs of Croydon and Lewisham


Sensitivity of the Cost: Benefit Ratio
 Option                                       10%                 15%                 20%                 25%

 Fast Track Replacement                       9.13               13.70               18.27               22.83


Economy
Journey times and vehicle operating costs will not be directly affected by lighting improvements. Project
construction and maintenance costs are considered elsewhere under appraisal and affordability of options.
Again, journey time reliability is not an expected outcome but regeneration certainly would be.

It is seen as beneficial in terms of the stimulation it brings to the night time economy and promoting safety in the
community. The benefits in terms of reduction in the fear of crime and of crime itself are explored in more detail
below. It will also have a beneficial effect in job creation. The Institute of Criminology‘s research in Dudley and
Stoke-on-Trent also suggested that re-lighting areas had a marked effect on change in street use after dark. In
Dudley the numbers of people using the street after dark (based on pedestrian head counts) increased
dramatically.

The research demonstrated that better lighting had positive effects on a number of groups. In Dudley and Stoke
night-time use of streets by women increased by 28% and 70% respectively. Elderly people benefited
significantly through reduced vandalism and disorderly behaviour. Following a survey amongst young people,
results showed that there was a significant decrease in victimisation amongst 11 to 17 year olds.

The Institute of Criminology’s research concluded that better lighting produces a profound effect in the
community in the following ways:

    it improves visibility and increases opportunities for social surveillance by encouraging more street use by
    residents

    it improves community confidence and civic pride

    these factors combine to work to decrease crime by deterring offenders and the effects can spill over to
    reducing crime during the day as well as at night.

The Institute of Criminology’s conclusions are reflected in the desires for better lighting expressed by residents
and groups in the Borough and detailed in community safety audits and reports.

It is likely that the increase in night-time street use will have a positive impact on the local retail, entertainment
economy and also in the dynamics of social order.

The cultural and quality of life impact associated with lighting improvements is an important area for
assessment. One of the main objectives in providing street lighting services is to support the social and cultural
needs of the community thereby promoting a feeling of well being and civic pride within the community. The
Institute of Criminology’s research suggested that there are also a range of wider benefits associated with
improved lighting these include:

    reduced fear of crime

    better quality of life

    improved perceptions of the area and the borough.

Data collected during the Institute of Criminology’s Dudley research project analysing the relationship between
improved lighting and culture and quality of life suggested that there can be a positive effect. Analysis from the
research project highlighted a number of benefits including:




June 2007                                                                                                           22
South London Street Lighting PFI Project                                       London Boroughs of Croydon and Lewisham


    19 % increase in those feeling very/fairly safe while walking alone after dark

    40% increase in perceptions that quality of life had improved in re-lit areas

    63% increase in perceptions that the area was well lit

    16% increase in those believing local councillors understood problem areas.

Accessibility
Under this objective, it is normal to consider pedestrians and other, access to public transport and community
severance. Good quality lighting has particular benefit to pedestrians, cyclists and equestrians in enabling them
to see the way ahead. The changes in amenity and the numbers affected are rated as high and, although no
new routes are being offered, there may well be a very significant increase in the use of existing ones.

Good lighting improves access to public transport. Whereas the guidance is written on the assumption that new
routes are being appraised, improved lighting would have a positive effect on public transport usage in the hours
of darkness, particularly for those with any form of vision impairment.

Lighting and furniture, which supports transportation centres such as bus stops and train stations, encourages
usage through the increased perception of security. The scheme will bring benefits in terms of encouraging more
use of public transport, walking and cycling during the hours of darkness being beneficial in encouraging these
modes. The project therefore supports the councils’ integrated transport strategy.

No community severance would be brought about by virtue of these proposals.




June 2007                                                                                                          23
South London Street Lighting PFI Project                                       London Boroughs of Croydon and Lewisham




Key Terms and Conditions
Project Agreement and Senior Lender's Direct Agreement
The councils intend to propose a contract based on H M Treasury's Standardisation of PFI Contracts (SoPC)
guidance and drafting (version 4 dated March 2007). Principles from the previous version of this guidance are
included in a model form contract drawn from the revised 4ps Street Lighting Procurement Pack dated
November 2006 (SLPP).

The councils are proceeding on the basis that the 4ps SLPP model contract will be mandatory drafting and that
all material changes to this form will need to be formally approved by the DfT as derogations. The councils will
only seek project specific derogations to the extent that they are required.

