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Procurement delay adds 24% to cost of M25 widening

22 Nov 10 An 18-month delay in procuring the contract to widen 40 miles of the M25 motorway has cost taxpayers an extra £660m, the government’s spending watchdog has revealed.

A National Audit Office examination of the Highways Agency’s PFI contract to widen the M25 found that it was supposed to have been signed before the credit crisis began. However, the slowness with which it was taken forward resulted in higher financing costs during the credit crisis. The Highways Agency is also criticised for its slowness to investigate a potentially cheaper alternative to widening, and for its over-reliance on outside consultants.

The delay in preparing and finalizing the widening procurement meant that the contract was let in May 2009 at the height of the credit crisis. This increased the net present cost of the deal by £660m to £3.4bn, a 24% increase. The NAO also says that “the case for PFI was less convincing than the Agency thought owing to shortcomings in its cost estimation process”.

In May 2009, the Highways Agency signed a 30-year private finance deal with Connect Plus. Under the contract, a Balfour Beatty/Skanska joint venture will widen two sections of the M25 (around 40 miles), refurbish the Hatfield Tunnel, and operate and maintain the M25 including the Dartford Crossing, plus 125 miles of connecting roads at junctions. Connect Plus started the widening work in May 2009, and began operating and maintaining the M25 in September 2009.

Operations and maintenance is by a Balfour Beatty led consortium with Atkins and Egis

The government first announced its intention to reduce congestion on the M25 in 2003. The Agency was starting to carry out trials at that time of an alternative, potentially cheaper solution of allowing drivers to use the hard shoulder at peak times, first tested in Europe in 1996.

The NAO reported back in 2004 that the Highways Agency had been slow and too risk averse in testing alternative road congestion measures. The Agency finally satisfied itself in 2008 on the viability of hard shoulder running, seven years after it announced its intention to begin trials. It now has a £3.7bn programme to use the new technique on 10 major roads including two other sections of the M25.

In its latest report, the NAO says that the Agency was too slow in exploring the costs and benefits of hard shoulder running and the delays proved costly.

The NAO estimates the savings from a conventionally procured hard shoulder running solution might range between £400m and £1.1bn. The Agency, however, doubted the technique’s suitability for one of the sections of the M25 being widened which has high traffic flow and whether operation and maintenance savings could be achieved through conventional procurement. Slow progress on testing hard shoulder running, and the Agency’s commitment to widening, meant that the Agency limited its options. As a result, it did not give itself the opportunity to secure a better price for the taxpayer. The Agency is now using hard shoulder running on a number of major roads, the NAO notes.

The full expected congestion-reducing benefits of the M25 widening project depend on the completion of techniques for managing traffic demand. Despite starting to consider these in 2003, the Agency is still testing their viability in 2010 and does not expect results until May 2012. This creates risks to maintaining the long-term benefits of the project and its potential value in cutting congestion.

National Audit Office boss Amyas Morse said: "The Highways Agency’s PFI project to widen the M25 could have achieved a materially better value for money outcome. This was partly because the slowness with which the project was taken forward subjected it to the cost effects of the credit crisis.

"The Agency should have adopted a more agile approach to procurement, recognising the potential for making savings using an alternative method of relieving congestion, hard shoulder running. The Agency should have kept its contracting approach open to allow the use of this method."

The NAO also says that the Agency was overly reliant on its advisers. It spent £80m, equal to 7.5% of the capital value, on advice and support from external organisations, including £45m on technical advice, of which £24m related to design works. The report says: “The Agency has not reviewed the total costs of its procurement to identify lessons for future projects. The Agency continues to rely on advisers for contract management support and documentation about the procurement. The Agency’s reliance on advisers has built up over time and in part reflects insufficient commercial and technical skills within the Agency. The Agency risks advisers controlling projects and having little incentive to transfer knowledge back to the Agency. The Agency is now addressing these issues.”

For the full report, titled “Procurement of the M25 private finance contract”, click here

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