The Mutual Investment Model for Roads: A New Approach To Roads Procurement?

One of the most eagerly awaited infrastructure projects is the Welsh Government’s £400m project to complete the dualling of the A465 Dowlais Top to Hirwaun. 

One of the most eagerly awaited infrastructure projects is the Welsh Government’s £400m project to complete the dualling of the A465 Dowlais Top to Hirwaun.  On 28 February the Cabinet Secretary for Finance and Local Government confirmed the Welsh Government’s intention to undertake this scheme using the Mutual Investment Model (MIM).  Whilst the project itself has not been formally launched yet, the Welsh Government has published its standard form of MIM Contract for roads, together with a user Guide.

At the same time it also published its standard form of MIM Contract for accommodation projects, as it is also planning to use the MIM approach for the Velindre Cancer Centre in Cardiff and for Band B of its 21st Century Schools Programme.

As is made clear in the guidance notes the Welsh Government has sought so far as possible to utilise similar drafting for both standard forms.  From a highways perspective, it quickly becomes apparent that the new form does not follow any of the existing highways PPP precedents as its base.  In fact, it appears that the new contract is based on the Scottish Futures Trust’s Standard Form Project Agreement (NPD), which itself appears to draw heavily on the old NHS PFU’s SFA3 PFI contract (first published in August 2003).  As such there are significant differences in drafting from the Treasury’s 2012 Standardisation of PF2 Contracts (which itself is due to be updated shortly).  For example bidders and their lenders will note there are deductions from the termination compensation payable on Authority default that are not contained in the PF2 guidance.  They will also note that the differences in the definition of Relevant Change in Law and the drafting of the Lenders Direct Agreement.

Whilst based on previous precedents, there are some interesting features in the MIM Contract for roads compared to previous roads standard forms, including:

  • Shareholding: the MIM envisages that a wholly owned Welsh Government investment entity (WG Co) will take an equity share in the Project Co’s holding company (“HoldCo”). Neither the MIM nor the accompanying guidance notes give any indication as to the likely extent of WG Co’s shareholding. A separate MIM Standard Form Shareholders’ Agreement is to be published.  The MIM guidance also envisages the use of equity competitions to secure Third Party Equity (ie equity invested by parties unrelated to the main sponsoring parties, such as pension funds and other long term investors).
  • Authority Observer: the MIM allows the Authority to nominate an Authority Observer to attend, but not vote at, board meetings of Project Co and Hold Co. The guidance notes that this right is likely to be used where the Welsh Ministers are not the procuring authority or where they are not shareholders in HoldCo.  Note that the right does not extend to attending board meetings where the board is to discuss the exercise or proposed exercise of contractual rights against the Authority, or the discussion of issues relating to any legal proceedings between the Project Co and the Authority.
  • Design: the DBFO Contracts procured by the Department for Transport (DfT) required that all design work be carried out by or under the supervision of the Designer, being a specialist professional design consultancy approved by the Department. In contrast the MIM has conflicting provisions on this point.  Clause 12.4 requires the Designer to be responsible for carrying out or supervising the design of the Works, whereas Clause 12.6.1 places the responsibility on the Project Co’s design and build sub-contractor.  This will require clarification as it will affect the Project Co’s sub-contracting strategy.
  • BIM – the Project Co is required to utilise BIM for the Project and to comply with a BIM protocol, which has not yet been provided in the documentation, but is stated to be based on the Construction Industry Council Building Information Modelling Protocol (which supports BIM working at Level 2).
  • Works Completion:
    • Certificates: Earlier roads projects made provision for a two stage completion process. A permit to use was issued when the new road was “suitable and safe for use by members of the public without traffic management restrictions”.   A Completion Certificate would only be issued when all Works had been completed.  This enabled the new road to be opened, notwithstanding that Works such as landscaping works, accommodation works and the clearance of site offices had not been completed.  The MIM primarily envisages a one stage PTU process which is to be issued when the PTU Criteria (which are yet to be defined) are satisfied.  The model does allow for a separate regime to apply for the completion of Wifi. However, there must be a risk that the road will be in a condition that it is ready to use, but cannot be opened because some off-site works remain to be completed.
    • Certifier: the MIM allocates responsibility for the issue of the PTU to an Independent Tester, jointly appointed by the Authority and Project Co. This is in contrast with the DfT’s DBFO Contracts where certification was undertaken by a consultant appointed by the Department, but is consistent with many of the Highways Maintenance PFI contracts.
  • Method Statements/Quality Plans: during the operational phase a failure to comply with a Method Statement or a Quality Plan is a breach of contract, even if the Project Co nonetheless complies with the Service Level Specifications. Bidders will need to be aware that such breaches could potentially give rise to a Persistent Breach termination. Bidders will therefore need to consider the extent to which an appropriate degree of flexibility needs to be built into their Method Statements and Quality Plans.  Any changes to Quality Plans and Method Statements have to go through the Review Procedure.
  • Latent Defects: unlike recent DBFO and Highways Maintenance PPPs, the risk of latent defects in the existing facilities is allocated fully to the Project Co. As by definition latent defects are defects that “could not reasonably have been ascertained” from a thorough inspection of the site and analysis of available data about the site, bidders will need to consider carefully the magnitude of the risk and price accordingly.  The guidance does acknowledge that making Project Co fully responsible may not represent best value and alternative approaches may be required, such as the Authority taking the risk on particular structures.
  • Protester Action: this risk is allocated fully to the Project Co. In some earlier roads DBFOs (particularly when Swampy was active) this was a shared risk, sized depending on the assessment of the likelihood of protest action occurring. The giving of any inducement (whether or not monetary) to any Protestor or Trespasser with a view to avoiding, limiting or influencing protest activities is treated as a Prohibited Act for the purposes of the Corrupt Gifts termination provisions.
  • Community Benefits: the MIM envisages that a series of community benefit targets will be included in the Contract for both the Works phase and the operational phase and that liquidated sums will be payable by the Project Co to the Authority if targets are not met.
  • Contracting Out of Statutory Functions: unusually for roads projects, there is no contracting out at all of statutory functions. In many road projects, the functions such as those of the Highway Authority under the New Roads and Street Works Act in relation to the Project Facilities were typically delegated to the Project Co.  This is not the case under MIM, where all such functions remain with the Welsh Government.  This may adversely affect Project Co’s ability to deal efficiently with statutory undertakers.
  • Tax Non-compliance: consistent with the Cabinet Office Procurement Policy Note, an Occasion of Tax Non-Compliance by the Project Co can result in termination. If it is a Shareholder that commits an Occasion of Tax Non-Compliance, then the Authority can require that Shareholder to transfer its shares, failing which the Authority may terminate the Contract.

The MIM contract includes a number of interesting developments, some of which may be new to bidders in the highway sector.  Bidders and their lenders will need to review the new form carefully with their advisers to ensure that they fully understand the risks that they are being asked to accept.  A number of the schedules remain to be completed, including the form of the payment mechanism, which will of course affect how bidders and lenders view those risks.

For further information, please contact Robert Turner, Partner in our Real Estate & Projects Team.

Footnotes  Whilst most of the Scottish references have been amended, there is still a reference to “interdict” rather than injunction in clause 58.5.


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