Examination of Witnesses (Questions 1-19)
HIGHWAYS AGENCY
12 MAY 2008
Q1 Chairman: Welcome to the Committee
of Public Accounts. I apologise for the late start. Today we are
considering the Report of the Comptroller and Auditor General
The Procurement of the National Roads Telecommunications Services.
We welcome back to the Committee Mr Archie Robertson of the Highways
Agency and also a delegation from the Accounts Chamber of the
Russian Federation. Thank you for coming. Mr Robertson, you are
leaving the agency soon, are you not?
Mr Robertson: I finish my term
at the end of this month.
Q2 Chairman: Do you want to tell
us what lessons you have learned from this and other procurements
you have overseen that you can pass on to your successor with
all the weight of your experience?
Mr Robertson: Just to pick this
one, this is a very successful public-private partnership which
has a bit of an angle inasmuch as it has a framework call-off
contract which I think offers to others some lessons to learn.
It has taken some time to get it through as the NAO points out,
but it is probably the better for that. It is absolutely fundamental
to what I and my successor try to do which is to continue to deliver
a focus and improvement on the management of traffic rather than
the narrow building of roads and maintenance about which we have
spoken in the past. I think that in this Report there is quite
a bit to commend the thoroughness with which it has been approached
by some determined, not novel, thinking about getting things right.
I believe that the term of 10½ years will be seen to be appropriate
for this kind of PFI when often one hears that it entails the
making of commitments for a very long time into the future. This
is a technology PFI which is absolutely vital in order to use
the capability of anything from a fault detection meter right
through to active traffic management as we are currently developing
it and it stands to enable us to get benefits of anything up to
£2.8 billion, which was in the business case.
Q3 Chairman: That is a very rosy
picture, but I should like to press you a bit on the benefits
of a PPP rather than traditional procurement. Presumably, you
went down the PPP route because of worries about cost and time
overruns, but that was exactly what you ended up with, was it
not?
Mr Robertson: With every challenge
we have to look at how we shall deliver it. The alternatives available
to me are: to do it myself by hiring the people and buying the
materials, but that is not the sort of agency we are; to embark
on a series of contracts for construction and then operation and
maintenance of the equipment, which is a set of options that falls
within conventional procurement; or to look at whether a PPP-type
solution is right in this case. The reason I think it is right,
apart from what is shown in the numbers and the £30 million
advantage, is that it is a solution that enables the technology
risk to be borne by people who are knowledgeable about it and
also enables private sector flexibility to be brought to this
challenge which is relatively unusual for us.
Q4 Chairman: I always understood
that the whole point of a PFI/PPP was that the public sector,
albeit perhaps at greater cost, would have a degree of certainty.
In this Committee we look at value for money. Why is it good value
for money to have a procurement that takes five years, not two
years, project costs that are nine times higher and adviser costs
that are three times higher than you started with?
Mr Robertson: It is good value
for money because when you take all of those issues together you
get a solution which, when the risks are factored in, gives you
a better response than if you were doing the public sector comparator.
That is exactly what this shows and what I expect to see demonstrated
as the project rolls through.
Q5 Chairman: We do not necessarily
accept that the public sector comparator is a true comparator,
and if you read in particular paragraphs 2.33 to 2.35 of the Report
you just increase the risk in the public sector comparator to
come out with the right answer. We have seen this in previous
PFIs and are very dubious about public sector comparators that
appear, frankly, to be fixed against traditional procurement.
Mr Robertson: Having observed
a number of other PFIs I can understand your scepticism particularly
in cases where PFI enables a project to be taken off the balance
sheet. This is the agency's 12th PFI; we are now working on our
13th, and all of our projects are on the balance sheet. The capital
and resource funding has to be provided in the same way as if
it were a conventional procurement. Therefore, I am able to make
the assessment simply on the basis of the advantages and disadvantages
of traditional procurement, if we can call it that—contracting—the
flexibility I can achieve and the risks I can transfer to the
private sector. The risks that are helpfully set out in the appendix
to the Report of the National Audit Office are significant and
real as far as concerns this comparison because there is no mysticism
involving off-balance sheet treatment.
