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National Audit Office Press Notice

The Private Finance Initiative: The First Four Design, Build, Finance and Operate Roads Contracts

Report by the Comptroller and Auditor General
HC 476 1997/98
28 January 1998
ISBN: 0102847983
Price: £10.75

Sir John Bourn, head of the National Audit Office, told Parliament today that the Highways Agency and the Department of Transport had managed the competition for the first four design, build, finance, and operate roads contracts in a way which both attracted widespread interest among bidders and maintained competitive tension throughout.

The National Audit Office found that there were uncertainties inherent in the assessment of the value for money of these projects, but the four contracts appear likely to generate net quantifiable financial savings of around £100 million (13 per cent). The Highways Agency’s original assessment had suggested that the 4 contracts would yield net financial savings of around £168 million.

Between January and March 1996, the Highways Agency signed contracts with three separate consortia to design, build, finance and operate the following four roads:

• the M1-A1 link road near Leeds (Yorkshire Link Ltd);
• the A1(M) widening between Alconbury and Peterborough (Road Management Group);
• the A419/A417 between Swindon and Gloucester (Road Management Group); and
• the A69 between Carlisle and Newcastle-upon-Tyne (Road Link (A69) Ltd).

Under the contracts, private sector consortia build, finance, operate and maintain the roads in question to the Highways Agency’s technical requirements for a period of 30 years. In return the Agency will make payments to the private sector builder/operators based primarily on the number of vehicle kilometres driven on the roads subject to a maximum figure above which no further payments will be made. These “shadow tolls” mean that road users do not pay directly for using the roads.

The National Audit Office found that:

• The Department of Transport selected these four projects specifically to test the market’s appetite for projects offering different mixes of construction and maintenance work. This involved choosing projects which may not have had priority had more conventional procurement arrangements been used;
• Scope for innovative changes to the design of the roads was limited by the core technical requirements which bidders were required to meet;
• The competitive procurement process provides assurance that the terms obtained were the best available from the market for deals of this type at the time;
• Using an eight per cent discount rate as recommended by the Treasury’s published guidance for publicly financed road schemes rather than the six per cent recommended in the guidance for privately financed projects, resulted in the benefits being overstated by around £68 million in the Agency’s original assessment;
• In the National Audit Office’s view, the use of shadow tolls as the primary means of payment to operators, may have reduced the net savings generated by the contracts. Shadow tolls introduce a risk - traffic volume -which the private sector operators cannot manage effectively and which can be expected to have increased the costs to the public sector; and
• The Agency have taken steps to monitor compliance with the construction and operational phases of the contracts but there were delays in setting up effective arrangements.

The report recommends:

• the Department of Transport should take into account the relative priority of road projects in the roads programme when selecting projects for inclusion in future rounds of tendering (paragraph 1.5);
• the Highways Agency should ensure that effective measures are in place to secure compliance with the contracts for the road projects both during construction and during operation, (paragraphs 3.1 - 3.10);
• Government departments and agencies procuring privately financed projects should consider the need to stimulate market interest in forthcoming projects before commencing the formal procurement procedures (paragraph 1.9);
• to encourage innovation in privately financed projects, it is important for departments and agencies to minimise the extent of core technical requirements, and when it is, exceptionally, necessary to vary those requirements, it is preferable for that to be done in a way which enables competitive pressure to bear on pricing such variations. (paragraph 1.24); and
• departments and agencies should be wary of spurious precision in carrying out public sector comparators as part of their evaluation of the value for money of privately financed projects (paragraph 2.18).

Notes for Editors

The Private Finance Initiative was launched in 1992 with the objective of finding new ways of mobilising the private sector to meet needs which have traditionally been met only by the public sector. It is intended to improve the value for money of public sector projects by encouraging the development of closer relationships between the public and private sectors through the transfer of risk and responsibility, and to enable the public sector to benefit from private sector skills and innovation in the delivery and procurement of services.

The Comptroller and Auditor General, Sir John Bourn, is the head of the National Audit Office employing some 750 staff. He and the NAO are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources.

Press Notice 5/98
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