In addition to the main PFI contract, depending on the preferred bidder's financing solution, there will be a
separate contract – the senior lender's direct agreement - between the councils and any external debt funder
providing for the funder's step in rights in the event of default of the PFI contractor.

The contract will be certified for the purposes of the Local Government (Contracts) Act 1997. The senior lender's
direct agreement shall also be a certified contract.

The project will be advertised in the Official Journal of the European Union (OJEU) and follow the competitive
dialogue procedure according to the Public Contracts Regulations 2006.

Key Terms
The twenty-five (25) year contract forming part of the Invitation to Participate in Dialogue documentation will be
developed in accordance with SoPC and 4ps guidance from SLPP. It will be utilised with the development of all
future documentation and strategy relating to the procurement process implementation.

The key contractual and commercial issues addressed will be supported by the output specification,
performance standards, payment mechanism and the contract shall embody and implement the project risk
matrix ensuring an efficient service is delivered.

The Contractor will have the exclusive right to design, install, finance and operate the street lighting, the Project
comprising such services. The councils shall own the apparatus and licence it to the Contractor for the term of
the contract.

The intention is for the councils to concentrate on an immediate five (5) year core investment period to maximise
replacement of outdated apparatus and overcome backlog maintenance concerns.

The Contractor shall deliver the street lighting service in accordance with good industry practice, the output
specifications, its own method statements, the stated programme of activity, any necessary consents and in
accordance with the law.

Maintenance of the apparatus within the project is to be conducted to satisfy the output specification and to
satisfy a five year minimum remaining life at the planned expiry date of the contract.

There shall be a management information system which shall be updated and provide suitable formatted
inventory and service information to pass back to the councils on expiry or an early termination to permit
business continuity.

The possible transfer of existing councils' staff is contemplated, as is the prevailing market position on pension
arrangements for transferees.




June 2007                                                                                                          24
South London Street Lighting PFI Project                                      London Boroughs of Croydon and Lewisham


Indexation
An appropriate indexation arrangement, based on RPI, to take account of inflation/deflation will be adopted for
this contract.

Changes/variations
The councils will need to negotiate appropriate payment variations with the Contractor to deal with any future
variations to the level of lighting stock - such as column additions through road de-trunking or housing transfers
and category changes to the European Standards.

There is a procedure to deal with the accrual and de-accrual of apparatus.

Refinancing
The councils will seek to contract with the private sector as part of the PFI procurement process so as to ensure
that the appropriate provisions outlined in recent SoPC guidance and included in the SLPP model contract with
respect to refinancing are adhered to.

Taxation
The taxation treatment will reflect the market approach to street lighting PFI schemes and will be consistent with
the approach taken on all schemes in this sector (composite trader). Whilst tax treatment is a contractor risk, the
councils will evaluate and review the validity of the tax treatment during the bid evaluation process.

Output Specification
The councils have drawn on the experience of other local authorities that have or are currently procuring street
lighting projects in formulating the basis of a workable scheme specifically adapted to the particular needs of the
London Boroughs of Croydon and Lewisham.

The councils’ service requirements would be set out in detail in the Output Specification based on current 4ps
standard guidance.

Payment Mechanism
The payment mechanism will be based on a unitary charge for the delivery of the key elements of the public
lighting service. Payments to the Contractor will vary according to agreed standards, measured in accordance
with pre-set rules. The "no service, no fee" principle prevails.

The councils' objectives in developing the payment mechanism for this project have been to:

    incentivise the Contractor to deliver to required service standards, timetable and objectives

    be bankable, whilst at the same time only requiring the councils to pay for the level of performance actually
    delivered

    reflect sound commercial principles i.e. the performance should be objective, clear, simple, cost effective
    and capable of measurement.

The approach the councils have adopted builds on the experience of other local authorities and key guidance
from the 4ps, DfT and H M Treasury.

Six key service outputs have been identified which will influence the level of unitary charge payment collectively.
These are described below:




June 2007                                                                                                         25
South London Street Lighting PFI Project                                       London Boroughs of Croydon and Lewisham


1. PS1 – Lighting Installation
All roads within the councils are required to be lit to defined lighting levels dependent on the category of lighting
required.

All equipment provided will be required to comply with any relevant European Standard and specified equipment
standards.

A deduction would be made until such time as the lighting has been replaced/refurbished as necessary to be
capable of delivering the required lighting standards. It is anticipated that this deduction would initially be
approximately 50% of the unitary charge.

