1 Planning the NRTS and choosing
the procurement route
1. In 1998, the Government announced that the
role of the Highways Agency (the Agency) was to change from that
of road builder to that of a road network operator, with objectives
to reduce traffic congestion through improved traffic monitoring
and travel information. At the time of the announcement, the Agency
was responsible for operating its own telecommunications systems
that captured information about road, traffic and weather conditions
across the motorway network through 14,000 roadside devices. The
systems also provided the Agency with the means of directly communicating
traffic information to road users through, for example, overhead
messaging using variable message signs.[2]
2. The backbone to the telecommunications systems
was a trunk network of copper transmission cables carrying voice
and data signals between the roadside devices and 32 local police
control offices. The transmission of these signals relied on obsolete
analogue technology. Across approximately half of the motorway
network, the Agency had installed, alongside its copper cables,
fibre optic cables that had the higher transmission capability
needed to carry CCTV images.[3]
3. In its new role as road network operator,
the Agency considered that it needed enhanced telecommunications.
The project for the National Roads Telecommunications Services
(NRTS) began as an upgrade to the cable network supporting the
motorway telecommunications systems, including laying lengths
of fibre optic cable to complete a high capacity resilient trunk
cable network. The Agency envisaged that its contractor would
use the upgraded assets to sell excess telecommunications capacity
to third-parties. This revenue-generating opportunity was the
principal driver behind the Agency's original decision to proceed
with a public private partnership (PPP).[4]
4. Excess cable capacity in the telecommunications
industry around 2000 meant that potential contractors had no interest
in exploiting the enhanced network. At the same time, the Agency
widened the scope of the NRTS to accommodate relevant aspects
of the Agency's proposals to meet objectives in its then 10-year
plan. Its justification for the procurement of a PPP, rather than
a conventional procurement, shifted to:
- transferring of technology
risk to the party best able to manage it; and
- enabling private sector flexibility in the whole
life management and adoption of technology.[5]
5. The actual cost of the NRTS contract depends
upon the volume of additional services that the Agency will order
over the term of the contract. To evaluate bidders' best and final
offers, the Agency used a demand scenario based on the mid-point
between ordering no additional services, and ordering what the
Agency considered was a likely high level of additional services.
On the basis of this scenario, the present value of the Agency's
payments under the negotiated contract with GeneSYS Telecommunications
Ltd, the winning bidder, will amount to £385 million[6]
(present value at 2004 prices). The Agency compared this figure
against a Public Sector Comparator of £415 million (Figure
1).[7]
Figure 1: From September 2004, the Agency calculated that GeneSYS's offers
were below the Public Sector Comparator
BID ROUND
| COST IN PRESENT VALUE TERMS/£ MILLIONS (2004 PRICES)
|
| GENESYS
| LINK
| RISK ADJUSTED PUBLIC SECTOR COMPARATOR
|
| Invitation to Negotiate (July 2003)1
| 680 |
910 | 6603
|
| Evaluation after Clarification (December 2003)1
| 690 |
920 | 6603
|
| Best and Final Offer (June 2004)2
| 490 |
770 | 4503,4
|
| Revise and Confirm (September 2004)
| 425 |
- | 4354
|
| At contract award (September 2005)
| 385 |
- | 4154
|
1
These April 2004 priced figures were calculated by inflating April
2003 prices using the Office for National Statistics' Retail Prices
Index CHAW (all items).
2
Between the Evaluation after Clarification and the Best and Final
Offer, the Agency reduced the scope of works that would be covered
by the base service charge.
3
The Public Sector Comparator at Invitation to Negotiate, Evaluation
after Clarification and Best and Final Offer included an allowance
for non-recoverable VAT, which was not included in the bids.
4
From Best and Final Offer there were minor incompatibilities between
the Public Sector Comparator and the bids. To achieve like-for-like
comparisons, the Agency adjusted the values of the bids rather
than alter the PSC. In the table above, the Public Sector Comparator
has been adjusted rather than the bids.
6. This Committee has previously seen Public
Sector Comparators that contained errors and omissions. Some contained
spurious precision in their figures, while others had been manipulated
to achieve the desired result.[8]
Prices in the Agency's comparator did not include possible discounts
that the Agency could have secured had it made bulk orders for
telecommunications equipment. The estimated savings could have
reduced the comparator by between £4 million and £14
million. However, the Agency considered that, under a conventional
procurement, it might not have secured funding for the entire
project and, therefore, would have progressed the upgrade works
in a piecemeal manner. Consequently, the Agency doubted that it
would have secured the best bulk order discounts, but did not
expressly state this doubt in its business case.[9]
7. The Public Sector Comparator also included
a risk allowance of £85 million, equivalent to 26% of the
non-risk adjusted figure. The risk adjustment in the NRTS comparator
was within the range of risk allowances included in the Agency's
twelve other PFI contracts (7% to 31%). The calculation did not
allow for events turning out better than expected, however, nor
did it take into account risk mitigation that would have been
applied had individual cost items been identified as being particularly
vulnerable. As a result, the risk allowance might have overestimated
the risk transferred in this deal.[10]
8. Despite uncertainties in the pricing of inputs
and of risks, which had to rely on the experience and judgement
of the Agency's advisers, the Agency's Public Sector Comparator
was a single point estimate, rather than a range. This approach
presented the comparator as a pass or fail value for money test,
rather than one element of a fuller value for money assessment.
This falls short of best practice in value for money assessments.[11]
2 C&AG's Report, paras 1.1-1.4 Back
3
C&AG's Report, paras 1.4, 1.5; Figures 4, 5 Back
4
Qq 19, 27; C&AG's Report, para 1.3 Back
5
Qq 3, 16, 27, 73 Back
6
The present value of GeneSYS's offer was £385 million in
2004 prices. The NAO calculated that this offer had a present
value of £345million in 1999 prices when deflated using the
Office for National Statistics' Retail Prices Index CHAW (all
items); C&AG's Report, paras 1.19, 1.21; Figure 8 Back
7
Q 59; C&AG's Report, para 1.21, 2.29, Figures 8, 15 Back
8
Public Accounts Committee, Twenty-eighth Report of Session 2002-03,
Delivering better value for money from the Private Finance
Initiative, HC 764 Back
9
Qq 5, 12-15 Back
10
Qq 5, 17, 18; C&AG's Report, para 2.35 Back
11
Q 3; C&AG's Report, paras 1.18, 2.29, 231-2.35 Back
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