19/07/2019

After a long-running legal saga, Birmingham City Council and Amey Birmingham Highways Limited (Amey) have agreed a settlement for Amey to free itself from the 25-year PFI highways contract, worth an estimated GBP2.6bn.

At the end of June, Ferrovial announced that the agreement involves the payment by Amey of GBP215m, of which GBP160m will be paid in 2019 and the remaining GBP55m over the next six years.

The ignominious ending for Amey may not come as a surprise to anyone familiar with the 2018 Court of Appeal judgment which arose from a dispute as to the correct interpretation of the contract. The council’s case was that Amey was deliberately leaving defects in selected areas untreated, based on a narrow interpretation of the scope of the inventory.

In the judgment, Jackson LJ noted that: “The PFI contract worked perfectly satisfactorily for the first three and a half years. Things only went wrong in 2014 when [Amey] thought up an ingenious new interpretation of the contract, which would have the effect of reducing their workload, alternatively increasing their profit.” Jackson also noted that parties to long-term contracts such as PFI contracts “should not be latching onto the infelicities and oddities, in order to disrupt the project and maximise their own gain”. In June 2018 it was reported that Amey had been ordered to pay Birmingham City Council more than GBP50m as compensation for overpayments made to Amey before the issue was spotted.

Unfortunately, this is not the only highways PFI which has found itself mired in legal proceedings: Portsmouth, Cumbria and the M25 orbital have all had disputes heard in the High Court, and the highways contract between Sheffield City Council and Amey has proved controversial, with protests surrounding the felling of trees and, now, a GBP32m claim reported over project delays by a road resurfacing firm.

Why, then, is this sector so litigious? Arguably PFI highways contracts have faced a “perfect storm” of pressures from local authorities to achieve savings in the face of austerity cuts, and increased costs. Another significant issue, however, is no doubt the difficulties for the project companies and lenders in analysing risk in this sector.

For PFIs in schools and hospitals there was, in theory, a clearly delineated model for risk, with a new asset being built and reasonable projections for the lifecycle of the asset. (Although, it should be noted, that this model has also not been without its challenges: Carillion’s downfall was largely attributable to an overrun on costs on two PFI hospitals: Royal Liverpool and the Midland Metropolitan; and NHS trusts and local authorities are facing huge issues with post-Grenfell fire surveys.)

With highways, however, project companies were carrying out analyses of variable assets, in poor condition after years of underinvestment. In Birmingham, the highways network was approximately 2,500km.

So what next for the sector? Whilst Philip Hammond announced the abolition of PFI and PF2 in his October 2018 Budget, the Birmingham City Council report to Cabinet recommending the settlement proposed that the current PFI structure is maintained, no doubt conscious that the PFI grant of GBP51.9m may not be forthcoming from other sources. The parties’ stated settlement objectives are to replace Amey’s sub-contractor with a new sub-contractor for the remaining life of the contract, which is not due to expire until 2035. However, the report notes that “capital investment works will need to take place on roads and pavements to ensure that a new sub-contractor is not faced with an unsurmountable backlog”.

It will be interesting to see, given the difficulties this contract has faced to date, whether the market will consider this contract a viable proposition.

Meanwhile, the means by which infrastructure is funded in this country remains at a crossroads.

 

This article first appeared in Partnerships Bulletin on 17th July 2019