1 Planning the NRTS and choosing the procurement route

1.  In 1998, the Government announced that the role of the Highways Agency (the Agency) was to change from that of road builder to that of a road network operator, with objectives to reduce traffic congestion through improved traffic monitoring and travel information. At the time of the announcement, the Agency was responsible for operating its own telecommunications systems that captured information about road, traffic and weather conditions across the motorway network through 14,000 roadside devices. The systems also provided the Agency with the means of directly communicating traffic information to road users through, for example, overhead messaging using variable message signs.2

2.  The backbone to the telecommunications systems was a trunk network of copper transmission cables carrying voice and data signals between the roadside devices and 32 local police control offices. The transmission of these signals relied on obsolete analogue technology. Across approximately half of the motorway network, the Agency had installed, alongside its copper cables, fibre optic cables that had the higher transmission capability needed to carry CCTV images.3

3.  In its new role as road network operator, the Agency considered that it needed enhanced telecommunications. The project for the National Roads Telecommunications Services (NRTS) began as an upgrade to the cable network supporting the motorway telecommunications systems, including laying lengths of fibre optic cable to complete a high capacity resilient trunk cable network. The Agency envisaged that its contractor would use the upgraded assets to sell excess telecommunications capacity to third-parties. This revenue-generating opportunity was the principal driver behind the Agency's original decision to proceed with a public private partnership (PPP).4

4.  Excess cable capacity in the telecommunications industry around 2000 meant that potential contractors had no interest in exploiting the enhanced network. At the same time, the Agency widened the scope of the NRTS to accommodate relevant aspects of the Agency's proposals to meet objectives in its then 10-year plan. Its justification for the procurement of a PPP, rather than a conventional procurement, shifted to:

•  transferring of technology risk to the party best able to manage it; and

•  enabling private sector flexibility in the whole life management and adoption of technology.5

5.  The actual cost of the NRTS contract depends upon the volume of additional services that the Agency will order over the term of the contract. To evaluate bidders' best and final offers, the Agency used a demand scenario based on the mid-point between ordering no additional services, and ordering what the Agency considered was a likely high level of additional services. On the basis of this scenario, the present value of the Agency's payments under the negotiated contract with GeneSYS Telecommunications Ltd, the winning bidder, will amount to £385 million6 (present value at 2004 prices). The Agency compared this figure against a Public Sector Comparator of £415 million (Figure 1).7

Figure 1: From September 2004, the Agency calculated that GeneSYS's offers were below the Public Sector Comparator

1  These April 2004 priced figures were calculated by inflating April 2003 prices using the Office for National Statistics' Retail Prices Index CHAW (all items).

2  Between the Evaluation after Clarification and the Best and Final Offer, the Agency reduced the scope of works that would be covered by the base service charge.

3  The Public Sector Comparator at Invitation to Negotiate, Evaluation after Clarification and Best and Final Offer included an allowance for non-recoverable VAT, which was not included in the bids.

4  From Best and Final Offer there were minor incompatibilities between the Public Sector Comparator and the bids. To achieve like-for-like comparisons, the Agency adjusted the values of the bids rather than alter the PSC. In the table above, the Public Sector Comparator has been adjusted rather than the bids.

6. This Committee has previously seen Public Sector Comparators that contained errors and omissions. Some contained spurious precision in their figures, while others had been manipulated to achieve the desired result.8 Prices in the Agency's comparator did not include possible discounts that the Agency could have secured had it made bulk orders for telecommunications equipment. The estimated savings could have reduced the comparator by between £4 million and £14 million. However, the Agency considered that, under a conventional procurement, it might not have secured funding for the entire project and, therefore, would have progressed the upgrade works in a piecemeal manner. Consequently, the Agency doubted that it would have secured the best bulk order discounts, but did not expressly state this doubt in its business case.9

7.  The Public Sector Comparator also included a risk allowance of £85 million, equivalent to 26% of the non-risk adjusted figure. The risk adjustment in the NRTS comparator was within the range of risk allowances included in the Agency's twelve other PFI contracts (7% to 31%). The calculation did not allow for events turning out better than expected, however, nor did it take into account risk mitigation that would have been applied had individual cost items been identified as being particularly vulnerable. As a result, the risk allowance might have overestimated the risk transferred in this deal.10

8.  Despite uncertainties in the pricing of inputs and of risks, which had to rely on the experience and judgement of the Agency's advisers, the Agency's Public Sector Comparator was a single point estimate, rather than a range. This approach presented the comparator as a pass or fail value for money test, rather than one element of a fuller value for money assessment. This falls short of best practice in value for money assessments.11

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2  C&AG's Report, paras 1.1-1.4

3  C&AG's Report, paras 1.4, 1.5; Figures 4, 5

4  Qq 19, 27; C&AG's Report, para 1.3

5  Qq 3, 16, 27, 73

6  The present value of GeneSYS's offer was £385 million in 2004 prices. The NAO calculated that this offer had a present value of £345million in 1999 prices when deflated using the Office for National Statistics' Retail Prices Index CHAW (all items); C&AG's Report, paras 1.19, 1.21; Figure 8

7  Q 59; C&AG's Report, para 1.21, 2.29, Figures 8, 15

8  Public Accounts Committee, Twenty-eighth Report of Session 2002-03, Delivering better value for money from the Private Finance Initiative, HC 764

9  Qq 5, 12-15

10  Qq 5, 17, 18; C&AG's Report, para 2.35

11  Q 3; C&AG's Report, paras 1.18, 2.29, 231-2.35