Term maintenance contracts: challenges and opportunities
First published in the May 2017 issue of Quarry Management
BDS Marketing Research have recently completed a review of all of the term maintenance contracts held by local authorities across England, Scotland and Wales
The declining condition of Britain’s roads is rarely out of the news these days. Industry bodies, including the Asphalt Industry Alliance (through its annual ALARM survey), the Local Government Association, AA, RAC and others, continue to raise the importance of this issue with the Government.
The backlog of repair work to correct existing defects is expected to approach £15 billion by the end of the decade, an increase of more than 50% since 2012. This represents over three times the current annual spend on road maintenance in Great Britain.
Local authorities are estimated to account for just over 40% of asphalt manufactured in Great Britain, or around 10 million tonnes at current levels of output. Total maintenance work, including trunk routes and motorways, takes this figure to almost 60%, so changes in government spending are critical to all asphalt producing companies.
BDS Marketing Research have recently completed a review of all term maintenance contracts held by local authorities across England, Scotland and Wales. In their latest report, published in March 2017, around 300 separate contracts, frameworks and in-house provisions have been identified. Where the authority has contracted out the maintenance of its road network, the name of the contractor and the duration of the contract have been identified.
The top six asphalt producing companies, which between them account for around 90% of asphalt production in Great Britain, all have their own road-surfacing divisions. These companies are a named contractor in nearly 30% of the term maintenance contracts held by local authorities. Independent regional or local contractors holding anything from one or two contracts to up to 25 deliver the remainder. For the major companies looking to secure outlets for their asphalt and develop their contracting divisions, these companies represent realistic targets for acquisition.
Around 130 of the contracts currently in place are set to expire over the next two years. This is at a time when maintenance budgets overall appear to be declining rather than increasing, in real terms. Analysis undertaken by BDS of road maintenance budgets in 25 London boroughs and county councils bordering the M25 showed an overall reduction in spend from £350 million in 2015/16 to £290 million in 2016/17, a decline of 17%. Only six councils indicated an increase, five of which were in London.
There was no boost to the market in the Chancellor’s Autumn or Spring Statements to specifically target the road maintenance programme. Scotland, however, did receive a 21% boost to its budget for trunk road repairs, announced in February 2017. In fiscal terms, this equated to an extra £34 million.
Much is being made of maintenance budgets being used smarter and the need to look for innovative ways to provide better services for the same, or less, money. At Highways England level, this includes the introduction of the relatively new Asset Delivery model to replace Asset Support Contracts, which failed to deliver the targeted 20% savings in maintenance costs. At local authority level, the use of Highway Asset Management Plans has been identified as a means of reducing time and money spent on roads maintenance.
A more direct way of looking to cut costs is for the means of asphalt supply to be integrated into the term maintenance contract. BDS monitor all activity in the asphalt industry on an ongoing basis, which has highlighted an interesting development. In March 2016, Hampshire County Council (HCC) received consent for a new asphalt plant near Winchester. HCC is expected to develop the plant to service the term maintenance contract for its road network, in association with its contracted partner, Amey LG.
This model has already gathered momentum with two further plants in the planning process. Colas are one of the three partners in A-one+, along with CH2M Hill Halcrow and Costain, which, as a whole, is the contractor for the Highways England Area 4 contract. The group commenced the five-year contract in June 2016, and at the end of 2016 Colas received consent for a plant in Kent to service the contract. Elsewhere, Cormac Solutions, wholly owned by Cornwall County Council (CCC), had a screening opinion issued by CCC for a new asphalt plant near Launceston to help them service their term contracts.
The term maintenance market will remain a vital source of activity for the asphalt industry. With access to the right information, there are opportunities for businesses to develop and grow.
This is the fourth in a series of bimonthly features by BDS Marketing Research into trends in the markets for aggregates, asphalt, concrete and cement. For further information on BDS-published reports on these markets and/or bespoke client research, please contact Andy Sales at: [email protected]; or tel: (01761) 433035.
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