10 The Agency ran a generally effective and competitive procurement for the widening deal it advertised in 2005. The project was attractive to the market due to its size and the opportunity to operate a major road system for 30 years. The Agency consulted with industry, responded to feedback and learned lessons from earlier procurements.
11 There was, however, some slippage in the timetable. The Government announced its intention to proceed with the widening of five sections of the M25 in July 2003 and asked the Agency to carry out further development work. The schemes entered the targetted programme of improvements in April 2004. The Agency's initial 2004 timetable anticipated construction of the first section starting in May 2007 which we consider was a reasonable timetable. When the Agency drew up its 2004 timetable it had not decided on the procurement strategy. During industry consultation in May 2005, following its decision to widen four of the sections using private finance, the Agency revised the date when it would the award the contract and construction would start to May 2008. The Agency said that this start date reflected a reasonable programme for the procurement. The contract was not, however, let until May 2009. The delays in both preparing and executing the procurement before the credit crisis added around 18 months to the Agency's initial 2004 timetable.
12 Exposing the project to risk for longer than was expected resulted in the Agency encountering the credit crisis which added £660 million to the price. The credit crisis in 2008, which the Agency could not have foreseen, made raising finance difficult. When it arose, the Agency worked hard to obtain financing for this project. This helped to deliver market confidence for completing the private financing of subsequent projects across government. As we have recently reported2, these projects bore much higher financing costs than before the credit crisis. The delays, which we consider could have been avoided, exposed the project to risk for longer than anticipated. As a result, the present value cost increased from £2.7 billion in May 2008 to £3.4 billion by contract award in May 2009, mainly due to the higher financing costs banks required during the credit crisis. We estimate that the Agency may recover around £100 million if the project is refinanced, but there is no certainty this will occur. The Agency hopes to achieve a higher level of gains through refinancing.
13 The Agency used a benchmark cost model but did not intend this to be an estimate of the cost of a privately financed solution. In January 2008, the Agency assessed quality compliant bids against a benchmark cost model. The Agency's cost model was up to 27 to 43 per cent higher than the bids. The main difference was that operational and maintenance costs in bids from the two remaining bidders were substantially lower than the Agency's lowest estimate. While the Agency satisfied itself that the bids were robust and in line with market rates, it did not, however, produce an analysis of the reasons for the differences between the bids and its cost model. In our experience, an accurate 'should-cost' model for private finance projects can help in planning financial resources and bid negotiations. It can also identify ways in which comparison with a conventional procurement can be improved.
14 The savings between the privately financed widening deal and the same project conventionally procured are not as clear cut as the Agency calculated. Before closing the deal, the Agency compared the present value cost of the contract (£3.4 billion) against its updated estimate for procuring the widening conventionally through multiple contracts (£3.4 billion-£4.2 billion). The comparator was updated from the Agency's 2004 estimate, which was £3.6 billion in equivalent prices, drawing on information in its benchmark cost model. We are concerned about the credibility of the comparison because the Agency had not taken up the earlier opportunity to investigate the difference between the bids and its benchmark cost model. Consequently, the updated comparator, in our opinion, was not a sufficiently robust guide to likely costs under a conventional procurement.
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2 Financing PFI projects in the credit crisis and the Treasury's response, HC 287, July 2010.