During the core investment period unitary charge payments to the Contractor would be reduced according to the
numbers of columns or areas not meeting relevant design standards (lighting that fails to meet the specified
standard for intervention).

As the core investment period proceeds, the councils would issue compliance (or deemed compliance)
certificates until all works are complete when the Contractor could achieve maximum unitary charge payments.

Throughout the contract there will be ongoing measurement of achieved lighting standards and equipment
compliance. The payment mechanism will include deductions where there is a failure to achieve compliance with
relevant standards.

The councils are considering a range of methods by which compliance could be measured; these include
photometric testing, desktop design compliance… [etc].

2. PS2 – Lighting Performance and Planned Maintenance
The councils will agree relevant performance standards with the Contractor for the percentage of lights working
at any one time (outages) and the maintained quality of light output (photometric testing).

Key standards regarding availability and quality of lighting and maintenance are to be assessed and measured.
Such monitoring and performances of the Contractor then feed into the payment mechanism.

The councils will use escalating deductions for continual service failures and will develop effective incentives to
maintain efficiency and service standards over the life of the contract.

3. PS3 – Operational Responsiveness and Reactive Maintenance
The councils will seek to negotiate the maintenance obligations associated with each type of apparatus and
response and/or rectification times (including relevant testing to meet mechanical and electrical safety
requirements).

As far as is practically possible these requirements should be output focussed, and bidders will be asked to
submit Method Statements setting out how they intend to meet the councils’ requirements. For each item of
apparatus, there should be a maximum length of time (put right period or rectification period) for which a
maintenance or non-emergency repair may be outstanding after detection or notification of the fault.

The payment mechanism deductions as per 4ps guidance will contain a multiplier relating to the time in which
apparatus is left in an unsatisfactory or unsafe state.

Rectification periods will also need to be agreed for emergencies, likely to be one hour, within which the
Contractor must have attended the incident and started to make safe the fault. Deductions will need to be
agreed for each item of apparatus that is not made safe within the agreed period. Again, a multiplier should be
used to incentivise responsive rectification of the emergency.




June 2007                                                                                                          26
South London Street Lighting PFI Project                                       London Boroughs of Croydon and Lewisham


4. PS4 – Contract Management and Customer Interface
The councils wish to link part of the unitary charge to the Contractor’s performance in responding and dealing
with requests for service, complaints from customers and maintaining asset management records/inventories.

The Management Information System will be monitored and assessed for data accuracy, recording accuracy
and customer care systems availability. Relevant deductions will be made for failure to provide such services
and reports generated via effective asset management.

5. PS5 – Strategic Reporting and Assistance
The Contractor will need to work in partnership with the councils to achieve their obligations under Best Value,
LTP and Comprehensive Performance Assessment (CPA) and will link part of the unitary charge to achieving
this. The Contractor’s obligations will include requirements to report Best Value indicators, service benchmarking
and to co-operate in the delivery of fundamental service reviews.

Financial deductions will be made for failure to provide reports/information in line with the Best Value timetable.

6. PS6 – Working Practices
Compliance of the requirements highlighted within 4ps guidance would warrant relevant performance payments.

7. PS7 – Accuracy of Reporting
Reporting of the performance of the Contractor on an ongoing basis.

The councils have studied the model documentation and believe it currently addresses the councils’ objectives
effectively and provides a basis in which to secure service standard via effective performance related payments.




June 2007                                                                                                          27
South London Street Lighting PFI Project                                        London Boroughs of Croydon and Lewisham




Balance Sheet Treatment (FRS 5)
In 1994, the Accounting Standards Board (ASB) issued Financial Reporting Standard 5 (FRS 5) which advised
on how to report the substance of transactions. The ASB subsequently issued an amendment to FRS 5
(Application note F) dated September 1998 which examined the application of FRS 5 to the Private Finance
Initiative and similar contracts.

The councils’ financial advisors have undertaken an initial view of the application of FRS5 to this project and
conclude that an off-balance sheet opinion is achievable, based on the initial structure of the contract. This initial
view is provided in Annex F. The councils’ external auditors, the Audit Commission, have reviewed this initial
view and have issued a ‘not minded to challenge’ letter. This is contained in Annex G.

However, it is possible that reconsideration of the balance sheet treatment will be necessary depending on a
decision as to whether the public sector adopts International Financial Reporting Standards (IFRS). This matter
will be reviewed during the procurement process as the Treasury announce guidelines for the public sector.




