1.19 The Agency estimated that a single private finance contract would be 7-15 per cent better value for money than a conventionally procured solution (Figure 3). This was supported by a qualitative assessment of the benefits. There were limitations in this assessment:
• Constructions costs (Figure 4) were based on data from 1992-94 as subsequent private finance contracts were not considered suitable as they were different in nature.
• The Agency did not use a range of outcomes for conventional procurement construction which we consider would have helped the comparison.
• The Agency based its calculations for conventional procurement on its old 1990s contracts which were competitively procured but subject to significant overruns. The Agency subsequently benchmarked its conventional procurement estimate against the total cost of road widening works in its new contract for the M1 Junctions 6A to 10. We have some reservations about the robustness of this comparison because of the overruns in the 1990s contracts and the fact that construction cost rates within the M1 costs were lower than those in the Agency's calculations.
• The Agency assumed that the operation and maintenance costs, which account for around 65 per cent of the costs, would be the same as it had previously incurred. This did not consider the scope for further efficiencies in either the privately financed or conventional options. The Agency doubted that it could achieve efficiencies in conventional procurement.
1.20 As with any cost estimate the results are sensitive to changes in assumptions. For example, reducing the percentage added to the conventional option for additional risk from 35 to 25 per cent would reduce the construction cost by £85 million.
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Figure 3 The Agency's assessment of the costs of different procurement options
|
| Present value of costs (£m)1 | The Agency's expected value for money against conventional procurement (%) |
Multiple conventional |
| 2,671 | - |
Single private finance | Optimistic, full benefits2 | 2,271 | 15 |
| Optimistic, reduced benefits2 | 2,328 | 13 |
Single private finance | Pessimistic, full benefits2 | 2,433 | 9 |
| Pessimistic, reduced benefits2 | 2,489 | 7 |
NOTES
1 2001 prices.
2 'Full benefits' reflects the expectation that under a single private finance option the widening could be completed at least a year earlier. 'Reduced benefits' excludes this benefit.
Source: National Audit Office analysis of Highways Agency data
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Figure 4 The Agency's calculation of the construction costs of a multiple conventional contract compared to multiple and single private finance contracts
Type of contract |
| Base cost excluding risk managed by the contractor | Cost of risk managed by the contractor | Total base cost | Percentage added for additional risk4 | Cost of additional risk | Total construction costs |
|
| (£m) | (£m) | (£m) | (%) | (£m) | (£m) |
Multiple conventional |
| 792 | 64 | 856 | 35 | 300 | 1,156 |
Multiple private finance | Optimistic2 | 792 | 45 | 837 | 31 | 261 | 1,098 |
| Pessimistic3 | 792 | 58 | 850 | 38 | 320 | 1,170 |
Single private finance | Optimistic | 792 | 45 | 837 | 17 | 139 | 976 (£180m cheaper than conventional) |
| Pessimistic | 792 | 58 | 850 | 32 | 275 | 1,125 (£31m cheaper than conventional) |
NOTES
1 All costs are in 2001 prices.
2 In the optimistic scenario, the Agency assumes that the contractor will be able to manage risks under its control 30 per cent better than under conventional procurement, and assumes no cost arising from interface risk.
3 In the pessimistic scenario, the Agency assumes that the contractor will be able to manage risks under its control 10 per cent better than under conventional procurement, and assumes some cost (lower than in conventional procurement) arising from interface risk.
4 This takes into account optimism bias, including the cost of risks such as changes made by the Agency, bad weather, and interface risk.
Source: National Audit Office Analysis of Highways Agency Data
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