M25 widening PFI takes further criticism

A report by the UK Parliament’s Public Accounts Committee has rubbed salt into the wounds of the Highways Agency, the procuring authority for the M25 motorway widening project which had already been criticised by the National Audit Office – the government’s auditor – for delays that allegedly cost the project an extra £660 million (€778 million; $1.1 billion).

The Public Accounts Committee has focused its attention on an alleged “technical mistake” in the Agency’s cost estimates for the Private Finance Initiative (PFI) project. “Had the error not been made, hard shoulder running [rather than widening] would have been shown to be the cheaper option,” said Committee chair Margaret Hodge. 

Hard shoulder running involves traffic being allowed to make use of the hard shoulder, the verge of a motorway normally kept free of traffic, in order to ease congestion. Widening involves adding extra lanes to certain sections of a motorway. Estimates suggest that converting a hard shoulder for traffic costs about £10 million a mile whereas widening costs about £40 million per mile.

Last November, a National Audit Office report focused on the slow progression of the project’s procurement as resulting in a £660 million increase in cost. It said that an 18-month delay meant that the procurement ended up coinciding with the credit crisis, resulting in higher financing costs.

The auditor also found that the procurement authority was “overly reliant” on external advisers, on which it spent £80 million or about 7.5 percent of the M25’s capital value. The NAO said that this over-reliance “risks advisers controlling projects and having little incentive to transfer knowledge back to the Agency”.
 
The NAO also took issue with the Highways Agency’s benchmark cost model for the M25, which turned out to be 27 percent to 43 percent higher than the bids it received. “The main difference was that operational and maintenance cost in bids from the two remaining bidders was substantially lower than the Agency’s lowest estimate,” the NAO explained, chiding the Highways Agency for failing to “produce an analysis of the reasons for the differences between the bids and its cost model.”
 
The 30-year contract to maintain and widen the M25 to four lanes was awarded last May to a Balfour Beatty/Skanska-led consortium. It reached financial close in early June backed by a club of 16 banks and the European Investment Bank (EIB). The commercial banks provided £950 million of debt starting at 250 basis points (bps), rising to 300 bps in year 7 and 350 bps in year 10. The EIB contributed a further £400 million in debt.