June 2007                                                                                                           28
South London Street Lighting PFI Project                                           London Boroughs of Croydon and Lewisham




PFI Implementation
Project Management
The project for the procurement will follow the PRINCE2 methodology adopted by the councils for all projects.
The project team will be led by the two Project Directors (the Croydon Divisional Director of Street Scene &
Waste Management and the Lewisham Head of Transport). The day-to-day control will be provided by the
Project Manager, who is common to both authorities. Specialist officers in the fields of Finance, Legal, Technical
and Personnel have been assigned to the project

Experience with the Private Sector
Both councils have considerable experience in the successful delivery of PFI/PPP projects. Examples include:

 Croydon                                                      Lewisham

    Customer focus project: outsourced provision of              Catering: expansion of catering in schools and for
    refreshed ICT infrastructure                                 ‘meals on wheels’
    Education: the Ashburton Learning Village including new      Leisure: the provision of three new leisure centres
    school, library and community facilities                     Lifestyle centre: including leisure, library and park,
    Care Homes: extra care housing and resource centre           working in conjunction with the PCT
    facilities                                                   Education: BSF and grouped schools PFI
    Joint Service Centres: new customer service locations        Housing: Decent Homes investment strategy includes
    across the borough, in co-operation with the PCT             two PFI developments


Experience of Joint working
Croydon and Lewisham have significant experience of delivering partnership projects, whether working with
each other, the private sector and/or neighbouring boroughs. Examples include:

    collaborative bids for capital funding for the load assessment and strengthening of their road bridge stock via
    the London Bridges Engineering Group and TfL
    the e-government departments of both councils work together to develop multi-function smart card, a
    community website and on the national e-Democracy web casting project
    Croydon are lead borough for the South London Waste Disposal Group that co-ordinates waste operations
    for seven south London boroughs. The group led the development of a DEFRA-funded green waste
    compost plant with the boroughs of Sutton and Merton and private sector partners
    in another DEFRA-funded waste project, Croydon, Sutton, Merton, Kingston and private sector partners are
    developing a biological waste treatment plant
    Lewisham Council works closely other London boroughs and with Dartford and Thurrock councils in the
    Thames Gateway partnership

    both authorities participate in South East London Transport Strategy (SELTRANS), London Cycle Network,
    London Bus Priority Network and other schemes, details of which are included in the boroughs’ LIPs.

Both councils are committed to working collaboratively with other local authorities to achieve further procurement
efficiencies. Neighbouring boroughs have been encouraged to co-operate with Croydon and Lewisham on a joint
EOI. Bromley and Bexley were initially considered jointing a four borough street lighting PFI project but decided
not to continue beyond the feasibility stage. Croydon and Lewisham are also committed to fully supporting any
networks or groups established by the 4ps, DfT or other organisations to promote knowledge sharing and
exchange of best practice on this or any similar project.




June 2007                                                                                                                 29
South London Street Lighting PFI Project                                                   London Boroughs of Croydon and Lewisham


Gateway Review
Both councils have project review procedures for projects of corporate significance. These review procedures
are driven by the requirements of the OGC Gateway Review process for programmes and procurement projects.
As such, the project will participate in the Gateway Review process and has been in discussion with 4ps to that
end.

Project Structure

                                               Individual Councils
                                              Mayor / Portfolio lead



                                                   Joint committee
                                                       (S.101)

                                                                                                            Delegation
                                                    Project Board
                                                                                                                 &
                                                                                                           Effectiveness
                                                                                                            of Decision
                                                                                                              Making
                                                   Project Director



                                                   Project Manager




                Finance
                                           Legal                    Technical   Other Project Roles
               Timetable


Project Team
The councils have given considerable consideration to how they will work together to procure and manage the
contract effectively and efficiently. In developing the team structure they also researched governance models
and met with the 4ps and the PFI project leads and team members form the Enfield/Barnett joint project. A
research trip to the Newcastle/North Tyneside project is planned for February 2007.

The objective of the arrangements put in place is that decision making is made efficient and effective and
provides a robust client structure for the private sector partner. Details of the arrangements and brief biographies
of the key project roles are set out in Annex J.

