Q101 Chair: You don't know whether you are getting best value.
Graham Dalton: We know what we are getting, so there is no doubt about what we are getting. We know the cost of maintaining and renewing, as has been, through conventional procurement, and we are doing that across the network. The bids came in much lower-I agree they came in a lot lower than our estimate. It is always difficult to second-guess what bidders in a tender situation will do to price. That fact that we have two very close bids is quite informative.
Amyas Morse: I want to ask you to help to clarify this, as it is an important point. If you calculated the costs in exactly the same way that the bidders did, and they simply decided to drive down their margins or do something else that you had not assumed, just to get the business, within certain limits that would be acceptable and a positive effect of competition. What you need to know is whether that is all that they are doing. For such a large difference, it is surprising if that would be all that was at play. Normally, in a situation such as this and you do a shadow bid-which I agree was the right professional thing to do, to calculate that-you would expect that to be pretty skinny. You would use it to push the bidder, wouldn't you, to say, "Don't bother producing something. I'm expecting you to take all this into account."
The difficulty is that, because there is such a big gap between the two, it is hard to believe that comes simply from competition. Looking at the way that they have costed it, you are left asking whether you have got best value, because it has been in such a different way and there has been such a big disparity. It must be hard for you to determine that. Is that fair comment? I am not trying to say this in a combative way, but from a commercial point of view.
Ginny Clarke: Can I go back to the point that we are talking about? That is assessing the case for a maintenance operation over 30 years, rather than five to seven years? We were comparing it with effectively extending our presumption about what you would maintain between the five and the 30-year period. That is over a time scale that in our traditional maintenance claims we don't do. We do it over a five-to-seven-year period.
You are right to say that the tenderers were looking at different ways in which they would invest money over 30 years and the rate at which they would renew, as distinct from our making that decision about renewing over a five-year period. That is where the differences lie. If you looked at the tenderers, that is where some of the differences were. Would they go and do maintenance on their bridges on a seven-year cycle or a 14-year cycle?
Effectively, they took the risks about those different decisions. The price of their offer is directly related in the maintenance field to their assessing the risk against things such as the life of the road, pavement, the structures, and how the much the cycle of investment will change from the ones that we do. Our estimates are based on our best presumption about how we would do it. Theirs-taking both the financial risk and the quality risk-are about how they would measure it. The benefit side of that isn't assessed in the way in which widening benefits are. It's about renewal-at what stage you would renew an asset, looking at its life. You chase the curve to some extent, and how much you let an asset deteriorate before you start to put money in.
Q102 Chair: They were so consistent in their bids, and you were so wrong. Did PWC advise you on this?
Ginny Clarke: On the financial model, yes.
Q103 Chair: What's your view on the advice you had internally and the advice you got from your consultants? They were so consistent; you were so wrong. It wasn't just one tender that came in that took a different view; they all did. What do you learn from that?
Graham Dalton: The blindingly obvious question for us is about how we take the techniques that Connect Plus now uses to live within that budget. We take those into our conventionally managed maintenance for the other 85% of the network. Apart from the practicalities of what they are doing on the ground, they show us a lot about how the business works and how they are running it, so that we can make sure they're performing. We'll copy with pride. I am quite happy to take ideas, if they've got some good ideas about-
Q104 Chair: Are you still using PWC to advise you on this?
Graham Dalton: PWC's contract-is it nearly finished?
Ginny Clarke: Its contract is on a framework for general legal advice to DBFO, so we use it for advice on other things. We are just about to retender that contract.
Q105 Chair: Do you have confidence in it?
Ginny Clarke: Yes; in terms of the financial modelling, very much so.
Chair: It was the financial modelling that was so bloody wrong!
Amyas Morse: The question is, does PWC prepare the model on your instructions? In other words, do you give it the data and it cranks out the model?
Ginny Clarke: Yes.
Amyas Morse: So it's actually your responsibility for what is in the model.
Ginny Clarke: It was our view about that cycle of maintenance, renewal and replacement. That was our view. What PWC did was to help us to understand how, in a 30-year investment profile, you would put the money against it.
Q106 Chair: And is that "our" Ian Scholey?
Ginny Clarke: Ian was the SRO, but it was my side of the organisation that advised on the techniques for maintenance and the specifications for that. That is around the technical specifications that my part of the organisation dealt with.
Q107 Stephen Barclay: It is a small point, but you have said that PWC also provides legal advice. Is that the case?
Ginny Clarke: No, it's Denton Wilde Sapte.
Q108 Chair: Because you tried to put this in the market at the time of the credit crunch, you ended up with an extra £660 million cost and an extra £68 million of risk being borne by the Agency. Have we got a value-for-money contract?
Graham Dalton: I believe so. While going through the funding competition in that final year from preferred bidder to the contract being awarded, we could clearly see the increase in the cost of finance. That is why, right through that phase, we prepared and refreshed the cost estimate that we had by conventional means, which is where the graph in figure 8-
Q109 Chair: So £3.4 billion is a value-for-money contract, although it's £660 million more than you thought? What is the basis for that? I don't get it.
Graham Dalton: We prepared a range of estimates. On the widening costs, our estimates had been close to the bidders, so we took those as fixed. We looked at a range for the operation and maintenance costs, again based on what the Agency was buying and procuring.
Chair: I don't think you're answering the question.
Q110 Joseph Johnson: You were previously saying that you had done no estimate of the potential present value of the maintenance. You just said that you looked at the lowest bid, so I don't see how you can compute it as being part of a calculation for value for money.
Graham Dalton: I said that we didn't do a benefits calculation. Appraisal doesn't have a benefits calculation.