Q111 Joseph Johnson: But that was because you didn't value the maintenance.
Graham Dalton: Right the way through, we estimated what the net present cost of maintenance would be, which is what we have just been discussing. We took a range, if the Agency were to do it itself, based on optimistic, most likely and pessimistic, built up from our experience in the market. That gave us a range from £3.4 billion to £4.2 billion, which the NAO has analysed. Our view at the time of the contract award was that while the cost of financing had increased, it had taken that level to the very best that we could achieve by going through a conventional approach. The 30-year contract gave us the opportunity to lock off at that price, rather than retaining the risk, so we deduced that it was a value-for-money decision.
Q112 Joseph Johnson: Just in case I'm being rather dim, does that mean to say the Department estimated that it would cost it, to do the maintenance and operations, more than £1.4 billion-the difference between £3.7 billion and the £2.3 billion estimated present value of the benefits of the construction?
Graham Dalton: Yes. As agents we estimated that it would cost us more, and we estimated the net present cost at a mid-point of £3.8 billion for operations, maintenance, renewals and widening. The £3.4 billion was compared to-
Q113 Mr Bacon: While you are talking about net present value of the cost of maintenance, can you turn to page 30, figure 10? The chart describes the Highways Agency's attempt to answer a question from the Secretary of State as to whether it was still worth while to proceed with the widening, or whether it would be better to do hard shoulder running. What it basically says is that, on the top half, there were a series of potential savings from not going ahead with the widening, but then there were further assumptions in the bottom half of further possible costs, which could offset those savings. At the top you've got a saving of £330 million, but then you've got all these additional costs that have been put in, so that the net saving is only £87 million. The biggest, by far, of those additional costs is the maintenance cost over 30 years. That £193 million is spread over 30 years isn't it?
Graham Dalton: Yes.
Q114 Mr Bacon: So why is that not a net present value figure? It should be, shouldn't it?
Graham Dalton: I thought it was, actually.
Ginny Clarke: The figures that you have quoted are costs.
Q115 Mr Bacon: It's the cost over 30 years, so if you're trying to work out the value of the savings, versus the value of the additional costs, the number that should go in there should be a net present value figure, shouldn't it?
Graham Dalton: I haven't got the reference here. I would expect it to be a net present value figure.
Q116 Mr Bacon: But it's not. We've been told by the National Audit Office that it is not a net present value figure.
Ed Humpherson: It is at paragraph 3.4, the first bullet, which reads: "The Agency offset maintenance costs over 30 years against upfront savings, without carrying out a discounted cash flow. This overstated the offsetting costs."
Q117 Mr Bacon: Thank you.
You've just been talking, in your answers, earlier, to Mr Johnson, about the way you've calculated these things, and the importance of assessing the net present value of the maintenance costs over a period of time; but you didn't do it here.
Graham Dalton: Figure 10 is about looking at an alternative solution to widening.
Q118 Mr Bacon: Yes, but you're trying to look at the cost and the value now spread out over 30 years into the future-aren't you? So you should have put in a net present value cost, and the effect of not doing that, as Mr Humpherson has just said, quoting paragraph 3.4, is to overstate the offsetting costs.
Amyas Morse: We would roughly say, Mr Bacon, very crudely, if you had discounted that number it would certainly be reduced by half, depending on what you choose to assume. Taking any reasonable rate of discounting, you know-
Ginny Clarke: Probably more.
Amyas Morse: Probably more-thank you.
Q119 Mr Bacon: In other words, that figure at the bottom, where it gives the net additional cost of using active traffic management-that's the hard shoulder running-and shows that it was £53 million more expensive to do widening than to do hard shoulder running, is just pie in the sky, isn't it? It's wrong. This chart basically says you've got £87 million of net savings, but you've also got further costs down at the bottom of £140 million. The difference between the two-£140 million minus £87 million-is £53 million. In other words, what it is saying is that it is £53 million more expensive to do the hard shoulder running than it is to do the widening. That is correct, isn't it? That's what it is saying.
Graham Dalton: That is what it is saying.
Q120 Mr Bacon: Good. Okay, we are on the same ground.
Now, intuitively it is bonkers to think that it would be more expensive to do hard shoulder running than to do widening, when there is an absolutely huge slug of capital cost in doing the widening that is higher than the capital cost of doing hard shoulder running, and in either case you will have to do maintenance. So, intuitively it is bonkers. This is just manipulating the numbers to give you the answer that you wanted anyway, isn't it?
Graham Dalton: This was an assessment, at that stage, of stopping the competition and procuring hard shoulder running, which would have given us fewer benefits and a different outcome.