The key features of the structure are:

    a single Project Managerto run the project on a day to day basis, managing input of both advisors and
    officers with specialist experience in finance, legal and technical areas

    Project Directors Croydon’s Divisional Director, Waste Management and Street Scene and Lewisham’s
    Head of Transport. The two are responsible for articulating the joint vision for the combined procurement
    and providing on-going management interface to the programme

    Project Board responsible for ensuring programme delivery and providing link to Elected Member
    Committee. It includes the Project Directors and other officers from the two councils with experience of PFI
    projects

    a joint, legally constituted (Section 101 of Local Government Act 1980) Elected Member Committee
    responsible for the overall governance of the project. This committee has already taken decisions on behalf
    of the parent authorities. It will continue to oversee the procurement and delivery of the contract on behalf of
    the two council’s, thereby avoiding the need for reporting to individual cabinet committees

June 2007                                                                                                                      30
South London Street Lighting PFI Project                                      London Boroughs of Croydon and Lewisham


    Joint external advisers for financial, legal and technical support with a specialist lead officer from one of
    the councils to support the project manager.

External Support
External expert support will be provided through the retained consultants for specialist finance, legal and
technical aspects of the scheme. As the financial advisor, PricewaterhouseCoopers LLP (PwC) have assisted
the councils in conducting the option appraisal, value for money, public sector comparator, PFI credits and risk
transfer assessments. Eclipse Partnership has provided technical assistance, most particularly on the due
diligence required to confirm the figures used in the EOI. Both organisations are experienced in PFI projects in
street lighting. Pinsent Masons have been retained as legal advisors and their experience of the street lighting
sector within the PFI market is extensive. 4ps is also providing support via overall project management for all of
the street lighting PFI projects and in managing the OJEU notice and PQQ stages of the procurement.

PricewaterhouseCoopers
PwC are recognised as one of the leading players within the street lighting market place and are actively
pursuing the development of different service delivery options to help tackle the backlog of investment in the
lighting infrastructure. They are currently financial advisers on the Surrey County Council Street Lighting
Schemes and have also closed deals at Dorset County Council, the London Boroughs of Ealing, Islington,
Lambeth and Enfield (in a joint scheme with Barnet), Walsall and Wakefield MBCs, Sunderland and Manchester
City Council and South Tyneside, Wakefield and Leeds Councils.

PwC are also advisors to all Councils who are preparing OBCs as part of this round of PFI credits. The PwC
team is led by Chris Buttress, Partner and Sukhy Duggal, Senior Consultant.

Eclipse Partnership
Specialists in public lighting and associated electrical works, Eclipse Partnership provides professional advice
and services to clients throughout the UK. It has significant experience of the technical aspects of PFI street
lighting projects and has worked with authorities and bidders on numerous assignments. It has, for example,
worked with the Tay Valley Lighting consortium (SSE, SEC and RBS), on seven PFI projects during the ITN and
BaFO stages: Stoke on Trent, Newcastle & North Tyneside, South Tyneside, Ealing, Dorset, Redcar &
Cleveland and Leeds. Eclipse has also supported Plymouth City Council and Somerset County Council at the
PFI Expression of Interest stage.

Of the Tay Valley projects, Eclipse has achieved preferred bidder status at Stoke on Trent, Newcastle & North
Tyneside and Leeds. Eclipse continues to provide technical expertise on all three projects with the delivery of all
CIP designs, consultation and where necessary certification.

The Eclipse team is headed by co-directors Mark Burrows I.Eng MILE (Junior Vice President ILE) and Larry
Taylor I.Eng MILE MIIE and is based in Plymouth. The company presently has a further eleven employees
engaged on contracts within the street lighting PFI sector.

Pinsent Masons
The street lighting PFI project sector is highly active and of the nineteen projects launched between 2002 and
2005 Pinsent Masons has secured eight public sector mandates and five successes for the private sector.
Pinsents has specialist street lighting teams working out of their London, Birmingham, Bristol and Leeds offices.
Pinsents has represented the authorities at Walsall, Islington, Sunderland, Newcastle and North Tyneside on
their joint scheme, Ealing, Derby, Surrey and, most recently, closed the Dorset project. Pinsents has also acted
for the winning service providers to close the Walsall, Wakefield, Manchester and the joint Barnet & Enfield
schemes. Pinsent Masons is acting for the preferred bidder on the Redcar and Cleveland project at present.



June 2007                                                                                                         31
South London Street Lighting PFI Project                                         London Boroughs of Croydon and Lewisham


Outside the world of street lighting Pinsent Masons has a team of over fifty projects lawyers supported by
specialists across disciplines from our overall strength of some 900 lawyers.

