M25 Private Finance Contract - Public Accounts Committee Contents

Conclusions and Recommendations

1.  We do not agree with the Highways Agency's view that the private finance contract to widen, operate and maintain the M25 represents value for money. The Agency mishandled the procurement at a potential extra cost to the taxpayer of around £1 billion. It took nine years from the government starting to consider congestion on the M25 to the Agency letting the contract. By asking bidders to focus only on road widening, the Agency limited the alternative solutions bidders could offer, ruling out hard shoulder running. The Agency lacked robust information, particularly on maintenance and operation costs, which undermined its ability to assess and challenge the bids received. The delays in progressing the project also exposed it to the credit crisis resulting in higher financing costs of £660 million. The recommendations that follow are intended to help the Agency do better in future.

2.  The Agency spent £80 million on consultants over six years on this project. We consider this expenditure to be excessive. More should have been done to limit the costly delays to the project and the amount spent on advisers who will have benefited from the drawn out procurement. The Agency should make more effective use of mechanisms to control the cost of its advisers, for example, through scoping their work into tightly defined packages, using target pricing, and managing contract performance closely.

3.  The Agency lacks the capacity to assess whether its advisers are providing value for money. Large amounts were spent on advice yet the outcome of the procurement has been very poor value for the taxpayer. We are not convinced that the Agency is in a position to identify poor quality advice or challenge the cost of the advice it receives. The Agency needs to develop its own commercial skills so that, in major procurements, it can challenge its advisers effectively, evaluate the quality of the advice received, and engage only those advisers who provide good value for money.

4.  The Agency's poor cost estimation meant that it lacked up to date information on the cost of construction and significantly over-estimated the market rate for operation and maintenance over a 30 year period. This undermined its ability to understand and challenge the bids received, and compare a private finance solution with conventional procurement. The Agency should identify the lessons from this contract and use them to seek reductions in operation and maintenance costs in its other contracts, particularly the 85% cent of the strategic motorway network that is not under a PFI contract.

5.  The advertisement inviting interest in tendering for the contract was too narrowly drawn as it excluded hard shoulder running as a solution for traffic congestion. We are concerned that a private finance solution aimed at transferring risk to the private sector should have restricted innovation in this way. Public authorities must encourage innovative solutions and avoid the possibility of building in potential obsolescence through the specification. The Agency, the Department for Transport and the Treasury should check that all advertisements inviting interest in tendering are drawn widely so that viable solutions are not ruled out.

6.  The Agency persisted with its preferred solution of widening the M25 because of the time taken to trial hard shoulder running. Hard shoulder running was first trialled in Europe in 1996 and is now commonly used in Germany and the Netherlands to deal with traffic congestion. It took five years before the Agency announced its intention to trial this technique in 2001. It took a further eight years before the Agency started to use hard shoulder running in 2009. This Committee concluded in 2005 that the Agency was inhibited by a risk averse culture resulting in it having fallen behind other leading countries in adopting alternative traffic management measures. We recommended among other things that the Agency should design pilots with clear objectives, budgets and timescales and evaluate the outcome quickly to enable faster roll out where appropriate. We are concerned that these recommendations have not been implemented and expect the Agency to do so now.

7.  The Agency appears to have been committed to a single procurement route and justified the widening deal through a flawed and biased cost estimation. The Agency now accepts that additional maintenance costs of £193 million used in the analysis should have been discounted to reflect the fact that these costs would be incurred over the 30 year life of the project. Had this been done, hard shoulder running would, we believe, have emerged as the cheaper option, casting serious doubt on the Agency's decision to proceed with the widening contract. We are concerned that the Agency's staff engaged in the project had become committed to a widening project using private finance. In seeking to justify this, they lacked objectivity in their cost comparison. The Agency should establish rigorous, effective and objective mechanisms to challenge the evidence for key decisions, involving people with relevant expertise who are not part of the project team.

8.  We were unable to take evidence from the Senior Responsible Owner (SRO) because he had left the Agency and at the time of our hearing was employed by one of the project's major contractors and investors. The SRO in this project left to work for a company that had previously provided advice on the project. That company is now owned by one of the project's major contractors and investors. We note that a condition of his new employment is that he works on rail rather than road projects, but it is not clear what procedures are in place to make sure that this commitment is honoured. We note that Cabinet Office clearance was obtained for this move but there remain potential conflicts of interest. The Treasury, in its role of promoting best practice in privately financed projects, should examine existing guidance to clarify the rules to be applied when officials who have worked on private finance projects leave the public sector.

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Prepared 8 February 2011