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
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