Q6 Chairman: I would have greater
belief in that if it was not for the very interesting figs 16
and 17 on pages 28 and 29 of the Report. The left-hand page is
what we were supposed to get: "The initial bid documents
required the contractor to increase the fibre optic cable network
by 278 kilometres in the first two years of the contract".
We know that we did not get that. If we read across the page to
fig 17 we see: "After the affordability review, the Agency
focused on removing gaps in the core `figure of 8'...", so
under this scheme you ended up with 110, not 278, kilometres.
If we look at the footnote on that page we see that under traditional
procurement you installed 168 kilometres. Therefore, the PPP whose
praises you have been singing for the past 10 minutes or so delivered
you only 110 of the 278 kilometres it was supposed to provide
and for the rest you had to rely on traditional procurement which
you have just told me was so risky.
Mr Robertson: The kilometres are
important but not significant in the sense that what really counts
is what one puts down the cables and enables by providing this
network. What is in the PFI that we are now progressing is a core
addition of 110 kilometres to give us the core figure of eight
network in illustration 17 and, associated with that, the framework
document which enables us then to buy at fixed prices the additional
parts of the network we will need in order to roll out the other
services we are putting in, for example ramp-metering, active
traffic management, weather detection and safety incident detection.
That is when this investment enables the benefits to be gained.
There is no point in putting in all of that network ahead of the
need for it.
Q7 Chairman: If we look at the top
of page 53 we see helpfully set out in clear form how the procurement
timetable progressively increased from 21 months to over five
years. Further down the page we see how you appear to have spent
more and more on advisers. If you were spending so much on advisers
why could they not warn you earlier of the risks involved in this?
What was going wrong? Surely, they should have told you that you
could not afford the original project in the way it was devised.
That is the point of having advisers.
Mr Robertson: It would have been
great if they could have told us of two of the things we would
have to deal with after we began the project. The meltdown in
the telecommunications industry meant that the original vision
that some income might arise from this became completely redundant
overnight. The agency and government did not become exposed to
that because the project was developed; nor were the advisers
in a position to anticipate just what it was government would
be looking for in terms of delivering the traffic services that
we were asked to develop from 1998 culminating, most importantly,
with the roll out of the traffic officer service from 2004. Therefore,
the advisers could not have told us that. The advisers' budget
was certainly more than had been anticipated because the problem
we were trying to solve certainly changed during that time which
was a risk in itself, but I believe that it has been managed positively
and we have a very good project coming out of it.
Q8 Chairman: You have appeared before
this Committee in the past. If you look at the front cover of
this Report you see a picture of a motorway. You have hard-shoulder
running, variable speed limits, speed cameras and variable signs.
All of these are recommendations we have made to you in the past.
But can you assure us that if we are to have better managed roads
we will need fewer new roads and, therefore, we will get better
value for the taxpayer?
Mr Robertson: Thank you for your
encouragement in getting services rolled out as far as concerns
our original report. They are indeed rolling out everything from
high-occupancy vehicle lanes to everything that is on the front
page, that is, ramp-metering and other detection systems beside.
The government's strategy that I am implementing continues to
be one that looks at construction where road capacity is already
beyond its nameplate capacity and it is under severe pressure,
like the M1 and M25. The second strand of that is exactly what
we are talking about here, which is to make better use of the
network, sweat the asset harder, as I still call it, and help
people to move better. The third strand is still to introduce
congestion pricing as a means of controlling demand at hot spots.
That is not directly within my remit, but you will know from the
recent statement of the Secretary of State that she is progressing
that and we are contributing to that strategy.
Q9 Mr Touhig: Mr Robertson, I see
that you are married with three children. Do you sometimes do
the weekly food shop?
Mr Robertson: I have been doing
it recently, yes.
Q10 Mr Touhig: Therefore, you will
know that when you buy in bulk you can purchase more cheaply?
Mr Robertson: I know that sometimes
you can be induced to buy in bulk when you do not need to.
Q11 Mr Touhig: In that case why does
it need the NAO to point out to you that the agency's bulk-buying
power could have saved the public sector comparator between £4
million and £14 million?
