Agenda item

Report of the Director for Placemaking and Housing. To be introduced by the Cabinet Member for Climate Action, Environment, and Transport and Deputy Leader of the Council.

 

This report requests approval to commence procurement for Design and Build (D&B) contracts for the Council’s Decentralised Energy Network (DEN) programme.

RESOLVED to

 

1.            Agree to commence the Design and Build (D&B) procurement for the Council’s Decentralised Energy Network (DEN) Programme in accordance with the Utilities Contract Regulations (UCRs) utilising Negotiation with Prior Call for Competition as permitted under UCR 47.

 

2.            Agree the procurement strategy set out in section 7 of the report.

 

Reasons for decision

 

Procurement of the DEN infrastructure must start in early 2023 in order to deliver the FBC by late 2023 and to support the Council to fulfil obligations in the Development Agreement at High Road West.

 

A full range of options has been considered and the proposed strategy will deliver best value to the Council.

 

Alternative options considered

 

Note a glossary is provided in Section 10 of the report to explain some terminology

 

Do nothing

If procurement is not commenced, the costs and contract terms for building DEN infrastructure would not be known and the Council will not be able to deliver the FBC for the DEN programme which in turn would not deliver the government requirements of the Heat Networks Investment Project (HNIP) funding.

 

This option has not been considered further.

 

See also further information on the Do nothing option in paragraph 5.1.1 of the Exempt Report,

 

Seek Third Party Investors

It is possible to run a procurement to select a third party investor who will then deliver the project directly (including procuring the infrastructure) or to simultaneously seek to find a third party investor as a partner while procuring the infrastructure (with this second route, the pool of investors is limited to those bidding for the works).

 

The OBCs for the various projects have considered the potential for 3^rd party investors in the Haringey DEN projects. The projects are large, complex, at an advanced stage and the Council does not have control over significant parts of the projects. This makes it difficult to find a third party investor under either of the routes summarised above. Even if it were possible to attract third parties to invest in Haringey’s DEN projects, there are two principal reasons why this has been discounted. Firstly, there is a preference for the future provider created by the project to be publicly owned which suggests first seeking a partner and then procuring the infrastructure (rather than seeking an investor at the same time as procuring the assets). Secondly, the three opportunities are all time-limited and there is insufficient time for the Council to select a project partner and to then deliver the projects.

 

It is important to note two things. Firstly, that any effort to seek a third party investor will be time and resource intensive. Seeking to do this while also trying to get the projects off the ground is not recommended. Secondly, there is nothing preventing the Council from seeking investors in the projects at a later date.

 

This option has not been considered further.

 

Contract Aggregation Options

Given the above, it will be the Council procuring the infrastructure. The options for aggregating the different aspects of the project are discussed below.

 

-       Seek a turnkeyDesign, Build, Operate and Maintain Contract

One way of procuring infrastructure which helps to transfer performance risk is to combine the Design and Build contract with a long-term Operation and Maintenance contract into a single design, build, operate and maintain (DBOM) contract.

 

This option has been considered and discarded. The reason for ruling out this option is that the scale of the project is too large for the nascent district heating market in the UK. There is likely only a single contractor capable of bidding for such a contract and so there will be no commercial tension in the procurement (assuming the aforementioned bidder chose to bid).

 

Officers have run Soft Market Testing which supported the above conclusion. The Soft Market Testing also sought to attract companies from outside the UK to bid (working in partnership with those responsible for market development in the Government Departments for International Trade and for Business, Energy and Industrial Strategy) but no international interest has been forthcoming.

 

Therefore this option has not been considered further.

 

-       Seek to break the procurement into smaller Lots of Design, Build, Operate and Maintain Contracts

 

This option has been considered and discarded. The reason for elimination is because this would fragment the future Operation and Maintenance (O&M).

 

A single O&M contactor across the network simplifies interfaces, but the scale of a single O&M contract also leads to economies and allows for greater risk transfer to the contractor as it is set against a bigger opportunity.

 

A single O&M contract is therefore considered to give a better result and will need to be procured separately (and indeed this procurement is already in train by the Council).

 

The DBOM option (either turnkey or multiple smaller contracts) has therefore not been considered further.

 

-       Seek a turnkey Design and Build (D&B) Contract

Although it is not feasible to run an effective procurement for a turnkey DBOM contract, the mechanism explained in paragraphs 6.9-6.11 shows how D&B and O&M can be separated out in a way which achieves many of the benefits of a DBOM procurement and mitigates the downside of having to procure O&M and D&B separately (due to the lack of an effective market for DBOM for projects of this scale).

 

Given the Council will have an O&M contractor in place to oversee the construction of assets to the requisite standard, ideally the D&B would then be a single turnkey contract to allow the Council to transfer design risk and minimise the number of contractual interfaces.

 

This option was considered. However, similar issues apply as for DBOM in that there is only a single UK contractor capable of delivering a D&B contract of this scale.

 

Therefore a turnkey D&B contract has not been considered further.

 

-       Seek separate contracts for designing the entire system and building the entire system

While there would be multiple organisations capable of delivering the design of the entire system, there would only likely be one capable of delivering the entire build too, meaning that the procurement of the works would need to be broken up in order to create competitive tension.

 

If there are going to be multiple works packages, there are arguably benefits to separating out the design from the build and appointing a single designer across all works packages to help ensure compatibility between multiple works packages.

 

However, the downside of this is it means the Council has to accept design risk and also further increases the number of contractual interfaces complicating the project and increasing risk.

 

While a single design package was considered, it has been rejected as the alternative design review/oversight mechanism from the O&M contract (explained in paragraphs 6.9-6.11 ) is seen as an effective way of mitigating the risk from breaking up the works into smaller packages by ensuring the design is coordinated across the scheme and counters the need for the Council to take on the design coordination role directly.

 

Therefore separate contracts for design and construction have not been considered further.

 

-       Options to Use Existing Frameworks

A simple route to comply with the public procurement is to make use of a pre-procured framework should a suitable framework exist.

 

Officers have conducted a review of suitable frameworks (including e.g. Haringey’s London Construction Programme, LCP, framework) and concluded that there are no suitable frameworks. This is because of the nature of the works (particularly buried pipes which do not easily fit within the LCP categories) and the expectation that the bidding organisations will be dominated by specialist SMEs.

 

Therefore it is recommended that a bespoke procurement be run.