M25 Private Finance Contract - Public Accounts Committee Contents

1  The procurement process

1. The Government commissioned consultants to produce a long-term sustainable strategy for tackling congestion on the M25 in 2000. In May 2009, nine years after the start of the project, the Highways Agency (the Agency) signed a 30-year private finance contract with Connect Plus for widening two sections of the M25 motorway, and maintaining the entire 125 mile length of the motorway, including the Dartford Crossing, and 125 miles of connecting roads and motorways. The contract has a present value cost of £3.4 billion.[2]

2. The Government announced its intention to proceed with widening in July 2003 and the Highway Agency's initial 2004 timetable anticipated construction starting in May 2007. This was subsequently revised following consultation with industry and a decision to widen the motorway using private finance, to May 2008. The delay exposed the project to the 2008 credit crisis resulting in further delay and higher financing costs of £660 million.[3]

3. We asked the Agency what they could have done differently to avoid these delays and the consequent cost increases. The Agency found it difficult to identify delays that could have been avoided, but noted that as a result of the credit crisis the time taken to raise finance had been much longer than expected.[4] The Agency accepted that, with hindsight, some things could have been done to progress the project more quickly - the various stages of the project could have been run faster and some decisions could have been taken earlier.[5] The Agency also considered that it could have reduced the time taken if it had avoided the lengthy consultation it carried out with the construction and financial markets before the procurement, asked bidders to arrange finance during the bid process rather than afterwards, and restricted the size of tender documents which each ran to some 30,000 pages.[6]

4. Private finance projects usually define the outputs required allowing flexibility over the solution. But in this case the Agency's 2005 procurement advertisement had specified only road widening.[7] This ruled out hard shoulder running, an option one of the bidders wanted to submit. The Agency accepted that its procurement advertisement should have been worded more loosely and told us that this was a lesson that it had taken away from this project.[8]

5. The Agency assessed the bids received against a model to benchmark costs, but it was difficult for the Agency to assess the value for money of the bids received because the cost range produced by the model was between 27% and 43% more than the lowest bid.[9] The Agency's estimates for the costs of widening were based on data from contracts from 1992-94, three of which were M25 widening schemes, updated using published indices for construction cost prices. The cost figures the Agency used for the operations and maintenance elements were based on existing contracts for maintenance and renewal, adjusted by an estimate of how much more efficient a PFI contractor might be on maintenance.[10]

6. While the Agency's estimates for widening costs were about the same as those in the bids, its estimates for maintenance were much higher. The Agency attributed its over-estimation of these costs to the fact that they were based on conventional maintenance contracts with five to seven-year terms, whereas the bids were based on the estimated costs for maintaining or renewing the assets and structures under a private finance contract over 30 years. The Agency explained that it had assessed the estimated maintenance costs by extending its existing maintenance regime from a five to a 30-year period, whereas the tenderers had proposed different ways in investing in maintenance over the 30 years. The Agency accepted that it needed to take the maintenance techniques used in this contract with a view to applying them to the 85% of the motorway strategic road network managed under conventional maintenance contracts.[11]

2   C&AG's Report, para 3 Back

3   C&AG's Report, paras 11, 12 and 1.3 Back

4   Q2 Back

5   Qq11,12 Back

6   Q49 Back

7   C&AG's Report, para 15 Back

8   Qq162, 166 Back

9   C&AG's Report, para 2.6 Back

10   Q75 Back

11   Qq 76, 82, 83, 92, 101, 103 Back

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Prepared 8 February 2011