Mr Robertson: This is important
and it was offered to us by the NAO from an organisation called
Mason, as I recall. I do worry a bit about bulk buying as far
as the public sector is concerned. In a way it assumes that I
have the budget from government which means I can go out and buy
everything at the same time.
Q12 Mr Touhig: Page 27, paragraph
2.32 is pretty specific, is it not? The consultants engaged by
the NAO "did, however, note that, for bulk order capital
cost items, the Agency might have secured discounts that could
have reduced the present value cost of the comparator by between
£4 million and £14 million". You have agreed the
Report and I take it you accept that?
Mr Robertson: I agree that it
might have and that the benefit might have been as much as £14
million, but that would not have changed the conclusion in the
simple arithmetic that the public sector comparator—
Q13 Mr Touhig: It would have reduced
the difference between the PPP and the public sector comparator,
would it not?
Mr Robertson: Absolutely. If we
had been able to do the bulk buying, which is one of the things
that the flexibility—
Q14 Mr Touhig: Are you suggesting
that you could not have done that and so the consultants brought
in by the NAO have got it wrong?
Mr Robertson: No.
Q15 Mr Touhig: It is in the Report
and you have accepted it.
Mr Robertson: I think it is quite
right because it is a speculative "might have reduced it
by between £4 million and £14 million". To capture
that I would have had to do the bulk buying which meant I would
have had to find the money to do it, taking money away from my
limited budgets for traffic management overall and investing in
that compared with other things that I might have wanted to do.
All of the things that we have talked about in the past in terms
of the technologies we can bring to bear have very high value
for money, so there is no zero price here.
Q16 Mr Touhig: I understand the point
you make, but, as the Chairman points out, the cost of this project
has gone up nine times since it was first conceived, has it not?
It seems to me that the whole reasoning of the agency for choosing
PPP over the conventional route is not very robust. As we started
the session this afternoon you praised the Report but I cannot
see it; it just seems to me that you have not been very robust
in saying why you wanted the PPP in the first place.
Mr Robertson: I explained that
I had three options. If one leaves aside the option to do it myself
on the basis that that is not the organisation we are set up to
be, the simple choice is between contracting and PPP. With a scheme
like this that is novel, that has come through a meltdown in telecommunications
in 2001 and 2002 and where technology advances all the time I
think that the public sector has to be very careful about engaging
in the sorts of risks involved.
Q17 Mr Touhig: Let us look at the
risks. The Report tells us that you factored £85 million
into the public sector comparator which was 26% of the non-risk-adjusted
figure. From where did that £85 million come, and why was
it so high?
Mr Robertson: The £85 million
is described by the National Audit Office in appendix 4, and we
have agreed that. We are happy to go through the risks that we
have allocated in that.
Q18 Mr Touhig: How did you work up
to that figure? Why was it such a large figure, because it certainly
had a final impact on whether you went the PPP or conventional
route?
Mr Robertson: Since Mr David Bradbrook,
the project manager, is sitting here I will invite him to give
you some perspective on that. However, the risk as a percentage
of this project works out at about 26% of the NPV which is not
so far away from the sorts of risks we have experienced in the
other PFIs we have done. They vary between 7% and 31% for what
are largely roads projects of a lower category risk. Therefore,
26% is not unusual for PFIs at least as far as I have seen them.
Q19 Mr Touhig: It is a lot of money.
You were against taking the risk and so you went down the PPP
route and the cost dramatically escalated. You got into a mess
right at the beginning. In 1999 the cost of this project was £90
million and it is now nine times that.
Mr Bradbrook: The cost of the
contract went from £40 million to £345 million because
the scope of the project changed. It started off as a very simple
project to renew life-expired assets and to try lever some revenue
off the market. By the time we got out to tender it had moved
on from the feasibility study and was addressing our strategic
needs and the needs of a 10-year plan that had been published
since then including the traffic officer service that had come
into being. We now required a network that needed to have far
greater levels of resilience, capacity and capability. The reason
why the costing increased was that capability and capacity increased.
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