Political Support and Commitment
At both councils there is full political support for the joint PFI project, its affordability and the delivery of the
objectives of improved street lighting. There is also strong political agreement for joint working. The project has
strong personal support from Councillor Mike Fisher, Leader of Croydon Council and Lewisham’s Mayor, Sir
Steve Bullock. At Croydon, Cabinet approval was granted for the relighting programme in September 2004 and
further approval to back the submission of a joint EOI was given on 20th January 2006. Lewisham’s Mayor and
Cabinet approved the joint project on 1st February 2006. In December (11th for Croydon and 22nd for
Lewisham) both authorities formally agreed to the setting up of the Joint Member Committee to oversee the
project and to provide the necessary approvals as required.

Council Employees
Preliminary meetings have been held with the staff and trades union representatives. Formal consultation will
take place with employees and trade unions following the submission of the OBC. There is potential for the
TUPE transfers of a number of staff and these details will be finalised in the run up to market engagement.

Programme
The councils understand that the project may be procured under the new Competitive Dialogue procedure. As
this procedure has only recently become effective in the UK, the timetable is based on the councils’ initial
interpretation of the steps and time-scales involved. Whilst the councils believe that this timetable is achievable,
they acknowledge that slippage is a key risk and will undertake risk mitigation action planning at OBC stage. The
project programme indicates commencement of the new service by Q3 2009, subject to timely approvals from
the DfT and Project Review Group. The proposed project development timescale for this PFI project is as
follows:

Project Development Timescale
 Procurement Stage                                                  Target Date

 OJEU Notice publication                                            January 2007

 Issue information memorandum/PQQ                                   January-March 2007

 Return of PQQ                                                      March 2007

 OBC submission                                                     June 2007

 Project Review Group decision on OBC                               November 2007

 Invitation to Dialogue (ITPD) & Outline Solutions (ISOS) issued    January 2008

 Evaluation of ISOS                                                 March 2008

 Invitation to Submit Detailed Solutions (ISDS)                     April 2008

 Call for Final Tenders                                             January 2009

 Contract award after standstill of at least ten days               August 2009

 Contract start date                                                November 2009


Contract Monitoring
The two boroughs intend to establish a single client function to monitor the delivery of the service following
procurement. Early expectations are that this function will be carried out by six staff (inc. one manager), drawn
from both councils, for the initial five years of the contract. The numbers of staff involved will be reviewed
thereafter.

June 2007                                                                                                            32
South London Street Lighting PFI Project                                       London Boroughs of Croydon and Lewisham


Contract monitoring will benefit considerably from the street lighting projects that are currently at various stages
of progress. For example, it is intended that the client function will be co-located with the services provider
personnel (as is the case in the Leeds City Council project). Croydon & Lewisham also attend the regular
London street lighting network group and, again, benefit from the experience of other organisations. The aim will
be to replicate best practice in this established field of operations.

Developments since the Councils’ Expression of Interest
Financial Model

The principal driver behind the revised figures in the OBC financial model set has been the significant increase
in the DNO’s connection charges. This has necessitated increases in the capital requirement and, in turn, the
increase in the PFI credits sought by the councils (from £58.3m at EOI to £79.5m at OBC). Whilst assessing this
impact, the project has continued to review the lighting inventory and more accurate figures are now included.
Despite these changes, the affordability position at OBC remains close to that projected at EOI (£5.64m per
annum against £5.52m respectively).
Benefit Cost Ratio

The calculated BCR within the councils’ submitted EOI was 3.94. The calculated BCR shown within this OBC is
9.13. In the development of this OBC, the councils have undertaken further analysis of the incidence of and
types of crime committed across the boroughs, consulting with the Metropolitan Police, and have also
considered the use of multiplication factors contained in the Home Office Online Report 30/05 report to assess
unrecorded crime within the boroughs. Despite prudently assuming a lower 10% reduction in crime reduction,
this has resulted in a higher BCR being calculated.
Value for Money Assessment

In the development of the EOI, the councils calculated value for money of the proposed scheme of 15%. The
VfM of the DBFO PFI option within this OBC is 16.62%. Since EOI, the councils have undertaken a more
rigorous VfM assessment including the use of the HM Treasury VfM model. This has resulted in the VfM
calculated.

General PFI Criteria
Annex L contains a checklist which demonstrates how the councils have met the general PFI criteria required by
CLG.




June 2007                                                                                                          33

								
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